UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
OR
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-38810
STEALTH BIOTHERAPEUTICS CORP
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Stealth BioTherapeutics Corp
c/o Intertrust Corporate Services (Cayman) Limited
One Nexus way, Camana Bay
Grand Cayman
KY1-9005 Cayman Islands
(Address of principal executive offices)
Irene McCarthy, Chief Executive Officer
Stealth BioTherapeutics Inc.
140 Kendrick Street,
Needham, MA 02494
(617) 600-6888
E-mail: IR@stealthbt.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered, pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
American Depositary Shares, each representing 12 ordinary shares, par value U.S.$0.0003
per share
MITO
The Nasdaq Global Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of the period covered by the annual report. 712,131,058 ordinary shares, $0.0003 par value per
share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 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 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, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Emerging growth company
☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-
Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
TABLE OF CONTENTS
PART I
4
Item 1. Identity of Directors, Senior Management and Advisors
4
Item 2. Offer Statistics and Expected Timetable
4
Item 3. Key Information
5
A.
Reserved
5
B.
Capitalization and indebtedness
5
C.
Reasons for the offer and use of proceeds
5
D.
Risk factors
5
Item 4. Information on the Company
58
A.
History and development of the company
58
B.
Business overview
59
C.
Organizational structure
108
D.
Property, plants and equipment
108
Item 4A. Unresolved Staff Comments
108
Item 5. Operating and Financial Review and Prospects
108
A.
Operating results
108
B.
Liquidity and capital resources
115
C.
Research and development, patents and licenses, etc.
119
D.
Trend information
120
E.
Critical accounting estimates
120
Item 6. Directors, Senior Management and Employees
123
A.
Directors and senior management
123
B.
Compensation
126
C.
Board practices
136
D.
Employees
138
E.
Share ownership
138
Item 7. Major Shareholders and Related Party Transactions
139
A.
Major shareholders
139
B.
Related party transactions
141
C.
Interests of experts and counsel
142
Item 8. Financial Information
143
A.
Consolidated statements and other financial information
143
B.
Significant changes
143
Item 9. The Offer and Listing
143
A.
Offer and listing details
143
B.
Plan of distribution
143
C.
Markets
143
D.
Selling shareholders
143
E.
Dilution
143
F.
Expenses of the issue
143
Item 10. Additional Information
143
A.
Share capital
143
B.
Memorandum and articles of association
144
C.
Material contracts
144
D.
Exchange controls
144
E.
Taxation
144
F.
Dividends and paying agents
149
i
G.
Statement by experts
149
H.
Documents on display
149
I.
Subsidiary information
150
Item 11. Quantitative and Qualitative Disclosures About Market Risk
150
Item 12. Description of Securities Other than Equity Securities
150
A.
Debt securities
150
B.
Warrants and rights
150
C.
Other securities
150
D.
American depositary shares
150
PART II
153
Item 13. Defaults, Dividend Arrearages and Delinquencies
153
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
153
Item 15. Controls and Procedures
153
Item 16. [Reserved]
154
Item 16A. Audit Committee Financial Expert
154
Item 16B. Code of Ethics
154
Item 16C. Principal Accountant Fees and Services
154
Item 16D. Exemptions from the Listing Standards for Audit Committees
155
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
155
Item 16F. Change in Registrant’s Certifying Accountant
155
Item 16G. Corporate Governance
155
Item 16H. Mine Safety Disclosure
156
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
156
PART III
157
Item 17. Financial Statements
157
Item 18. Financial Statements
157
Item 19. Exhibits
157
ii
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Accounting Principles
The consolidated financial statements presented at the end of this annual report have been prepared in conformity with accounting principles generally
accepted in the United States of America, or GAAP. Any reference in the notes to the consolidated financial statements to applicable guidance is meant to refer to
authoritative GAAP, as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASU, of the Financial Accounting
Standards Board, or FASB. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the company’s management evaluates its estimates related
to, but not limited to, share-based compensation expense, fair value of derivative liability, fair value of warrants, recoverability of the company’s net deferred tax
asset-related valuation allowances, and certain prepaid expenses and accrued expenses. The company bases its estimates on historical experience and other
market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ materially from those estimates
or assumptions.
General Information
Except where the context otherwise requires and for purposes of this annual report on Form 20-F only:
•
the “company,” “we,” “us,” “our company” and “our” refer to Stealth BioTherapeutics Corp, or Stealth, and its consolidated subsidiaries, including
Stealth BioTherapeutics Inc., or Stealth Delaware; and Stealth BioTherapeutics (HK) Limited, or Stealth HK.
•
“ordinary shares” refers to our ordinary shares, par value $0.0003 per share;
•
“ADSs” refers to the American depositary shares, each of which represents 12 ordinary shares;
•
“ADRs” refers to American depositary receipts, which, if issued, evidence our ADSs;
•
unless otherwise indicated, all historical share and per-share data contained in this annual report on Form 20-F have been restated to give retroactive
effect to a three-for-one reverse share split that became effective on December 28, 2018.
This annual report on Form 20-F includes our audited consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 and
audited consolidated balance sheets as of December 31, 2021 and 2020.
Our ADSs are listed on The Nasdaq Global Market under the symbol “MITO”.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating results and conditions,
our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward-
looking statements are contained principally in the sections entitled “Item 3.D.—Risk Factors,” “Item 4.—Information on the Company” and “Item 5.—
Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform
Act of 1995. The words “anticipate,” “expect,” “hope,” “plan,” “potential,” “possible,” “will,” “believe,” “estimate,” “intend,” “may,” “predict,” “project,”
“would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying
words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance
on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking
statements we make as a result of known and unknown risks, uncertainties and other important factors, including but not limited to the following:
•
our plans to develop and commercialize elamipretide, SBT-272, SBT-550 series, and our other product candidates, and to identify additional product
candidates;
•
ongoing and planned clinical trials and preclinical studies for our product candidates, including the timing of initiation of these trials and studies and
the timing of the anticipated results;
•
our plans to possibly enter into collaborations for the development of product candidates and the potential benefits of any collaboration;
•
the timing of anticipated regulatory filings, meetings with regulatory agencies or regulatory approvals and plans and expectations for expedited
regulatory review for our product candidates;
•
the potential advantages and clinical utility of our product candidates;
•
our commercialization, marketing and manufacturing capabilities and strategy;
•
our intellectual property position and strategy;
•
our estimates regarding the potential market opportunity for our product candidates; and
•
our estimates regarding expenses, future revenue, capital requirements, sufficiency of our current cash and cash equivalent and our need for and
ability to obtain additional funding.
The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on which the statements are
made in this annual report on Form 20-F. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated
events. You should read this annual report on Form 20-F completely and with the understanding that our actual future results may be materially different from
what we expect.
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RISK FACTOR SUMMARY
Our business is subject to a number of risks that if realized could materially affect our business, financial condition, results of operations, cash flows and
access to liquidity. These risks are discussed more fully in Part I, Item 3D. “Risk Factors” of this Annual Report on Form 20-F. Our principal risks include the
following:
•
We will need substantial additional funding. If we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our research
and drug development programs or commercialization efforts. If we do raise additional capital, it may cause dilution to our shareholders.
•
Based on our cash balances, recurring losses and our projected spending in 2022, there is a substantial doubt about our ability to continue as a going
concern.
•
We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain
profitability. As of December 31, 2021, we had an accumulated deficit of $608.0 million.
•
We depend heavily on the success of our clinical product candidates, and we cannot be certain that we will receive regulatory approval for any of our
product candidates or if we will successfully commercialize any of our product candidates even if we receive such regulatory approval. If the U.S.
Food and Drug Administration does not accept or approve our NDAs for our most advanced product candidates, it may require that we conduct
additional clinical, nonclinical or manufacturing validation studies and submit that data before it will reconsider our applications.
•
Our approach to the discovery and development of product candidates that target mitochondria is unproven, and we do not know whether we will be
able to develop any products of commercial value.
•
If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise
produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and
commercialization of our product candidates.
•
We expect to depend on third parties for the development, marketing and/or commercialization of our product candidates in some cases. If those
collaborations are not successful, we may not be able to capitalize on the market potential of our product candidates.
•
We hold exclusive licenses from Cornell Research Foundation and the Institut de recherches cliniques de Montréal for our lead clinical-stage product
candidate elamipretide. If these third parties terminate their agreements with us, our competitive position and our market share will be harmed. For
example, our license agreement with Cornell required us to commercialize a product by December 31, 2020, subject to specified exceptions for causes
due to scientific and regulatory events that are common in drug development, and Cornell has the right to terminate the license if we do not comply.
We believe that our noncompliance is subject to the named exceptions, and to date we have not received any notice of termination from Cornell.
Morningside Venture (I) Investments Limited has a controlling interest in us and is able to control all matters submitted to our shareholders for approval that
require an ordinary resolution or special resolution, as well as our management and affairs.
•
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and Nasdaq Stock Market, and corporate governance
rules and are permitted to file less information with the Securities and Exchange Commission, than U.S. companies. This may limit the information
available to holders of our securities.
-3-
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
-4-
Item 3. Key Information
A. Reserved.
B. Capitalization and indebtedness.
Not applicable.
C. Reasons for the offer and use of proceeds.
Not applicable.
D. Risk factors.
Our business has significant risks. You should consider carefully the risks described below, together with the other information contained in this annual
report, including our consolidated financial statements and the related notes. If any of the following risks occur, our business, financial condition, results of
operations and future growth prospects could be materially and adversely affected.
Risks Related to Our Financial Position and Need for Additional Capital
We will need substantial additional funding. If we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our product
development programs or commercialization efforts.
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain
process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials
of, initiate new research and preclinical development efforts for and seek marketing approval for our product candidates. In addition, if we obtain marketing
approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and
distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. Furthermore, we have
incurred, and expect to continue to incur, significant additional costs associated with operating as a public company. Accordingly, we will need to obtain
substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed and on attractive terms, we may be
forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.
As of December 31, 2021, we had cash and cash equivalents of $47.1 million. Our existing cash and cash equivalents will not be sufficient to support our
clinical development of elamipretide for rare and common ophthalmic indications, rare cardiomyopathies and rare neuromuscular and neurological indications
and will not be sufficient to support any additional protocols or studies we may conduct for Barth syndrome, or BTHS, our planned Phase 3 clinical trial for
primary mitochondrial disease arising due to nuclear DNA mutations, or nPMM, our ongoing Phase 2b clinical trial for treatment of GA, our anticipated Phase 2
clinical trial for the treatment of Duchenne cardiomyopathy, any Phase 2 clinical trials or clinical development for SBT-272 or any preclinical development for
SBT-550 series, or for any other product candidates we may develop in the future. We will be required to expend significant funds in order to advance the
development of elamipretide, SBT-272 and SBT-550 series, as well as any other product candidates we may develop in the future. In addition, while we may
seek one or more collaborators for future development of our product candidates, and, in particular, may conduct any large Phase 3 clinical trials of elamipretide,
such as those we would likely be required to conduct for common age-related diseases such as dry age-related macular degeneration, or dry AMD, in
collaboration with one or more partners that would finance most of the associated costs, we may not be able to enter into a collaboration for any of our product
candidates on suitable terms, or at all. In any event, our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to
undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public
or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us
on acceptable terms, or at all. In addition, market volatility, inflation and interest rate fluctuations may increase our cost of financing or restrict our access to
potential sources of future liquidity. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to
pursue our business strategy.
-5-
Our estimate as to how long we expect our existing cash and cash equivalents to be able to fund our operations is based on assumptions that may prove to
be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our
control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our
future funding requirements, both short-term and long-term, will depend on many factors, including:
▪
the scope, progress, timing, costs and results of our current and future clinical trials;
▪
research and preclinical development efforts for any future product candidates that we may develop;
▪
our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;
▪
the number of future product candidates that we pursue and their development requirements;
▪
the outcome, timing and costs of seeking regulatory approvals;
▪
costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the
responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing
capabilities;
▪
subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;
▪
our headcount growth and associated costs if and as we expand our research and development and establish a commercial infrastructure;
▪
costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against
intellectual property related claims; and
▪
costs of operating as a public company.
Our recurring losses and negative cash flows raise substantial doubt regarding our ability to continue as a going concern.
Based on our cash balances, recurring losses and projected spending, there is doubt about our ability to continue as a going concern. We are required to
comply with an unrestricted minimum cash balance in accordance with our venture loan facility with Horizon Technology Finance Corporation and Powerscourt
Investments XXV, LP, which we refer together as the Lenders, until certain cash financing conditions are met, and there is a risk that we may be unable to remain
in compliance with this financial covenant in the future in which case the debt may become immediately due and payable. Given our planned expenditures for
the next several years, including, without limitation, expenditures in connection with our clinical trials of elamipretide, SBT-272, SBT-550 series and other new
compounds, we have concluded, in connection with the issuance of our consolidated financial statements for the year ended December 31, 2021, that there is a
substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm has issued a going concern opinion in
connection with the audit of our annual financial statements for the fiscal year ended December 31, 2021. A going concern opinion means that there is substantial
doubt that the company can continue as an ongoing business for the next 12 months. If we are unable to continue as a going concern, we might have to liquidate
our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
In addition, the inclusion of an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern and our lack of cash resources
may materially adversely affect the price of the American Depositary Shares, or ADSs and our ability to raise new capital or to enter into critical contractual
relations with third parties. There is no assurance that we will be able to adequately fund our operations in the future.
-6-
Raising additional capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our technologies or product
candidates.
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent that we raise additional capital
through the sale of ordinary shares, ADSs, convertible securities or other equity securities, our existing shareholders’ ownership interest may be substantially
diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our
existing shareholders. Additional debt financing, if available, would result in increased fixed payment obligations and may involve the issuance of additional
warrants and/or agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital
expenditures, creating liens, redeeming shares or declaring dividends, that could adversely impact our ability to conduct our business. For example, in connection
with our venture loan facility with our Lenders, we granted a security interest in substantially all of our assets, excluding our intellectual property, and agreed to a
negative pledge on our intellectual property. The venture loan facility also contains restrictive covenants including, subject to certain exceptions, covenants that
prohibit us from incurring additional indebtedness, creating any lien on our property, making investments, paying dividends or redeeming shares, transferring
any material portion of our assets, merging with or acquiring another entity, entering into a transaction that will result in a change of control and making certain
other corporate changes. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. In addition,
securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention
away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.
If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish
valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to
raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant
rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
If we receive regulatory approval for the use of elamipretide for certain indications, we will be required to make substantial payments pursuant to our
Development Funding Agreement.
If we receive regulatory approval for the use of elamipretide as a treatment for BTHS, geographic atrophy, or GA, which is an advanced form of dry
AMD, Friedreich’s ataxia, or FRDA, Duchenne cardiomyopathy, nPMM or Leber hereditary optic neuropathy, or LHON, we will be required to make substantial
payments pursuant to our Development Funding Agreement. Our ability to make these required payments depends on our future performance, which is subject to
economic, financial, competitive and other factors beyond our control. Our business may generate cash flow from operations in the future sufficient to meet our
obligations under the Development Funding Agreement. If we are unable to generate such cash flow or to obtain additional funding through public or private
equity offerings, debt financings, collaborations and licensing arrangements or other sources on acceptable terms, or at all, we could default on our payment
obligations under the Development Funding Agreement.
We have incurred significant losses since inception and expect to incur significant and increasing losses for at least the next several years. We may never
achieve or maintain profitability.
We have incurred significant annual net operating losses in every year since our inception. Our net losses were $52.5 million, $57.5 million, and $71.7
million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we had an accumulated deficit of $608.0 million. We
expect to continue to incur significant and increasing operating losses for the foreseeable future, and we do not know whether or when we will become
profitable. We have not generated any revenues from product sales, have not completed the development of any product candidates and may never have a
product candidate approved for commercialization. We have financed our operations to date through the issuance of our ADSs, ordinary shares, Series A
convertible preferred shares, debt financings, a payment under an option agreement and payments under our Development Funding Agreement, and have devoted
substantially all of our financial resources and efforts to research and development, including preclinical
-7-
studies and clinical development programs. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year. Net losses and negative cash
flows have had, and will continue to have, an adverse effect on our shareholders’ equity and working capital.
We anticipate that our expenses will increase substantially if and as we:
•
continue to develop and conduct clinical trials with respect to, elamipretide, including our ongoing Phase 2b clinical trial for the treatment of GA,
any additional protocols or studies we may conduct in BTHS to support a resubmission of a new drug application, or NDA, our planned Phase 3
clinical trial in nPMM, our anticipated Phase 2 clinical trial for the treatment of Duchenne cardiomyopathy, and any future clinical trials;
•
initiate and continue research and preclinical and clinical development efforts for our other product candidates, including SBT-272 and compounds
in the SBT-550 series;
•
seek to identify and develop additional product candidates;
•
seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;
•
establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may
obtain marketing approval, if any;
•
require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;
•
maintain, expand and protect our intellectual property portfolio;
•
hire and retain additional personnel, such as clinical, quality control and scientific personnel;
•
add operational, financial, management information systems and commercial personnel, including personnel to support our product development
and help us comply with our obligations as a public company; and
•
add property, equipment and physical infrastructure to support our research and development programs in the United States and Europe.
Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until
we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. This will
require our, or any of our future collaborators’, success in a range of challenging activities, including completing clinical trials of our product candidates;
obtaining marketing approval for these product candidates; manufacturing, marketing and selling those products for which we, or any of our future collaborators,
may obtain marketing approval; satisfying any post-marketing requirements; and obtaining reimbursement for our products from private insurance or
government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of
increased expenses, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or
any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company
and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or
continue our operations. A decline in the value of our company could cause our shareholders to lose all or part of their investment.
We have no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.
We began operations in 2006 and initiated our first clinical trial in 2010. Our operations have been limited to financing and staffing our company and
developing our technology and conducting preclinical research and clinical trials for our product candidates. We have not demonstrated an ability to obtain
marketing approvals, manufacture a commercial scale product, or arrange for a third party to do so on our
-8-
behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, you should consider our prospects in light of
the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage
biopharmaceutical companies such as ours. Predictions about our future success or viability may not be as accurate as they could be if we had a longer operating
history or a history of successfully developing and commercializing pharmaceutical products.
We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.
As of December 31, 2021, we had $15.0 million of outstanding principal under our venture loan facility with the Lenders. Subject to the restrictions set
forth in the venture loan and security agreement governing our existing venture loan facility, we could incur additional indebtedness beyond our borrowings
under our venture loan facility.
Our outstanding indebtedness, including any additional indebtedness beyond our borrowings under our venture loan facility, combined with our other
financial obligations and contractual commitments, could have significant adverse consequences, including:
▪
requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital,
capital expenditures, product development and other general corporate purposes;
▪
increasing our vulnerability to adverse changes in general economic, industry and market conditions;
▪
subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;
▪
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
▪
placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.
We may not have sufficient funds and may be unable to arrange for additional financing to pay the amounts due under our venture loan facility. Failure to
make payments or comply with other covenants under our venture loan facility could result in an event of default and acceleration of amounts due. Additionally,
under our venture loan facility, an occurrence that has a material adverse effect on our business, our ability to repay our obligations under the venture loan and
security agreement or associated agreements when due or on the value or priority of the Lenders’ security interest could be considered an event of default. If an
event of default occurs and the Lenders accelerate the amounts due, we may not be able to make accelerated payments, and the Lenders could seek to enforce
their security interests in the collateral securing such indebtedness, which includes substantially all of our assets other than our intellectual property. In addition,
the covenants under our venture loan facility, the pledge of substantially all of our assets as collateral and the negative pledge with respect to our intellectual
property could limit our ability to obtain additional debt financing.
Risks Related to the Discovery, Development and Commercialization of Our Product Candidates
Our approach to the discovery and development of product candidates and the development of therapies targeting mitochondria generally are unproven, and
we do not know whether we will be able to develop any products of commercial value.
We are focused on discovering and developing therapies for diseases involving mitochondrial dysfunction, particularly by developing therapies that target
mitochondria in order to normalize the function of dysfunctional mitochondria. While we believe that our approach may ultimately enable drug research and
clinical development for mitochondrial diseases across a wide range of therapeutic areas, this approach is unproven. We have not yet succeeded and may never
succeed in demonstrating efficacy and safety for any of our product candidates in later stage clinical trials or in obtaining marketing approval thereafter. For
example, we announced in December 2019 that our Phase 3 clinical trial in primary mitochondrial myopathy, or PMM, did not meet its primary efficacy
endpoints. In addition, in October
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2021 we received a Refusal to File letter, or RTF, from the U.S. Food and Drug Administration, or the FDA, regarding our NDA for BTHS. Furthermore, no
products or therapies targeting mitochondrial dysfunction have ever obtained marketing approval from the FDA, and the European Medicines Agency, or the
EMA, has approved one therapy to treat LHON (Raxone, or idebenone, made by Santhera Pharmaceuticals Holding), which is the only approved therapy to treat
any primary mitochondrial disease. If we are unable to successfully discover and develop product candidates, our business prospects will be substantially
harmed.
We are dependent on the success of our clinical product candidates. If we are unable to complete the clinical development of, obtain marketing approval for
or successfully commercialize any of our product candidates, either alone or with a collaborator, or if we experience significant delays in doing so, our
business could be substantially harmed.
We have no products approved for sale and have invested a significant portion of our efforts and financial resources in the development of elamipretide for
the treatment of rare primary mitochondrial diseases. Our prospects are substantially dependent on our ability, or the ability of any future collaborator, to
develop, obtain marketing approval for and successfully commercialize elamipretide, SBT-272 or any of our other product candidates.
The success of elamipretide will depend on several factors, including the following:
▪
successful recruitment of subjects, enrollment in and completion of our ongoing clinical trials;
▪
initiation and successful recruitment of subjects, enrollment in and completion of additional clinical trials;
▪
safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority for marketing approval;
▪
our ability to identify success criteria and endpoints for our clinical trials such that the FDA and other regulatory authorities will be able to
determine the clinical efficacy and safety profile of any product candidates we may develop;
▪
timely receipt of marketing approvals from applicable regulatory authorities;
▪
the performance of our future collaborators, if any;
▪
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
▪
establishment of supply arrangements with third-party raw materials suppliers and manufacturers;
▪
establishment of arrangements with third-party manufacturers to obtain finished drug products that are appropriately packaged for sale;
▪
obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;
▪
protection of our rights in our intellectual property portfolio;
▪
successful launch of commercial sales following any marketing approval;
▪
a continued acceptable safety profile following any marketing approval;
▪
accuracy of the estimates of the current and future number of patients with mitochondrial associated or inherited mitochondrial diseases;
▪
commercial acceptance by patients, the medical community and third-party payors following any marketing approval; and
▪
our ability to compete with other therapies targeting diseases involving mitochondrial dysfunction.
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Many of these factors—including with respect to clinical development, the regulatory submission process, potential threats to our intellectual property
rights and the manufacturing, marketing and sales efforts of any future collaborator—are beyond our control, and clinical development of product candidates is
inherently risky and uncertain. For example, although we observed trends towards improvement in a certain subset of patients, our Phase 2/3 clinical trial in
BTHS failed to reach its primary efficacy endpoints during the double-blind, placebo-controlled portion of the trial, and one of the FDA’s stated reasons for
issuing an RTF in response to our NDA submission for BTHS in October 2021 was the absence of a single adequate and well-controlled trial that provided
evidence of effectiveness. Our Phase 3 clinical trial in PMM also failed to meet its primary endpoints. If we are unable to develop, receive marketing approval
for and successfully commercialize elamipretide, on our own or with any future collaborator, or experience delays as a result of any of these factors or otherwise,
our business could be substantially harmed.
We are developing elamipretide for certain indications of the eye, including GA and LHON. Our phase 2 clinical trial for the treatment of LHON involved
administration of elamipretide by use of topical drops, and our clinical trial for the treatment of GA involves administration of elamipretide by subcutaneous
injection. We are working to develop methods for intravitreal injection, or direct injection of drug into the eye, but we cannot predict whether those development
efforts will be successful.
We may not be successful in our efforts to identify or discover and develop additional potential product candidates.
A significant portion of the research that we are conducting involves the development of new therapeutic compounds targeting the mitochondria. The drug
discovery that we are conducting may not be successful in identifying compounds that have commercial value or therapeutic utility. Our discovery platform may
initially show promise in identifying potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization for a
number of reasons, including the following:
▪
compounds we develop may not demonstrate improved efficacy, safety or tolerability;
▪
potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are
unlikely to receive marketing approval and achieve market acceptance;
▪
competitors may develop alternative therapies that render our potential product candidates non-competitive or less attractive; or
▪
a potential product candidate may not be capable of being produced at an acceptable cost.
Our research programs to identify new product candidates will require substantial technical, financial and human resources, and we may be unsuccessful
in our efforts to identify new product candidates. Further, the results we obtain in preclinical testing and early clinical trials may not be predictive of results that
are obtained in later studies, and we may suffer significant setbacks in advanced clinical trials, even after seeing promising results in earlier studies. If we are
unable to identify suitable additional compounds for preclinical and clinical development, our ability to develop product candidates and obtain product revenues
in future periods could be compromised, which could result in significant harm to our financial position and adversely impact the price of the ADSs
We have never obtained marketing approval for a product candidate and we may be unable to obtain, or may be delayed in obtaining, marketing approval for
any of our product candidates.
We have never obtained marketing approval for a product candidate. The FDA has, and may in the future, refuse to accept for substantive review any
NDAs we submit for our product candidates or if accepted for substantive review, may conclude after review of our data that our application is insufficient to
obtain marketing approval of our product candidates. For example, we met with the FDA to discuss the clinical evidence to support a potential NDA submission
for BTHS, and the FDA expressed its view that the existing clinical data are insufficient to demonstrate substantial evidence of effectiveness and would not
support NDA review. The FDA recommended that we collect additional controlled clinical data in this indication prior to an NDA submission. In May 2021, we
submitted a randomized withdrawal clinical trial protocol to FDA. After reviewing our submission, the FDA concluded that neither the proposed randomized
withdrawal trial nor any new clinical trial data from the patients remaining on the open label
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extension would be likely to add meaningfully to the evidence to support an NDA. Despite FDA’s view that the existing clinical data are insufficient to
demonstrate substantial evidence of effectiveness and would not support NDA review, we submitted our NDA to the FDA in August 2021, and the FDA refused
to file the NDA.
If the FDA does not accept or approve our NDAs for our most advanced product candidates, it may require that we conduct additional clinical, nonclinical
or manufacturing validation studies and submit that data before it will reconsider our applications.
Depending on the extent of these or any other FDA-required studies, approval of any NDA or application that we submit may be delayed by several years
or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered
sufficient by the FDA to approve our NDAs.
Any delay in obtaining, or an inability to obtain, any marketing approvals would prevent us from commercializing our product candidates, generating
revenues and achieving and sustaining profitability. If any of these outcomes occur, we may be forced to abandon our development efforts for our product
candidates, which could significantly and materially harm our business.
Results of preclinical studies and early clinical trials may not be predictive of results of future clinical trials.
The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials
do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks
in late-stage clinical trials after achieving positive results in earlier development. We faced this type of setback when our Phase 3 clinical trial in PMM did not
meet its primary efficacy endpoints despite encouraging signals in early clinical trials, and we cannot be certain that we will not face similar setbacks in other
trials. The design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become
apparent until the clinical trial is well advanced. If our trial designs are not sufficient, our clinical programs may be delayed, or we may decide to terminate one
or more of such programs.
We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition,
preclinical and clinical data are often susceptible to varying interpretations and analyses. During the regulatory review process, we will need to identify success
criteria and endpoints at the time of the initiation of the trial such that the FDA or other regulatory authorities will be able to determine the clinical efficacy and
safety profile of any product candidates we may develop, and the resulting clinical data and results may be difficult to analyze. Even if the FDA or other
regulatory authorities were to find our success criteria to be sufficiently validated and clinically meaningful, we may not achieve the pre-specified endpoints to a
degree of statistical significance. Many companies that believed that their product candidates had performed satisfactorily in preclinical studies and clinical trials
nonetheless failed to obtain marketing approval of their product candidates. Even if we, or any future collaborators, believe that the results of clinical trials for
our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of
our product candidates. For example, in our BTHS program, we believed that our clinical trial data could support an NDA review and submitted an NDA to the
FDA in August 2021. In October 2021, the FDA refused to file our NDA.
In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to
numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and
adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. Specifically, the clinical trials we have
completed to date have enrolled only small numbers of subjects, we have experienced dropout among participants, and we have not always successfully achieved
our pre-specified clinical trial endpoints to a degree of statistical significance.
To date, other than our ongoing Phase 2b clinical trial in GA, our Phase 3 clinical trial in PMM, our Phase 3 retrospective natural history control trial in
BTHS, and our Phase 2/3 clinical trial in BTHS, we have only conducted small Phase 1 and Phase 2 clinical trials, many of which have been undertaken to help
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inform our clinical strategy and develop later stage clinical trials intended to assess efficacy. While the endpoints and populations for these later stage clinical
trials, including our Phase 2b clinical trial for GA, our anticipated Phase 3 clinical trial for nPMM and our anticipated Phase 2 clinical trial for Duchenne
cardiomyopathy, are or will be derived from results of our earlier trials and medical literature, in some cases we did not demonstrate a statistically significant
effect in the population and on the efficacy endpoints in our prior clinical trials prospectively described in the clinical trial protocol. The lack of statistical
significance could be attributed to various factors, including the lack of power to demonstrate significance, the design of the studies or the lack of a treatment
benefit from our product candidate. In some cases, we conducted post hoc, retrospective analyses of data subsets and have designed, and expect to design later
stage clinical trials based on the results of such post hoc analyses. For example, the improvements in stroke volume and other parameters of cardiac function as
well as in functional endpoints observed in our BTHS Phase 2/3 trial were not statistically significant during the double-blind, placebo-controlled portion of the
trial, which we believe was due to the duration of therapy being too short to derive benefit. Although we plan to design our future trials in rare cardiomyopathies
with a longer duration of dosing, we cannot predict the successfulness of that approach. Additionally, despite improvements observed in similar endpoints during
a Phase 2 clinical trial, our Phase 3 clinical trial in PMM failed to reach its primary efficacy endpoints, and we observed that subjective, effort-dependent
endpoints such as the six-minute walk test, or 6MWT, may be influenced by a placebo effect, such that patients randomized to placebo may experience
meaningful improvements. Although we have incorporated and plan to incorporate objective endpoints including disease biomarkers such as echocardiographic
parameters of cardiac function for BTHS and other rare cardiomyopathies, and optical coherence tomography and fundus autofluorescence imaging of
geographic atrophy progression for GA, we have also assessed and expect to assess functional endpoints including 6MWT, for BTHS, and visual function, for
GA.
If we fail to receive positive results in clinical trials of our product candidates and do not achieve statistical significance for the prospectively specified
primary endpoints in our planned Phase 3 clinical trials, the development timeline and regulatory approval and commercialization prospects for our most
advanced product candidates, and, correspondingly, our business and financial prospects, would be negatively impacted.
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on Reenie McCarthy, our Chief Executive Officer and a Director, as well as the other principal members of our management and
scientific teams. Ms. McCarthy is employed “at will,” meaning we or she may terminate the employment relationship at any time. In the future, we may be
dependent on other members of our management, scientific and development team. Our ability to compete in the highly competitive biotechnology and
pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. Our industry has
experienced a high rate of turnover of management personnel in recent years. If we lose one or more of our executive officers or other key employees, our ability
to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers or other key employees may be difficult
and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to
develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to
hire, train, retain or motivate these additional key employees on acceptable terms given the competition among numerous pharmaceutical and biotechnology
companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.
We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and
commercialization strategy. Our consultants and advisors may be employed by other entities and may have commitments under consulting or advisory contracts
with those entities that may limit their availability to us. If we are unable to continue to attract and retain highly qualified personnel, our ability to develop and
commercialize our product candidates will be limited.
Because we are developing elamipretide for the treatment of several indications for which regulatory authorities have not issued definitive guidance as to
how to measure and demonstrate efficacy, there is
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substantial risk that the design or outcomes of our clinical trials will not be satisfactory to support marketing approval.
We are developing elamipretide for several indications for which there are currently no approved therapies in the United States or the European Union,
including BTHS, dry AMD and nPMM, and for symptoms of diseases including Duchenne cardiomyopathy and FRDA, for which there are currently no
approved therapies in the United States or the European Union (although there are therapies approved generally for the treatment of Duchenne which do not
address the cardiomyopathic manifestations). We are developing elamipretide for LHON, for which there are no currently approved therapies in the United States
and only one therapy approved in Europe. Furthermore, there has been limited historical clinical trial experience for the development of drugs to treat many of
these indications. As a result, the design and conduct of clinical trials for these indications is subject to substantial risk. In particular, regulatory authorities in the
United States and in other jurisdictions, including Europe, have not issued definitive guidance as to how to measure and demonstrate efficacy for BTHS, LHON,
dry AMD, nPMM, Duchenne cardiomyopathy or FRDA, and, as a result, there is substantial risk that the design or outcomes of our clinical trials will not be
satisfactory to support marketing approval. For example, the endpoints in our Phase 2/3 clinical trial of elamipretide for the treatment of BTHS included change
in six-minute walk distance and change in a total fatigue scale from the BTHS symptom assessment, a newly developed patient reported outcome measure,
which has not been utilized in prior trials and may not be accepted by regulators as a basis for approval. Even if this type of novel endpoint is accepted as a basis
for approval in the United States, we cannot be certain that regulators outside of the United States will accept such endpoints or will not require us to conduct
additional validation studies to support the suitability of such endpoints for approval in these jurisdictions.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that
may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify
as most likely to succeed, in terms of both their potential for marketing approval and commercialization. As a result, we may forego or delay pursuit of
opportunities with other product candidates or for other indications that may prove to have greater commercial potential.
Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on
current and future research and development programs and product candidates for specific indications may not yield any commercially viable product
candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to
that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain
sole development and commercialization rights to the product candidate.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
Clinical testing is expensive, time consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or
completed on schedule, or at all. The clinical development of our product candidates is susceptible to the risk of failure at any stage of drug development,
including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically
or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign
regulatory authority that a product candidate may not continue development or is not approvable. For example, Phase 3 clinical trials for common diseases
associated with aging, such as dry AMD, would likely require a large number of subjects to be enrolled, which would cause any such trial to be very expensive.
Moreover, it is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a
result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result
of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any.
Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe
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that our product candidates are toxic or not well tolerated when that is not in fact the case. Many companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face
additional setbacks. It is possible that any of our development programs may be placed on full or partial clinical hold by regulatory authorities at any point,
which would delay and possibly prevent further development of our product candidates.
If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other comparable foreign regulators, we, or
any future collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and
commercialization of these product candidates.
We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining
marketing approval from the FDA. Comparable foreign regulatory authorities impose similar restrictions. We, and any future collaborators, may never receive
such approvals. We, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of
our product candidates in humans before we, or they, will be able to obtain these approvals.
Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have
submitted one NDA to the FDA, which was determined, based on a preliminary review, not to be sufficiently complete to permit a substantive review, and have
not previously submitted any similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates. Any inability to
complete preclinical and clinical development successfully could result in additional costs to us, or any future collaborators, and impair our ability to generate
revenues from product sales, regulatory and commercialization milestones and royalties. Moreover, if (i) we, or any future collaborators, are required to conduct
additional clinical trials or other testing of our product candidates beyond the trials and testing that we or they contemplate, (ii) we, or any future collaborators,
are unable to identify a feasible trial design to generate additional data, (iii) we, or any future collaborators, are unable to successfully complete clinical trials of
our product candidates or other testing, (iv) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (v) there are
unacceptable safety concerns associated with our product candidates, we, or any future collaborators, may:
▪
be delayed in obtaining marketing approval for our product candidates;
▪
not obtain marketing approval at all;
▪
obtain approval for indications or patient populations that are not as broad as intended or desired;
▪
obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;
▪
be subject to additional post-marketing testing or other requirements; or
▪
be required to remove the product from the market after obtaining marketing approval.
Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during development
that could delay or prevent their marketing approval or limit their use.
Adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, any future collaborators, an
institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more
restrictive label or the delay or denial of marketing approval by the FDA or comparable regulatory authorities. If any of our product candidates is associated with
adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit
development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less
severe or more acceptable from a risk-benefit perspective. For example, subjects in certain of our clinical trials have reported adverse events arising from
reaction at the injection site and some subjects have withdrawn as a result. Moreover, laboratory findings
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have demonstrated mild to moderate elevations in eosinophils, a variety of white blood cells that combats parasites and infections and controls mechanisms
associated with allergy and asthma, beginning at approximately three to four weeks after initiation of elamipretide treatment, although these have not been
reported to be associated with any systemic clinical manifestations of eosinophilia and in general were demonstrated to have returned to within normal range or
to baseline levels after withdrawal of elamipretide therapy and, in most subjects, to decrease to within normal range after approximately 16 weeks of
elamipretide therapy (and without withdrawal of therapy). Many compounds that initially showed promise in clinical or earlier stage testing have later been
found to cause undesirable or unexpected side effects that prevented further development of the compound. If we, or any future collaborators, experience any of
a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our
product candidates could be delayed or prevented.
We, or any future collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing
approval or commercialization of our product candidates, including the following:
▪
clinical trials of our product candidates may produce unfavorable or inconclusive results;
▪
we, or any future collaborators, may decide, or regulators may require us, or them, to conduct additional clinical trials or abandon product
development programs;
▪
the number of subjects required for clinical trials of our product candidates may be larger than we, or any future collaborators, anticipate, subject
enrollment in these clinical trials may be slower than we, or any future collaborators, anticipate or participants may drop out of these clinical trials
at a higher rate than we, or any future collaborators, anticipate;
▪
the cost of planned clinical trials of our product candidates may be greater than we anticipate;
▪
our third-party contractors or those of any future collaborators, including those manufacturing our product candidates or components or
ingredients thereof or conducting clinical trials on our behalf or on behalf of any future collaborators, may fail to comply with regulatory
requirements or meet their contractual obligations to us or any future collaborators in a timely manner, or at all;
▪
regulators or institutional review boards may not authorize us, any future collaborators or our or their investigators to commence a clinical trial or
conduct a clinical trial at a prospective trial site;
▪
we, or any future collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial
protocols with prospective trial sites;
▪
subjects that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol,
resulting in the need to drop the subjects from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical
trial’s duration;
▪
we, or any future collaborators, may have to delay, suspend or terminate clinical trials of our product candidates for various reasons, including a
finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the
product candidate;
▪
regulators or institutional review boards may require that we, or any future collaborators, or our or their investigators suspend or terminate clinical
research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants
are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of
undesirable effects caused by a chemically or mechanistically similar product or product candidate;
▪
the FDA or comparable regulatory authorities may disagree with our, or any future collaborators’, clinical trial designs or our or their
interpretation of data from preclinical studies and clinical trials;
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▪
the FDA or comparable regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of
third-party manufacturers with which we, or any future collaborators, enter into agreements for clinical and commercial supplies;
▪
the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product
candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and
▪
the approval policies or regulations of the FDA or comparable regulatory authorities may significantly change in a manner rendering our clinical
data insufficient to obtain marketing approval.
Product development costs for us, or any future collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals
and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We
do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule, or at all.
Significant preclinical or clinical trial delays also could shorten any periods during which we, or any future collaborators, may have the exclusive right to
commercialize our product candidates or allow our competitors, or the competitors of any future collaborators, to bring products to market before we, or any
future collaborators, do and impair our ability, or the ability of any future collaborators, to successfully commercialize our product candidates and may harm our
business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any
of our product candidates.
If we, or any future collaborators, experience delays or difficulties in the enrollment of subjects in clinical trials, our or their receipt of necessary regulatory
approvals could be delayed or prevented.
We, or any future collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate
and enroll a sufficient number of eligible subjects to participate in clinical trials as required by the FDA or comparable regulatory authorities. For example, we
are developing elamipretide for the treatment of several rare diseases with small patient populations, such as BTHS. Enrollment is a significant factor in the
timing of clinical trials, and is affected by many factors, including:
▪
the size and nature of the patient population;
▪
the severity of the disease under investigation;
▪
the proximity of subjects to clinical sites;
▪
the eligibility criteria for the trial;
▪
the design of the clinical trial;
▪
efforts to facilitate timely enrollment;
▪
competing clinical trials;
▪
COVID-19 related safety considerations; and
▪
clinician and patient perception as to the potential advantages and risks of the drug being studied in relation to other available therapies, including
any new drugs that may be approved for the indications we are investigating.
Our inability, or the inability of any future collaborators, to enroll a sufficient number of subjects for our, or their, clinical trials could result in significant
delays or may require us or them to abandon one or more clinical trials altogether. For example, our Phase 2a clinical trial of elamipretide in subjects pre-treated
prior to a renal angioplasty was terminated early due to recruitment challenges after enrolling only 14 subjects of the 28 originally planned. Enrollment delays in
clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product
candidates and jeopardize our, or any future collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause
the value of our company to decline.
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If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or
causes undesirable side effects that were not previously identified, our ability, or that of any future collaborators, to market the drug could be compromised.
Clinical trials of our product candidates are conducted in carefully defined subsets of subjects who have agreed to enter into clinical trials. Consequently,
it is possible that our clinical trials, or those of any future collaborator, may indicate an apparent positive effect of a product candidate that is greater than the
actual positive effect, if any, or alternatively fail to identify undesirable side effects. In particular, because our product candidates will require chronic dosing
over the lifetime of the patient, there may be undesirable side effects as a result of long-term exposure to the drug that were not observed in our clinical trials. If,
following approval of a product candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that
were not previously identified, any of the following adverse events could occur:
▪
regulatory authorities may withdraw their approval of the drug or seize the drug;
▪
we, or any future collaborators, may be required to recall the drug, change the way the drug is administered or conduct additional clinical trials;
▪
additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular drug;
▪
we may be subject to fines, injunctions or the imposition of civil or criminal penalties;
▪
regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
▪
we, or any future collaborators, may be required to create a medication guide outlining the risks of the previously unidentified side effects for
distribution to patients;
▪
we, or any future collaborators, could be sued and held liable for harm caused to patients;
▪
the drug may become less competitive; and
▪
our reputation may suffer.
Any of these events could have a material and adverse effect on our operations and business and could adversely impact the price of the ADSs.
Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party
payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we
estimate.
We have never commercialized a product. Even if one of our product candidates is approved by the appropriate regulatory authorities for marketing and
sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example,
physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the
market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching
products or they are required to switch therapies due to lack of reimbursement for existing therapies.
Efforts to inform the medical community and third-party payors of the benefits of our product candidates may require significant resources and may not be
successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues
and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of
factors, including:
▪
the efficacy and safety of the product;
▪
the potential advantages of the product compared to alternative treatments;
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▪
the prevalence and severity of any side effects;
▪
the clinical indications for which the product is approved;
▪
whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;
▪
limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;
▪
our ability, or the ability of any future collaborators, to offer the product for sale at competitive prices;
▪
the product’s convenience and ease of administration compared to alternative treatments;
▪
the willingness of the target patient population to try, and of physicians to prescribe, the product;
▪
the strength of sales, marketing and distribution support;
▪
the approval of other new products for the same indications;
▪
changes in the standard of care for the targeted indications for the product;
▪
the timing of market introduction of our approved products as well as competitive products;
▪
availability of coverage and the adequacy of reimbursement from government payors, managed care plans and other third-party payors;
▪
adverse publicity about the product or favorable publicity about competitive products; and
▪
potential product liability claims.
The potential market opportunities for our product candidates are difficult to estimate precisely. Our estimates of the potential market opportunities are
predicated on many assumptions, including industry knowledge and publications, third-party research reports and other surveys. While we believe that our
internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and
the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets
for our product candidates could be smaller than our estimates of the potential market opportunities.
If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we
may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.
We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products.
To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third
parties. We plan to use a combination of focused in-house sales and marketing capabilities and third-party collaboration, licensing and distribution arrangements
to sell any of our products that receive marketing approval.
We generally plan to retain rights to participate in commercialization in the United States, particularly for products that we can commercialize with a
specialized sales force and by building a focused sales and marketing organization in the United States to sell our products. Any efforts related to sales,
marketing and distribution may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we
may not be able to hire or retain a sales force that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to
establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has
development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential
partner even if we believe we could otherwise develop and commercialize the product independently.
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We hope to collaborate with third parties for commercialization in the United States of any products that require larger sales, marketing and product
distribution infrastructure. We plan to commercialize our products outside the United States through collaboration, licensing and distribution arrangements with
third parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the
profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets.
Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us.
In addition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market
our products effectively.
If we do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in
commercializing any of our product candidates that receive marketing approval.
We have established commercial manufacturing processes for both the elamipretide drug substance and drug product and have begun validation of our
manufacturing processes at a scale that exceeds our expected quantities of elamipretide required for commercial launch and beyond. The successful
validation of manufacturing processes is a necessary part of pre-approval inspections by regulatory authorities. An unfavorable pre-approval inspection
could delay anticipated approval of marketing authorization applications.
Our transition to a solution-phase process for making the active ingredient, elamipretide, was relatively recent. A change in the contract manufacturer for
elamipretide was necessary late in the development timeline to meet the goals for scale and product quality. In addition to any findings that could result from a
pre-approval inspection, regulatory authorities could require that additional batches be produced to demonstrate the suitability of the process at the current
contract manufacturing sites and/or at the current commercial scale. Such additional batches could cause a delay in granting approval of marketing authorization
applications, including NDAs.
We face substantial competition from other pharmaceutical and biotechnology companies, and our operating results may suffer if we fail to compete
effectively.
The development and commercialization of new drug products is highly competitive. We expect that we, and any future collaborators, will face significant
competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to any of our
product candidates that we, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and
biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of the key indications
of our most advanced programs.
We are initially developing elamipretide for the treatment of rare primary mitochondrial diseases and common diseases of aging in which mitochondrial
function is impaired. There are several companies developing treatments that target mitochondria or mitochondria-associated diseases. The majority of these
efforts are in preclinical or early clinical development are focused on gene therapy or are proposing the use of generic compounds. To our knowledge, none of
these is focused on cardiolipin remodeling. Our competitors include: Abliva AB, Reata Pharmaceuticals, Inc., LumiThera, Inc., Reneo Pharmaceuticals, Inc. and
Santhera Pharmaceuticals Holding. In addition to competition from competitors who are developing treatments that seek to improve mitochondrial function or
otherwise target the mitochondria, we also face competition from therapies that target the indications we are studying, particularly for diseases of aging such as
GA. Such competitors who are developing or who have developed competing therapies include Apellis Pharmaceuticals Inc., Astellas Pharma Inc., Hemera
Biosciences Inc., Ionis Pharmaceuticals, Inc. and IVERIC bio, Inc.
Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have fewer or more tolerable
side effects or are less costly than any product candidates that we are currently developing or that we may develop, which could render our product candidates
obsolete and noncompetitive.
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Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have
fewer or less severe side effects, are more convenient or are less expensive than any products that we, or any future collaborators, may develop. Our competitors
also may obtain FDA or other marketing approval for their products before we, or any future collaborators, are able to obtain approval for ours, which could
result in our competitors establishing a strong market position before we, or any future collaborators, are able to enter the market.
Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and
acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our
competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing
clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
If the FDA or comparable regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not
grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely
affected.
Once an NDA is approved, the product covered thereby becomes a “reference-listed drug” in the FDA’s publication, “Approved Drug Products with
Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference-listed drugs through submission of abbreviated new
drug applications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant
generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the
reference-listed drug and that the generic version is bioequivalent to the reference-listed drug, meaning it is absorbed in the body at the same rate and to the same
extent. Generic products may be significantly less costly to bring to market than the reference-listed drug and companies that produce generic products are
generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or
reference-listed drug may be typically lost to the generic product.
The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference-listed drug has expired.
The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity,
or NCE. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the
submission is accompanied by a Paragraph IV certification that a patent covering the reference-listed drug is either invalid or will not be infringed by the generic
product, in which case the applicant may submit its application four years following approval of the reference-listed drug. We have an issued composition of
matter patent on elamipretide. As such, the active ingredient will be treated as an NCE and any products containing elamipretide will be granted exclusivity
based on that patent expiry date and other contributing factors. It is unclear whether the FDA will treat the active ingredients in our other product candidates as
NCEs and, therefore, afford them five years of NCE data exclusivity if they are approved. If any product we develop does not receive five years of NCE
exclusivity, the FDA may approve generic versions of such product three years after its date of approval. Manufacturers may seek to launch these generic
products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.
Competition that our products, if any, may face from generic versions of our products could materially and adversely impact our future revenue,
profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.
Even if we, or any future collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to
unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives that could harm our business.
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The commercial success of our product candidates in key potential markets will depend substantially on the extent to which the costs of our product
candidates will be paid by third-party payors, including government health administration authorities and private health coverage insurers. If coverage and
reimbursement is not available, or reimbursement is available only to limited levels, we, or any future collaborators, may not be able to successfully
commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or any future
collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments.
There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and
reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed.
In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription
pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or any future collaborators,
might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product,
possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing
limitations may hinder our ability or the ability of any future collaborators to recoup our or their investment in one or more product candidates, even if our
product candidates obtain marketing approval. Moreover, in the United States, no uniform policy of coverage and reimbursement for products exists among
third-party payors. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their reimbursement rates, but also have their
own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement for products in the United States can differ
significantly from payor to payor.
Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with
their treatment. Therefore, our ability, and the ability of any future collaborators, to commercialize any of our product candidates will depend in part on the
extent to which coverage and reimbursement for these products and related treatments will be available from third-party payors. Third-party payors decide which
medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and
worldwide. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for
particular medications, which could affect our ability or that of any future collaborators to sell our product candidates profitably. These payors may not view our
products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of any future collaborators, or may not be
sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or any future collaborators, to decrease the
price we, or they, might establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any, decrease or if
governmental and other third-party payors do not provide coverage or adequate reimbursement, our prospects for revenue and profitability will suffer.
There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for
which the drug is approved by the FDA or comparable regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid
for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of
example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set
for lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are
challenging the prices charged. We cannot be sure that coverage will be available for any product candidate that we, or any future collaborator, commercialize
and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there
are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability to
promptly obtain coverage and adequate payment rates from both government-funded and private payors for
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any of our product candidates for which we, or any future collaborator, obtain marketing approval could significantly harm our operating results, our ability to
raise capital needed to commercialize products and our overall financial condition.
The COVID-19 pandemic has and may continue to affect our ability to recruit or retain patients for our clinical trials, and may disrupt regulatory activities,
disrupt preclinical studies or have other adverse effects on our business and operations.
The COVID-19 pandemic has caused many governments to implement measures to slow the spread of the pandemic through quarantines, travel
restrictions, heightened border scrutiny and other measures. The pandemic and government measures taken in response have also had a significant impact, both
direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been
suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as
travel, has fallen. The future progression of the pandemic and its effects on our business and operations are uncertain. We seek to enroll patients for our clinical
trials at sites located in the United States and may be unable to continue trials as scheduled. We have and may continue to face difficulties recruiting or retaining
patients in our ongoing and planned clinical trials if patients are affected by the virus or are fearful of traveling to our clinical trial sites because of the pandemic.
For example, for our on-going trials we have implemented best practices measures, including availability of night and weekend visits and visiting nurses, to
alleviate COVID-19 related challenges. We are closely monitoring any COVID-19 related discontinuations in light of increased reported incidence in the United
States. We and our third-party contract manufacturers, contract research organizations, academic collaborators and clinical sites may also face disruptions in
accessing laboratory or clinical trial sites or procuring items that are essential for our research and development activities, including, for example, raw materials
used in the manufacture of our product candidates, medical and laboratory supplies used in our clinical trials or preclinical studies or animals that are used for
preclinical testing, in each case, that are sourced from abroad or for which there are shortages because of ongoing efforts to address the pandemic. These factors
have and may continue to may increase our cost for future studies and may further delay timelines to start new studies. For example, we manufacture our
products outside the United States and could be subject to disruptions in due to responses of other governments to outbreaks of COVID-19. Additionally, during
various periods in 2021, the principal investigator for the TAZPOWER trial suspended all ongoing regular clinic visits in accordance with pandemic safety
guidelines published by the Barth Syndrome Foundation, compromising the practicability of collecting additional controlled clinical data; similar disruptions in
regularly scheduled visits also impacted our ReCLAIM 2 trial. Pandemic-related shutdowns could also impact our ability to initiate our Duchenne
cardiomyopathy or nPMM trials. In addition, we may face impediments to regulatory meetings and approvals due to measures intended to limit in-person
interactions. We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business, and it has the potential to adversely affect our
business, operations and financial condition.
Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we
may develop.
We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed
consents from our clinical trial participants. We will face an even greater risk if we or any future collaborators commercially sell any product that we or they may
develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing,
manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of
dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we
cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product
candidates. Regardless of the merits or eventual outcome, liability claims may result in:
▪
decreased demand for our product candidates or products that we may develop;
▪
injury to our reputation and significant negative media attention;
▪
withdrawal of clinical trial subjects;
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▪
significant costs to defend resulting litigation;
▪
substantial monetary awards to trial subjects or patients;
▪
loss of revenue;
▪
reduced resources of our management to pursue our business strategy; and
▪
the inability to commercialize any products that we may develop.
Although we believe we maintain adequate general and clinical trial liability insurance for a company at our stage, this insurance may not fully cover
potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will
need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is
becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against
potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could
adversely affect our business, financial condition, results of operations and prospects.
Risks Related to Our Dependence on Third Parties
We expect to seek to establish collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our
development and commercialization plans.
Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses.
We expect to seek collaborators for the development and commercialization of one or more of our product candidates. For example, we hold worldwide rights
for elamipretide and we own our new pipeline compounds, including SBT-272. We may explore partnerships for development of elamipretide or SBT-272, as
well as one or more of our pipeline compounds, in selected other indications and territories. Likely future collaborators may include large and mid-size
pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. In addition, if we are able to obtain marketing
approval for any of our product candidates from foreign regulatory authorities, we intend to enter into strategic relationships with international biotechnology or
pharmaceutical companies for the commercialization of such product candidates outside of the United States.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among
other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed
collaborator’s evaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from competing product
candidates, design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for
any such approval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product to patients and the
potential of competing products. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available
for collaboration and whether such collaboration could be more attractive than the one with us for our product candidate.
Collaborations are complex and time-consuming to negotiate and document. Further, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the
development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development
programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development
or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we
may need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If
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we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
If we enter into collaborations with third parties for the development and commercialization of our product candidates, our prospects with respect to those
product candidates will depend in significant part on the success of those collaborations.
We may enter into collaborations for the development and commercialization of certain of our product candidates. If we enter into such collaborations, we
will have limited control over the amount and timing of resources that our collaborators will dedicate to the development or commercialization of our product
candidates. Our ability to generate revenues from these arrangements will depend on any future collaborators’ abilities to successfully perform the functions
assigned to them in these arrangements. In addition, any future collaborators may have the right to abandon research or development projects and terminate
applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.
Collaborations involving our product candidates pose a number of risks, including the following:
▪
collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
▪
collaborators may not perform their obligations as expected;
▪
collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or
commercialization programs, based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors,
such as an acquisition, that divert resources or create competing priorities;
▪
collaborators may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial or abandon a product candidate, repeat or
conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
▪
a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and
distribution of such product or products;
▪
disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development,
might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional
responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and
expensive;
▪
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to
invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
▪
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and
▪
collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or
commercialization of the applicable product candidates.
Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. For example, in
October 2019, we granted Alexion Pharmaceuticals, Inc., or Alexion, an exclusive option to co-develop and commercialize elamipretide. Alexion terminated the
option agreement in January 2020. Moreover, if any future collaborator of ours were to be involved in a business combination, it could decide to delay, diminish
or terminate the development or commercialization of any product candidate licensed to it by us.
We rely on third parties to conduct our clinical trials. If they do not perform satisfactorily, our business could be significantly harmed.
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We do not independently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical
data management organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct
clinical trials of any other product candidate that we develop. Any of these third parties may terminate their engagements with us under certain circumstances.
We may not be able to enter into alternative arrangements or do so on commercially reasonable terms. In addition, there is a natural transition period when a new
contract research organization begins work. As a result, delays would likely occur, which could materially impact our ability to meet our expected clinical
development timelines and harm our business, financial condition and prospects.
Further, our reliance on these third parties for clinical development activities limits our control over these activities, but we remain responsible for
ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding
the obligations of a contract research organization for a trial of one of our product candidates, we remain responsible for ensuring that each of our clinical trials is
conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly
referred to as current good clinical practices, or cGCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported
results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these cGCPs through
periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third-party contractors fail to comply
with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical
trials before approving our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will
determine that any of our clinical trials comply with cGCPs. Similar regulatory requirements apply outside the United States, including the International Council
for Harmonization of Technical Requirements for the Registration of Pharmaceuticals for Human Use, or ICH. We are also required to register clinical trials and
post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in
fines, adverse publicity and civil and criminal sanctions.
Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under our agreements
with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors
may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug
development activities, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out
their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may not be
able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our
efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates
that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be impaired.
We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could
delay clinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additional losses and
depriving us of potential product revenue.
We contract with third parties for the manufacture and distribution of our product candidates for clinical trials and expect to continue to do so in connection
with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our
product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on contract manufacturers to produce both
drug substance and drug product required for our clinical trials. We plan to continue to rely upon contract manufacturers, and potentially collaboration
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partners, to manufacture commercial quantities of our product candidates and, if approved, products. Reliance on such third-party contractors entails risks,
including:
▪
manufacturing delays if our third-party contractors give greater priority to the supply of other products over our product candidates or otherwise
do not satisfactorily perform according to the terms of the agreements between us and them;
▪
disruptions in supply from manufacturers outside of the United States due to import/export limitations or responses of other governments to
outbreaks of COVID-19;
▪
the possible termination or nonrenewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;
▪
the possible breach by the third-party contractors of our agreements with them;
▪
the failure of third-party contractors to comply with applicable regulatory requirements;
▪
the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being
properly identified;
▪
the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being
distributed to commercial vendors in a timely manner, resulting in lost sales; and
▪
the possible misappropriation of our proprietary information, including our trade secrets and know-how.
We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical studies and clinical trials, as
well as for commercial manufacture if our product candidates receive marketing approval. To date, we, or our partners on our behalf, have obtained materials for
elamipretide and SBT-272 from third-party manufacturers. If any of our existing manufacturers should become unavailable to us for any reason, we may incur
some delay in identifying or qualifying replacements.
Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations, delay our clinical trials and, if our products are
approved for sale, result in lost sales. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced
control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to future contract manufacture caused by problems at
suppliers could delay shipment of our product candidates, increase our cost of goods sold and result in lost sales.
If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third-party contract manufacturers for the
commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a
timely manner. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating
under current good manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach
agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization efforts.
Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States, such as the ICH. Facilities
used by our third-party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar
regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely
dependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our
manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA, and of any
applicable foreign regulatory authority, we will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved
for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable
product candidate.
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In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with
cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these
inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in
sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions
in supply and criminal prosecutions, any of which could adversely affect supplies of our product candidates and significantly harm our business, financial
condition and results of operations.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins
and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently
broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to commercialize our product candidates
successfully may be adversely affected.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our
proprietary product candidates. If we do not adequately protect our intellectual property, competitors may be able to erode or negate any competitive advantage
we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United
States and abroad related to our novel product candidates that are important to our business. The patent application and approval process is expensive and time
consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims
allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of
patent rights with respect to pharmaceutical compounds commonly involves complex legal and factual questions, which has in recent years been the subject of
much litigation. As a result, the issuance, scope, validity, enforceability, term and commercial value of our patent rights are highly uncertain.
Our pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent
issues from such applications. Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the
patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature
often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing,
or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or
that we were the first to file for patent protection of such inventions.
Moreover, because the issuance of a patent is not conclusive as to its inventorship, scope, validity, term or enforceability, our patents or pending patent
applications may be challenged in the courts or patent offices in the United States and abroad. For example, we may be subject to a third-party preissuance
submission of prior art to the U.S. Patent and Trademark Office, or USPTO, or become involved in post-grant review procedures, oppositions, derivations,
reexaminations, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An
adverse determination in any such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or
in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent
protection of our technology and products. Moreover, if the breadth or strength of protection provided by our patents and patent applications is threatened,
regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. In
addition, given the amount of time required for the development, testing and regulatory
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review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Furthermore,
while it is our policy to require agreements with selected contractors, consultants, scientific advisors and collaborators requiring assignment of inventions or, in
limited cases, the grant of an exclusive, worldwide license or option to license intellectual property rights developed in the course of their work with or for us, we
may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. As a
result, the inventorship or ownership of our intellectual property may be challenged in the future.
Our pending and future patent applications may not result in patents being issued which protect our product candidates, in whole or in part, or which
effectively prevent others from commercializing competitive products. Our issued patents or any patents that may issue in the future may be invalidated or
interpreted narrowly, such that they fail to provide us with any significant competitive advantage. Changes in either the patent laws or interpretation of the patent
laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. In addition, the laws of foreign
countries may not protect our rights to the same extent or in the same manner as the laws of the United States. For example, European patent law restricts the
patentability of methods of treatment of the human body more than United States law does.
Even if our patent applications have issued or do issue as patents, they may not issue in a form that will provide us with any meaningful protection,
prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by
developing similar or alternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market their own products
similar to or otherwise competitive with our products. Alternatively, our competitors may seek to market generic versions of any approved products by
submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we
may need to defend or assert our patents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other
agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have
valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business
objectives.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, and our business would
be harmed.
While we have obtained composition of matter patents with respect to elamipretide and certain methods of use through an application family in-licensed
from Cornell Research Foundation, Inc., a subsidiary of Cornell University, or Cornell, and Institut de recherches cliniques de Montréal, or the IRCM, we also
rely on trade secret protection for certain aspects of our discovery platform. We seek to protect these trade secrets, in part, by entering into non-disclosure and
confidentiality agreements with parties who have access to them, such as our employees, consultants, independent contractors, advisors, contract manufacturers,
suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements with employees, certain consultants,
contractors and collaborators. To our knowledge, such agreements have been entered into with all relevant parties; however, we cannot be certain that our trade
secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or
independently develop substantially equivalent information and techniques. Any party with whom we have executed such an agreement may breach that
agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.
Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time consuming, and the outcome is unpredictable.
In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third
party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade
secrets were to be misappropriated or disclosed to, or independently developed by, a competitor, our business and competitive position could be harmed.
Certain aspects of our product candidates and technology are protected by patents exclusively licensed from academic institutions. If these third parties
terminate their agreements with us or fail to maintain or enforce the underlying patents, or we otherwise lose our rights to these patents, our competitive
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position and our potential market share in the markets for any of our products that is approved will be harmed.
We are a party to license agreements and certain aspects of our business depend on patents and/or patent applications owned by third parties. In particular,
we hold exclusive licenses from Cornell and the IRCM for elamipretide as well as for other compounds and certain methods. We may enter into additional
license agreements as part of the development of our business in the future. If we are unable to maintain these patent rights or our license to these patent rights
for any reason, or if we are unable to maintain any future material license we may enter into, our ability to develop and commercialize our product candidates
could be materially harmed.
Our licensors may not successfully prosecute certain patent applications under which we are licensed and on which our business depends. Even if patents
issue from these applications, our licensors may fail to maintain these patents, may decide not to pursue litigation against third-party infringers, may fail to prove
infringement, or may fail to defend against counterclaims of patent invalidity or unenforceability. For example, under our license agreement with Cornell, we
have the first right to enforce the licensed patents against third-party infringement. However, our first right to enforce is subject to Cornell’s consent.
Risks with respect to parties from whom we have obtained intellectual property rights may also arise out of circumstances beyond our control. Despite our
best efforts, our licensors might conclude that we have materially breached our license agreements and might therefore terminate the license agreements, thereby
removing our ability to obtain regulatory approval and to market products covered by these license agreements. For example, our license agreement with Cornell
required us to commercialize a product by December 31, 2020, subject to specified exceptions for causes due to scientific and regulatory events that are common
in drug development, such as institutional review board delays, clinical trial recruitment, clinical trial results and regulatory delays, and other events over which
we cannot exert direct control, and Cornell has the right to terminate the license if we do not comply. We believe that our noncompliance is subject to the named
exceptions, and to date we have not received any notice of termination from Cornell. Any actual termination of the license would be subject to cure periods and
appeals before taking effect. If our license agreements are terminated, or if the underlying patents fail to provide the intended market exclusivity, competitors
would have the freedom to seek regulatory approval of, and to market, products similar or identical to ours. Moreover, if our license agreements are terminated,
our former licensors and/or assignors may be able to prevent us from utilizing the technology covered by the licensed or assigned patents and patent applications.
This could have a material adverse effect on our competitive business position and our business prospects.
Our license agreements with Cornell and the IRCM impose, and future license agreements we may enter into may impose, various diligence, milestone
payment, royalty and other obligations on us. For example, our license agreements with Cornell and the IRCM include obligations to pay royalties on the net
sales of product candidates or related technologies to the extent they are covered by the agreements. If we fail to comply with our obligations under our license
agreements with Cornell and the IRCM or future license agreements, and if no such exceptions apply, our counterparties may have the right to terminate these
agreements, in which event we might not be able to develop, manufacture or market any product that is covered by the agreement or face other penalties under
the agreement, such as loss of exclusivity. Such an occurrence could materially adversely affect the value of the product candidate being developed under any
such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or
reinstated agreements with less favorable terms or cause us to lose our rights under these agreements, including our rights to important intellectual property or
technology.
Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:
▪
the scope of rights granted under the license agreement and other interpretation-related issues;
▪
the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the
licensing agreement;
▪
the sublicensing of patent and other rights under our collaborative development relationships;
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▪
our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
▪
the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and
us and our partners; and
▪
the priority of invention of patented technology.
In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in
such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we
believe to be the scope of our rights to the relevant intellectual property or technology or increase what we believe to be our financial or other obligations under
the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects. Moreover,
if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially
acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on
our business, financial conditions, results of operations and prospects.
Some of our intellectual property that was discovered through government-funded programs may be subject to federal regulation such as “march-in” rights,
certain reporting requirements and a preference for United States industry. Compliance with such regulations may limit our exclusive rights, subject us to
expenditure of resources with respect to reporting requirements and limit our ability to contract with foreign manufacturers.
Some of our intellectual property with respect to our product candidates has been funded, at least in part, by the U.S. government and, therefore, would be
subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product
candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act. For example, under the “march-in” provisions of the Bayh-Dole Act, the U.S. government
may have the right under limited circumstances to require the patent owners to grant exclusive, partially exclusive or non-exclusive rights to third parties for
intellectual property discovered through the government-funded program. The U.S. government can exercise its march-in rights if it determines that action is
necessary because the patent owner fails to achieve practical application of the new invention or because action is necessary to alleviate health concerns or
address the safety needs of the public. Intellectual property discovered under the government-funded program is also subject to certain reporting requirements,
compliance with which may require us or our licensors to expend substantial resources. Such intellectual property is also subject to a preference for U.S.
industry, which may limit our ability to contract with foreign product manufacturers for products covered by such intellectual property. We may apply for
additional U.S. government funding, and it is possible that we may discover additional compounds or product candidates as a result of such funding. Intellectual
property under such discoveries would be subject to the applicable provisions of the Bayh-Dole Act. Similarly, intellectual property that we license in the future
may have been made using government funding and may be subject to the provisions of the Bayh-Dole Act.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and
unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. We may be required to file infringement claims, which can be
expensive and time consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers
could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are
invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in
whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such
patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at
issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our
ability to assert our patents against those parties or other competitors and may curtail or preclude our ability to exclude third parties
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from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects
and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or
unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could
ultimately be forced to cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary
damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential or trade-secret information could be compromised by disclosure during litigation. There could also
be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these
results to be negative, it could have a material adverse effect on the price of the ADSs. Moreover, there can be no assurance that we will have sufficient financial
or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such
claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive
as a result of the proceedings. In addition, we may from time to time become involved in disputes, including litigation, with respect to intellectual property.
If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time-consuming and could prevent or delay us
from developing or commercializing our product candidates.
Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates without infringing the intellectual
property and other proprietary rights of third parties. Third parties have U.S. and non-U.S. issued patents and pending patent applications relating to compounds
and methods of use for the treatment of key indications for our priority programs, and we may be subject to claims that our research, development and
commercialization activities infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. If any third-party
patents or patent applications are found to cover our product candidates or their methods of use, we may not be free to manufacture or market our product
candidates as planned without obtaining a license, which may not be available on commercially reasonable terms, or at all.
There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or
threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our products candidates, including derivation or
interference proceedings, post grant and inter partes reviews, opposition proceedings, and the like in the United States and in other jurisdictions. Third parties
may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to
uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have produced a significant number of patents,
and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is
subject to interpretation by the courts, and the interpretation is not always uniform. If we were sued for patent infringement, we would need to demonstrate that
our product candidates, products, or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable,
and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and
the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could significantly harm our business
and operating results. In addition, we may not have sufficient resources to bring these actions to a successful conclusion. Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation or administrative proceedings, there is a risk that some of our confidential
information could be compromised by disclosure. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have
material adverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial
condition and prospects.
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If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing, or
commercializing the infringing product candidate or product. Alternatively, we may be required to obtain a license from such third party in order to use the
infringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any
required license on commercially reasonable terms, or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors
access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we
are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some
of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third
parties could have a similar negative impact on our business.
Changes to the patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect
our products.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and
enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently
uncertain. Patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, signed into
law in September 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These
include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors
to challenge the validity of patents. In addition, the Leahy-Smith Act has transformed the U.S. patent system into a “first to file” system. The first-to-file
provisions, however, only became effective in March 2013. It remains unclear what, if any, long-term impact the Leahy-Smith Act will have on the operation of
our business. However, the Leahy-Smith Act and its implementation could make it more difficult to obtain patent protection for our inventions and increase the
uncertainties and costs surrounding the prosecution of our or our collaboration partners’ patent applications and the enforcement or defense of our or our
collaboration partners’ issued patents, all of which could harm our business, results of operations and financial condition.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain
circumstances or weakening the rights of patent owners in certain situations. Additionally, there have been recent proposals for additional changes to the patent
laws of the United States and other countries that, if adopted, could impact our ability to enforce our proprietary technology. Depending on future actions by the
U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in
unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, 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 on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the
patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other
similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in
accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting
in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent
application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize
and submit formal documents. If we fail to maintain the patents and patent applications covering our product candidates, our competitive position would be
adversely affected.
We may not be able to enforce our intellectual property rights throughout the world.
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Filing, prosecuting, and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The
requirements for patentability may differ in certain countries, particularly in developing countries. Competitors may use our technologies in jurisdictions where
we have not pursued and obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we
may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These products may compete with our products in
jurisdictions where we do not have any issued or licensed patents and any future patent claims, or other intellectual property rights may not be effective or
sufficient to prevent them from so competing.
Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual
property laws. Additionally, laws of some countries outside of the United States and Europe do not afford intellectual property protection to the same extent as
the laws of the United States and Europe. Many companies have encountered significant problems in protecting and defending intellectual property rights in
certain foreign jurisdictions. The legal systems of some countries, including China, India and other developing countries, do not favor the enforcement of patents
and other intellectual property rights. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual
property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties.
Consequently, we may not be able to prevent third parties from practicing our inventions in certain countries outside the United States and Europe. Competitors
may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise
infringing products to territories where we have patent protection, if our ability to enforce our patents to stop infringing activities is inadequate. These products
may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and
resources from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in major markets for our products, we
cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts
to protect our intellectual property rights in such countries may be inadequate.
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its
earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents
covering our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including generics or
biosimilars. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates
might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient
rights to exclude others from commercializing products similar or identical to ours.
If we do not obtain patent term extension and data exclusivity for any product candidates we may develop, our business may be materially harmed.
Depending upon the timing, duration, and specifics of any FDA marketing approval of any product candidates we may develop, one or more of our U.S.
patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984, or the Hatch-Waxman
Amendments. The Hatch-Waxman Amendments permit a patent term extension of up to five years as compensation for patent term lost during the FDA
regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval,
only one patent may be extended and the extension only applies to those claims covering the approved drug, a method for using it or a method for manufacturing
it. However, we may not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or regulatory review process,
failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements.
Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term
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extension or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration,
and our business, financial condition, results of operations and prospects could be materially harmed. Furthermore, in the United States, only a single patent can
be extended for each qualifying FDA approval, and any patent can be extended only once and only for a single product. Laws governing analogous patent term
extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single patent family. Because elamipretide
compositions-of-matter are protected by a single family of patents and applications, we may not be able to secure patent term extensions for both of these
product candidates in all jurisdictions where these product candidates are or may be approved, including the United States.
We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property or claiming ownership of
what we regard as our own intellectual property.
Many of our employees and our licensors’ employees, including our senior management, were previously employed by others, including universities and
other biotechnology and pharmaceutical companies, some of which are our competitors or potential competitors. Some of these employees, including each
member of our senior management, executed proprietary rights, non-disclosure and non-competition agreements, or similar agreements, in connection with such
previous employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may
be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such
third party. Litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may
lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be
required to obtain a license from such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable
terms, or at all. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to
execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops
intellectual property that we regard as our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in
prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful
in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our senior management and scientific personnel.
Risks Related to Regulatory Approval and Other Legal Compliance Matters
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time-consuming and uncertain and
may prevent us from obtaining approvals for the commercialization of any product candidates. If we are not able to obtain, or if there are delays in
obtaining, required regulatory approvals, we will not be able to commercialize any product candidates, and our ability to generate revenue will be materially
impaired.
Elamipretide, our other product candidates and any future product candidates we may identify and pursue and the activities associated with their
development and commercialization, including design, development, testing, manufacture, packaging, recordkeeping, labeling, storage, approval, advertising,
promotion, sale and distribution, export, import and adverse event reporting, are subject to comprehensive regulation by the FDA and other regulatory agencies
in the United States and by the EMA and similar regulatory authorities outside of the United States. In addition, even if we receive approval, regulatory agencies
may not approve the labeling claims that are necessary or desirable for the successful commercialization of any such product candidates.
Marketing approval of drugs in the United States requires the submission of an NDA to the FDA and we are not permitted to market any product candidate
in the United States until we obtain approval from the FDA of the NDA for that product. An NDA must be supported by extensive clinical and preclinical data, as
well as extensive information regarding pharmacology, toxicology, and chemistry, manufacturing and controls. Other than the NDA for elamipretide for the
treatment of BTHS, which the FDA determined was not sufficiently complete to permit a substantive review, we have not submitted an application or received
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marketing approval for elamipretide or any other product candidates we may develop in the United States or in any other jurisdiction.
We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third-party clinical
research organizations or other third-party consultants or vendors to assist us in this process. Securing marketing approval requires the submission of extensive
preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and
efficacy. Securing marketing approval also requires the submission of information about the product manufacturing processes to, and inspection of
manufacturing facilities by, the regulatory authorities. Our product candidates may not be effective, may be only moderately effective or may prove to have
undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.
If our manufacturing facilities cannot pass FDA pre-approval inspection, our application could be delayed or rejected. If any of any product candidates receives
marketing approval, the accompanying label may limit the approved use of our drug, which could limit sales of the product.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years, if approval is obtained at all, and
can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing
approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each
submitted product application may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval
process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other
studies. For example, in October 2021, the FDA issued an RTF with respect to our NDA for BTHS, which the FDA determined was not sufficiently complete to
permit a substantive review. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing
approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render
the approved product not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of elamipretide, or our other product candidates and any other product
candidates we may develop, the commercial prospects for any product candidates may be harmed and our ability to generate revenues will be materially
impaired.
Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed abroad.
In order to market and sell our products in the European Union and many other foreign jurisdictions, we or our potential third-party collaborators must
obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can
involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval
process outside of the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside of the
United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or our potential third-
party collaborators may not obtain approvals from regulatory authorities outside of the United States on a timely basis, if at all. Approval by the FDA does not
ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside of the United States does not ensure
approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, a failure or delay in obtaining regulatory approval in one country
may have a negative effect on the regulatory process in other countries. We may not be able to file for marketing approvals and may not receive necessary
approvals to commercialize our products in any market.
Additionally, we could face heightened risks with respect to seeking marketing approval in the United Kingdom as a result of the withdrawal of the United
Kingdom from the European Union, commonly referred to as Brexit. The United Kingdom is no longer part of the European Single Market and European Union
Customs Union. As of January 1, 2021, the Medicines and Healthcare products Regulatory Agency, or the MHRA, became responsible for supervising medicines
and medical devices in Great Britain, comprising England, Scotland and Wales under domestic law, whereas Northern Ireland will continue to be
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subject to European Union rules under the Northern Ireland Protocol. The MHRA will rely on the Human Medicines Regulations 2012 (SI 2012/1916) (as
amended), or the HMR, as the basis for regulating medicines. The HMR has incorporated into the domestic law of the body of European Union law instruments
governing medicinal products that pre-existed prior to the United Kingdom’s withdrawal from the European Union. Any delay in obtaining, or an inability to
obtain, any marketing approvals, as a result of Brexit or otherwise, may force us to restrict or delay efforts to seek regulatory approval in the United Kingdom for
our product candidates, which could significantly and materially harm our business.
We expect that we will be subject to additional risks in commercializing any of our product candidates that receive marketing approval outside the United
States, including tariffs, trade barriers and regulatory requirements; economic weakness, including inflation, or political instability in particular in foreign
economies and markets; compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; foreign currency fluctuations,
which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country; and workforce
uncertainty in countries where labor unrest is more common than in the United States.
If we resubmit our NDA for elamipretide for the treatment of BTHS and the FDA does not accept our NDA, we will experience delays in obtaining approval
of this candidate product and will incur additional costs in securing approval and commercialization of this product.
Upon receipt of an NDA, the FDA conducts a preliminary review of all applications within 60 days of receipt and must inform the sponsor at that time or
before whether an application is sufficiently complete to permit substantive review. In pertinent part, FDA’s regulations state that an application “shall not be
considered as filed until all pertinent information and data have been received” by the FDA. In the event that FDA determines that an application does not
satisfy this standard, it will issue a Refuse to File, or RTF, determination to the applicant. Typically, an RTF will be based on administrative incompleteness,
such as clear omission of information or sections of required information; scientific incompleteness, such as omission of critical data, information or analyses
needed to evaluate safety and efficacy or provide adequate directions for use; or inadequate content, presentation, or organization of information such that
substantive and meaningful review is precluded. The FDA may request additional information rather than accept an application for filing. In this event, the
application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing.
On August 25, 2021, we submitted our NDA for elamipretide for the treatment of BTHS to the FDA. On October 18, 2021, we received an RTF from the
FDA. The FDA determined, upon its preliminary review, that the NDA was not sufficiently complete to permit a substantive review. In the letter, the FDA stated
that the NDA does not contain an adequate and well-controlled trial that provides evidence of effectiveness, noting that the SPIBA-201 Phase 2 clinical trial of
elamipretide for the treatment of BTHS was negative during the randomized, double-blind portion of the study and that the FDA does not consider the open label
extension of the SPIBA-201 trial to be adequate and well-controlled. In the event that we resubmit our NDA and the FDA decides not to file our NDA for
review, we will experience delays in obtaining approval of elamipretide for the treatment of BTHS, if at all, and our ability to generate revenues will be
materially impaired.
We have obtained Fast Track designation from the FDA for elamipretide for the treatment of BTHS, LHON and GA. However, Fast Track designation may
not actually lead to a faster development, regulatory review or approval process.
We have received Fast Track designation for elamipretide for the treatment of BTHS, PMM, LHON, and GA. We may seek Fast Track designation for
other product candidates we may develop. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential
to address unmet medical needs for this condition, the drug sponsor may apply for FDA Fast Track designation. The FDA has broad discretion whether or not to
grant this designation, so even if we believe a particular product candidate is eligible for this designation, we cannot be certain that the FDA would decide to
grant it. Fast Track designation does not ensure that we will experience a faster development, regulatory review or approval process compared to conventional
FDA procedures or that we will ultimately obtain regulatory approval of elamipretide. Additionally, the FDA may withdraw Fast Track designation if it believes
that the designation is no longer supported by data from our clinical development program.
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We may not be able to obtain or maintain orphan drug designation or exclusivity for any product candidates and, even if we do, that exclusivity may not
prevent the FDA or the EMA from approving other competing products.
We have obtained orphan drug designation from the FDA and the EMA for elamipretide for the treatment of BTHS and from the FDA for the treatment of
LHON. We may seek orphan drug designation in other indications or for any other future product candidates. Regulatory authorities in some jurisdictions,
including the United States and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act,
the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population
of fewer than 200,000 individuals in the United States.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such
designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the EMA from approving another marketing application for
the same drug for that time period. The applicable period is seven years in the United States and ten years in the European Union. The exclusivity period in the
European Union can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that
market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially
defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because competing
drugs containing a different active ingredient can be approved for the same condition. In addition, even after an orphan drug is approved, the FDA can
subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more
effective or makes a major contribution to patient care.
In August 2017, the U.S. Congress passed the FDA Reauthorization Act of 2017. which, among other things, codified the FDA’s pre-existing regulatory
interpretation to require that a drug sponsor demonstrate the clinical superiority of an orphan drug that is otherwise the same as a previously approved drug for
the same rare disease in order to receive orphan drug exclusivity. The new legislation reverses prior precedent holding that the Orphan Drug Act unambiguously
requires that the FDA recognize the orphan exclusivity period regardless of a showing of clinical superiority. The FDA may further reevaluate the Orphan Drug
Act and its regulations and policies. We do not know if, when or how the FDA may change the orphan drug regulations and policies in the future, and it is
uncertain how any changes might affect our business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business
could be adversely impacted.
The FDA may further reevaluate the Orphan Drug Act and its regulations and policies. This may be particularly true in light of a decision from the Court
of Appeals for the 11th Circuit in September 2021 finding that, for the purpose of determining the scope of exclusivity, the term “same disease or condition”
means the designated “rare disease or condition” and could not be interpreted by the FDA to mean the “indication or use.” We do not know if, when, or how the
FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our business. Depending on what
changes the FDA may make to its orphan drug regulations and policies, our business could be adversely impacted.
Although we have obtained Rare Pediatric Disease Designation, or RPDD, for elamipretide for the treatment of BTHS, we may not be eligible to receive a
priority review voucher in the event that FDA approval does not occur prior to October 1, 2022.
The Rare Pediatric Disease Priority Review Voucher Program, or PRV Program, is intended to incentivize pharmaceutical sponsors to develop drugs for
rare pediatric diseases. A sponsor who obtains approval of an NDA or Biologics License Application, or BLA, for a rare pediatric disease may be eligible for a
Priority Review Voucher, or PRV, under the PRV Program, which may be redeemed by the owner of such PRV to obtain priority review for a marketing
application. A PRV is fully transferrable and can be
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sold to any sponsor, who in turn can redeem the PRV for priority review of a marketing application in six months, compared to the standard timeframe of
approximately 10 months.
In December 2016, Congress extended the PRV Program, authorizing the FDA to award vouchers through September 30, 2022, limited to drugs with rare
pediatric disease designation granted by September 30, 2020. On September 30, 2020, Congress provided a short-term extension of the PRV Program. On
December 27, 2020, the PRV Program was further extended. Under the current statutory sunset provisions, after September 30, 2024, FDA may only award a
voucher for an approved rare pediatric disease product application if the sponsor has RPDD for the drug, and that designation was granted by September 30,
2024. After September 30, 2026, FDA may not award any rare pediatric disease PRVs. If we do not obtain approval of an NDA for elamipretide for the treatment
of BTHS by these dates, and if the PRV Program is not further extended by congressional action, we may not receive a PRV.
Inadequate funding for the FDA, the U.S. Securities and Exchange Commission, or SEC and other government agencies, including from government shut
downs, or other disruptions to these agencies’ operations, could hinder their ability to hire and retain key leadership and other personnel, prevent new
products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business
functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels,
ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory and policy changes. Average review times at the agency
have fluctuated in recent years as a result. Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be
reviewed and/or approved by necessary government agencies, which would adversely affect our business. In addition, government funding of the SEC and other
government agencies on which our operations may rely, including those that fund research and development activities, is subject to the political process, which is
inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary
government agencies, which would adversely affect our business. For example, over the last several years the U.S. government has shut down several times and
certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities.
If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which
could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the public markets and obtain
necessary capital in order to properly capitalize and continue our operations.
Separately, in connection with the COVID-19 pandemic, a number of companies announced receipt of complete response letters due to the FDA’s inability
to complete required inspections for their applications. As of May 26, 2021, the FDA noted it was continuing to ensure timely reviews of applications for medical
products during the ongoing COVID-19 pandemic in line with its user fee performance goals and conducting mission critical domestic and foreign inspections to
ensure compliance of manufacturing facilities with FDA quality standards. However, the FDA may not be able to continue its current pace and review timelines
could be extended, including where a pre-approval inspection or an inspection of clinical sites is required and due to the ongoing COVID-19 pandemic and travel
restrictions, the FDA is unable to complete such required inspections during the review period. Regulatory authorities outside the U.S. may adopt similar
restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities. If a prolonged government
shutdown or other disruption occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could
have a material adverse effect on our business. Future shutdowns or other disruptions could also affect other government agencies such as the SEC, which may
also impact our business by delaying review of our public filings, to the extent such review is necessary, and our ability to access the public markets
Even if we, or any future collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our
products may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.
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Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive
regulation. We, and any future collaborators, must therefore comply with requirements concerning advertising and promotion for any of our product candidates
for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory
restrictions and must be consistent with the information in the product’s approved labeling. Thus, we and any future collaborators will not be able to promote any
products we develop for indications or uses for which they are not approved.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including
ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as
well as the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, any future collaborators and
their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.
Accordingly, assuming we, or any future collaborators, receive marketing approval for one or more of our product candidates, we, and any future
collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including
manufacturing, production, product surveillance and quality control.
If we, or any of our future collaborators, are not able to comply with post-approval regulatory requirements, we, and any such future collaborators, could
have the marketing approvals for our products withdrawn by regulatory authorities and our, or any future collaborators’, ability to market any future products
could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may
have a negative effect on our operating results and financial condition.
Any product candidate for which we obtain marketing approval could be subject to post-marketing restrictions or withdrawal from the market, and we may
be subject to substantial penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and
if any of them are approved.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising
and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These
requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating
to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of
samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the
indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation
Strategy, or REMS. If any product candidate receives marketing approval, the accompanying label may limit the approved use of our drug, which could limit
sales of the product.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of the
product, including the adoption and implementation of REMS. The FDA and other agencies, including the Department of Justice closely regulate and monitor the
post-approval marketing and promotion of drugs to ensure, among other things, that they are marketed and distributed only for the approved indications and in
accordance with the provisions of the approved labeling. The FDA and other agencies impose and enforce stringent restrictions on manufacturers’
communications regarding off-label use, and if we promote our products beyond their approved indications, we may be subject to enforcement action or
prosecution arising from off-label promotion. Violations of the FDCA and other statutes relating to the promotion and advertising of prescription drugs may lead
to investigations and enforcement actions alleging violations of federal and state healthcare fraud and abuse laws, including the False Claims Act, as well as state
consumer protection laws.
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In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, or
failure to comply with regulatory requirements, may have various consequences, including:
▪
suspension of or restrictions on such products, manufacturers or manufacturing processes;
▪
restrictions and warnings on the labeling or marketing of a product;
▪
restrictions on product distribution or use;
▪
requirements to conduct post-marketing studies or clinical trials;
▪
warning letters or untitled letters;
▪
withdrawal of the products from the market;
▪
refusal to approve pending applications or supplements to approved applications that we submit;
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recall of products;
▪
fines, restitution or disgorgement of profits or revenues;
▪
suspension of any ongoing clinical trials;
▪
suspension or withdrawal of marketing approvals;
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damage to relationships with any potential collaborators;
▪
unfavorable press coverage and damage to our reputation;
▪
refusal to permit the import or export of our products;
▪
product seizure or detention;
▪
injunctions or the imposition of civil or criminal penalties; or
▪
litigation involving patients using our products.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including
ensuring that quality control and manufacturing procedures conform to cGMPs applicable to drug manufacturers or quality assurance standards applicable to
medical device manufacturers, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records
and documentation and reporting requirements. We, any contract manufacturers we may engage in the future, our future collaborators and their contract
manufacturers will also be subject to other regulatory requirements, including submissions of safety and other post-marketing information and reports,
registration and listing requirements, requirements regarding the distribution of samples to clinicians, recordkeeping, and costly post-marketing studies or
clinical trials and surveillance to monitor the safety or efficacy of the product such as the requirement to implement a REMS.
Similar restrictions apply to the approval of our products in the European Union. The holder of a marketing authorization is required to comply with a
range of requirements applicable to the manufacturing, marketing, promotion and sale of medicinal products. These include: compliance with the European
Union’s stringent pharmacovigilance or safety reporting rules, which can impose post-authorization studies and additional monitoring obligations; the
manufacturing of authorized medicinal products, for which a separate manufacturer’s license is mandatory; and the marketing and promotion of authorized
drugs, which are strictly regulated in the European Union and are also subject to EU Member State laws.
Current and future legislation may increase the difficulty and cost for us and any future collaborators to obtain reimbursement for any of our product
candidates that do receive marketing approval and our ability to generate revenue will be materially impaired.
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the
healthcare system that could prevent or delay marketing
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approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain
marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous
coverage criteria and in additional downward pressure on the price that we, or any collaborators, may receive for any approved products. If reimbursement of
our products is unavailable or limited in scope, our business could be materially harmed.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, or collectively the ACA. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. In
August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit
Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals,
thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to
providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2031 under the Coronavirus Aid, Relief, and
Economic Security Act. These Medicare sequester reductions have been suspended through the end of March 2022. From April 2022 through June 2022 a 1%
sequester cut will be in effect, with the full 2% cut resuming thereafter. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare
payments to several providers and increased the statute of limitations period for the U.S. government to recover overpayments to providers from three to five
years. These laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our
product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the ACA, there have been, and continue to be, numerous legal challenges and Congressional actions to repeal and replace provisions of
the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by President Trump on December 22, 2017, Congress repealed the
“individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective in 2019.
Further, in December 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and
inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act of 2017, the remaining provisions of the
ACA are invalid as well. After appeal, the case was heard by the U.S. Supreme Court, which dismissed this case in June 2021 after finding that the plaintiffs do
not have standing to challenge the constitutionality of the ACA. However, litigation and legislation over the ACA are likely to continue, with unpredictable and
uncertain results.
The Trump Administration also took executive actions to undermine or delay implementation of the ACA, including directing federal agencies with
authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would
impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On
January 28, 2021, however, President Biden issued a new Executive Order which directs federal agencies to reconsider rules and other policies that limit
Americans’ access to health care and consider actions that will protect and strengthen that access. Under this Executive Order, federal agencies are directed to
re-examine: policies that undermine protections for people with pre-existing conditions, including complications related to COVID-19; demonstrations and
waivers under Medicaid and the ACA that may reduce coverage or undermine the programs, including work requirements; policies that undermine the Health
Insurance Marketplace or other markets for health insurance; policies that make it more difficult to enroll in Medicaid and the ACA; and policies that reduce
affordability of coverage or financial assistance, including for dependents.
Current and future legislative efforts may limit the costs for our products, if and when they are licensed for marketing, and that could materially impact our
ability to generate revenues.
The prices of prescription pharmaceuticals have also been the subject of considerable discussion in the United States. There have been several recent U.S.
congressional inquiries, as well as proposed and enacted state and federal legislation designed to, among other things, bring more transparency to pharmaceutical
pricing, review the relationship between pricing and manufacturer patient programs, and
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reduce the costs of pharmaceuticals under Medicare and Medicaid. In 2020, President Trump issued several executive orders intended to lower the costs of
prescription products and certain provisions in these orders have been incorporated into regulations. These regulations include an interim final rule
implementing a most favored nation model for prices that would tie Medicare Part B payments for certain physician-administered pharmaceuticals to the lowest
price paid in other economically advanced countries, effective January 1, 2021. That rule, however, has been subject to a nationwide preliminary injunction and,
on December 29, 2021, the Centers for Medicare & Medicaid Services, or CMS, issued a final rule to rescind it. With issuance of this rule, CMS stated that it
will explore all options to incorporate value into payments for Medicare Part B pharmaceuticals and improve beneficiaries' access to evidence-based care.
In addition, in October 2020, the U.S. Department of Health and Human Services, or HHS, and the FDA published a final rule allowing states and other
entities to develop a Section 804 Importation Program, or SIP, to import certain prescription drugs from Canada into the United States. The final rule is currently
the subject of ongoing litigation, but at least six states (Vermont, Colorado, Florida, Maine, New Mexico, and New Hampshire) have passed laws allowing for
the importation of drugs from Canada with the intent of developing SIPs for review and approval by the FDA. Further, on November 20, 2020, HHS finalized a
regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through
pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed by the Infrastructure Investment and
Jobs Act to January 1, 2026 in response to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as
a new safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers, the implementation of which have also been
delayed until January 1, 2026.
At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product
pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency
measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and
individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their
prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our
product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that
federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional
pricing pressures.
Finally, outside the United States, in some nations, including those of the European Union, the pricing of prescription pharmaceuticals is subject to
governmental control and access. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing
approval for a product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct a clinical trial that
compares the cost-effectiveness of our product to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if
pricing is set at unsatisfactory levels, our business could be materially harmed.
We may be subject to certain healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational
harm, fines, disgorgement, exclusion from participation in government healthcare programs, curtailment or restricting of our operations, and diminished
profits and future earnings.
Healthcare providers, third-party payors and others will play a primary role in the recommendation and prescription of any products for which we obtain
marketing approval. Our future arrangements with healthcare providers and third-party payors will expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any
products for which we obtain marketing approval. Potentially applicable U.S. federal and state healthcare laws and regulations include the following:
Anti-Kickback Statute. The federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase,
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order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid;
False Claims Laws. The federal false claims laws, including the civil False Claims Act, impose criminal and civil penalties, including those from civil
whistleblower or qui tam actions against individuals or entities for knowingly presenting, or causing to be presented to the federal government, claims for
payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
HIPAA. The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing or
attempting to execute a scheme to defraud any healthcare benefit program;
HIPAA and HITECH. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, also
imposes obligations on certain types of individuals and entities, including mandatory contractual terms, with respect to safeguarding the privacy, security and
transmission of individually identifiable health information;
False Statements Statute. The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or
making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;
Transparency Requirements. The federal Physician Payments Sunshine Act requires 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, to report annually to
HHS information related to physician and healthcare provider payments and other transfers of value and physician ownership and investment interests; and
Analogous State and Foreign Laws. Analogous state laws and regulations, such as state anti-kickback and false claims laws, and transparency laws, may
apply to sales or marketing arrangements, and claims involving healthcare items or services reimbursed by non-governmental third party payors, including
private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the
relevant compliance guidance promulgated by the federal government, in addition to requiring manufacturers to report information related to payments to
physicians and other healthcare providers or marketing expenditures. Many state laws also govern the privacy and security of health information in some
circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Foreign
laws also govern the privacy and security of health information in many circumstances.
The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or
use of medicinal products is prohibited in the European Union. Payments made to physicians in certain EU Member States must be publicly disclosed. Moreover,
agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional
organization and/or the regulatory authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes or
professional codes of conduct applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk, public
reprimands, administrative penalties, fines or imprisonment.
Efforts to ensure that our business arrangements with third parties, and our business generally, will comply with applicable healthcare laws and regulations
will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes,
regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of
these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages,
fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages,
and reputational harm, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do
business is found not to be in compliance with applicable laws, they may be
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subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our ability to collect and process
data globally, and the failure to comply with such requirements could subject us to significant fines and penalties, which may have a material adverse effect
on our business, financial condition or results of operations.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is
likely to remain uncertain for the foreseeable future. Globally, virtually every jurisdiction in which we operate or plan to operate has established its own data
security and privacy frameworks with which we must comply. For example, the collection, use, disclosure, transfer, or other processing of personal data
regarding individuals in the European Union, including personal health data, is subject to the European Union General Data Protection Regulation, or the GDPR,
which took effect across all member states of the European Economic Area, or EEA, in May 2018. The GDPR is wide-ranging in scope and imposes numerous
requirements on companies that process personal data, including strict rules on the transfer of personal data to countries outside the European Union, including
the United States.
As a result, there is increased scrutiny on the extent to which clinical trial sites located in the EEA should apply the GDPR to transfers of personal data
from such sites to countries that are considered to lack an adequate level of data protection, such as the United States. The GDPR also permits data protection
authorities to require destruction of improperly gathered or used personal information and/or impose substantial fines for violations of the GDPR, which can be
up to four percent of global revenues or 20 million Euros, whichever is greater, and it also confers a private right of action on data subjects and consumer
associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the
GDPR. In addition, the GDPR provides that European Union member states may make their own laws and regulations limiting the processing of personal data,
including genetic, biometric or health data. Assisting parties with whom we exchange personal data in complying with the GDPR, or complying with the GDPR
ourselves, may cause us to incur substantial operational costs or require us to change our business practices.
Similar initiatives are either in place or under way in the United States. There are a broad variety of data protection laws that are applicable to our
activities, and a wide range of enforcement agencies at both the state and federal levels that can review companies for privacy and data security concerns based
on general consumer protection laws. The Federal Trade Commission and state Attorneys General all are aggressive in reviewing privacy and data security
protections for consumers. New laws also are being considered at both the state and federal levels. For example, the California Consumer Privacy Act, which
went into effect on January 1, 2020, is creating similar risks and obligations as those created by GDPR, though the Act does exempt certain information collected
as part of a clinical trial subject to the Federal Policy for the Protection of Human Subjects (the Common Rule). Many other states are considering similar
legislation. A broad range of legislative measures also have been introduced at the federal level. Accordingly, failure to comply with federal and state laws (both
those currently in effect and future legislation) regarding privacy and security of personal information could expose us to fines and penalties under such laws.
There also is the threat of consumer class actions related to these laws and the overall protection of personal data. Even if we are not determined to have violated
these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could
harm our reputation and our business.
Given the breadth and depth of changes in data protection obligations, preparing for and complying with such requirements is rigorous and time intensive
and requires significant resources and a review of our technologies, systems and practices, as well as those of any third-party collaborators, service providers,
contractors or consultants that process or transfer personal data collected in the European Union. The GDPR and other changes in laws or regulations associated
with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from our clinical trials, could require us to
change our business practices and put in place additional compliance mechanisms, may interrupt or delay our development, regulatory and commercialization
activities and increase our cost of doing business, and could lead to government enforcement actions, private litigation and significant fines and penalties
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against us and could have a material adverse effect on our business, financial condition or results of operations.
The Economic Substance Law in the Cayman Islands may have an adverse effect on our business.
The Cayman Islands is a member of the Organisation for Economic Co-operation and Development, or OECD, Inclusive Framework on Base Erosion and
Profit Shifting, and, along with other OECD-compliant jurisdictions, enacted economic substance legislation in January 2019. Pursuant to the legislation, namely
the International Tax Cooperation (Economic Substance) Law, as amended, together with related regulations and guidance, collectively referred to as the ES
Law, we may need to incur additional costs in order to comply with filing or other requirements. While we are taking steps to comply with the ES Law, such as
repatriation of assets domiciled in Cayman Island, there is a risk of inadvertent non-compliance, which could result in the payment of associated penalties.
International standards are continuing to develop, and it is anticipated that the ES Law will evolve and be subject to further clarification. Hence, it is not possible
to determine with certainty the extent to which the ES Law may affect us.
Our internal computer systems, or those of our future collaborators or other contractors or consultants, may fail or suffer security breaches, which could
result in a material disruption of our product development programs.
Our internal computer systems and those of any future collaborators, or other contractors or consultants are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such systems are also vulnerable to service interruptions or
to security breaches from inadvertent or intentional actions by employees, third-party vendors and/or business partners, or from cyberattacks by malicious third
parties. Cyber incidents are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Additionally, the risk of
cyber-attacks or other privacy or data security incidents may be heightened as a result of our moving increasingly towards a remote working environment, which
may be less secure and more susceptible to hacking attacks. For example, we have experienced attempts at phishing and e-mail fraud with the goal of causing
payments to be transmitted to an unintended recipient. Cyber incidents could also include the deployment of harmful malware, ransomware, denial-of-service
attacks, unauthorized access to or deletion of files, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and
availability of information.
In the event any cyberattack security breach or system failure were to occur and cause interruptions in our operations, it could result in a material
disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar
disruptions. For example, the loss of clinical trial data from completed or future 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 were to result in a loss of, or damage to, our
data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position and reputation could
be harmed and the development of our product candidates could be delayed.
We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anticorruption laws and anti-money laundering laws and
regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We could face criminal
liability and other serious consequences for violations, which could harm our business.
We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations,
various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, the U.S. Foreign Corrupt
Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state
and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and
prohibit companies and their employees, agents, contractors and other collaborators from authorizing, promising, offering, or providing, directly or indirectly,
improper payments or anything else of value to recipients in the public or private sector. We may engage third parties to sell any products for
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which we obtain marketing approval outside the United States, to conduct clinical trials, and/or to obtain necessary permits, licenses, patent registrations and
other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals,
universities and other organizations. We could be held liable for the corrupt or other illegal activities of our employees, agents, contractors and other
collaborators, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may
result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract
and fraud litigation, reputational harm and other consequences.
If we or any third-party manufacturers we engage now or in the future fail to comply with environmental, health and safety laws and regulations, we could
become subject to fines or penalties or incur costs or liabilities that could harm our business.
We and third-party manufacturers we engage now are, and any third-party manufacturers we may engage in the future will be, subject to numerous
environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of
hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our
operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate
the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held
liable for any resulting damages, and any liability could exceed our resources. Liability under certain environmental laws governing the release and cleanup of
hazardous materials is joint and several and could be imposed without regard to fault. We also could incur significant costs associated with civil or criminal fines
and penalties or become subject to injunctions limiting or prohibiting our activities for failure to comply with such laws and regulations.
Although we maintain general liability insurance as well as workers’ compensation insurance to cover us for costs and expenses we may incur due to
injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not
maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological,
hazardous or radioactive materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current
or future laws and regulations may impair our research, development or production efforts. Our failure to comply with these laws and regulations also may result
in substantial fines, penalties or other sanctions.
Further, with respect to the operations of our current and any future third-party contract manufacturers, it is possible that if they fail to operate in
compliance with applicable environmental, health and safety laws and regulations or properly dispose of wastes associated with our products, we could be held
liable for any resulting damages, suffer reputational harm or experience a disruption in the manufacture and supply of any product candidates or products. In
addition, our supply chain may be adversely impacted if any of our third-party contract manufacturers become subject to injunctions or other sanctions as a result
of their non-compliance with environmental, health and safety laws and regulations.
In the future, if we decide to market our products outside of the United States, such as in the European Union or the United Kingdom, we would need to
obtain additional approvals and comply with additional regulatory requirements.
Our primary regulatory strategy has been to apply first for approvals in the United States for our rare disease programs. We may in the future apply for
approvals in Europe and the United Kingdom, following receipt of marketing authorization in the United States or, in the case of BTHS, concurrent with or even
prior to United States regulatory interactions. As we also plan to consider collaboration for commercialization efforts in Europe and the United Kingdom, we
anticipate that potential commercialization partners may have input into regulatory strategies in those jurisdictions. To date, we have focused our regulatory
efforts primarily on achieving approvals and marketing authorization in the United States, but we are now undertaking preliminary efforts in Europe in the
context of BTHS, such as discussions for potential partnerships. In order to market any product outside of the United States, we will
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need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing,
among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not we obtain FDA approval for a product,
we or any future collaborators would need to obtain the necessary approvals by the comparable foreign regulatory authorities before marketing the product in
those countries or jurisdictions. We cannot be sure whether and when we would be able to obtain the necessary approvals, which could adversely affect our
business and prospects.
Governments outside the United States may impose strict price controls, which may adversely affect our revenues, if any.
In some countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with
governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some
countries, we, or any future collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available
therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be
materially harmed.
Our employees, independent contractors, consultants and vendors may engage in misconduct or other improper activities, including non-compliance with
regulatory standards and requirements and insider trading, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of fraud or other misconduct by our employees, independent contractors, consultants and vendors. Misconduct by these
partners could include intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, provide accurate
information to the FDA or similar foreign regulatory authorities, comply with manufacturing standards, 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, report financial information or data
accurately or disclose unauthorized activities to us. Employee misconduct could also 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. This could include violations of HIPAA, other U.S. federal and state law, and
requirements of non-U.S. jurisdictions, including the European Union Data Protection Directive. We are also exposed to risks in connection with any insider
trading violations by employees or others affiliated with us. It is not always possible to identify and deter employee misconduct, and the precautions we take to
detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to be in compliance with such laws, standards, regulations, guidance or codes of conduct. If any such actions
are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business
and results of operations, including the imposition of significant fines or other sanctions.
Risks Related to Ownership of ADSs
Morningside Venture (I) Investments Limited, or MVIL, has a controlling ownership interest in our ordinary shares and the ability to substantially control
all matters submitted to shareholders for approval.
As of February 28, 2022, MVIL beneficially owns 66.2% of our ordinary shares. In addition, certain entities associated within MVIL beneficially own an
additional 8.2% of our ordinary shares. As a result, MVIL and such entities will be able to control all matters submitted to our shareholders for approval that
require an ordinary resolution or special resolution, as well as our management and affairs. For example, MVIL would control the election of directors and
approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:
▪
delay, defer or prevent a change in control;
▪
entrench our management or the board of directors; or
▪
impede a merger, consolidation, takeover or other business combination involving us that other shareholders may desire.
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MVIL owns a controlling portion of our ordinary shares and may have conflicts of interest with us and other shareholders in the future.
The interests of MVIL may not always be consistent with our interests or the interests of our other shareholders. Accordingly, MVIL could cause us to
enter into transactions or agreements of which other holders of our ordinary shares would not approve or make decisions with which such holders would
disagree. Gerald L. Chan, one of our directors, is a co-founder of the Morningside group, a private investment group with venture, private equity and property
investments. In addition, Reenie McCarthy, our Chief Executive Officer and a director, served as a member of the investment team at Morningside Technology
Advisory, LLC (and affiliates) from 1993 through 2016, and remains a director of Morningside Technology Advisory, LLC, which provides advisory services to
entities associated with the Morningside group.
Although Dr. Chan is not an officer, director or employee of MVIL and has neither voting nor dispositive control over the ordinary shares held by MVIL
and does not otherwise beneficially own such shares, as a result of his ongoing relationship with the Morningside group, transactions between us and MVIL may
present an actual or perceived conflict of interest. Although Ms. McCarthy is not an officer, director or employee of MVIL, and has neither voting nor dispositive
control over our ordinary shares held by MVIL and does not otherwise beneficially own such shares, as a result of her historic relationship with the Morningside
group and her ongoing relationship with Morningside Technology Advisory, LLC, transactions between us and MVIL may present an actual or perceived conflict
of interest. Any actual or perceived conflicts of interest may lead Dr. Chan and Ms. McCarthy to recuse themselves from actions of our board of directors with
respect to transactions involving MVIL and its affiliates. For example, in a situation in which MVIL is adverse to us, such as if it breaches an agreement with us,
a conflict could arise. We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with
an unaffiliated party.
MVIL is in the business of making investments in companies and could from time to time acquire and hold interests in businesses that compete with us.
MVIL may also pursue acquisition opportunities that may be complementary to our business, and as a result, desirable acquisitions may not be available to us.
As long as MVIL continues to own a significant amount of our equity, it will continue to be able to strongly influence or effectively control our decisions.
If we fail to meet the requirements for continued listing on the Nasdaq Global Market or Nasdaq, our ADSs could be delisted from trading, which would
decrease the liquidity of our ADSs and our ability to raise additional capital.
Our ADSs are currently listed for quotation on the Nasdaq Global Market. We are required to meet specified financial requirements in order to maintain
our listing on the Nasdaq Global Market. These requirements include maintaining a minimum bid price of at least $1.00 per share for our ADSs, which is
referred to as the Bid Price Rule, maintaining a minimum market value of listed securities, or MVLS, of $50,000,000 and maintaining a minimum Market Value
of Publicly Held Shares, or MVPHS, of $15,000,000. On January 4 and 5, 2022, and on February 14, 2022, we received deficiency letters from the Listings
Qualifications Department of the Nasdaq Stock Market notifying that we were not in compliance with the Bid Price Rule, the MVLS and the MVPHS,
respectively. We have been provided an initial period of 180 calendar days, for each such deficiency, or until July 5, 2022 and August 10, 2022, to regain
compliance with the applicable. If we do not regain compliance with the Bid Price Rule, MVLS and MVPHS by the applicable compliance date, we may be
eligible for an additional 180 calendar day compliance period. To qualify, we would need to transfer the listing of our common stock to the Nasdaq Capital
Market, provided that we meet the continued listing requirement for the market value of publicly held shares and all other initial listing standards of the Nasdaq
Capital Market, with the exception of its bid price requirement, or, if we fail to meet its listing requirements, the OTC Bulletin Board. Any potential delisting of
our common stock from the Nasdaq Global Market would make it more difficult for our holders of our ADSs to sell our stock in the public market and would
likely result in decreased liquidity and increased volatility for our ADSs.
The price of the ADSs has been, and is likely to continue to be, highly volatile.
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The price of the ADSs has been, and is likely to continue to be, highly volatile. The stock market in general and the market for smaller pharmaceutical and
biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.
The market price for the ADSs may be influenced by many factors, including:
▪
our ability to commercialize or obtain regulatory approval for our product candidates, or delays in commercializing or obtaining regulatory
approval;
▪
announcements relating to our clinical trials, including any periodic updates relating to enrollment of trial subjects, adverse events, site initiation,
and timing of release of interim analyses and final trial results;
▪
commencement or termination of collaborations for our development programs;
▪
failure or discontinuation of any of our development programs;
▪
results from, or any delays in, clinical trials relating to our product candidates, including our clinical trials for elamipretide;
▪
any need to suspend or discontinue clinical trials due to side effects or other safety risks, or any need to conduct studies on the long-term effects
associated with the use of our product candidates;
▪
manufacturing issues related to our product candidates for clinical trials or future products for commercialization;
▪
commercial success and market acceptance of our product candidates following regulatory approval;
▪
undesirable side effects caused by product candidates after they have entered the market;
▪
ability to discover, develop and commercialize additional product candidates;
▪
announcements relating to collaborations that we may enter into with respect to the development or commercialization of our product candidates;
▪
success of our competitors in discovering, developing or commercializing products;
▪
strategic transactions undertaken by us;
▪
additions or departures of key personnel;
▪
product liability claims related to our clinical trials or product candidates;
▪
business disruptions caused by earthquakes or other natural disasters or a public health crisis (for example, an outbreak of a contagious disease
such as COVID-19);
▪
disputes concerning our intellectual property or other proprietary rights;
▪
FDA or EMA or other regulatory actions affecting us or our industry;
▪
healthcare reform measures in the United States;
▪
future sales or issuances of equity or debt securities by us;
▪
fluctuations in our semi-annual operating results;
▪
announcement or expectation of additional financing efforts;
▪
sales of our ordinary shares by us, our insiders or other shareholders;
▪
actual and anticipated variations in our results of operations;
▪
changes in securities analysts’ estimates or market perception of our financial performance;
▪
announcements by us of significant acquisitions, disposals, strategic alliances or joint ventures;
▪
market developments affecting us or the markets in which we operate;
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▪
regulatory or legal developments, including litigation;
▪
the operating and share price performance of companies that investors consider to be comparable to us;
▪
the depth and liquidity of the market for the ADSs;
▪
the release or expiry of lock-up or other transfer restrictions on our ordinary shares and ADSs;
▪
general economic, political and stock market conditions in the United States and the countries in which we operate and elsewhere in the world;
and
▪
the other factors described in this “Risk Factors” section.
Additionally, in the past, securities class action litigation has often been brought against a company following a decline in the market price of its
securities. This risk is especially relevant for us in light of the significant stock price volatility we and other pharmaceutical companies have experienced in
recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our
business.
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the Securities
and Exchange Commission, or the SEC, than U.S. companies. This may limit the information available to holders of the ADSs.
We are a “foreign private issuer,” as defined in the rules and regulations of the SEC and, consequently, we are not subject to all of the disclosure
requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the Securities Exchange Act of
1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or
authorizations applicable to a security registered under the Exchange Act. In addition, our senior management and supervisory board members are exempt from
the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our
securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies.
Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.
In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S.
domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private
issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of
the above, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
If we are, or another entity in our group is, a controlled foreign corporation, or CFC, there could be adverse U.S. federal income tax consequences to certain
U.S. shareholders.
If a U.S. person is treated as owning, directly, indirectly or constructively, at least 10% of the value or voting power of our ordinary shares (including
ADSs), such person may be treated under the Internal Revenue Code of 1986, as amended, or the Code, as a “United States shareholder,” or a Ten-Percent
Shareholder, with respect to each CFC in our group, if any. We do not believe that we were a CFC for our taxable year ended December 31, 2021; we have not
made a determination regarding our CFC status in the current taxable year, and we may become a CFC in the current or a subsequent taxable year. In addition,
because Stealth BioTherapeutics Corp has a U.S. subsidiary, any future newly formed or acquired non-U.S. subsidiaries of Stealth BioTherapeutics Corp may be
treated as CFCs, regardless of whether we are treated as a CFC.
A Ten-Percent Shareholder of a CFC may be required to annually report and include in its taxable income its pro rata share of “Subpart F income,” “global
intangible low-taxed income” and investments in U.S. property by the CFC, regardless of whether it makes any distributions. In addition, a Ten-Percent
Shareholder that realizes gain from the sale or exchange of shares in a CFC may be required to classify a portion of such gain as dividend income rather than
capital gain. An individual that is a Ten-Percent
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Shareholder with respect to a CFC generally is not allowed certain tax deductions or foreign tax credits that would be allowed to a Ten-Percent Shareholder that
is a U.S. corporation.
Failure to comply with CFC reporting obligations may subject a Ten-Percent Shareholder to significant monetary penalties. We cannot provide any
assurances that we will furnish to any Ten-Percent Shareholder information that may be necessary to comply with the reporting and tax-paying obligations
applicable under the CFC rules of the Code.
Our status, or the status of any subsidiary, as a CFC will generally not have any U.S. federal income tax consequences for U.S. shareholders holding our
ordinary shares or ADSs who are not Ten-Percent Shareholders.
If we are a passive foreign investment company, or PFIC, for any taxable year, there could be adverse U.S. federal income tax consequences to certain U.S.
shareholders.
Under the Code, we will be a PFIC for any taxable year in which (1) 75% or more of our gross income consists of passive income or (2) 50% or more of
the value of our assets (generally determined on the basis of a weighted quarterly average) consists of assets that produce, or are held for the production of,
passive income (including cash and cash-equivalents). For purposes of these tests, passive income includes dividends, interest, gains from the sale or exchange of
investment property and certain rents and royalties. In addition, for purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at
least 25% by value of the shares of another corporation is treated as holding and receiving directly its proportionate share of assets and income of such
corporation. If we are a PFIC for any taxable year during which a U.S. person holds our shares, such U.S. holder may be subject to adverse tax consequences
regardless of whether we continue to qualify as a PFIC in future years, including ineligibility for any preferred tax rates on capital gains or on actual or deemed
dividends, the imposition of interest charges on certain taxes treated as deferred and additional reporting requirements.
Based on our analysis of our activities and current estimates (and not fully audited financials) of the composition of our income and assets, and taking into
account the market price of our ordinary shares and ADSs, we do not believe that we were a PFIC in our taxable year ended December 31, 2021. The
determination of whether we are a PFIC is a fact-intensive determination made on an annual basis as of the end of each taxable year, applying principles and
methodologies that in some circumstances are unclear and subject to varying interpretation. In addition, for our current and future taxable years, the total value of
our assets (including goodwill) for PFIC testing purposes may be determined in part by reference to the market price of our ordinary shares or ADSs from time to
time, which may fluctuate considerably. Accordingly, if our market capitalization declines while we hold a substantial amount of cash and cash-equivalents for
any taxable year, we may be a PFIC for that taxable year. Under the income test, our status as a PFIC depends on the composition of our income for the relevant
taxable year which will depend on the transactions we enter into in the future and our corporate structure. The composition of our income and assets is also
affected by how we spend the cash we raise in any financing. We may be a PFIC for any taxable year in which we do not generate sufficient amounts of active
income to offset our passive income. Therefore, we cannot express an expectation regarding our PFIC status for the current or any future taxable year. Even if
we determine that we are not a PFIC for a taxable year, there can be no assurance that the U.S. Internal Revenue Service, or IRS, will agree with our conclusion
and that the IRS would not successfully challenge our position.
Certain consequences of being a U.S. shareholder in a PFIC may be mitigated in some circumstances through the making of certain elections. We cannot
provide any assurances that we will furnish to any U.S. shareholder information that may be necessary to permit such elections to be made.
If we are a PFIC, certain U.S. shareholders will generally be subject to similar rules with respect to distributions we receive from, and our dispositions of
the stock of, any of our direct or indirect subsidiaries or any other entities in which we hold equity interests that also are PFICs, or lower-tier PFICs, as if such
distributions were indirectly received by, and/or dispositions were indirectly carried out by, such U.S. shareholder.
Failure to comply with PFIC reporting obligations may subject a U.S. shareholder to significant monetary penalties. We cannot provide any assurances
that we will furnish to any U.S. shareholder information that may be necessary to comply with the reporting and tax-paying obligations applicable
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under the PFIC rules of the Code. If we are classified as both a CFC (as discussed above) and a PFIC, we generally will not be treated as a PFIC with respect to
those U.S. shareholders that meet the definition of a Ten-Percent Shareholder during the period in which we are a CFC.
We intend to continue to rely on Nasdaq rules that permit us to comply with applicable Cayman Islands corporate governance practices, rather than the
corresponding domestic U.S. corporate governance practices, and therefore the rights of our shareholders will differ from the rights of shareholders of a
U.S. domestic issuer.
As a foreign private issuer whose ADSs are listed on The Nasdaq Global Market, we are permitted in certain cases to follow Cayman Islands corporate
governance practices instead of the corresponding requirements of Nasdaq rules. A foreign private issuer that elects to follow a home country practice instead of
Nasdaq requirements must submit to Nasdaq in advance a written statement from an independent counsel in such issuer’s home country certifying that the
issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each
such requirement that it does not follow and describe the home country practice followed instead of any such requirement. In accordance with Cayman Islands
law:
▪
we do not require a remuneration committee to have entirely independent directors;
▪
we do not require an independent director oversight of director nominations;
▪
we do not require the board of directors to have regularly scheduled meetings at which only independent directors are present;
▪
we are not required to obtain shareholder approval for transactions of the equity issuances covered by Nasdaq Rule 5635(d), which requires
shareholder approval of equity issuances in connection with acquisition of stock or assets of another company, the establishment of or
amendments to equity-based compensation plans for employees, a change of control of us and certain private placements.
For further information upon the differences between Delaware law and Cayman Islands law, please see “Description of Share Capital and Articles of
Association—Differences in Corporate Law” in our preliminary prospectus, filed with the SEC on Form F-1 on August 5, 2021, which information is
incorporated by reference in this annual report.
We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to
incur significant legal, accounting and other expenses.
As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting
requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently
completed second fiscal quarter. We would lose our foreign private issuer status if, for example, more than 50% of our ordinary shares are directly or indirectly
held by residents of the United States and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign
private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are
more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements,
and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the
Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the Nasdaq listing rules. As a
U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we do not incur as a
foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These rules and regulations could
also make it more difficult for us to attract and retain qualified members of our board of directors and more expensive to procure director and officer liability
insurance.
We incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives
and corporate governance practices.
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As a public company we incur significant legal, accounting and other expenses that we did not incur as a private company, and we expect these expenses
to increase after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act of 2002, or SOX, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the listing requirements of Nasdaq and other applicable securities rules and regulations impose various requirements on public companies,
including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel
devote a substantial amount of time towards maintaining compliance with these requirements. Moreover, these requirements have increased our legal and
financial compliance costs and make some activities more time consuming and costly.
Pursuant to SOX Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while
we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our
independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to
document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial
reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a
continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to
conclude, within the prescribed timeframe, or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify
one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial
statements.
A significant portion of our total outstanding shares may be sold into the market, which could cause the market price of the ADSs to decline significantly,
even if our business is doing well.
Sales of a substantial number of ADSs in the public market could occur at any time. These sales, or the perception in the market that the holders of a large
number of ordinary shares intend to sell ADSs, could reduce the market price of the ADSs.
On June 2, 2020, we entered into the Purchase Agreement with Lincoln Park Capital Fund LLC, or Lincoln Park, pursuant to which Lincoln Park has
committed to purchase up to $20.0 million of our ordinary shares over the 36-month period commencing on June 22, 2020. As of December 31, 2021, pursuant
to the Purchase Agreement a total of 45,774,552 ordinary shares were sold to Lincoln Park for aggregate gross proceeds totaling $5.3 million. On August 6,
2020, we entered into the At The Market Offering Agreement, or ATM Offering Agreement, with H.C. Wainwright & Co., LLC, or Wainwright, pursuant to
which we may offer and sell, from time to time through Wainwright, ADSs. We generally have the right to control the timing and amount of any future sales of
ordinary shares to Lincoln Park or ADSs through Wainwright. Sales of ordinary shares or ADSs to Lincoln Park or through Wainwright, respectively, will depend
upon market conditions and other factors to be determined by us. We may decide to sell the remaining ordinary shares to Lincoln Park pursuant to the Purchase
Agreement and/or we may decide to sell all, some or none of the ADSs through Wainwright pursuant to the ATM Offering Agreement. Further sales to Lincoln
Park or any sales through Wainwright by us could result in substantial dilution to the interests of other holders of our ordinary shares and ADSs. Additionally, the
sale of a substantial number of ordinary shares to Lincoln Park or ADSs through Wainwright, or the anticipation of such sales, could make it more difficult for us
to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. Lincoln Park may resell all, some or
none of the ordinary shares that it has acquired and may acquire in the future at any time or from time to time in its discretion. If and when we do sell ADSs
through Wainwright, after the purchaser has acquired the ADSs, such purchaser may resell all, some or none of those ADSs at any time or from time to time in its
discretion.
As of March 31, 2022, we have also reserved 159,699,644 ordinary shares that we may issue under our equity compensation plans. The ADSs representing
these ordinary shares can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates.
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We have issued warrants to purchase an aggregate of 161,823,177 ordinary shares to MVIL in connection with funding under our Development Funding
Agreement. Further, in connection with our entry into the venture loan facility, we issued the Lenders warrants to purchase up to an aggregate of 13,636,364
ordinary shares. Subject to compliance with applicable securities laws, and volume limitations, ADSs representing the ordinary shares issued upon exercise of
these warrants may be sold in the public market.
We do not anticipate paying any cash dividends on the ADSs in the foreseeable future. Accordingly, holders of ADSs must rely on capital appreciation, if any,
for any return on their investment.
We have never declared nor paid cash dividends on our share capital. We currently plan to retain all of our future earnings, if any, to finance the operation,
development and growth of our business. In addition, the terms of our venture loan and security agreement with the Lenders restrict our ability to pay cash
dividends. As a result, capital appreciation, if any, of the ADSs will be your sole source of gain for the foreseeable future. However, if we do pay a cash dividend
on our ordinary shares and ADSs in the future, we may only pay such dividend out of our profits or share premium (subject to applicable solvency requirements)
under Cayman Islands law.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading
volume could decline.
The trading market for the ADSs will likely depend, in part, on the research and reports that securities or industry analysts publish about us or our
business. We do not have any control over these analysts. There can be no assurance that analysts will continue to cover us or provide favorable coverage. If one
or more analysts downgrade the ADSs or change their opinion of the ADSs, our share price would likely decline. . In addition, if one or more analysts cease
coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of the ADSs or
trading volume to decline.
Holders of our ADSs have fewer rights than our shareholders and must act through the depositary to exercise their rights.
Holders of our ADSs do not have the same rights as our shareholders and may only exercise their voting rights with respect to the underlying ordinary
shares in accordance with the provisions of the deposit agreement. Holders of the ADSs have appointed the depositary or its nominee as their representative to
exercise the voting rights attaching to the ordinary shares represented by the ADSs. When a general meeting is convened, holders of ADSs may not receive
sufficient notice of a shareholders’ meeting to permit them to withdraw the ordinary shares underlying their ADSs to allow them to vote directly with respect to
any specific matter. We cannot assure any holders of our ADSs that they will receive voting materials in time to instruct the depositary to vote, and it is possible
that such holders, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
Furthermore, the depositary will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any
such vote. As a result, holders of the ADSs may not be able to exercise their right to vote and may lack recourse if their ADSs are not voted as they request. In
addition, ADS holders will not be able to call a shareholders’ meeting. See “Description of American Depositary Shares” in our preliminary prospectus filed with
the SEC on Form F-1 on August 5, 2021, which information is incorporated by reference in this annual report.
Holders of our ADSs may face limitations on transfer and withdrawal of underlying ordinary shares.
Our ADSs, which may be evidenced by American Depositary Receipts, are transferable on the books of the depositary. However, the depositary may close
its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver,
transfer or register transfers of the ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is
advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other
reason subject to your right to cancel your ADSs and withdraw the underlying ordinary shares. Temporary delays in the cancellation of the ADSs and withdrawal
of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary
shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares. In addition, holders of the ADSs may not be
able to cancel their ADSs and withdraw the underlying
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ordinary shares when they owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or
governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities. See “Description of American Depositary
Shares” in our preliminary prospectus filed with the SEC on Form F-1 on August 5, 2021, which information is incorporated by reference in this annual report.
ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to
the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our ordinary shares provides that holders and beneficial owners of ADSs irrevocably waive the
right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including in respect of claims under federal
securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury trial waiver provision is prohibited by applicable law, an
action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the
federal securities laws has not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under
the laws of the State of New York, which govern the deposit agreement, by a court of the State of New York or a federal court, which have non-exclusive
jurisdiction over matters arising under the deposit agreement, applying such law. In determining whether to enforce a jury trial waiver provision, New York
courts and federal courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has
knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts
will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence
in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim (as opposed to a contract dispute), none of which we
believe are applicable in the case of the deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a
waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If any holder or
beneficial owner of ADSs brings a claim against us or the depositary in connection with such matters, such holder or beneficial owner may not be entitled to a
jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought
against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted
according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to
the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims, and the venue of the
hearing.
Our shareholders may face difficulties in protecting their interests, and their ability to protect their rights through U.S. courts may be limited, because we are
incorporated under Cayman Islands law and many of our directors reside outside of the United States.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Amended and Restated
Memorandum and Articles of Association, referred to as our Articles of Association, the Companies Law (2020 Revision) (as amended) of the Cayman Islands,
referred to as the Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by
minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman
Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the
common law of England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. Similarly,
the rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or
judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United
States, and some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. As a
Cayman Islands exempted company, we may not have standing to initiate a derivative action in a federal court of the United States. As a result, our shareholders
may be limited in their ability to protect their interests if they are harmed in a manner that would otherwise
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enable them to sue in a United States federal court. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder
derivative action in U.S. federal courts.
Shareholders of Cayman Islands exempted companies like us have very limited statutory rights under Cayman Islands law to inspect the corporate records
of Cayman Islands exempted companies into which they are invested and have no statutory rights to obtain copies of registers of shareholders of Cayman Islands
exempted companies. Although our shareholders may request access to our books and records, our directors have discretion under our Articles of Association to
determine whether or not, and under what conditions, certain of our corporate records may be inspected by our shareholders. Under the Companies Law,
shareholders are entitled to view our Articles of Association. This may make it more difficult for our shareholders to obtain the information needed to establish
any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Certain corporate governance practices in the Cayman Islands, which is the jurisdiction of our incorporation, differ significantly from requirements for
companies incorporated in other jurisdictions such as the United States. To the extent we choose to follow practice in the Cayman Islands with respect to
corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S.
domestic issuers.
The Cayman Islands has no legislation specifically dedicated to the rights of investors in securities or statutorily defined private causes of action to
investors in securities such as those found under the Securities Act of 1933, as amended, or the Exchange Act. Subject to limited exceptions, under Cayman
Islands law, a shareholder is not entitled to bring a derivative action against the board of directors. U.S.-style class action lawsuits are not recognized in the
Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings in a similar fashion.
As a result of all of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken by management, or
members of the board of directors than they would as public shareholders of a company incorporated in the United States. For a discussion of significant
differences between the provisions of the Companies Law of the Cayman Islands and the U.S. Delaware General Corporation Law applicable to companies
incorporated in Delaware and their shareholders, see “Description of Share Capital and Articles of Association—Differences in Corporate Law” in our
preliminary prospectus filed with the SEC on Form F-1 on August 5, 2021, which information is incorporated by reference in this annual report.
The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
Our corporate affairs and the rights of holders of ordinary shares are governed by our Articles of Association, the Companies Law, and the common law
of the Cayman Islands. Certain rights and responsibilities of our shareholders, ADS holders and members of our board of directors under Cayman Islands law are
different from those that apply to a Delaware corporation.
Directors of Cayman Islands exempted companies are required to observe certain fiduciary duties. These fiduciary duties are owed to the Cayman Islands
company and include the duty to act in the best interests of the company and the shareholders as a whole. However, the fiduciary duties of a director of a
Cayman Islands exempted company may not be the same as the fiduciary duty of a director of a Delaware corporation.
In addition, controlling shareholders of Delaware corporations may owe fiduciary duties to minority shareholders, while shareholders (including
controlling shareholders) of Cayman Islands companies generally owe no fiduciary duties to the company or other shareholders.
The rights of our shareholders to bring shareholders’ suits against us or our board of directors under Cayman Islands law are much more limited than
those of shareholders of a Delaware corporation. For example, under Cayman Islands law, a shareholder who wishes to bring a claim against a director would
generally need to obtain permission from the Grand Court of the Cayman Islands, or Cayman Islands Court, to bring a derivative action, in the name of the
company, against the director. This is because the director of a Cayman Islands exempted company owes duties to the company and not to individual
shareholders. As a result, our shareholders, including holders of ADSs, may have more difficulty protecting
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their rights in connection with actions taken by our directors than they would as shareholders of a U.S. corporation.
Minority shareholders in a Cayman Islands exempted company have more limited rights than minority shareholders in a Delaware corporation in relation
to mergers and similar transactions that the company may carry out. For example, if a merger under the Companies Law involving a Cayman Islands exempted
company is approved by the requisite majority of shareholders, a dissenting minority shareholder would have the right to be paid the fair value of their shares
(which, if not agreed between the parties, will, following the course of legal proceedings, be determined by the Cayman Islands Court) if the shareholders follow
the statutorily prescribed procedure for initiating such proceedings, subject to certain exceptions. Such dissenter rights differ substantially from the appraisal
rights, which would ordinarily be available to dissenting shareholders of Delaware corporations. Further, if a takeover offer is made to the shareholders of a
Cayman Islands exempted company and accepted by holders of 90% of the shares affected, the offeror may require the holders of the remaining shares to transfer
such shares on the terms of the offer. An objection can be made to the Cayman Islands Court, but this is unlikely to succeed in the case of an offer which has
been so approved unless there is evidence of fraud, bad faith or collusion. A minority shareholder in this scenario would have no rights comparable to the
appraisal rights which would generally be available to a dissenting shareholder of a U.S. corporation in similar circumstances. For a discussion of significant
differences between the provisions of the Companies Law of the Cayman Islands and the U.S. Delaware General Corporation Law applicable to companies
incorporated in Delaware and their shareholders, see “Description of Share Capital and Articles of Association—Differences in Corporate Law” in our
preliminary prospectus filed with the SEC on Form F-1 on August 5, 2021, which information is incorporated by reference in this annual report.
Item 4. Information on the Company
A. History and development of the company.
Our registered office is located at c/o Intertrust Corporate Services (Cayman) Limited, One Nexus Way, Camana Bay KY1-9005 Cayman Islands. We
have two wholly owned subsidiaries: Stealth BioTherapeutics Inc., a Delaware company, which we refer to as Stealth Delaware and Stealth BioTherapeutics
(HK) Limited, a company incorporated with limited liability under the laws of Hong Kong. Our agent for service of process in the United States is Stealth
Delaware, and the executive offices of Stealth Delaware are located at 140 Kendrick Street, Needham, MA 02494, and the telephone number there is (617) 600-
6888. Our website address is www.stealthbt.com. We have included our website address in this annual report as an inactive textual reference only. The
information contained in, or accessible through, our website does not constitute part of this annual report on Form 20-F. The U.S. Securities and Exchange
Commission, or SEC, maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants,
such as us, that file electronically with the SEC.
Stealth BioTherapeutics Corp was incorporated in Grand Cayman, Cayman Islands as Stealth Peptides International, Inc. in April 2006. Its wholly owned
subsidiary, Stealth BioTherapeutics Inc., was incorporated in Delaware as Stealth Peptides Inc. in October 2007. In addition, a wholly owned subsidiary, Stealth
BioTherapeutics (HK) Limited, was incorporated in Hong Kong in September 2017. In 2020, a former wholly owned subsidiary, Stealth BioTherapeutics
(Shanghai) Limited, was closed.
We conduct our operations in the United States through Stealth Delaware. All of our employees are employed by Stealth Delaware. We are a clinical stage
biotechnology company focused on the discovery and development of novel pharmaceutical agents to treat patients suffering from diseases involving
mitochondrial dysfunction through our mitochondrial medicine platform. Since inception, we have devoted substantially all of our efforts to research and
development, business planning, acquiring operating assets, seeking intellectual property protection for our technology and product candidates, and raising
capital.
Our capital expenditures for the years ended December 31, 2021, 2020 and 2019 amounted to $0.1 million, $0.04 million and $0.1 million, respectively.
In the three-year period ended December 31, 2021, we have invested a total of $0.2 million in equipment and facilities.
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B. Business overview.
Overview
We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving
mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal
organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases and many common age-related diseases, leading to devastating
cardiac, ophthalmic and neurological symptoms. We believe our product candidates have significant potential to treat the cardiac, ophthalmic and neurological
symptoms of both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have
assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission. Our leadership team has
decades of experience leading drug discovery and development programs, including at GlaxoSmithKline, Novo Nordisk and Pfizer.
Our first clinical product candidate, elamipretide, is a small peptide that targets and binds reversibly to cardiolipin, an essential structural element of
mitochondria, stabilizing the inner mitochondrial membrane under conditions of oxidative stress. This novel mechanism of action has shown potential clinical
benefit in both rare genetic and common age-related ophthalmic and cardiac diseases entailing mitochondrial dysfunction. Elamipretide has been generally well
tolerated in clinical trials with over 1,000 subjects systemically exposed to it to date.
We are studying elamipretide in the following indications:
•
Geographic atrophy or GA, an advanced form of dry age-related macular degeneration, for which we conducted ReCLAIM, a Phase 1 clinical
trial, in the United States and are expecting to announce data from ReCLAIM-2, our fully enrolled Phase 2b clinical trial, early in the second
quarter of 2022; and
•
Primary mitochondrial myopathy due to nuclear DNA, or nDNA, mutations, or nPMM, for which we are currently recruiting patients for
enrollment in NuPOWER, a Phase 3 clinical trial. We have designed this trial to focus upon patients with nDNA mutations because we observed
improvements in this prespecified subgroup of patients in our previous Phase 3 primary mitochondrial myopathy trial.
We are evaluating the potential for additional clinical trials of elamipretide in the following neuromuscular and cardiac diseases in which mitochondrial
dysfunction is implicated:
▪
Duchenne muscular dystrophy, or DMD, where deficits in dystrophin and associated mitochondrial dysfunction lead to a progressive decline in
skeletal and cardiac muscle function; and
▪
Barth syndrome, or BTHS, where deficits in cardiolipin lead to a progressive decline in skeletal and cardiac muscle function.
We hope to submit one or more investigational new drug applications, or INDs, for elamipretide for the treatment of DMD during 2022. Subject to
ongoing regulatory discussions, we are evaluating the feasibility of conducting another Phase 3 clinical trial in BTHS, where we have previously conducted a
Phase 2/3 clinical trial and a Phase 3 retrospective natural history controlled clinical trial.
Our second clinical product candidate, SBT-272, is a novel peptidomimetic that has been shown to increase adenosine triphosphate, or ATP, production
and decrease levels of reactive oxygen species, or ROS, in dysfunctional mitochondria in preclinical studies. In early experiments, SBT-272 demonstrated higher
mitochondrial uptake and greater concentrations in the brain relative to elamipretide. We are developing SBT-272 for rare neurological diseases involving
mitochondrial dysfunction, with a preliminary focus on amyotrophic lateral sclerosis, or ALS, and frontotemporal lobar degeneration, or FTLD. Results from a
Phase 1 clinical trial of orally administered SBT-272 in healthy human volunteers completed during 2020 showed that orally administered SBT-272 did not reach
desired drug exposure levels. We have initiated a Phase 1 clinical trial of subcutaneous SBT-272 in healthy human volunteers and plan to initiate chronic
toxicology studies to support the potential initiation of a Phase 2 clinical trial in patients. We are
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also conducting additional preclinical studies in other neurological disease models to inform our decisions regarding potential additional indications.
We have discovered and own over 100 compounds, including SBT-272 and the SBT-550 family, that also target the mitochondria and form the basis of our
broad proprietary pipeline of mitochondrial-targeted product candidates. We are evaluating compounds in the SBT-550 family for rare neurological indications.
In addition, our internal discovery platform has generated a library of over 100 differentiated proprietary compounds which could have clinical benefit for
diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds
as part of our carrier program, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.
As of December 31, 2021, we held exclusive worldwide rights or an option for exclusive worldwide rights under 435 issued patents and 185 patent
applications to protect our platform and product candidates. We have exclusive worldwide rights to elamipretide and a second product candidate, SBT-20, both of
which we licensed from Cornell Research Foundation, Inc., a subsidiary of Cornell University, or Cornell, and Institut de recherches cliniques de Montréal, or
the IRCM, in 2006. The unique mitochondrial activity of elamipretide was first published in The Journal of Biological Chemistry in August 2004. Since
licensing elamipretide and SBT-20, we and our collaborators have published approximately 100 peer-reviewed articles highlighting the activity of our
compounds in several disease models, including heart failure, kidney disease, skeletal muscle weakness, diabetic retinopathy and neurodegenerative diseases.
Our compounds have been evaluated in preclinical and clinical studies at academic and clinical institutions, including Boston Children’s Hospital, Charité Berlin,
Children’s Hospital of Philadelphia, Columbia University, Cornell University, Duke University, Johns Hopkins University, Massachusetts General Hospital,
Mayo Clinic, Stanford University, University of California Los Angeles, University of California San Diego, University of Colorado and University of
Washington.
Our Pipeline
The following table summarizes our development pipeline, including preclinical studies and ongoing and planned clinical trials of our product candidates.
Our Strategy
We aspire to lead the development of mitochondrial medicine to improve the lives of patients with severe unmet medical needs. Our strategy is to focus on
near-term rare disease opportunities in ophthalmic, neuromuscular, cardiac and neurological indications, while continuing to progress the potential of our
approach to treat diseases associated with aging in which mitochondrial dysfunction has been implicated. Particularly for larger common disease indications
associated with aging, we plan to assess development collaborations with industry leaders. To achieve our goals, we intend to:
Progress the clinical and preclinical development of our mitochondrial medicines in ophthalmology
We are developing elamipretide for ophthalmic conditions associated with mitochondrial dysfunction. We intend to continue to rapidly advance
elamipretide through the completion of our Phase 2b clinical trial
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in GA, which was fully enrolled in the first quarter of 2021, with data expected to be announced early in the second quarter of 2022. We have received Fast Track
designation for this indication in the United States. We are also exploring elamipretide and our second-generation and pipeline mitochondrial medicines in
preclinical models of other ophthalmic diseases.
Advance the development of our mitochondrial medicines for rare neuromuscular diseases
We are currently recruiting patients with primary mitochondrial myopathy due to nPMM, for enrollment in a pivotal trial of elamipretide. We have
reached alignment with the U.S. Food and Drug Administration, or the FDA, regarding the trial design for this trial. We have received Fast Track and Orphan
Drug designations for this indication in the United States. Subject to continued planning efforts, we hope to file one or more INDs for elamipretide in DMD
during 2022. We have reached preliminary alignment with the FDA regarding the trial design for a trial assessing elamipretide in patients with cardiomyopathy
associated with DMD. We have also observed in a preclinical model of DMD that administration of elamipretide in combination with a phosphorodiamidate
morpholino oligomer, or PMO, more than doubles the levels of dystrophin in animals than administration of the PMO alone. PMOs are part of an approved
therapeutic class of antisense oligonucleotides that mediate exon-skipping to improve dystrophin levels in DMD. We are evaluating the feasibility of a
combination trial of elamipretide and a PMO to improve dystrophin levels in patients with DMD and plan to request a pre-IND meeting with the FDA during
2022 to discuss this development effort.
Advance the development of our mitochondrial medicines in rare cardiomyopathies
We have conducted SPIBA-001, a Phase 3 retrospective natural history control trial, and TAZPOWER, a Phase 2/3 double-blind placebo-controlled trial,
in BTHS. We observed improvements in cardiac and clinical endpoints in SPIBA-001 and during the open-label extension portion of TAZPOWER. In October
2021 FDA refused to file our NDA submitted in August 2021 on the basis that these data are insufficient to demonstrate substantial evidence of effectiveness.
We are continuing to discuss the feasibility of conducting additional clinical studies to support NDA resubmission with the FDA, which has said that it is also
evaluating the possibility of assessing efficacy on the basis of nonclinical data since the ultra-rare nature of this disease introduces potential ethical issues with
further clinical research. We have received Rare Pediatric and Fast Track designations for BTHS in the United States and Orphan Drug designations for BTHS
in the United States and the European Medicines Agency, or the EMA. In addition to our continued discussions with the FDA, we are evaluating regulatory
pathways in Europe. We are continuing to evaluate the potential for elamipretide in other rare cardiomyopathies and also plan to explore our second-generation
and pipeline mitochondrial medicines in preclinical models of cardiac dysfunction.
Advance the development of SBT-272 and the SBT-550 series for rare neurological diseases
We are developing SBT-272 for rare neurological diseases. We have observed that SBT-272 has mitochondria-protective and neuroprotective effects
across nonclinical models of ALS, frontotemporal dementia, or FTD, alpha-synucleinopathy, or α-Syn, a rare form of dementia that is similar to Parkinson’s
disease, or PD, Huntington’s disease and ischemic stroke. We have also observed SBT-272-mediated improvements in functional assessments, lifespan,
inflammation, and reduction of protein aggregates across certain of these nonclinical models. We have initiated a Phase 1 clinical trial of subcutaneous SBT-272
in healthy human volunteers and plan to initiate chronic toxicology studies in animals during 2022. We have identified ALS and FTD as the indications of
highest interest for our initial clinical development of SBT-272, and we are conducting additional preclinical studies in other neurological disease models to
inform our decisions regarding potential additional indications. We are also evaluating compounds in the SBT-550 family for rare neurological indications,
including Friedreich’s ataxia, or FRDA.
Deliver on the promise of our carrier program
We have extensive experience in optimizing delivery of our compounds to the mitochondria, which has been a challenge for other drug delivery
technologies. We have demonstrated capability to deliver beneficial payloads to mitochondria by conjugating them with our proprietary compounds, which serve
as vectors or carriers to mitochondria. This approach has the potential to confer mitochondrial specificity to promising therapies that do not otherwise localize to
mitochondria, potentially increasing the efficacy of a payload by targeting it to the part of the cell where it is needed most. These payloads might include small
molecules, proteins, oligonucleotides, nanoparticles and liposomes. This delivery strategy, which we call
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our carrier program, has the potential to create new pipeline assets from known delivery of small molecules, enzymes, proteins or therapeutic genes to address
inherited mitochondrial disorders.
Explore potential strategic partnerships
We may explore select strategic partnerships and alliances to support our drug development programs, while preserving significant development and
commercialization rights, if we believe that such alliances will enable us to leverage the financial support and therapeutic area expertise and resources of a
strategic partner to accelerate the development and commercialization of our product candidates.
Background
Mitochondria
Mitochondria, found in almost all human cells, are the “powerhouse of the cell.” Mitochondria produce 90% of our energy by converting food into ATP, a
molecule that carries energy within cells. Mitochondria produce approximately our body weight in ATP daily, providing the energy that allows cardiac muscles,
for example, to beat an estimated 100,000 times every 24 hours, or 2.5 billion times by age 70, without stopping. Our heart, kidney, eyes, brain and skeletal
muscle are among the highest producers and users of mitochondrial ATP in our bodies, as ATP is required for their critical functions such as the contraction of
skeletal, cardiac, vasculature and lung muscle, maintenance of cell membrane potential, cellular transport and secretion of hormones and neurotransmitters.
Normal mitochondrial function is essential for human life and for the proper functioning of many systems in our bodies.
Mitochondria are highly specialized structures. They have their own DNA, called mitochondrial DNA, or mtDNA, which is inherited only from our
mothers and is separate and distinct from nDNA. In addition, they are under dual genetic control with nDNA, which encodes for over 90% of the mitochondrial
proteome. Mitochondria are located within the cell, which is protected by the cell membrane, and they also have their own inner and outer membrane, which
create further barriers to the effective delivery of therapeutics to these specialized organelles. In normal mitochondria, cardiolipin, which is a phospholipid
unique to the mitochondria, is responsible for creating folds, called cristae, in the inner mitochondrial membrane, or IMM. The cristae house the electron
transport chain, or ETC, which is composed of five protein complexes responsible for mitochondrial ATP production through a process known as oxidative
phosphorylation. The curved architecture of the cristae in the IMM is essential to keep the electron transport chain complexes in optimal close configuration for
normal oxidative phosphorylation.
Mitochondrial Dysfunction, Aging and Human Disease
Mitochondrial dysfunction most often arises from mutations in mtDNA or nDNA, that can either be inherited or, in the case of mtDNA mutations, can
occur as we age. Dysfunctional mitochondria not only produce less ATP, which impairs the normal functioning of our major organ systems, but they also
generate unhealthy levels of ROS, which damages cardiolipin. ROS-mediated damage of cardiolipin can lead to pathological oxidative stress, causing the
inflammation, fibrosis and cell death which are causal or contributory to the process of human aging.
Mitochondrial dysfunction, whether inherited or acquired, often impacts high energy-demanding organs such as those of the cardiac, renal, visual,
neurological, central nervous, skeletal muscle, circulatory or endocrine systems. Mitochondrial diseases arising from inherited genetic defects, called primary
mitochondrial diseases, are typically rare diseases which can impact multiple organ systems within the body and may lead to reduced lifespan. Symptoms of
primary mitochondrial disease include cardiovascular and kidney problems, vision problems and chronic pain.
Although mtDNA is originally inherited from our mothers, it is replicated within our mitochondria as mitochondria reproduce and is highly susceptible to
mutation within specific cells and organ systems as we age. Mitochondrial diseases arising from these spontaneous mutations in our mtDNA, called secondary
mitochondrial diseases, include heart disease (such as heart failure and atherosclerosis), diabetes, ophthalmic conditions (such as age-related macular
degeneration, glaucoma, diabetic retinopathy and diabetic macular edema), neurodegenerative diseases (such as Alzheimer’s, Parkinson’s and ALS), senescence,
cancer, diabetes, skeletal muscle dysfunction (such as sarcopenia) and kidney diseases.
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Targeting Mitochondrial Dysfunction: Role of Cardiolipin
Several of our product candidates, including elamipretide and SBT-272, target cardiolipin in the IMM, stabilizing the IMM under conditions of oxidative
stress.
Cardiolipin is a conically shaped phospholipid that plays an important role in establishing the cristae architecture within the IMM and optimizing the
function of the ETC. Reduced and damaged cardiolipin content has been observed in many diseases, and a deficiency of normal cardiolipin is thought to be
centrally involved in mitochondrial dysfunction.
Cardiolipin is essential for normal oxidative phosphorylation, the process by which most ATP is made. Cardiolipin congregates in and around the cristae
of the IMM. Cardiolipin’s conical shape is responsible for creating the curved architecture of the cristae. This curvature helps to keep the electron transport chain
complexes in close association with one another, increasing the efficiency of ATP production and minimizing the electron leakage that leads to oxidative stress,
as illustrated below.
Cardiolipin is embedded with the complexes of the ETC, as can be seen above, and its interaction with the ETC complexes facilitates super-complex
association, a process by which electron transport chain complexes selectively associate with, or merge with, one another, to optimize the efficiency of the
oxidative phosphorylation process.
Correct mitochondrial morphology is also essential for mitochondrial network connectivity and function. Mitochondrial networks exhibit coordination of
inner mitochondrial membrane cristae at inter-mitochondrial junctions.
This mitochondrial network connectivity is associated with cellular signaling pathways, including:
▪
fusion, in which mitochondria join to spread metabolites, enzymes and mitochondrial gene products through the mitochondrial network,
optimizing mitochondrial function and counteracting the accumulation of mitochondrial mutations during aging;
▪
fission, or the division of mitochondria, which plays an important role in the removal of damaged organelles;
▪
mitophagy, a mechanism to remove damaged mitochondria;
▪
ROS-mediated pathways, including the PI3K/Akt pathway, an intracellular signaling pathway important in regulating the cell cycle, and the tumor
necrosis factor alpha (TNFα) signaling pathway, a proinflammatory pathway involved in various biological processes including regulation of cell
proliferation, differentiation, apoptosis and immune response;
▪
calcium regulation, entailing the transfer of calcium from the endoplasmic reticulum to the mitochondria to facilitate mitochondrial respiration,
disrupted calcium regulation is thought to be implicated in cardiomyopathy associated with DMD and FRDA, as well as in heart failure with
preserved ejection fraction, or HFpEF;
▪
various transcription factors, which are proteins that control the rate of transcription of genetic information from DNA to messenger RNA; and
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▪
certain protein kinase C (PKC) signaling pathways that can affect cardiomyocyte function and are involved in the induction of mitophagy.
Cardiolipin is also required for the structural integrity of the translocase of outer membrane, or TOM, which serves as a central entry gate for almost all
mitochondrial proteins including replisome-related proteins, which are deficient in most patients with nPMM, tafazzin, which is deficient in BTHS, and frataxin,
which is deficient in FRDA.
Cardiolipin is susceptible to peroxidation, or degradation, by oxidative stress produced by dysfunctional mitochondria. When cardiolipin is degraded, it
can lose its conical shape, compromising the structural integrity of the IMM by leading to a relaxation of the cristae and a drifting apart of the electron transport
chain complexes. Shuttling of electrons through the electron transport chain becomes less efficient with the complexes further apart from one another, resulting
in lower ATP production and higher ROS generation. Disruption of mitochondrial morphology also impairs fission and fusion, impacting signaling pathways
including mitophagy. This can trigger the cellular and extra-cellular cascades involving inflammation, fibrosis and cell death that underlie many diseases.
Various diseases alter cardiolipin composition and reduce cardiolipin content within the mitochondria. In BTHS, which entails a cardiolipin deficiency,
experiments in patient-derived lymphoblastoid cell lines showed 50%-60% less cardiolipin than control cell lines, and work done in BTHS patient-derived
cardiomyocytes, or heart cells, showed up to 75% less cardiolipin than control cardiomyocytes. Cardiolipin and lipid peroxidation have also been implicated in
FRDA, and cardiolipin decrements or alterations have been observed in DMD and in both pediatric and adult patients with heart failure. Aging has also been
shown to decrease cardiolipin content in high energy-demanding organs, such as the heart, brain, liver and kidney, as well as the epidermis. Studies suggest that
oxidative stress and peroxidation of cardiolipin may contribute to the overall loss of cardiolipin content in these diseases.
Our Approach to Mitochondrial Medicine
We have focused our development efforts on diseases and conditions that affect the organs in the body that generate significant energy because of the high
mitochondrial content found in the cells comprising these organs. The activity of our compounds has been studied in several disease models, including heart
failure, kidney disease, skeletal muscle weakness, diabetic retinopathy and neurodegenerative diseases. We believe that our product candidates may be most
relevant for the visual system, the cardiorenal system and the brain, all of which are innately highly dependent on mitochondrial bioenergetics.
Elamipretide is known to compensate for cardiolipin deficit by improving the packing, or aggregation, of cardiolipin and other membrane lipids.
Elamipretide reacts electrostatically with the anionic headgroups of cardiolipin and hydrophobically with the acyl chains of cardiolipin, as depicted below, to
aggregate cardiolipin more densely within the inner mitochondrial membrane. This improved packing of cardiolipin promotes membrane curvature, or cristae
formation, and surface area, leading to improvements in supercomplex association and oxidative phosphorylation and reduction in oxidative stress.
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In nonclinical studies or clinical trials, we have observed that elamipretide normalized function in dysfunctional mitochondria, including by reducing
peroxidation of cardiolipin, increasing mitochondrial respiration (the process by which mitochondria produce energy), improving ATP levels, reducing formation
of ROS and reducing inflammation, fibrosis and cell death. Importantly, we have not observed any effect of elamipretide on healthy or normal mitochondria.
Following treatment with elamipretide and other pipeline candidates, we observed normalization of mitochondrial morphology across various disease
models, including models of diabetic retinopathy, and kidney reperfusion injury, each of which were published in Clinical Pharmacology & Therapeutics in
December 2014.
We are also developing products to address other aspects of mitochondrial dysfunction beyond cardiolipin. We believe that our SBT-550 series of
compounds acts upon the ferroptosis pathway, a recently recognized pathway for regulated cell death characterized morphologically by the presence of smaller
than normal mitochondria with condensed mitochondrial membrane densities, reduction or vanishing of mitochondria cristae, and outer mitochondrial membrane
rupture, which has been implicated in many neurological diseases. We are also progressing our carrier program in which we utilize our proprietary compounds as
mitochondria-targeted vectors to deliver other beneficial compounds to the mitochondria.
Our Product Candidates
We believe that our product candidates have significant potential to address the ophthalmic, neuromuscular, cardiac and neurological symptoms of various
diseases associated with mitochondrial dysfunction. In addition to our clinical and preclinical focus on rare and common age-related ophthalmic diseases, rare
neuromuscular diseases, rare cardiomyopathies and rare neurological diseases, we have conducted preclinical studies and Phase 1 and Phase 2 clinical trials in
common diseases and conditions that affect the organs in the body that have significant mitochondrial content to meet their high energy needs; these include the
heart, the kidney, the brain (inclusive of the visual system) and skeletal muscle. We believe that our product candidates may be most relevant for the visual
system, the cardiorenal system and the brain, which are innately highly dependent on mitochondrial bioenergetics, and we expect these to continue to be key
focus areas with respect to some of our pipeline compounds.
We believe that there is significant potential for mitochondrial medicine beyond the indications we are currently studying, including with respect to
common diseases associated with aging. In addition to our clinical-stage product candidates, we have a growing pipeline of over 100 compounds that have been
screened for mitochondrial activity, including in some cases preferential mitochondria-targeting characteristics; improved tissue distribution in targeted tissues,
such as the heart and brain; and differentiated mechanistic targets, including the ferroptosis pathway of cell death. Some of these compounds may be suitable for
oral formulations, which we believe may be more appropriate for development for common diseases associated with aging. We have also designed proprietary
compounds, which benefit from our peptide carriers, that can potentially deliver beneficial payloads to mitochondria; for example, if genetic mutations impact
the production of certain proteins necessary for proper mitochondrial function, this proprietary technology might help us deliver those missing proteins to the
mitochondria.
Elamipretide
Elamipretide is a mitochondria-protecting peptide that is known to compensate for cardiolipin deficit by improving lipid packing, membrane curvature and
membrane surface area. Elamipretide has been reported to be well tolerated in clinical trials in over 1,000 subjects systemically exposed to it to date. See “—
Elamipretide Safety Data” below. We are evaluating elamipretide in ophthalmic indications, including GA, for which we have received Fast Track designation
from the FDA. We expect to announce data from our ongoing Phase 2b clinical trial in patients with GA early in the second quarter of 2022. We are evaluating
or plan to evaluate elamipretide in rare neuromuscular conditions where we have the potential for expedited regulatory review, including PMM, for which we
have received Fast Track and Orphan Drug designation in the United States, and DMD. We are currently recruiting patients for enrollment in our Phase 3
clinical trial for elamipretide in nPMM. We have reached preliminary alignment with the FDA on the design of a Phase 2 clinical trial of elamipretide in patients
who have cardiomyopathy associated with DMD, and plan to submit our IND for that indication during 2022. We also hope to meet with the FDA during 2022
to discuss the potential development of elamipretide in combination with a PMO to improve
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dystrophin levels in affected DMD patients. We are evaluating elamipretide in rare cardiomyopathies where we have the potential for expedited regulatory
review, including BTHS, for which we have received Fast Track designation from the FDA and Orphan Drug designation from the FDA and EMA, and with
respect to which we are engaged in ongoing discussions with the FDA regarding the feasibility of an additional clinical trial and the availability of other
pathways for regulatory review.
Ophthalmic Diseases
Normal mitochondria play a critical role for ocular function, and dysfunctional mitochondria are implicated in several rare and common diseases of the
eye. Ophthalmologic diseases that have not traditionally been considered to have obvious mitochondrial origins are increasingly recognized to result in part from
impaired mitochondrial function, increased oxidative stress and increased apoptosis. As a high energy-demand organ, the eye is particularly susceptible to the
consequences of mitochondrial damage. Oxidative damage that results over time from inherited mtDNA mutations or prolonged oxidative stress instability leads
to cumulative mitochondrial damage, which is recognized to be an important pathogenic factor in age-related ophthalmologic diseases such as dry age-related
macular degeneration, or dry AMD, diabetic retinopathy and glaucoma as well as in inherited ophthalmologic disorders such as Leber’s hereditary optic
neuropathy, or LHON.
We have observed beneficial effects of treatment with elamipretide in preclinical models of dry AMD, diabetic retinopathy and glaucoma. We have dosed
elamipretide both topically, instilled as a topical ophthalmic solution, and systemically, by subcutaneous injection, in different animal models and in early clinical
trials. We observed improvement from baseline in visual function in subjects enrolled in a Phase 1 clinical study of elamipretide in dry AMD who were treated
with 40 mg subcutaneous systemic elamipretide injections once daily for six months. We also observed signs of clinical benefit in a Phase 1/2 clinical trial of
elamipretide topical ophthalmic solution in patients with Fuchs’ corneal endothelial dystrophy, or Fuchs, and in the open-label extension portion of a Phase 2
clinical trial of elamipretide topical ophthalmic solution in patients with LHON. Based on our studies in animals, we believe that higher concentrations of
elamipretide may be found in the retina following subcutaneous administration than topical ophthalmic administration.
Geographic Atrophy. We are advancing development of elamipretide for GA, an advanced form of dry AMD. Dry AMD is a common ophthalmic disease
associated with aging and the leading cause of blindness among older adults in the developed world. GA is estimated to impact approximately two million
individuals in the United States. There are no treatments approved by the FDA or EMA for the disease. The FDA has granted Fast Track designation to
elamipretide for this disease in the United States.
The earliest clinical manifestation of dry AMD is often a reduction in low luminance, or low light, visual acuity, which can make it challenging to conduct
normal daily activities such as reading in artificial light, driving at dusk or at night and navigating indoors in low light. The disease may progress to the GA
stage, which includes blurred vision and loss of central vision, which can impair facial recognition, mobility, watching television and computer use, and can
eventually lead to blindness. These limitations may impair the independence of older adults and have been associated with increased depression.
The pathophysiology of GA involves the gradual deterioration, or geographic atrophy, of the central part of the retina, known as the macula. The retinal
pigment epithelium provides nutrition to the retina, which has a very active metabolism and rids the eye of waste by phagocytosis of photoreceptor outer
segments, protects against photooxidation and enables perception of light through retinal recycling. The eye is the highest consumer of mitochondrial ATP in the
central nervous system, due to the intensive bioenergetics required to support visual function. Preclinical studies suggest that diseases of the retinal pigment
epithelium, such as dry AMD, may be exacerbated by light- induced mitochondrial dysfunction, and that mitochondrial DNA mutations appear to accumulate
over time in diseased retinal pigment epithelium as a consequence of chronic and ongoing oxidative stress. Cigarette smoking and high fat diets, both of which
contribute to mitochondrially deleterious oxidative stress, are known to be environmental risk factors for dry AMD onset and progression. These findings suggest
a key role for mitochondrial dysfunction in the pathology of the disease.
Elamipretide was evaluated in several preclinical models of dry AMD, with data suggesting that treatment with elamipretide improved mitochondrial
morphology. In a preclinical model, 24-month old atherosclerotic mice (roughly equivalent to human octogenarians) accumulated drusen-like deposits when
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fed a high fat diet, and, after one month of subcutaneous administration of elamipretide, showed normal mitochondrial morphology and ultrastructure of the
retinal pigment endothelium cells. Additionally, the animals treated with elamipretide were observed to have normalization of b-wave amplitudes on
electroretinograms, which suggests an improvement in photoreceptor function reflecting improved visual acuity.
The table below provides a summary of our completed and ongoing trials for dry AMD and GA.
TRIAL
INDICATION
STAGE;
STATUS
TRIAL DESIGN
ReCLAIM
dry AMD
Phase 1;
completed in
March 2018
Open-label, single-center clinical trial involving 19 subjects with non-central
geographic atrophy, which occurs when the photoreceptors no longer work and the
patients develop a blind spot or spot of poor vision in the macula, and 21 subjects with
high risk drusen, which are large deposits of debris located between the retina and the
Bruch’s membrane, that can interfere with waste products getting removed from the
macula. Subjects received once daily subcutaneous injections of elamipretide for 24
weeks.
ReCLAIM-2
GA
Phase 2b; fully
enrolled in
February 2021
Double-blind, placebo-controlled, multi-center clinical trial involving 176 subjects
with non-central geographic atrophy, receiving once daily subcutaneous injections of
either elamipretide or placebo for approximately 48 weeks.
We conducted our ReCLAIM Phase 1 open-label clinical trial at Duke Eye Center to evaluate the safety, tolerability and efficacy of daily subcutaneous
injections of 40 mg elamipretide given over 24 weeks to 40 individuals with intermediate characteristics of dry AMD, including 21 individuals with high-risk
drusen, the most common early sign of dry AMD, and 19 individuals with extra-foveal or non-central geographic atrophy, which refers to areas of dysfunctional
macula that do not impinge on the fovea, or the center of the macula. All subjects had a five-letter or greater deficit in low luminance visual acuity, or LLVA, at
baseline. For the 19 subjects with high-risk drusen and 15 subjects with non-central geographic atrophy who completed 24 weeks of therapy, we observed
significant improvements from baseline in both cohorts, as summarized below.
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ENDPOINT
DRUSEN
COHORT
(N=19)
GEOGRAPHIC
ATROPHY COHORT
(N=15)
Best corrected visual acuity (regular light) mean letters gained/p value
3.58
4.60
(p=0.0253)
(p=0.0034)
Low luminance visual acuity mean letters gained/p value
5.63
5.40
(p=0.0055)
(p=0.0186)
Reading speed (regular light) mean reduction in time/p value
-0.11
-0.02
(p=0.0054)
(p=0.5501)
Low luminance reading speed mean reduction in time/p value
-0.28
-0.52
(p<0.0001)
p=0.0172
Visual function questionnaire composite score
9.25
6.59
(p=0.0004)
(p=0.0125)
Low luminance questionnaire general dim light vision score
20.75
10.32
(p=0.0003)
(p=0.027)
Since we did not have a placebo, or control group, in this study, we evaluated natural history data and prior placebo-controlled trials of subjects with
similar disease burden to understand the likelihood that we would observe a learning or placebo effect in this study. In a number of other reported interventional
studies conducted by others, including Chroma, Spectri and Filly (combined n>700), as well as in several natural history studies conducted by others, including
Proxima, Holz and Ladd (combined n>250), best corrected visual acuity, or BCVA, was observed to decline in similar patient groups by four to six letters over
an up to one-year period, and LLVA was observed to decline in similar patient groups by approximately two letters over a six-month to one-year period. In the
once-monthly interventional and sham arms of the Filly trial, LLVA was observed to decline by 1 letter over a six-month period. This supports our belief that the
improvements observed in the ReCLAIM trial are unlikely to be due to the natural variability of the disease.
While each subject in ReCLAIM had one eye designated as a study eye, which met the inclusion criteria for the trial, the other eye was not required to
meet inclusion criteria. Fourteen subjects in the trial had neovascular age-related macular degeneration, or wet AMD, that was at the quiescent stage, meaning
that it was stable on standard-of-care anti-vascular endothelial growth factor, or anti-VEGF, therapy. While there is an improvement in visual acuity when some
subjects are first dosed with anti-VEGF therapy, improvement typically plateaus and even declines slightly when the disease reaches the quiescent state. We
observed that subjects with wet AMD experienced similar improvements in vision as was observed in the study eyes, with a 5.6 letter mean gain from baseline in
BCVA, which was statistically significant at p=0.0027, and a 6.1 letter mean gain from baseline in LLVA, which was statistically significant at p=0.0012.
We also assessed the rate of progression of geographic atrophy in the extra-foveal geographic atrophy cohort relative to what has been observed in other
studies. The typical rate of geographic atrophy progression in dry AMD is well understood from prior studies and the natural history, and we believe slowing of
geographic atrophy progression could be a meaningful endpoint as we pursue approval by the FDA. This analysis was conducted using several types of imaging
technologies including fundus auto-fluorescence, or FAF, an advanced imaging technique for observing the fundus, which is the interior surface of the eye
opposite the lens including the retina, optic disk, macula, fovea and posterior pole, FAF squared, or FAF SQRT, a calculation performed to eliminate dependence
of growth rates on lesion measurements, and optical coherence tomography, or OCT, a non-invasive imaging test which uses light
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waves to take cross-sectional pictures of the retina, also squared, or OCT SQRT, to eliminate dependence of growth rates on lesion measurements. Each of these
imaging technologies showed that six months’ treatment with elamipretide was associated with slower progression of geographic atrophy than was observed in
prior published studies conducted by others (assuming, for prior studies which were completed over a longer time period, a linear progression of geographic
atrophy enabling calculation at the six-month time point). After six months of elamipretide treatment, FAF demonstrated mean growth of 0.50 mm2, versus 0.91
mm2 mean observation from ten prior studies over a similar time period (assuming linear progression), FAF SQRT demonstrated mean growth of 0.136 mm,
versus 0.19 mm mean observation from five prior studies over a similar time period (assuming linear progression), and OCT SQRT demonstrated mean growth
of 0.11 mm, versus 0.18 mm mean observation from five prior published studies over a similar time period (assuming linear progression). By comparison, after
six months in the once monthly interventional and sham arms of the FILLY trial, which studied patients with GA, FAF SQRT demonstrated mean growth of
0.156 and 0.17 respectively, and after six months in the 2 mg interventional and sham arms of the GATHER-1 trial, which studied patients with extra-foveal GA,
FAF SQRT demonstrated mean growth of 0.14 and 0.195 respectively. Although the patient populations in these trials do not entirely overlap since we are
studying extra-foveal GA, which is expected to grow more rapidly than foveal GA, and smaller lesion sizes, we believe reported growth rates utilizing FAF
SQRT to eliminate dependence of growth rates on lesion measurements would be similar.
We conducted a post hoc analysis of the ReCLAIM trial data, to assess whether there was any relationship between baseline mitochondrial dysfunction
and improvement in visual function which could help inform inclusion criteria for any Phase 3 trial we may initiate in the future. Most of the mitochondria in the
retina are located in the ellipsoid zone, or EZ, which is a layer of the retina located proximate to the photoreceptors and near the retinal pigment endothelium, as
shown below in an OCT image of a normal eye. It has been previously reported that patients with the early stages of AMD exhibit reduced relative intensity of
the EZ when compared with healthy controls, and that in eyes with GA, retinal areas with disrupted EZ have a greater risk for progressing to dense areas of
atrophy compared with areas with intact EZ.
The data, presented at the 2021 Association for Research in Vision and Ophthalmology (ARVO) Virtual Annual Meeting, showed that for patients with GA
treated with elamipretide for 24-weeks, improvements from baseline in LLVA were significantly correlated to both baseline macular percentage of total EZ
attenuation (r = -0.72; P = 0.002) and the baseline volume of the area between the ellipsoid zone and the retinal pigment epithelium layer of the retina, or EZ-
RPE volume (r = 0.62; P = 0.01), with eyes gaining 2 or more lines of LLVA having significantly less macular total EZ attenuation at baseline (9.0% vs 27%; P =
0.03) and significantly less percentage area of macular GA (4.7% vs 15.6%; P = 0.004). We believe that these data support the mitochondrial pathophysiology of
vision loss in dry AMD, provide further support for our Phase 2b study inclusion criteria, which was modelled on our Phase 1 inclusion criteria, and offer
potentially valuable enrichment strategies for any future Phase 3 trials we may initiate.
We initiated ReCLAIM 2, a Phase 2b placebo-controlled clinical trial with once daily subcutaneous dosing in subjects with extra-foveal geographic
atrophy in March 2019. ReCLAIM 2 enrolled 176 subjects who were randomized two-thirds:one-third to elamipretide 40 mg once daily subcutaneous injection
or placebo for a 48-week period. Eligible subjects are required to have a geographic atrophy area greater than or equal to 0.05mm2 and less than 10.16 mm2,
BCVA greater than or equal to 55 letters and greater than 5 letters low luminance deficit. The primary efficacy endpoint family in ReCLAIM 2 is comprised of
low-luminance best-corrected visual acuity and FAF SQRT; secondary and exploratory efficacy endpoints include BCVA, FAF, OCT, EZ attenuation and
volume, low-luminance best-corrected visual acuity, low-luminance reading acuity, National Eye Institute Visual Function Questionnaire-39 score, visual
function by the Low-luminance Questionnaire and conversion to choroidal neovascularization.
We completed enrollment in the ReCLAIM 2 clinical trial in February 2021, and we expect to announce data early in the second quarter of 2022.
Although we believe that individuals experiencing a progressive decline in visual activity will be compliant with daily subcutaneous injections, we are
evaluating the feasibility of developing a sustained-release formulation for intravitreal injection for this indication. We expect to have data to inform a decision
on Phase 3 formulation during 2022.
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Rare neuromuscular diseases
Increasing evidence suggests that mitochondria are involved in both inherited and age-related neurological diseases. Although we have designed several
of our pipeline compounds, including SBT-272 and the SBT-550 series of compounds, to optimize their suitability for neurological diseases of mitochondrial
dysfunction, we have also observed preclinical and clinical signals of efficacy with elamipretide in certain neuromuscular diseases during the course of our
development of elamipretide for primary mitochondrial myopathy. We plan to continue to develop elamipretide for these specific neuromuscular diseases, while
exploring broader rare neurological diseases for development using our pipeline compounds.
nPMM. We have initiated NuPOWER, a Phase 3 clinical trial of elamipretide for primary mitochondrial myopathy due to nPMM. We observed
improvement in this subgroup of patients in our previous primary mitochondrial myopathy development program, which enrolled participants irrespective of
their genetic diagnosis (i.e., including both nDNA and mtDNA mutations). We have received Fast Track and Orphan Drug designations from the FDA for the
development of elamipretide for this indication.
We previously studied elamipretide in three clinical trials for the treatment of primary mitochondrial myopathy, a disease characterized by debilitating
skeletal muscle weakness, exercise intolerance and fatigue accompanied by a confirmed molecular genetic diagnosis with mutations in one or more of an
estimated 250 different nDNA or mtDNA genes. Although we did not observe improvement overall in MMPOWER-3, our Phase 3 clinical trial, we did observe
improvement in a prespecified subgroup of patients with nDNA mutations, most of whom had mutations in nuclear genes encoding for proteins necessary for
mtDNA replication, or replisome-related mutations. Scientifically, this may be due to the fact that cardiolipin, which is the target for elamipretide, is involved in
mitochondrial protein and metabolite transporters which mediate the import of nDNA encoded proteins into the mitochondria and is also involved in the
replisome machinery associated with mtDNA packaging and replication.
A post hoc analysis of the prespecified subgroup of subjects with nDNA mutations (n=59) enrolled in MMPOWER-3 demonstrated a mean increase of
25.5 meters from baseline in distance walked after 24 weeks (which was the end of treatment) for subjects receiving elamipretide compared to only a 0.3-meter
increase for subjects receiving placebo, for a 25.2-meter difference between the two groups favoring elamipretide (p= 0.03), as shown below. Additionally, an
exposure-response analysis, which is an analysis conducted to establish the relationship of blood concentrations of elamipretide to its pharmacologic effect on
the distance walked on the six-minute walk test, or the 6MWT, showed that the increase in distance walked on the 6MWT for subjects with an nDNA mutation
was related to blood concentrations of elamipretide (p = 0.03).
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Most of the subjects in the prespecified nDNA subgroup had nDNA mutations affecting the nuclear expression of components of the mitochondrial
replisome, or replisome-related mutations. The mitochondrial replisome is responsible for transcribing mtDNA within the mitochondria. Most common among
these replisome-related mutations were mutations in polymerase gamma, or POLG, which is the most common cause of primary mitochondrial disease. POLG-
related disorders typically affect tissues with high energy demand, such as the nervous system, muscle and liver, and are progressive conditions that show direct
correlation between age of onset and severity. Other replisome-related mutations included mutations in the TWINKLE, MPV17, DGUOK, TK2 and RRM2B
genes. Although we plan to enroll patients with nPMM in our proposed Phase 3 clinical trial irrespective of their nDNA mutation, we plan to conduct our
primary efficacy analysis only on the patients with replisome-related mutations.
As with most primary mitochondrial diseases, symptoms of nPMM can affect multiple organ systems including the brain and the skeletal muscle. To
ensure a more homogenous and less variable cohort of patients in our Phase 3 clinical trial, our key opinion leaders encouraged us to also require that patients
have a diagnosis of progressive external ophthalmoplegia, or PEO, which is the progressive weakening of the eye muscles thought to be almost always observed
with skeletal muscle involvement in this disease. A post hoc analysis of those nPMN patients with replisome-related mutations and PEO, on whom we proposed
to conduct our primary efficacy analysis in our proposed Phase 3 clinical trial, showed that patients who met these criteria and were randomized to elamipretide
had a greater increase in 6MWT, as shown below.
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Our NuPOWER Phase 3 clinical trial is a double-blind, placebo controlled, global trial enrolling 90 patients with nPMM due to replisome-related
mutations (primary analysis population) and up to 40 additional patients with other nDNA mutations. Patients will be randomized 1:1 to elamipretide 60 mg SC
daily or placebo for 48-weeks, as shown below. The primary efficacy endpoint will be distance walked on the 6MWT; secondary endpoints will include other
assessments of axial muscle strength and patient reported outcomes. We have reached alignment with the FDA regarding this trial design. NuPOWER is
currently recruiting patients for enrollment.
DMD. DMD is an inherited muscle wasting
disease affecting an estimated one in 3,500 to 5,000 male births in the United States. DMD is caused by mutations in the gene encoding the dystrophin protein.
The loss of dystrophin and ensuing mitochondrial dysfunction results in a cascade of events leading to progressive loss of skeletal and cardiac muscle function.
There are several PMOs that have been approved by the FDA for the treatment of DMD under the accelerated approval pathway, based upon an observed
improvement in dystrophin levels. There are no therapies approved by the FDA or EMA for the treatment of the cardiac manifestations of DMD, or DMD
cardiomyopathy. Most DMD patients with DMD develop cardiomyopathy, and heart failure and sudden cardiac death are the most commonly reported causes of
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early mortality among these patients. We plan to explore the potential of elamipretide as a treatment for DMD.
DMD is characterized by a loss of dystrophin at a cellular level, which creates tears in the muscle membrane allowing free entry of calcium ions and
ensuing activation of numerous cascades associated with muscle damage. Mitochondrial dysfunction is an important and early part of the pathological cascade in
DMD and has been hypothesized to be central to the etiology of the disease. Myocardial calcium overload simultaneously disrupts contractile and bioenergetic
homeostasis, as high cellular calcium can both depolarize mitochondria (leading to decreased ATP production and increased ROS), and prevent the dissociation
of cross-bridges obligatory for muscle relaxation. These disruptions trigger pathophysiological cascades that lead to muscle wasting and the progressive fibrosis
(referring generally to the progressive process of fibrosis, scar formation and fibrofatty and connective tissue infiltration characteristic of the disease). Altered
cardiac mitochondrial ultrastructure has been observed in tissues biopsied from DMD patients as well as across animal models of DMD.
We have observed in a preclinical mouse model of DMD that treatment with elamipretide in combination with a PMO more than doubled levels of
dystrophin above those observed with the PMO alone; the preliminary data from this study, pending the final report, is shown below. We plan to request a pre-
IND meeting with the FDA during 2022 to discuss a development pathway for elamipretide in combination with a PMO to improve dystrophin levels in DMD.
Although several PMOs have been approved for the treatment of DMD, there are no therapies approved for the treatment of DMD cardiomyopathy, which
is the leading cause of early mortality in affected individuals. In the dystrophic heart, a lack of dystrophin leads to an influx of extracellular calcium and
disruption of calcium homeostasis, triggering a pathological cascade of protease activation, augmented ROS production, mitochondrial dysfunction, increased
cardiomyocyte structural vulnerability, membrane instability, myocyte death, necrosis, and inflammation resulting in increased fibrosis and impairment in
cardiomyocytes, endothelial cells, vascular smooth muscle cells, and fibroblasts. DMD cardiomyopathic progression occurs in an infiltrative fashion through the
gradual accumulation of myocardial cellular and extracellular substances that impair viable myocardium function. This progressive infiltrative process of
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fatty fibrous replacement leads to the creation and expansion of non-viable areas of the myocardium which has been associated with poor outcomes for patients.
Cardiac fibrosis in DMD is assessed by magnetic resonance imaging (cMRI) using late gadolinium enhancement, or LGE, to identify areas of fibrotic tissue.
Elamipretide has been shown to improve mitochondrial respiration in failing dystrophic cardiac tissue from a patient with Becker’s muscular dystrophy,
which is phenotypically similar to Duchenne cardiomyopathy. Elamipretide has also been shown to prevent or improve myocardial fibrosis and myocyte
hypertrophy in preclinical models of heart failure, including in mouse models of hypertrophic cardiomyopathy induced by TAC and in a porcine model of
HFpEF.
We met with the FDA in 2021 for a pre-IND meeting to discuss elamipretide for the treatment of DMD cardiomyopathy. FDA agreed that attenuation of
myocardial fibrosis in patients affected by DMD cardiomyopathy would be an appropriate surrogate endpoint that may support accelerated approval of
elamipretide for the treatment of DMD. We plan to submit our IND for this indication during 2022.
Rare Cardiomyopathies
We have extensive preclinical and early clinical support for the use of elamipretide in the setting of heart failure, which can arise due to dysfunction of
either the contractile or filling mechanisms of the heart. In a study published in JACC: Basic to Translational Science in April 2019, elamipretide was shown to
rapidly (within four hours) improve multiple parameters of mitochondrial function in freshly explanted subsarcomal tissue from heart failure transplant subjects,
including samples taken from pediatric and adult patients across a broad range of phenotypes, including dilated cardiomyopathy, hypertrophic cardiomyopathy,
ischemic cardiomyopathy and muscular dystrophy. Data posted on the preprint server bioRxiv in January 2021 demonstrated that elamipretide remediated
respiratory chain and mitochondrial quality control abnormalities caused by cardiolipin deficiency within days to weeks. Data posted on the preprint server
medRxiv in November 2021 demonstrated that in patients with BTHS, elamipretide improved cardiac substrate metabolism within months during the double-
blind portion of TAZPOWER, a Phase 2 double-blind placebo-controlled crossover trial followed by an open-label extension. Collectively these data, together
with the long-term data showing improvement in parameters of cardiac structure and function during the open-label extension portion of the TAZPOWER trial,
suggest a time-course to elamipretide-mediated cardiac improvements that starts within hours at the cellular level and may result within months or years in
cardiac reverse remodeling at the organ system level.
Overall, the improvements in cardiac function observed across multiple clinical and preclinical hypertrophic heart failure phenotypes lead us to believe
that elamipretide may be a promising therapeutic treatment for the cardiac dysfunction presenting in BTHS and other rare cardiomyopathies.
Barth Syndrome. BTHS is estimated to affect between one in 300,000 to one in 400,000 births in the United States, and there are estimated to be less than
300 known living patients worldwide with BTHS. There are no therapies approved by the FDA or the EMA for the treatment of BTHS. We have received Fast
Track designation from the FDA and Orphan Drug designation from the FDA and EMA for the development of elamipretide in BTHS. In February 2020, the
FDA granted rare pediatric disease designation for elamipretide for the treatment of BTHS, and we may therefore be eligible for a voucher that can be used to
obtain priority review for a subsequent human drug application if our BTHS product candidate meets relevant statutory requirements associated with the
program, including FDA approval of the drug in this indication.
BTHS typically presents in infancy or early childhood. The disease is characterized by cardiomyopathy, which makes it harder for the heart to pump blood
to the rest of the body; reduced muscle tone and muscle weakness; delayed growth; fatigue; low white blood cell count, or neutropenia, which can compromise
the body’s ability to fight off infections; and varying degrees of physical disability. Some individuals with BTHS require one or more heart transplants, including
during infancy. Implantable cardioverter defibrillators may be used to prevent sudden death due to life-threatening ventricular arrhythmias, and other heart
failure medications including angiotensin-converting enzyme (ACE) inhibitors and beta blockers may also be used to help manage cardiac dysfunction. In
addition to medical and surgical intervention, individuals with BTHS may require physiotherapists and occupational therapists, speech and language therapists,
psychologists and educational support workers. BTHS can be a lethal infantile and early childhood disease, and mortality is highest in the first four years of life.
Although improvements in the management of the disease have increased survival for some patients, with reports of individuals with
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BTHS living into their late 40’s and a single individual with BTHS reported as surviving to age 51, the disease nevertheless is associated with premature death,
most often due to cardiac problems.
BTHS is caused by a genetic mutation in the TAZ gene that leads to decreased production of tafazzin, an enzyme required to produce cardiolipin; as a
result, there is an abnormal composition of cardiolipin in individuals with BTHS, particularly in the heart and skeletal muscle mitochondria. BTHS patients have
less tetralinoleylcardiolipin, or L4-CL, and increased amounts of monolysocardiolipin, or MLCL, than healthy subjects, and the disease can be diagnosed by the
ratio of MLCL to L4-CL, called the MLCL:CL ratio, or by genetic testing. MLCL, a phospholipid found in the inner mitochondrial membrane, is considered to
be an immature form of cardiolipin. MLCL is structurally differentiated from L4-CL due to its lack of a fourth acyl chain, which alters the typical conical
structure of the lipid, causing alterations to mitochondrial morphology. These morphological alterations result in destabilization of respiratory chain
supercomplexes and increased oxidative stress. Studies have shown increased susceptibility of cardiolipin to peroxidation in BTHS patient-derived pluripotent
stem cells, leading to increased accumulation of MLCL. Analyses of cardiolipin levels in BTHS patient-derived lymphoblasts have shown up to 60% lower
levels of cardiolipin than in healthy control cells; this cardiolipin deficit has been found to range to up to 95% in other BTHS cell lines or animal models.
The Barth Syndrome Foundation, an advocacy group for BTHS awareness and research, asked us to conduct a clinical trial of elamipretide for BTHS. As
the mechanism of elamipretide is to bind reversibly to cardiolipin, which is deficient in individuals with BTHS, we undertook preclinical work to better
characterize the safety profile of elamipretide for BTHS as well as to gain insight into whether there would be adequate target engagement for elamipretide given
the severe depletion of cardiolipin that characterizes this disease.
These experiments suggested that elamipretide may improve mitochondrial respiration in cardiomyocytes derived from individuals with BTHS. In lipid
model systems intended to simulate a cardiolipin deficiency in the IMM, although elamipretide ameliorated the reduced membrane-surface area attributable to
the cardiolipin deficiency, elamipretide’s effect was more pronounced with less severe cardiolipin loss, suggesting that therapeutic benefit may be more
pronounced or more rapidly observed in subjects with more moderate cardiolipin loss.
While BTHS patients have some normal cardiolipin, the ratio of abnormal MLCL to normal cardiolipin may vary from patient to patient. The MLCL:CL
ratio has been observed to correlate with functional impairment; patients with a lower MLCL:CL ratio are typically less impaired than those with a higher
MLCL:CL ratio. For example, a prior observational study of 34 BTHS patients suggests that the MLCL:CL ratio is inversely correlated with performance on the
6MWT (p=0.00014). Accordingly, if the interaction of elamipretide with normal cardiolipin is critical to therapeutic effect, such therapeutic effect may also vary
among patients, and as a result may be more rapidly observed in a subset of patients.
We initiated TAZPOWER, a Phase 2 clinical trial of elamipretide for individuals diagnosed with BTHS, in the third quarter of 2017 at Johns Hopkins.
TAZPOWER was a double-blind, placebo-controlled cross-over trial to evaluate the efficacy of once daily subcutaneous administration of elamipretide in 12
individuals who were 12 years of age or older and had been diagnosed with BTHS. During the controlled portion of the trial, or Part 1, subjects were randomized
in a one-to-one ratio to either 40 mg elamipretide or placebo administered daily by subcutaneous injection for an initial 12-week treatment period, or Treatment
Period 1. After an initial treatment period, on either the 40 mg elamipretide treatment arm or the placebo treatment arm, treatment was discontinued for a four-
week wash-out period, following which the subjects crossed over to the other treatment arm for a second 12-week treatment period, or Treatment Period 2.
Subjects enrolled in TAZPOWER were eligible for participation in an optional open-label extension trial, or Part 2, that is contributing to our safety database and
includes periodic efficacy assessments to support the durability of any effects observed in the placebo-controlled phase of the trial.
TAZPOWER did not meet its primary efficacy endpoints of (i) change in the 6MWT or (ii) change in fatigue reported on a patient reported outcome
assessment between end of treatment on elamipretide and end of treatment on placebo. Improvements were observed in the subgroup of patients with relatively
more cardiolipin at baseline, which we believe suggests that elamipretide therapy may more rapidly affect subjects with relatively more normal cardiolipin.
Improvements in surrogate echocardiographic measures of cardiac function were observed in 10 of the 12 subjects following exposure to elamipretide.
Significant
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changes in metabolites associated with cellular bioenergetics were observed in elamipretide-treated subjects relative to placebo-treated subjects which we believe
suggest that elamipretide improved cellular metabolism; these included improvements in plasma medium-chain acylcarnitines (p=0.007) which are known to be
elevated in BTHS and other cardiac diseases. We believe the data suggest that although improvements in disease markers were starting to occur during the 12-
week treatment period, we did not treat for long enough to see significant changes overall in the primary endpoints.
Part 2 of the trial was an open label extension intended to assess longitudinal trends in efficacy with longer duration of therapy. Eight subjects remained
enrolled in the open label extension through the week 72 visit. With longer duration of therapy during open-label extension, adaptive myocardial changes in both
cardiac proportion and function may indicate the occurrence of physiologic cardiac remodeling. At baseline, all subjects demonstrated impaired left ventricular,
or LV, cardiac function as assessed by 3-D echocardiogram measurements of LV end systolic volumes, which is the volume of blood in the left ventricle at the
end of contraction and the beginning of filling, LV end diastolic volumes, which is the volume of blood in the left ventricle at the end of filling, before
contraction, and LV stroke volume, which is the amount of blood pumped by the heart’s left ventricle per contraction, in each case indexed to body surface area.
LV stroke volume is one of the primary determinants of cardiac output, or the volume of blood pumped by the heart, and an important indicator of how
efficiently the heart can meet the body’s demands for perfusion to various organs. During Part 1, improvement in left ventricular volumes were observed in 10 of
the 12 individual subjects following randomization to elamipretide; during open-label extension, an overall increase from baseline up to week 72 was observed
in LV end diastolic volume, LV end systolic volume, and LV stroke volume, in each case indexed to baseline body surface area, demonstrating a statistically
significant slope of change for each parameter (indexed LV end diastolic volume overall slope = 0.020; p = 0.0001; indexed LV end systolic volume overall slope
= 0.007; p = 0.0002; indexed LV stroke volume overall slope = 0.012; p = 0.0001). There were no meaningful changes to heart rate, blood pressure or ejection
fraction observed. Together, these changes may be suggestive of a durable reversal of disease pathology.
LV stroke volume has been reported to be a major determinant of peak exercise capacity in patients presenting with this cardiac phenotype. With longer
duration of therapy during open label extension, we observed continued improvement in functional assessments of exercise capacity, including distance walked
on the 6MWT (change of 95.9, 97.4 and 106.8 meters from study baseline to week 36, 48 and 72 of open-label extension, respectively), which was increasingly
correlated with improvements in LV stroke volume (week 36, Rs 0.21, p=0.29; week 48, Rs 0.36, p=0.39; week 72, Rs 0.52, p=0.18). The referenced
correlations are to the Spearman’s Rank Correlation Coefficient, or Rs, which is a is a statistical measure of the strength of a link or relationship between two sets
of data; Rs of 1.0 indicates a perfect positive correlation, -1.0 indicates a perfect negative correlation, 0 indicates no association between the sets of data.
At week 72 of open label extension, in addition to the 106.8 meter improvement from baseline in 6MWT distance (p=0.02), improvements from baseline
were observed on Barth symptom assessment Total Fatigue (-1.7 decrease in fatigue from baseline, p=0.07); muscle strength as measured by hand-held
dynamometry, or Muscle Strength by HHD (43 newton increase from baseline, p=0.008); the SWAY Balance Score, a measure of postural sway that is an
important indicator of possible balance deficits (13 point improvement from baseline, p=0.01); five times sit to stand, or 5XSST, in which patients are required to
sit and stand five times in succession (2.1 second improvement from baseline, p=0.10); CGI symptoms (0.88 improvement from baseline, p=0.0006)(investigator
rated 4 out of 8 subjects at week 72 as having no signs or symptoms of BTHS); and Patient Global Impression, or PGI, symptoms (0.5 improvement from
baseline, p=0.10). The results of these assessments at baseline, week 36 of open label extension, and week 72 of open label extension are depicted graphically
below.
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The MLCL:CL ratio, which measures the relative level of abnormal cardiolipin to normal cardiolipin and is diagnostic for the disease, has also improved
for all patients. For each of the 12 subjects who enrolled in TAZPOWER, their MLCL:CL ratio was lower at their last visit than at baseline. For the eight patients
who completed week 72 of open label extension, the mean MLCL:CL ratio is improving over time, with a mean change of -5.6 at week 36, -7.1 and week 48
(p=0.04) and -17.9 at week 72 (p=0.03).
Overall, for the 8 subjects still enrolled at week 72 of open label extension, the ratio was significantly improved (-17.9, p=0.03). Although there are some
inherent limitations regarding the degree of precision with which this diagnostic biomarker is assayed, these changes may suggest improvement at the cellular
level.
In February 2020, we completed a Phase 3 retrospective natural history comparative control study to establish the efficacy of elamipretide as a treatment
for subjects with BTHS. The treatment arm for this pivotal trial derived from the long term, open-label extension arm of TAZPOWER, and the control arm
derived from a natural history database maintained by the same team at Johns Hopkins involved in the TAZPOWER trial, ensuring consistency of data
collection. The FDA published guidance in 2019 recognizing the utility of natural history controls as a possible control group for single-arm or open-label trials,
noting that while the inability to control for certain biases could limit the ability of externally controlled trials to demonstrate substantial evidence of
effectiveness, this bias may be mitigated in certain situations where the disease course is predictable and the treatment effect is dramatic.
The natural history study met the primary efficacy endpoint of change in the 6MWT between the eight patients treated with elamipretide through week 36
of open-label extension and 19 prognostically matched natural history controls, with a least square means improvement of 81.26 meters on elamipretide versus
0.59 meters in the natural history control cohort (p=0.0005). A similar finding at later timepoints, corresponding to weeks 48 and 72 (which was a post-hoc
sensitivity analysis) of open-label extension, suggests the durability of this response, with a least square means improvement of 93.08 meters on elamipretide
versus 0.88 meters in the natural history cohort (p=0.0006) at the timepoint corresponding to week 48 and a least square means improvement of 116.92 meters on
elamipretide versus 1.73 meters in the natural history cohort (p=0.0003) at the timepoint corresponding to week 72.
The natural history study also met several secondary efficacy endpoints:
▪
Statistically significant differences in muscle strength as measured by Muscle Strength by HHD were observed for eight patients treated with
elamipretide as compared to 19 prognostically matched natural history controls across a cumulative time period corresponding to both week 36
of open-label extension (difference of 41.8 newtons; p=0.0002), week 48 of open-label extension (difference of 47.9 newtons; p=0.0004) and
week 72 of open-label extension (difference of 58.2 newtons; p=0.0002).
▪
Statistically significant differences in 5XSST were observed for eight patients treated with elamipretide as compared to 15 prognostically
matched natural history controls across a cumulative time period corresponding to both week 36 of open-label extension (difference of -2.3
seconds; p=0.047), week 48 of open-label extension (difference of -2.8 seconds; p=0.039) and week 72 of open-label extension (difference of
-3.237 seconds; p=0.008; n=14 natural history controls).
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▪
Improvements in the SWAY Balance Score were observed for eight patients treated with elamipretide as compared to 12 prognostically matched
natural history controls across a cumulative time period corresponding to week 36 of open-label extension (improvement of 6.46 out of 100;
p=0.1275), week 48 of open-label extension (improvement of 7.6 out of 100; p=0.1232) and week 72 of open-label extension (improvement of
11.92 out of 100; p=0.0258).
▪
A multi-domain responder index was included to inform as to the clinical meaningfulness of any changes observed. For this index, a 10%
improvement on any of the 6MWT, Muscle Strength by HHD, 5XSST, and SWAY Balance Score by the eight patients treated with elamipretide
as compared to 12 prognostically matched natural history controls was considered clinically meaningful and scored as +1, and a 10% decline on
any endpoint was considered clinically meaningful and scored as -1, with any other changes scored as 0. This endpoint demonstrated
statistically significant differences across a cumulative time period corresponding to both week 36 (2.4; p=0.0001), week 48 (2.4; p=0.0001)
and week 72 (2.53; p=0.0006).
In addition, FDA requested that we analyze whether the improvements observed in cardiac function at week 72 of the TAZPOWER open label extension
would be expected in the natural course of the disease. In the natural history study, an analysis of natural history age-matched controls demonstrates that left
ventricular stroke volume would be expected to decline in the natural course of the disease. A similar decline in stroke volume for patients greater than 12 years
old affected by BTHS was also observed in another longitudinal cardiac natural history database.
These data are depicted graphically below.
We submitted our NDA to the FDA in August 2021 and in October 2021 we received a notice from the FDA that it refused to file and review the NDA
because the data are insufficient to demonstrate substantial evidence of effectiveness. We are continuing to discuss the feasibility of conducting additional
clinical studies to support NDA resubmission with the FDA, which has said that it is also evaluating the possibility of assessing efficacy on the basis of
nonclinical data since the ultra-rare nature of this disease introduces potential ethical issues with further clinical research.
Elamipretide Safety Data
We have a significant amount of clinical trial data indicating that elamipretide is generally well tolerated. As of December 31, 2020, 27 clinical trials had
been completed with single and multiple intravenous and subcutaneous administrations of elamipretide at dose levels ranging from approximately 0.7 mg/day to
300 mg/day. These included 15 clinical pharmacology studies enrolling approximately 312 healthy subjects in which the primary objective was to assess safety
rather than to treat a disease state, and 12 clinical trials enrolling approximately 618 subjects across multiple patient populations, including subjects with primary
mitochondrial myopathy, skeletal muscle mitochondrial dysfunction, stable chronic heart failure, acute coronary syndrome and acute kidney injury and dry
AMD.
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The most commonly reported systemic treatment-emergent adverse events, or TEAEs, that were reported in greater frequency among elamipretide-treated
subjects as compared to placebo-treated subjects included headache and dizziness in both single dose and repeat dose cohorts. TEAEs observed exclusively in
repeat-dosed elamipretide-treated patients included incidences of increased blood immunoglobulin E (though no associated clinical signs or symptoms were
present), urinary tract infections and viral gastroenteritis, as well as upper respiratory tract infections in an open-label trial in an elderly population where there
was no placebo-control group. A mild to moderate increase in eosinophils, a variety of white blood cells that combat parasites and infections and control
mechanisms associated with allergy and asthma, were observed in a significant percentage of patients treated with longer-term dosing regimens, with no
associated clinical signs and symptoms. These appear to decrease to within normal limits with longer duration of elamipretide administration and return to pre-
treatment levels after the end of elamipretide treatment. In addition, injection site reactions were reported in the majority of subjects receiving elamipretide by
subcutaneous injection; most commonly these entailed mild redness, swelling and itchiness which usually resolved within four hours of dosing. The investigator
brochure was recently updated to inform investigators that three potential cases of hypersensitivity / allergic reactions have been reported, including one reported
as a suspected unexpected serious adverse reaction (SUSAR) in an Expanded Access/Early Access Program (EAP). There does not appear to be a clear
association between the occurrence of these events and duration of exposure to elamipretide. Investigators and subjects should be aware of the potential for
hypersensitivity / allergic reactions with elamipretide.
Earlier Clinical Trials of Elamipretide
We have studied elamipretide in clinical trials in several diseases associated with aging, including studies enrolling subjects with reduced skeletal muscle
mitochondrial function, subjects with heart failure with reduced ejection fraction, subjects with HFpEF, subjects undergoing percutaneous transluminal renal
angioplasty, subjects with acute coronary syndrome and subjects with Fuchs. These trials were designed as small proof-of-concept studies to inform our decision
whether to progress later stage development in these indications, and as such were generally not well powered to achieve statistical significance. Although we
have decided not to progress development of elamipretide for these common disease indications, we saw signs of clinical benefit from treatment with
elamipretide in several of these indications, which may help inform our future development of pipeline compounds for age-related diseases.
SBT-272
SBT-272, our second clinical-stage pipeline compound, is a second-generation novel peptidomimetic that targets the mitochondria, stabilizing
mitochondrial function under conditions of oxidative stress. SBT-272 has been shown to increase ATP production and decrease levels of ROS in dysfunctional
mitochondria in preclinical studies. Our primary objective in designing this compound was to increase brain exposure relative to elamipretide, as we believe that
mitochondrial therapeutics may be beneficial in various neurological disorders. We also sought to improve the potency and stability of the compound relative to
elamipretide.
An important differentiating aspect of SBT-272 from elamipretide is that the compound demonstrates higher mitochondrial uptake and greater
concentrations in the brain than elamipretide. In early experiments, SBT-272 demonstrated approximately three times greater maximum concentration in the
brain of rats relative to elamipretide, in each case dosed 10 mg/kg subcutaneously. SBT-272 has demonstrated more than 25 times greater area under the drug
concentration-time curve in the brains of rats relative to elamipretide, in each case dosed 10 mg/kg subcutaneously, suggesting significantly higher brain
exposure and residence time. In addition, the compound has shown greater than six times higher mitochondrial uptake relative to elamipretide in cell-based
assays of isolated mitochondria, suggesting improved potency. In a murine stroke model, SBT-272 demonstrated improved respiratory control ratio in brain
mitochondria after ischemia reperfusion injury relative to placebo (p=0.006), suggesting neuroprotective benefit.
We have conducted a Phase 1 clinical trial of orally administered SBT-272 in healthy volunteers. We have initiated a new Phase clinical 1 trial of
subcutaneous SBT-272 in healthy human volunteers to assess the safety and tolerability of SC dosing and different doses. We plan to initiate chronic toxicology
studies in animals during 2022. We have conducted and are continuing to conduct studies in preclinical models of neurological diseases to help inform selection
of indication for Phase 2. We are also evaluating SBT-272 in preclinical ophthalmic disease models.
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SBT-272 Safety
In January 2020, we initiated a double-blind, placebo-controlled, single-ascending dose study enrolling up to 40 healthy subjects across multiple cohorts.
Based on SBT-272’s improved oral bioavailability relative to elamipretide in early animal studies, SBT-272 was administered orally in the study. As a primary
objective, the study evaluated the safety and tolerability of SBT-272. Secondary objectives included an analysis of the pharmacokinetic profile and appropriate
dose range. Results from a Phase 1 clinical trial in healthy human volunteers completed during 2020 showed that orally administered SBT-272 did not reach
desired drug exposure levels.
Preclinical Data of SBT-272 for Rare Neurological Diseases
We have conducted preclinical studies in several neurological disease models to help inform selection of Phase 2 indications.
Superoxide dismutase 1 pathology. Mutations in superoxide dismutase 1, or SOD-1, have been associated with ALS, a progressive neurodegenerative
disease characterized by motor neuron deterioration and muscle atrophy. In a preclinical SOD-1 mouse model, 60 model mice were randomized to daily
intraperitoneal injections of placebo, 0.5 mg/kg of SBT-272 or 5.0 mg/kg of SBT-272 for up to 10 weeks. The 10 male mice treated with the higher dose of SBT-
272 demonstrated a statistically significant delay in the onset of neurological symptoms and increase in lifespan compared with male mice treated with placebo.
Statistically significant reductions in circulating plasma levels of neurofilament light chain—a biomarker of nerve damage—were also noted with the 5.0 mg
dose versus placebo. Significant differences were not seen with SBT-272 versus placebo in the female mice, which are known to present with a milder phenotype
and lower levels of neurofilament light chain. Plasma exposure levels in female mice were also observed to be lower than those in the male cohort.
Transitive response DNA/RNA-binding protein 43 kDa pathology. Transitive response DNA/RNA-binding protein 43 kDa, or TDP43, is a nDNA encoded
protein that has been identified as the major component of the pathological hallmark, ubiquitin-positive protein inclusions, in patients with ALS and FTLD,
Lewy Body Dementia, or LBD, Progressive Supranuclear Palsy and AD. These and other characteristic TDP-43-related pathological features are usually
referred to as TDP-43 proteinopathy. In mutant TDP43 primary upper motor neurons, SBT-272 improved mitochondrial morphology and neurite length and
branching.
Alpha-synucleinopathy. Alpha-synuclein, or a-Syn, is a protein expressed in the presynaptic terminals of the brain. Pathologic aggregation of a-Syn has
been demonstrated across several neurological diseases, called alpha-synucleinopathies, including LBD, PD, and multiple system atrophy, or MSA. We
evaluated SBT-272 in a preclinical model of alpha-synucleinopathy, which showed a neuroprotective benefit, including a reduced loss of dopaminergic neurons,
a dose-dependent reduction in neuro-inflammation, and a reduction in a-Syn protein aggregates, as shown below.
FTLD. In a nonclinical model of FTLD, which is a subgroup of FTD for which there are no approved therapies, SBT-272 showed a neuroprotective
benefit, including a reduced loss of dopaminergic neurons, a reduction in neuro-inflammation, and a reduction in tau protein aggregates.
Discovery Compounds
We have an active discovery and development program focused on novel compounds targeting mitochondria. Mitochondria have been an extremely
challenging therapeutic target, due in part to difficulty in targeting delivery of drugs to mitochondria. Successful delivery requires traversing not only the cell
membrane, but also achieving intracellular diffusion/transport through the outer membrane of the mitochondria to act on processes in the inner membrane space
or the matrix. We believe the differentiated mitochondrial targeting characteristics of our compounds, our development of proprietary assays to screen new
compounds for mitochondrial targeting capability and pharmacologic activity, and our experience working with various models of mitochondrial dysfunction
position us to lead the next generation of development of mitochondrial product candidates, including SBT-272, that are improved relative to elamipretide.
We have developed multiple series of novel compounds with improved pharmacokinetic properties. These include over 100 different compounds,
including peptidomimetics, small molecules and novel
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peptides, that we have screened to broaden our existing mitochondrial product candidate portfolio. We are focused on producing agents with mitochondrial
therapeutic potential and improved properties over our first-generation compounds, by altering the rate and extent of absorption, the bio-distribution and/or the
routes of metabolism and excretion. We are evaluating certain of these compounds in models of ischemic reperfusion injury, including burn, ophthalmic diseases
and cardiac diseases.
Compounds within the SBT-550 family of compounds, which are small molecules that may be suitable for oral formulations, appear to be mechanistically
differentiated from elamipretide, SBT-272 and SBT-20. Preliminary in vitro studies in primary fibroblast cells from FRDA patients stressed by eliminating the
glutathione defense mechanism (typically leading to cell death) show dose-dependent improvements in cell viability (survival) with SBT-550 family compounds.
We plan to evaluate compounds in the SBT-550 family for rare neurological indications such as FRDA and Leigh’s syndrome, a severe neurological condition
affecting an estimated one in 40,000 newborns.
Carrier program
We have also conducted experiments in our carrier program in which we observed that we can use our proprietary compounds as vectors or carriers to
selectively deliver various therapeutic payloads to mitochondria, conferring organelle specificity to promising therapies. Many individuals diagnosed with
primary mitochondrial disease, for which there are no therapies approved by the FDA, take a so-called “mito cocktail” of vitamins and supplements, usually in
high doses and comprising up to 50 pills per day if not compounded. These may typically include co-enzyme Q-10, or Co Q-10, or its analogs, L-carnitine, B
vitamins and antioxidants. The reason these are taken in such high doses is because delivery to the mitochondria is likely confounded by permeability challenges
traversing the cell and outer mitochondrial membranes. By contrast, we have observed mitochondria-targeting capabilities in our proprietary compounds and
have also observed that we can conjugate payloads to our compounds and direct the conjoined carrier/payload to the mitochondria.
For example, idebenone is a Co Q-10 analog that introduces electrons into the electron transport chain downstream of complexes I and II, a promising
mechanism for bypassing defective complexes in genetic diseases. Because idebenone is poorly absorbed and does not specifically target mitochondria, it has
demonstrated limited pharmacologic activity even at high doses. Preliminary preclinical data show that our idebenone-conjugated peptide was effective at
stimulating complex III enzyme activity at a concentration of approximately 100 times lower than the dose achieved with systemically administered idebenone.
We believe this is promising support for the potential of our carrier program, and we are actively evaluating other mitochondrial beneficial payloads for
evaluation in this program.
Development Funding Agreement
On October 30, 2020, we entered into a development funding agreement, or the Development Funding Agreement, with Morningside Venture (I)
Investments Limited, or MVIL, under which MVIL agreed to provide funding to us to support our efforts to secure regulatory approval for elamipretide and to
develop elamipretide for the treatment of BTHS, dry AMD, FRDA, DMD, nPMM and LHON, which we collectively refer to as the Designated Indications.
Under the Development Funding Agreement, MVIL paid us $20 million upon execution of the Development Funding Agreement, paid us $10 million
upon our completing enrollment of our RECLAIM-2 Phase 2 clinical trial of elamipretide for the treatment of dry AMD in February 2021, and paid us $5 million
upon our submission of an NDA to the FDA for elamipretide for the treatment of BTHS in September 2021. In addition, in May 2021, MVIL agreed to provide
an additional funding of $30 million in 2021 based on the positive post hoc analysis of data from our ReCLAIM clinical trial, showing the relationship between
mitochondrial health and elamipretide’s potential to improve visual function, and the positive post hoc analysis from our primary mitochondrial myopathy trial,
showing that patients with nPMM appeared to respond to elamipretide therapy and supporting further development efforts; $8 million was paid in May 2021 and
$22 million was paid during the fourth quarter of 2021. As of December 31, 2021, we have received a total of $65.0 million pursuant to the terms of the
Development Funding Agreement and the amended Development Funding Agreement.
During the term of the Development Funding Agreement, we agreed to use commercially reasonable efforts to (i) seek and maintain regulatory approval of
elamipretide for the treatment of BTHS in the United
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States and (ii) initiate clinical trials in two of the Designated Indications other than BTHS, which are referred to together as the Development Efforts.
We are required to make success payments to MVIL, or Success Payments, upon receipt of an approval of elamipretide, or a Regulatory Approval of an
NDA by the FDA or a marketing authorization application by the EMA for the treatment of (i) dry AMD, or a Common Approval, and (ii) BTHS, FRDA, DMD,
nPMM or LHON (each, an Orphan Approval) as follows, subject to certain adjustments:
▪
If the first Regulatory Approval is an Orphan Approval, we will pay Success Payments of $2 million and then an additional $158 million in the
aggregate in seven additional annual payments; and
▪
If the first Regulatory Approval is a Common Approval, or upon a second regulatory approval (whether a Common Approval or an Orphan
Approval), we will make total Success Payments reflecting a 27% internal rate of return over a seven-year term following such approval.
All Success Payments will be proportionately adjusted to the actual funding received by us from MVIL if lower or greater than $70.0 million (including as
a result of the payment of the additional funding of $30.0 million).
If our board of directors determines to seek a Regulatory Approval from both the FDA and EMA, then 66% of each applicable Success Payment will be
due upon Regulatory Approval by the FDA and each applicable anniversary thereof and 34% of each applicable Success Payment will be due upon Regulatory
Approval by the EMA and each applicable anniversary thereof.
At any time within 60 days of a receipt of (a) a Common Approval, if such approval is the first Regulatory Approval or (b) the second Regulatory
Approval, if the first Regulatory Approval is an Orphan Approval, we have the right, at our option, to make one-time cash payments to the Investors to buy out
all or a portion of the future unpaid Success Payments for a price that reflects a discount rate of 5%.
In addition, we have agreed that our obligations to MVIL under the Development Funding Agreement will be subordinated to our existing indebtedness
owed to Horizon Technology Finance, or Horizon, under our venture loan and security agreement. We, Horizon and MVIL have entered in a customary
subordination agreement.
In accordance with the Development Funding Agreement, upon each funding receipt, we are required to issue a warrant exercisable for ordinary shares at
an exercise price that is 115% of the implied price of the our ordinary shares on the date of issuance, with such number of ordinary shares being equal to the
quotient of 30% of the amount of each funding received divided by the exercise price. As of December 31, 2021 we issued warrants to MVIL exercisable for
161,823,177 ordinary shares with a weighted average exercise price of $0.12. The warrants issued were immediately exercisable and have a term of three years.
Upon the receipt of the respective milestone payments, the warrants were deemed to have met the criteria for equity classification as they were considered
“fixed-for-fixed” and were recognized as a component of additional paid in capital and were not remeasured.
The Development Funding Agreement terminates upon the payment of all Success Payments or the final Buyout Payment owed to MVIL, unless earlier
terminated. The Development Funding Agreement may be terminated by us or MVIL following failure to receive Regulatory Approval which would be deemed
to occur upon (a) the failure to receive Regulatory Approval in at least one of the Designated Indications within five years after the occurrence of the BTHS
NDA submission, despite exercises of commercially reasonable efforts or (b) the reasonable determination of MVIL that the research results do not support
Regulatory Approval due to failure of the clinical trials to achieve their primary endpoint. MVIL may terminate the Development Funding Agreement in the
event of a (i) breach by us of our obligations with respect to the Development Efforts or its payment obligations to MVIL, (ii) material breach by us of certain
representations, warranties or covenants in the development funding agreement, (iii) a change of control of us or (iv) MVIL reasonably determines that we will
likely be prevented from further developing elamipretide for the Designated Indications and its future value may be adversely affected in a material way due to
third-party patents. We may terminate the Development Funding Agreement (i) for convenience for any reason or no reason at any time prior to the receipt of the
first Regulatory Approval or (ii) in the event of a product safety concern.
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In certain instances, upon the termination of the Development Funding Agreement, we will be obligated to pay MVIL a multiple of the amounts paid to us
under the Development Funding Agreement, including specifically:
(i)
300% of such amounts, less any Success Payments actually made, in the event that (i) the Investors terminate the agreement due to specified
fundamental breaches of the agreement by us or (iii) we terminate for convenience;
(ii)
150% in the event the agreement is upon a change of control of us;
(iii) 100% in the event of a termination due to a breach of a representation, warranty or covenant, plus simple interest; and
(iv) 100% in the event of a termination due to third party patents.
In addition, if following a termination for any reason other than due to a breach of representation, warrant or covenant, due to third party patents or change
in control, we continue to develop elamipretide and obtain a Regulatory Approval, we will make the Success Payments to MVIL as if the Development Funding
Agreement had not been terminated less any payments made upon termination.
Manufacturing
We do not have any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of our product
candidates for preclinical studies and clinical trials, as well as for commercial manufacture if our product candidates receive marketing approval. We have also
obtained key raw materials for elamipretide from third-party manufacturers. For elamipretide, we intend to identify and qualify a single manufacturer to provide
the active pharmaceutical ingredient and other manufacturers for fill-and-finish services for each of our elamipretide-containing drug products. This approach
allows us to reduce the risk to approval of marketing authorization applications, including the NDA, by focusing our resources on preparing only one
manufacturing site for active pharmaceutical ingredient and one for each drug product for pre-approval inspections. We can sufficiently reduce the supply risk
usually associated with a single source of product based on our capability to build pre-launch inventory and the relatively small demand for material projected
for our rare disease indications.
Both of our clinical stage candidates are small molecules and are manufactured in reliable and reproducible synthetic processes from readily available
starting materials. The chemistry is amenable to scale up and does not require unusual equipment in the manufacturing process. Elamipretide was produced for
early non-clinical studies and clinical trials by a solid-phase manufacturing process, similar to ones that have been commonly used to produce commercial
peptides. Due to a lack of scalability, we deemed this process undesirable for production of commercial quantities of elamipretide. A solution-phase process for
producing elamipretide as a hydrochloride salt has been developed and implemented at a contract manufacturing site at a scale sufficient to meet the projected
clinical and commercial demand. The solution-phase process for manufacturing elamipretide is proprietary to us, but the equipment and the unit operations used
in the process are not unique to any particular contract manufacturer. We have transferred this process to contract manufacturing sites capable of using such
processes to manufacture large quantities of similar drug substances, and we have completed the drug supply for pivotal clinical trials and have progressed into
commercial production. Manufacturing at a higher production scale has led to a significant reduction in our cost-of-goods and provided us with the ability to
respond to any need to supply large clinical trials or unanticipated commercial demand in the future. Following FDA review of test results demonstrating the
same/similar identity, quality, purity and strength of elamipretide from early and commercial-scale processes, the FDA has stated that non-clinical and clinical
trials with drug substance from the former processes can be used to support further development and registration of elamipretide made by the commercial
process.
In addition, we have produced SBT-272 in kilogram quantities using a convergent solution phase process similar to that used for elamipretide. We have
produced sufficient drug substance for the start of a Phase 2 trial at a CMO that is capable of further increases in scale, if needed for future larger trials.
We have active clinical programs for which our contract manufacturing organizations, or CMOs, are routinely manufacturing a sterile solution product of
elamipretide for subcutaneous injection. Our CMOs have successfully produced our product on a scale of tens of thousands of units and shown, using validated
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stability-indicating methods, that the product would meet specifications over a shelf life typical of commercial products. We have begun drug product
formulation development studies for SBT-272 and expect results to be available to begin manufacturing of the first multi-dose vials of clinical material in 2022.
Intellectual Property
We strive to protect the proprietary technologies that we believe are important to our business, including seeking and maintaining patent protection
intended to cover our lead product candidates, elamipretide and SBT-272, and related compositions, our core clinical applications and other know-how, to
operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary or intellectual property rights worldwide. Our
patent portfolio, which includes patents and patent applications that we own, as well as those that we have exclusively in-licensed, is structured to provide layers
of protection for the proprietary technologies central to our business. Our portfolio includes claims to the elamipretide and other peptides, the SBT-272
peptidomimetic, the 550 family of small molecules, compositions comprising the same, and use of the peptides and other therapeutically active molecules for our
core clinical applications. As of December 31, 2021, the patent portfolio included 435 granted patents (64 U.S. and 371 foreign, which include individual
national patents based on granted European patents) and 185 pending applications, including provisional applications (53 U.S., 126 foreign, and 6 Patent
Cooperation Treaty, or PCT).
We also rely on trade secret protection, technical knowledge, and continuing technological innovation to develop and maintain our proprietary and
intellectual property position. We seek to protect our proprietary information, in part, using confidentiality agreements with our collaborators, scientific advisors,
employees, consultants and select contractors, and invention assignment agreements with our employees.
We also have agreements with selected contractors, consultants, scientific advisors and collaborators requiring assignment of inventions or, in limited
cases, the grant of an exclusive, worldwide license or option to license intellectual property rights developed in the course of their work with or for us. As with
other biotechnology and pharmaceutical companies, our capacity to obtain, maintain and protect our proprietary and intellectual property positions for our
products and technologies depends on our continued ability to obtain relevant patent rights and to enforce those patent rights, if necessary. However, patent
applications that we may file or license from third parties may not necessarily result in the grant of rights. We also cannot predict the scope of rights that may be
granted to us in the future, our desire or ability to seek enforcement of any granted rights, or the willingness of courts or other administrative bodies to uphold or
enforce our rights.
In addition, any currently issued patents or any future patents, should they issue, may be challenged, invalidated, or circumvented, such as through district
court proceedings or inter partes review. For example, we cannot be certain of the priority of inventions covered by pending third-party patent applications, and
proceedings to establish our rights could result in substantial costs, even if the eventual outcome is favorable. Due to the extensive time required for clinical
development and regulatory review, it is possible that, before any of our product candidates can be commercialized, any related patent right may expire or its
term may have substantially run, leaving its remaining term in force for only a short period following commercialization. To the extent that occurs, the possible
commercial advantage conferred by such patents would be reduced. Accordingly, we have attempted to design a patent portfolio with both breadth and depth of
potential protection, with the goal of maximizing coverage for elamipretide and related peptides and their uses in commercially relevant countries.
Elamipretide
Patent rights relating to elamipretide peptide and compositions comprising elamipretide have been granted in Australia, Canada, China, Europe, Hong
Kong, Japan and the United States. The U.S. patent claiming elamipretide has an adjusted statutory expiration date in 2026, which includes 717 days of patent
term adjustment, or PTA, granted by the U.S. Patent and Trademark Office, or USPTO, upon issue of the patent. The foreign patents have a statutory expiration
date in 2024. We hold an exclusive license to these rights from Cornell and the IRCM.
Patent rights to the use of elamipretide as a carrier for the transport of therapeutic molecules into a cell as well as related compositions have been granted
or allowed in Australia, Canada, China, Europe,
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Hong Kong, Japan and the United States. The first of four issued U.S. patents in this family has an adjusted statutory expiration date in 2027, which includes
1,215 days of PTA granted by the USPTO upon issue of the patent. The remaining three issued U.S. patents and the foreign patents have a statutory expiration
date in 2024. We hold an exclusive license to these patent rights from Cornell.
Patent rights related to compositions including elamipretide and a second therapeutic compound have also been granted. For example, claims directed to
elamipretide-cyclosporine conjugates have been granted in the United States. The U.S. patent has a statutory expiration date in 2031. The USPTO recently
granted a patent claim to a conjugate of a portfolio peptide conjugated to frataxin, a therapeutic biological molecule associated with mitochondrial disorders.
This patent has a statutory expiration date in 2035. These patent rights are owned exclusively by us.
Patents directed to methods of treating or preventing various diseases and medical conditions by administering elamipretide have been granted to us, or
have been in-licensed by us, in a number of countries. Where possible, the scope of granted claims has been tailored to provide broad generic support
encompassing a wide range of conditions as well as specific disease states. By way of example, there are granted patents related to the use of elamipretide to
treat basic, adverse cellular events that contribute to disease, such as mitochondrial permeability transition, or MPT.
Patents related to MPT have been granted in Australia, Canada, China, Europe, Hong Kong, Japan and the United States. Two of the granted U.S. patents
in this family have an adjusted statutory expiration date in 2026, and one of them is the same patent referred to above as covering the composition of
elamipretide. The other two issued patents and all related foreign patents have statutory expiration dates in 2024. We hold exclusive rights to these patents by
way of a license agreement with Cornell and the IRCM.
Our patent portfolio also protects or aims to protect the use of elamipretide to treat or prevent specific clinical indications. By way of example, our
portfolio includes granted claims drawn to the use of elamipretide to treat diabetes, metabolic syndrome, renal diseases, certain cardiovascular diseases, ocular
diseases, and neurodegenerative diseases (including AD, Huntington’s disease and ALS) that are in patents owned by us or in-licensed to us. Claims relating to
the use of elamipretide to treat BTHS were recently granted in the United States, Canada, Europe and Japan, and applications related to treating this clinical
indication remain pending in the United States, Europe, China, Japan and Hong Kong. Claims related to using elamipretide to treat Friedreich’s ataxia were
recently granted in the United States and applications related to treating this clinical indication remain pending in the United States and Canada. We have
granted patents for treating Alport Syndrome in the United States, Europe and Japan, and applications related to treating this clinical indication remain pending
in the United States, Europe, Canada, China and Hong Kong. We have granted patents in the United States, Canada, Europe and Hong Kong for the use of
elamipretide in the treatment of Leigh syndrome, Alpers’ disease, ataxia-neuropathy disorders or progressive external ophthalmoplegia, with pending
applications remaining in the United States, Europe, China, and Japan. We have patents granted in the United States, Europe, Australia, Canada, Hong Kong and
Japan with respect to using elamipretide in the treatment of neuropathic pain, such as in pain induced by treatments with a chemotherapeutic agent like
vincristine, with pending applications remaining in China and the United States. Other clinical indications covered by pending claims in our patent portfolio
include LHON, primary mitochondrial myopathy, traumatic optic neuropathy, Senger’s syndrome and mitochondrial diseases associated with certain gene
mutations such as POLG are pending in applications owned by us. Furthermore, our portfolio includes granted and pending claims drawn to the process we use
to produce elamipretide, as well as certain intermediates and processes that produce crystalline drug substance. Our portfolio also includes granted and pending
claims that disclose similar processes that we have conceived that could be competitive with our preferred process to produce commercial quantities of
elamipretide.
SBT-272
Claims drawn to the SBT-272 peptidomimetic are currently pending in the United States, Europe, Australia, Canada, China, India, Israel, South Korea, and
Japan. If granted (and not subject to any terminal disclaimer, statutory adjustment or extension of time), any patent claiming priority to these applications will
have a statutory expiration date in 2038. These patent rights are owned exclusively by us. Claims drawn to using SBT-272 for the treatment of ALS and other
neurodegenerative conditions such as α-Syn or TDP-43 proteinopathies, including FTLD, PD, PD with dementia, dementia with Lewy bodies, and MSA
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were filed in a United States and a PCT application that claims priority to a now-expired U.S. provisional patent application. If granted (and not subject to any
terminal disclaimer, statutory adjustment or extension of time), any patent claiming priority to this U.S. provisional patent application is expected to have a
statutory expiration date in 2040. These patent rights are owned exclusively by us.
Claims drawn to the use of the SBT-272 peptidomimetic and compositions for the treatment of ophthalmic indications is currently pending as a United
States provisional patent application. If granted (and not subject to any statutory adjustment or extension of time), any patent claiming priority to this U.S.
provisional patent application is expected to have a statutory expiration date in 2041. These patent rights are owned exclusively by us.
550 Family
Claims drawn to one class of compounds in the 550 family are currently pending in United States and PCT applications that claim priority to a now
expired United States provisional patent application. If granted (and not subject to any terminal disclaimer, statutory adjustment or extension of time), any patent
claiming priority to these non-provisional applications will have a statutory expiration date in 2040. These patent rights are owned exclusively by us.
Claims drawn to a separate class of compounds in the 550 family are currently pending in United States and PCT applications that claim priority to a now
expired United States provisional patent application. If granted (and not subject to any terminal disclaimer, statutory adjustment or extension of time), any patent
claiming priority to this provisional application will have a statutory expiration date in 2041. These patent rights are owned exclusively by us.
We hold patent rights to additional pipeline compounds in the portfolio and are continuing to expand coverage in the United States and commercially
relevant foreign jurisdictions. Subject matter for new filings is expected to include, but will not necessarily be limited to, the use of peptides or other
therapeutically active molecules to treat additional disease indications, new combination therapies, new peptide formulations, new compositions and uses of the
same.
The term of a patent depends upon the legal length of the term of patents in the jurisdiction in which it is issued. In most countries in which we file, the
patent term is 20 years from the earliest date of filing of a non-provisional patent application. Patent term adjustment is a process of extending the term of a
United States patent beyond the 20-year statutory patent term to accommodate for delays caused by the USPTO during prosecution. By contrast, a patentee or
applicant may file a terminal disclaimer which disclaims or dedicates to the public the entire term or any terminal part of the term of a patent or patent to be
granted.
In the United States, the term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term
restoration as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Amendments permits a patent term extension
of up to five years beyond the regularly scheduled expiration of a patent. The length of the patent term extension is related to the length of time the drug is under
regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval by the FDA, only
one patent applicable to an approved drug may be extended, and a given patent can only be extended based on one approved drug. Similar provisions are
available in Europe and certain other jurisdictions to extend the term of a patent that covers an approved drug. We anticipate that we will apply for patent term
extensions for relevant U.S. patents, if and when our pharmaceutical products receive FDA approval. We also anticipate seeking patent term extensions for issued
patents in any jurisdiction where patent term extension is available, however, there is no guarantee that the applicable authorities, including the FDA in the
United States, will agree with our assessment of whether such extensions should be granted, and if granted, the length of such extensions. Unless specifically
indicated, the above statutory patent terms refer to the 20-year base statutory term and do not include any patent term adjustment or extension that may be
available in any jurisdiction.
Cornell License Agreements
We have entered into several license agreements with Cornell and the IRCM, pursuant to which Cornell granted us specified exclusive, worldwide rights
under patents related to elamipretide, SBT-20, and other technology described below, which we refer to collectively as the licensed patents. The original
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Cornell agreement was entered into with Cornell and the IRCM in April 2006 and subsequently amended in October 2010. Concurrent with our execution of the
original Cornell agreement, we entered into a sponsored research agreement with Cornell in which we agreed to fund specified research at Cornell for three
years. We retained the right to license inventions arising under such sponsored research agreement, as well as certain material transfer agreements entered into
between us and Cornell, through entry into license agreements on substantially the same terms as the original Cornell agreement. Such subsequent agreements
under which we obtained rights under additional patent families, which we refer to as other Cornell license agreements, and collectively with the original Cornell
agreement as the Cornell license agreements, were entered into in November 2010 and November 2011. In each of the Cornell license agreements, Cornell
granted us an exclusive, worldwide license under specified patents and patent application families claiming certain inventions, including inventions related to
elamipretide, SBT-20, certain other peptides and/or specified uses of the foregoing, which we refer to collectively as the licensed patents, to make, use, sell,
lease, import, export or otherwise dispose of products or services that incorporate, utilize or are otherwise described and claimed in the licensed patents, which
we refer to as the licensed products, in any and all fields. Our rights under the Cornell license agreements are subject to the rights of the United States
government and other applicable restrictions imposed by the Bayh-Dole Act and its implementing regulations, and the rights of Cornell, and in some cases
certain other specified institutions, to practice the inventions claimed in the licensed patents for educational and research purposes.
We have agreed to use best efforts, as defined in each of the Cornell license agreements to commercialize licensed products and to achieve specified
diligence milestones by specified target dates. We are also required to periodically set forth additional milestones until first commercial sale of a specified
licensed product. We believe that to date we have met each diligence milestone with respect to our licensed products and the specific licensed indications and/or
formulations which we are developing. If, however, we fail in the future to meet any diligence milestone within a specified period after the corresponding target
date, our exclusive license under the applicable Cornell license agreement will convert to a non-exclusive license and, in the case of the original Cornell
agreement, such conversion will occur only with respect to the peptide, indication and/or formulation that is subject of the unachieved milestone.
In connection with the licenses granted under the original Cornell agreement, we issued Cornell 666,667 ordinary shares. With respect to the other Cornell
license agreements, we paid Cornell upfront license fees of $60,000, annual fees of approximately $60,000 and royalties on net sales, if any, by us and our
sublicensees of any licensed product, on a product-by-product and country-by-country basis. Subject to specified reductions and royalty offsets, such royalties
are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the Cornell license agreements, except that for
licensed products under the original Cornell agreement, such royalties are calculated as a tiered, low single digit to sub-teen percentage of net sales, depending
on patent coverage, amount of net sales and type of licensed product. Our obligation to pay royalties as to any licensed product extends until the later of the
expiration of the last-to-expire valid claim of any licensed patent covering such licensed product or 15 years after the date of our first commercial sale of such
licensed product. If a licensed product is covered by licenses granted under the original Cornell agreement and another Cornell license agreement, then, for each
unit of product, royalties will only be due under the original Cornell agreement.
We are obligated to pay Cornell a low double-digit percentage of specified payments we receive in connection with granting a sublicense under the
Cornell license agreements. We have also agreed to reimburse Cornell for its out-of-pocket expenses incurred in preparing, filing, prosecuting and maintaining
the licensed patents, except for any licensed patents as to which we elect to waive our licensed rights. We also have agreed to pay Cornell annual license
maintenance fees in the mid-five digits for the original Cornell agreement, and mid-four digits for each of the other Cornell license agreements starting on a date
specified in each such agreement, in all cases until the first commercial sale of a specified type of licensed product under such agreement.
If Cornell identifies any licensed product that we are not actively developing or commercializing and we do not elect within a specified period to develop
or commercialize such licensed product ourselves or through a sublicensee, or, if we do so elect, we do not then agree on reasonable diligence goals with Cornell
or enter into an agreement with such a sublicensee within specified periods as to such licensed product, then Cornell may terminate our rights under the
applicable Cornell license agreement for such licensed product.
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Unless earlier terminated, each of the Cornell license agreements will remain in effect until the expiration or invalidation of the last of all licensed patents
and as long as no licensed patent applications remain pending. Cornell, together with the IRCM in the case of the original Cornell agreement, can terminate a
Cornell license agreement if we are in material breach of such license agreement, if we intentionally provide false reports, or if we are in default in our payment
obligations, and we fail to cure such breach, false report or default within a specified period. In addition, Cornell can terminate the original Cornell agreement
and certain of the other Cornell license agreements if we fail to achieve first commercial sale of a therapeutic licensed product by the date specified in the
respective agreement which, with respect to the original Cornell agreement, was December 31, 2020; however, there are a number of exceptions to Cornell’s
termination right, including:
▪
delays due to clinical development, including clinical trial enrollment challenges or data read-outs;
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delays due to regulatory matters; or
▪
delays due to other events over which we cannot exert direct control.
We believe that our noncompliance is subject to the named exceptions, and to date we have not received any notice of termination from Cornell. If we
receive a notice of termination from Cornell, we will have a 60-day period in which to cure the breach before any actual termination would occur. We can
terminate any of the Cornell license agreements in its entirety or on a patent-by-patent, licensed product-by-licensed product or country-by-country basis if we
have a reasonable basis for doing so by giving Cornell a specified number of days’ prior notice. We can transfer each of the Cornell license agreements with
Cornell’s prior written approval, not to be unreasonably withheld, in the event of a sale of the Company, sale of assets or sale of shares, provided that such sale is
not primarily for the benefit of creditors. If we fail to obtain Cornell’s prior written approval for such transfer, Cornell can terminate the respective agreement
and require that the transfer of such agreement be voided. We cannot assign the Cornell license agreements without Cornell’s (and in the case of the original
Cornell agreement, IRCM’s) written consent.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. While we believe that our technology, knowledge, experience and scientific resources provide us with competitive advantages, we face
potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies; academic
institutions and governmental agencies; and public and private research institutions. Any product candidates that we successfully develop and commercialize will
compete with existing therapies and new therapies that may become available in the future.
We are initially developing elamipretide for the treatment of rare primary mitochondrial diseases and common diseases of aging in which mitochondrial
function is impaired. There are several companies developing treatments that target mitochondria or mitochondria-associated diseases. The majority of these
efforts are in preclinical or early clinical development, are focused on gene therapy or are proposing the use of generic compounds. To our knowledge, none of
these are focused on cardiolipin remodeling. Our competitors include NeuroVive Pharmaceutical AB, Reata Pharmaceuticals, Inc., LumiThera, Inc., Reneo
Pharmaceuticals, Inc. and Santhera Pharmaceuticals Holding. In addition to competition from competitors who are developing treatments that seek to improve
mitochondrial function or otherwise target the mitochondria, we also face competition from therapies that target the indications we are studying, particularly for
diseases of aging such as GA. Such competitors who are developing or who have developed competing therapies include Apellis Pharmaceuticals Inc., Astellas
Pharma Inc., Hemera Biosciences Inc., Ionis Pharmaceuticals, Inc. and IVERIC bio, Inc.
Many of the companies against which we are competing or against which we may compete in the future may have significantly greater financial resources
and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved
products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being
concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly
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through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific
and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or
necessary for, our programs.
The key competitive factors affecting the success of all of our therapeutic product candidates, if approved, are likely to be their efficacy, safety,
tolerability, convenience and price and the availability of reimbursement from government and other third-party payors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have
fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or
other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong
market position before we are able to enter the market.
Government Regulation and Product Approvals
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union,
extensively regulate, among other things, the research, development, testing, manufacture, pricing, quality control, approval, packaging, storage, recordkeeping,
labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of biopharmaceutical products. The
processes for obtaining marketing approvals in the United States and in foreign countries and jurisdictions, along with compliance with applicable statutes and
regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
Approval and Regulation of Drugs in the United States
In the United States, drug products are approved and regulated under the Federal Food, Drug and Cosmetic Act, or FDCA, and applicable implementing
regulations and guidance. A company, institution, or organization which takes responsibility for the initiation and management of a clinical development program
for such products, and for their regulatory approval, is typically referred to as a sponsor. The failure of a sponsor to comply with the applicable regulatory
requirements at any time during the product development process may result in delays to the conduct of a study, regulatory review and approval and/or
administrative or judicial sanctions.
Specifically, a sponsor seeking approval to market and distribute a new drug in the United States generally must satisfactorily complete each of the
following steps before the product candidate will be approved by the FDA:
•
preclinical testing including laboratory tests, animal studies and formulation studies, which must be performed in accordance with the FDA’s good
laboratory practice, or GLP, regulations and standards;
•
design of a clinical protocol and submission to the FDA of an IND for human clinical testing, which must become effective before human clinical
trials may begin;
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approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;
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performance of adequate and well-controlled human clinical trials to establish the safety, potency and purity of the product candidate for each
proposed indication, in accordance with current good clinical practices, or cGCP;
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preparation and submission to the FDA of an NDA for a drug product which includes not only the results of the clinical trials, but also, detailed
information on the chemistry, manufacture and quality controls for the product candidate and proposed labelling for one or more proposed
indication(s);
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review of the product candidate by an FDA advisory committee, where appropriate or if applicable;
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities, including those of third parties, at which the product
candidate or components thereof are manufactured to assess compliance with current good manufacturing practices, or cGMP, requirements and to
assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;
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satisfactory completion of any FDA audits of the non-clinical and clinical trial sites to assure compliance with cGCP and the integrity of clinical
data in support of the NDA;
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payment of user fees and securing FDA approval of the NDA to allow marketing of the new drug product; and
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compliance with any post-approval requirements, including the potential requirement to implement a REMS, and the potential requirement to
conduct any post-approval studies required by the FDA.
Preclinical Studies
Before a sponsor begins testing a product candidate with potential therapeutic value in humans, the product candidate enters the preclinical testing stage.
Preclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as other studies to evaluate, among other things, the
toxicity of the product candidate. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal regulations and
requirements, including GLP regulations and standards and the U.S. Department of Agriculture’s Animal Welfare Act, if applicable. Some long-term preclinical
testing, such as animal tests of reproductive adverse events and carcinogenicity, and long-term toxicity studies, may continue after the IND is submitted.
The IND and IRB Processes
An IND is a request for FDA authorization to administer such investigational product to humans. Such authorization must be secured prior to interstate
shipment and administration of any product candidate that is not the subject of an approved NDA. In support of a request for an IND, sponsors must submit a
protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the results of the
preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things,
must be submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of each IND before clinical trials may begin. This
waiting period is designed to allow the FDA to review the IND to determine whether human research subjects will be exposed to unreasonable health risks. At
any time during this 30-day period, or thereafter, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND and impose a
clinical hold or partial clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin.
Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on that trial. A clinical hold is an
order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or
suspension of only part of the clinical work requested under the IND. For example, a specific protocol or part of a protocol is not allowed to proceed, while other
protocols may do so. No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of
the basis for the hold. Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after the FDA has notified the sponsor that
the investigation may proceed. The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or
otherwise satisfying the FDA that the investigation can proceed.
A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinical study is conducted under an IND, all
FDA IND requirements must be met unless waived. When a foreign clinical study is not conducted under an IND, the sponsor must ensure that the study
complies with certain regulatory requirements of the FDA in order to use the study as support for an IND or application for marketing approval. The FDA’s
regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical studies, as well as the quality and integrity of the
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resulting data. They further help ensure that non-IND foreign studies are conducted in a manner comparable to that required for IND studies.
In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must review and approve the plan for
any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must
review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in
compliance with FDA regulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial
is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.
Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety monitoring
board or committee. This group provides a recommendation as to whether or not a trial may move forward at designated check points based on access that only
the group maintains to available data from the study. Suspension or termination of development during any phase of clinical trials can occur if it is determined
that the participants or patients are being exposed to an unacceptable health risk. Other reasons for suspension or termination may be made by us based on
evolving business objectives and/or competitive climate.
Expanded Access to an Investigational Drug for Treatment Use
Expanded access, sometimes called “compassionate use,” is the use of investigational new drug products outside of clinical trials to treat patients with
serious or immediately life-threatening diseases or conditions when there are no comparable or satisfactory alternative treatment options. The rules and
regulations related to expanded access are intended to improve access to investigational drugs for patients who may benefit from investigational therapies. FDA
regulations allow access to investigational drugs under an IND by the company or the treating physician for treatment purposes on a case-by-case basis for:
individual patients (single-patient IND applications for treatment in emergency settings and non-emergency settings); intermediate-size patient populations; and
larger populations for use of the drug under a treatment protocol or Treatment IND Application.
When considering an IND application for expanded access to an investigational product with the purpose of treating a patient or a group of patients, the
sponsor and treating physicians or investigators will determine suitability when all of the following criteria apply: patient(s) have a serious or immediately life-
threatening disease or condition, and there is no comparable or satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition; the
potential patient benefit justifies the potential risks of the treatment and the potential risks are not unreasonable in the context or condition to be treated; and the
expanded use of the investigational drug for the requested treatment will not interfere with the initiation, conduct, or completion of clinical investigations that
could support marketing approval of the product or otherwise compromise the potential development of the product.
There is no obligation for a sponsor to make its investigational products available for expanded access; however, as required by amendments to the FDCA
included in the 21st Century Cures Act, or the Cures Act, passed in 2016, if a sponsor has a policy regarding how it responds to expanded access requests with
respect to product candidates in development to treat serious diseases or conditions, it must make that policy publicly available. Sponsors are required to make
such policies publicly available upon the earlier of initiation of a Phase 2 or Phase 3 study for a covered investigational product; or 15 days after the
investigational product receives designation from the FDA as a breakthrough therapy, fast track product, or regenerative medicine advanced therapy.
In addition, on May 30, 2018, the Right to Try Act was signed into law. The law, among other things, provides a federal framework for certain patients to
access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under
certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded
access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act, but the
manufacturer must develop an internal policy and respond to patient requests according to that policy.
Human Clinical Trials in Support of an NDA
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Clinical trials involve the administration of the investigational product candidate to human subjects under the supervision of a qualified investigator in
accordance with cGCP requirements which include, among other things, the requirement that all research subjects provide their informed consent in writing
before their participation in any clinical trial. Clinical trials are conducted under written clinical trial protocols detailing, among other things, the objectives of the
study, inclusion and exclusion criteria, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in three sequential phases, but the phases may overlap or be combined. Additional studies may also be
required after approval.
Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, including adverse effects, dose tolerance,
absorption, metabolism, distribution, excretion and pharmacodynamics in healthy humans or in patients. During Phase 1 clinical trials, information about the
investigational drug product’s pharmacokinetics and pharmacological effects may be obtained to permit the design of well-controlled and scientifically valid
Phase 2 clinical trials.
Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, evaluate the efficacy of
the product candidate for specific targeted indications and determine dose tolerance and optimal dosage and dosage schedule. Multiple Phase 2 clinical trials may
be conducted by the sponsor to obtain information prior to beginning larger and more costly Phase 3 clinical trials. Phase 2 clinical trials are well controlled,
closely monitored and conducted in a limited patient population.
Phase 3 clinical trials proceed if the Phase 2 clinical trials demonstrate that a dose range of the product candidate is potentially effective and has an
acceptable safety profile. Phase 3 clinical trials are undertaken within an expanded patient population to further evaluate dosage, provide substantial evidence of
clinical efficacy and further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites. A well-
controlled, statistically robust Phase 3 clinical trial may be designed to deliver the data that regulatory authorities will use to decide whether or not to approve,
and, if approved, how to appropriately label a drug: such Phase 3 studies are referred to as “pivotal.”
A clinical trial may combine the elements of more than one phase and the FDA often requires more than one Phase 3 trial to support marketing approval of
a product candidate. A company’s designation of a clinical trial as being of a particular phase is not necessarily indicative that the study will be sufficient to
satisfy the FDA requirements of that phase because this determination cannot be made until the protocol and data have been submitted to and reviewed by the
FDA. Generally, pivotal trials are Phase 3 trials, but they may be Phase 2 trials if the design provides a well-controlled and reliable assessment of clinical benefit,
particularly in an area of unmet medical need.
In some cases, the FDA may approve an NDA for a product candidate but require the sponsor to conduct additional clinical trials to further assess the
product candidate’s safety and effectiveness after approval. Such post-approval trials are typically referred to as Phase 4 clinical trials. These studies are used to
gain additional experience from the treatment of a larger number of patients in the intended treatment group and to further document a clinical benefit in the case
of drugs approved under accelerated approval regulations. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result in
withdrawal of approval for products.
Progress reports detailing the status and a brief description of available results of the clinical trials must be submitted at least annually to the FDA. In
addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other
studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product; and any clinically important increase in the case of a serious
suspected adverse reaction over that listed in the protocol or investigator brochure. The FDA will typically inspect one or more clinical sites to assure compliance
with cGCP and the integrity of the clinical data submitted.
Sponsors of clinical trials are also required to register and disclose certain clinical trial information on a public registry (clinicaltrials.gov) maintained by
the U.S. National Institutes of Health, or NIH. In particular, information related to the product, patient population, phase of investigation, study sites and
investigators and other aspects of the clinical trial is made public as part of the registration of the clinical trial. Both the NIH and the FDA have recently signaled
the U.S. government’s willingness to begin
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enforcing those requirements against non-compliant clinical trial sponsors. The failure to submit clinical trial information to clinicaltrials.gov, as required, is a
prohibited act under the FDCA with violations subject to potential civil monetary penalties of up to $10,000 for each day the violation continues.
Concurrent with clinical trials, companies often complete additional animal studies and must also develop additional information about the chemistry and
physical characteristics of the investigational drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP
requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must
develop methods for testing the identity, strength, quality, purity, and potency of the final drug. Additionally, appropriate packaging must be selected and tested
and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
Pediatric Studies
Under the Pediatric Research Equity Act, or PREA, applications and certain types of supplements to applications must contain data that are adequate to
assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for
each pediatric subpopulation for which the product is safe and effective. The sponsor must submit an initial Pediatric Study Plan, or PSP, within 60 days of an
end-of-phase 2 meeting or as may be agreed between the sponsor and the FDA. Those plans must contain an outline of the proposed pediatric study or studies the
sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such
detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies
along with supporting information. The sponsor and the FDA must reach agreement on a final plan. A sponsor can submit amendments to an agreed-upon initial
PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials, and/or other
clinical development programs.
The FDA may, on its own initiative or at the request of the sponsor, grant deferrals for submission of some or all pediatric data until after approval of the
product for use in adults, or full or partial waivers from the pediatric data requirements. A deferral may be granted for several reasons, including a finding that
the product or therapeutic candidate is ready for approval for use in adults before pediatric trials are complete or that additional safety or effectiveness data needs
to be collected before the pediatric trials begin. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan
designation, although FDA has recently taken steps to limit what it considers abuse of this statutory exemption in PREA by announcing that it does not intend to
grant any additional orphan drug designations for rare pediatric subpopulations of what is otherwise a common disease. The FDA also maintains a list of diseases
that are exempt from PREA requirements due to low prevalence of disease in the pediatric population.
Submission and Filing of an NDA
In order to obtain approval to market a drug product in the United States, a marketing application must be submitted to the FDA that provides sufficient
data establishing the safety and efficacy of the proposed drug product for its intended indication. The application includes all relevant data available from
pertinent preclinical and clinical trials, 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 trials intended to test the safety and effectiveness of a use of a product, or from a number
of alternative sources, including studies initiated by investigators.
The NDA is a vehicle through which sponsors formally propose that the FDA approve a new product for marketing and sale in the United States for one or
more indications. Every new drug product candidate must be the subject of an approved NDA before it may be commercialized in the United States. Under
federal law, the submission of most NDAs is subject to an application user fee, which for federal fiscal year 2021 is $3,117,218 for an application requiring
clinical data. The sponsor of an approved NDA is also subject to an annual program fee, which for federal fiscal year 2022 is $369,413. Certain exceptions and
waivers are available for some of these fees, such as an exception from the application fee for products with orphan designation and a waiver for certain small
businesses.
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Following submission of an NDA, the FDA conducts a preliminary review of the application within 60 calendar days of its receipt and, within that period
of time, it must inform the sponsor whether the application is sufficiently complete to permit substantive review. In the event that FDA determines that an
application does not satisfy this standard, it will issue a Refuse to File, or RTF, determination to the sponsor. Typically, an RTF will be based on administrative
incompleteness, such as clear omission of information or sections of required information; scientific incompleteness, such as omission of critical data,
information or analyses needed to evaluate safety and efficacy or provide adequate directions for use; or inadequate content, presentation, or organization of
information such that substantive and meaningful review is precluded. The FDA may request additional information rather than accept the application for filing.
In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it
for filing.
Once the submission is accepted for filing, the FDA begins an in-depth substantive review. Under the goals and policies agreed to by the FDA under the
Prescription Drug User Fee Act, or PDUFA, the FDA has ten months from the filing date in which to complete its initial review of a standard application that is a
new molecular entity, and six months from the filing date for an application with “priority review.” The review process may be extended by the FDA for three
additional months to consider new information or in the case of a clarification provided by the sponsor to address an outstanding deficiency identified by the
FDA following the original submission. Despite these review goals, it is not uncommon for FDA review of an application to extend beyond the PDUFA goal
date.
In connection with its review of an application, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These
pre-approval inspections may cover all facilities associated with an NDA submission, including component manufacturing, finished product manufacturing and
control testing laboratories. 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.
In addition, as a condition of approval, the FDA may require a sponsor to develop a REMS. REMS use risk minimization strategies beyond the
professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the
size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known
or potential adverse events and whether the product is a new molecular entity.
The FDA may refer an application for a novel product to an advisory committee or explain why such referral was not made. Typically, an advisory
committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to
whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it
considers such recommendations carefully when making decisions.
Expedited Review Programs
The FDA is authorized to expedite the review of applications in several ways. None of these expedited programs changes the standards for approval but
each may help expedite the development or approval process governing product candidates.
•
Fast Track designation. The sponsor of a product candidate may request the FDA to designate the product for a specific indication as a Fast Track
product concurrent with or after the filing of the IND. Candidate 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. Fast Track designation
applies to the combination of the product candidate and the specific indication for which it is being studied. In addition to other benefits, such as
the ability to have greater interactions with the FDA, the FDA may initiate review of sections of a Fast Track application before the application is
complete, a process known as rolling review.
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•
Breakthrough therapy designation. To qualify for the breakthrough therapy program, product candidates must be intended to treat a serious or life-
threatening disease or condition and preliminary clinical evidence must indicate that such product candidates may demonstrate substantial
improvement on one or more clinically significant endpoints over existing therapies. The FDA will seek to ensure the sponsor of a breakthrough
therapy product candidate receives intensive guidance on an efficient development program, intensive involvement of senior managers and
experienced staff on a proactive, collaborative and cross-disciplinary review and rolling review.
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Priority review. A product candidate is eligible for priority review if it treats a serious condition and, if approved, it would be a significant
improvement in the safety or effectiveness of the treatment, diagnosis or prevention compared to marketed products. FDA aims to complete its
review of priority review applications within six months as opposed to 10 months for standard review.
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Accelerated approval. Drug or biologic products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that
provide meaningful therapeutic benefit over existing treatments may receive accelerated approval. Accelerated approval means that a product
candidate may be approved on the basis of adequate and well controlled clinical trials establishing that the product candidate has an effect on a
surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or
irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity and prevalence of the condition and the
availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a drug or biologic product
candidate receiving accelerated approval perform adequate and well controlled post-marketing clinical trials. In addition, the FDA currently
requires as a condition for accelerated approval pre-approval of promotional materials.
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Regenerative advanced therapy. With passage of the Cures Act in December 2016, Congress authorized the FDA to accelerate review and
approval of products designated as regenerative advanced therapies. A product is eligible for this designation if it is a regenerative medicine
therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition and preliminary clinical evidence
indicates that the product candidate has the potential to address unmet medical needs for such disease or condition. The benefits of a regenerative
advanced therapy designation include early interactions with the FDA to expedite development and review, benefits available to breakthrough
therapies, potential eligibility for priority review and accelerated approval based on surrogate or intermediate endpoints.
Rare Pediatric Disease Designation and Priority Review Vouchers
In 2012, Congress enacted the Food and Drug Administration Safety and Innovation Act, requiring the FDA to award priority review vouchers, or PRVs,
to sponsors of certain rare pediatric disease product applications. This program is designed to encourage development of new drug and biological products for
prevention and treatment of “rare pediatric diseases” by, upon initial approval of an application meeting certain specified criteria, providing companies with a
voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. The sponsor of a rare pediatric disease
product receiving a PRV may sell or otherwise transfer the voucher to another company. The voucher may be further transferred any number of times before the
voucher is used, as long as the sponsor making the transfer has not yet submitted an application relying on the priority review voucher. The FDA may also revoke
any PRV if the rare pediatric disease product for which the voucher was awarded is not marketed in the United States within one year following the date of
approval.
In order to receive a PRV upon Biologics License Application, or BLA, or NDA approval, the product must receive designation from the FDA as a product
for a rare pediatric disease prior to submission of the marketing application. A “rare pediatric disease” is a disease that is serious or life-threatening, in which the
serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years and affects fewer than 200,000 people in the United States, or
affects more than 200,000 people in the United States but there is no reasonable expectation that the cost of developing and making available in the
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United States a product for such disease or condition will be recovered from sales in the United States of such product. In addition to receiving rare pediatric
disease designation, in order to receive a PRV, the NDA or BLA must be given priority review, rely on clinical data derived from studies examining a pediatric
population and dosages of the product intended for that population, not seek approval for a different adult indication in the original rare pediatric disease product
application and be for a product that does not include a previously approved active ingredient.
The Rare Pediatric Disease PRV program was scheduled to expire after September 30, 2020. After that, only drugs designated as rare pediatric treatments
and approved by the FDA by October 1, 2022, could receive a voucher. In December 2020, however, Congress renewed the program as part of the 2021
Coronavirus Response and Relief Supplemental Consolidated Appropriations Act through the federal fiscal year 2024. Thus, under the current statutory sunset
provisions, FDA may only award PRVs for approved rare pediatric disease product applications if sponsors have rare pediatric disease designation for the drug
granted by September 30, 2024. The FDA may not award any rare pediatric disease PRVs after September 30, 2026.
The FDA’s Decision on an NDA
The FDA reviews an application to determine, among other things, whether the product is safe and whether it is effective for its intended use(s), with the
latter determination being made on the basis of substantial evidence.
The FDA has interpreted this evidentiary standard to require at least two adequate and well-controlled clinical investigations to establish effectiveness of a new
product. Under certain circumstances, however, the FDA has indicated that a single trial with certain characteristics and additional information may satisfy this
standard. Ultimately, the FDA will determine whether the expected benefits of the drug product outweigh its potential risks to patients. On the basis of the
FDA’s evaluation of the application and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA will issue
either a complete response letter, or CRL, or an approval letter.an approval letter or a complete response letter.
A CRL generally outlines the deficiencies in the submission and may require additional clinical or other data, additional pivotal Phase 3 clinical trial(s)
and/or other significant and time- consuming requirements related to clinical trials, preclinical studies or manufacturing. The FDA has committed to reviewing
such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately
may decide that the application does not satisfy the regulatory criteria for approval. If a CRL is issued, the sponsor will have one year to respond to the
deficiencies identified by the FDA, at which time the FDA can deem the application withdrawn or, in its discretion, grant the sponsor an additional six month
extension to respond.
An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. The FDA may limit the
approved indications for use of the product. The agency may also require testing and surveillance programs to monitor the product after commercialization, or
impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, to help ensure that the benefits of the
product outweigh the potential risks. REMS can include medication guides, communication plans for health care professionals, and elements to assure safe use,
or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances,
special monitoring and the use of patent registries. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or
surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional
labeling claims, are subject to further testing requirements and FDA review and approval.
Post-Approval Requirements
If regulatory approval for marketing of a product or new indication for an existing product is obtained, the sponsor will be required to comply with all
regular post-approval regulatory requirements as well as any post-approval requirements that the FDA may have imposed as part of the approval process. The
sponsor will be required to report, among other things, certain adverse reactions and manufacturing problems to the FDA, provide updated safety and efficacy
information and comply with requirements
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concerning advertising and promotional labeling requirements. Manufacturers and certain of 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 ongoing
regulatory requirements, including cGMP regulations, which impose certain procedural and documentation requirements upon manufacturers.
A product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests on each lot of the product before it
is released for distribution. If the product is subject to official release, the manufacturer must submit samples of each lot, together with a release protocol
showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in
addition perform certain confirmatory tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research
related to the safety, purity, potency and effectiveness of pharmaceutical products.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after
the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency,
or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety
information; imposition of post-market studies or clinical trials to assess safety risks; or imposition of distribution or other restrictions under a REMS program.
Other potential consequences include, among other things:
•
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
•
fines, warning letters or holds on post-approval clinical trials;
•
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 strictly regulates the marketing, labeling, advertising and promotion of prescription drug products placed on the market. This regulation
includes, among other things, standards and regulations for direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored
scientific and educational activities, and promotional activities involving the Internet and social media. Promotional claims about a drug’s safety or effectiveness
are prohibited before the drug is approved. After approval, a drug product generally may not be promoted for uses that are not approved by the FDA, as reflected
in the product’s prescribing information. In September 2021, the FDA published final regulations which describe the types of evidence that the agency will
consider in determining the intended use of a drug product.
In the United States, health care professionals are generally permitted to prescribe drugs for such uses not described in the drug’s labeling, known as off-
label uses, because the FDA does not regulate the practice of medicine. However, FDA regulations impose rigorous restrictions on manufacturers’
communications, prohibiting the promotion of off-label uses. It may be permissible, under very specific, narrow conditions, for a manufacturer to engage in
nonpromotional, non-misleading communication regarding off-label information, such as distributing scientific or medical journal information.
If a company is found to have promoted off-label uses, it may become subject to adverse public relations and administrative and judicial enforcement by
the FDA, the DOJ, or the Office of the Inspector General of the Department of Health and Human Services, as well as state authorities. This could subject a
company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the
manner in which a company promotes or distributes drug products. The federal government has levied large civil and criminal fines against companies for
alleged improper promotion and has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional
conduct is changed or curtailed.
NDAs for most new drug products are based on two full clinical studies which must contain substantial evidence of the safety and efficacy of the proposed
new product for the proposed use. These
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applications are submitted under Section 505(b)(1) of the FDCA. The FDA is, however, authorized to approve an alternative type of NDA under Section 505(b)
(2) of the FDCA. This type of application allows the sponsor to rely, in part, on the FDA’s previous findings of safety and efficacy for a similar product, or
published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug for which the investigations made to show whether or not the drug is safe for use
and effective in use and relied upon by the sponsor for approval of the application “were not conducted by or for the sponsor and for which the sponsor has not
obtained a right of reference or use from the person by or for whom the investigations were conducted.”
Section 505(b)(2) thus authorizes the FDA to approve an NDA based on safety and effectiveness data that were not developed by the sponsor. NDAs filed
under Section 505(b)(2) may provide an alternate and potentially more expeditious pathway to FDA approval for new or improved formulations or new uses of
previously approved products. If the 505(b)(2) sponsor can establish that reliance on the FDA’s previous approval is scientifically appropriate, the sponsor may
eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or
measurements to support the change from the approved product. The FDA may then approve the new drug candidate for all or some of the label indications for
which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) sponsor.
Abbreviated New Drug Applications for Generic Drugs
In 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress authorized the FDA to approve generic drugs that are the same as drugs
previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an abbreviated new
drug application, or ANDA, to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously
conducted for a drug product previously approved under an NDA, known as the reference listed drug, or RLD.
Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active
ingredients, the route of administration, the dosage form and the strength of the drug. At the same time, the FDA must also determine that the generic drug is
“bioequivalent” to the innovator drug. Under the statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a
significant difference from the rate and extent of absorption of the listed drug.”
Upon approval of an ANDA, the FDA indicates whether the generic product is “therapeutically equivalent” to the RLD in its publication “Approved Drug
Products with Therapeutic Equivalence Evaluations,” also referred to as the Orange Book. Physicians and pharmacists consider a therapeutic equivalent generic
drug to be fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s designation of
therapeutic equivalence often results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.
Under the Hatch-Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for the RLD has
expired. The FDCA provides a period of five years of non-patent data exclusivity for a new drug containing a new chemical entity or NCE. An NCE is a drug
that contains no active moiety that has previously been approved by the FDA in any other NDA. This interpretation of the FDCA by the FDA was confirmed
with enactment of the Ensuring Innovation Act in April 2021. An active moiety is the molecule or ion responsible for the physiological or pharmacological action
of the drug substance. In cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the
submission is accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the original product
approval. The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than
bioavailability or bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application. This three-year
exclusivity period often protects changes to a previously approved drug product, such as a new dosage form, route of administration, combination or indication.
Hatch-Waxman Patent Certification and the 30-Month Stay
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Upon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s
product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published in the Orange Book. The FDA’s regulations
governing patient listings were largely codified into law with enactment of the Orange Book Modernization Act in January 2021. When an ANDA or 505(b)(2)
applicant files its application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the Orange
Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval.
Specifically, the ANDA or 505(b)(2) applicant must certify with respect to each patent whether:
•
the required patent information has not been filed;
•
the listed patent has expired;
•
the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or
•
the listed patent is invalid, unenforceable or will not be infringed by the new product.
A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is
called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use,
the application will not be approved until all the listed patents claiming the referenced product have expired (other than method of use patents involving
indications for which the ANDA applicant is not seeking approval).
If the ANDA or 505(b)(2) applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV
certification to the NDA and patent holders once the ANDA or 505(b)(2) application has been accepted for filing by the FDA. The NDA and patent holders may
then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days
after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of 30 months
after the receipt of the Paragraph IV notice, expiration of the patent or a decision in the infringement case that is favorable to the ANDA applicant.
Pediatric Exclusivity
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional
six months of marketing protection to the term of any existing unexpired patent or regulatory exclusivity, including orphan exclusivity. This six-month
exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to
show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional
protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or
regulatory periods of exclusivity or patent protection cover the product are extended by six months.
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Orphan Drug Designation and Exclusivity
Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition, generally
meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of
developing and making a product available in the United States for treatment of the disease or condition will be recovered from sales of the product. A company
must seek orphan drug designation before submitting an NDA for the candidate product. If the request is granted, the FDA will disclose the identity of the
therapeutic agent and its potential use. Orphan drug designation does not shorten the PDUFA goal dates for the regulatory review and approval process, although
it does convey certain advantages such as tax benefits and exemption from the PDUFA application fee.
If a product with orphan designation receives the first FDA approval for the disease or condition for which it has such designation or for a select indication
or use within the rare disease or condition for which it was designated, the product generally will receive orphan drug exclusivity. Orphan drug exclusivity means
that the FDA may not approve another sponsor’s marketing application for the same drug for the same condition for seven years, except in certain limited
circumstances. Orphan exclusivity does not block the approval of a different product for the same rare disease or condition, nor does it block the approval of the
same product for different conditions. If a drug designated as an orphan drug ultimately receives marketing approval for an indication broader than what was
designated in its orphan drug application, it may not be entitled to exclusivity. Orphan drug exclusivity will not bar approval of another product under certain
circumstances, including if a subsequent product with the same drug for the same condition is shown to be clinically superior to the approved product on the
basis of greater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market
demand.
In September 2021, the Court of Appeals for the 11th Circuit held that, for the purpose of determining the scope of market exclusivity, the term “same
disease or condition” in the statute means the designated “rare disease or condition” and could not be interpreted by the FDA to mean the “indication or use.”
Thus, the court concluded, orphan drug exclusivity applies to the entire designated disease or condition rather than the “indication or use.” It is unclear how this
court decision will be implemented by the FDA.
Patent Term Restoration and Extension
A patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Amendments, which permits a patent
restoration of up to five years for patent term lost during product development and the FDA regulatory review. The restoration period granted on a patent
covering a product is typically one-half the time between the effective date of the IND clearing the clinical investigation and the submission date of an
application, plus the time between the submission date of an application and the ultimate approval date. Patent term restoration cannot be used to extend the
remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved product is eligible for the
extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple products for
which approval is sought can only be extended in connection with one of the approvals. The USPTO reviews and approves the application for any patent term
extension or restoration in consultation with the FDA.
Review and Approval of Drug Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other
countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales
and distribution of products. Whether or not it obtains FDA approval for a product, a sponsor will need to obtain the necessary approvals by the comparable non-
U.S. regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. Specifically, the process
governing approval of medicinal products in the European Union, generally follows the same lines as in the United States. It entails satisfactory completion of
preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication. It also requires
the submission to the relevant competent authorities of a marketing authorization application, or
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MAA, and granting of a marketing authorization by these authorities before the product can be marketed and sold in the European Union.
Clinical Trial Approval in the European Union
On January 31, 2022, the new Clinical Trials Regulation (EU) No 536/2014, or the Clinical Trials Regulation, became effective in the European Union
and replaced the prior Clinical Trials Directive 2001/20/EC. The new regulation aims at simplifying and streamlining the authorization, conduct and transparency
of clinical trials in the European Union. Under the new coordinated procedure for the approval of clinical trials, the sponsor of a clinical trial to be conducted in
more than one EU Member State, will only be required to submit a single application for approval. The submission will be made through the Clinical Trials
Information System, a new clinical trials portal overseen by the EMA and available to clinical trial sponsors, competent authorities of the EU Member States and
the public.
The main characteristics of the regulation include: a streamlined application procedure via a single entry point, the “EU Portal and Database”; a single set
of documents to be prepared and submitted for the application as well as simplified reporting procedures for clinical trial sponsors; and a harmonized procedure
for the assessment of applications for clinical trials, which is divided in two parts. Part I is assessed by the appointed reporting Member State, whose assessment
report is submitted for review by the sponsor and all other competent authorities of all EU Member States in which an application for authorization of a clinical
trial has been submitted, or concerned member states. Part II is assessed separately by each concerned member state. Strict deadlines have been established for
the assessment of clinical trial applications. The role of the relevant ethics committees in the assessment procedure will continue to be governed by the national
law of the concerned member state. However, overall related timelines will be defined by the Clinical Trials Regulation.
The new regulation did not change the preexisting requirement that a sponsor must obtain prior approval from the competent national authority of the
EU Member State in which the clinical trial is to be conducted. If the clinical trial is conducted in different EU Member States, the competent authorities in each
of these EU Member States must provide their approval for the conduct of the clinical trial. Furthermore, the sponsor may only start a clinical trial at a specific
study site after the applicable ethics committee has issued a favorable opinion.
As in the U.S., parties conducting certain clinical trials must post clinical trial information in the European Union at the EudraCT website:
https://eudract.ema.europa.eu.
PRIME Designation in the European Union
In March 2016 EMA launched an initiative to facilitate development of product candidates in indications, often rare, for which few or no therapies
currently exist. The PRIority MEdicines, or PRIME, scheme is intended to encourage drug development in areas of unmet medical need and provides accelerated
assessment of products representing substantial innovation reviewed under the centralized procedure. Products from small- and medium-sized enterprises may
qualify for earlier entry into the PRIME scheme than larger companies. Many benefits accrue to sponsors of product candidates with PRIME designation,
including but not limited to, early and proactive regulatory dialogue with the EMA, frequent discussions on clinical trial designs and other development program
elements, and accelerated marketing authorization application assessment once a dossier has been submitted.
Marketing Authorization in the European Union
To obtain a marketing authorization for a product under EU regulatory systems, an applicant must submit an MAA either under a centralized procedure
administered by the EMA, or one of the procedures administered by competent authorities in the EU Member States (decentralized procedure, national procedure
or mutual recognition procedure). A marketing authorization may be granted only to a sponsor established in the European Union. Regulation (EC) No
1901/2006 provides that prior to obtaining a marketing authorization in the European Union, sponsor have to demonstrate compliance with all measures included
in an EMA-approved Pediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted (i) a product-specific
waiver, (ii) a class waiver or (iii) a deferral for one or more of the measures included in the PIP.
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The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid across the European
Economic Area (i.e., the European Union as well as Iceland, Liechtenstein and Norway). Pursuant to Regulation (EC) No 726/2004, the centralized procedure is
compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products,
advanced therapy medicinal products, and products with a new active substance indicated for the treatment of certain diseases, including products for the
treatment of cancer. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a
centralized process is in the interest of patients, the centralized procedure may be optional. The centralized procedure may at the request of the sponsor also be
used in certain other cases. We anticipate that the centralized procedure will be mandatory for the product candidates we are developing.
Under the centralized procedure, the Committee for Medicinal Products for Human Use, or CHMP is also responsible for several post-authorization and
maintenance activities, such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the
European Union, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral
explanation is to be provided by the sponsor in response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases,
when a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. If the CHMP
accepts such request, the time limit of 210 days will be reduced to 150 days but it is possible that the CHMP can revert to the standard time limit for the
centralized procedure if it considers that it is no longer appropriate to conduct an accelerated assessment. At the end of this period, the CHMP provides a
scientific opinion on whether or not a marketing authorization should be granted in relation to a medicinal product. Within 15 calendar days of receipt of a final
opinion from the CHMP, the European Commission must prepare a draft decision concerning an application for marketing authorization. This draft decision must
take the opinion and any relevant provisions of EU law into account. Before arriving at a final decision on an application for centralized authorization of a
medicinal product the European Commission must consult the Standing Committee on Medicinal Products for Human Use. The Standing Committee is
composed of representatives of the EU Member States and chaired by a non-voting European Commission representative. The European Parliament also has a
related “droit de regard.” The European Parliament's role is to ensure that the European Commission has not exceeded its powers in deciding to grant or refuse to
grant a marketing authorization.
The European Commission may grant a so-called “marketing authorization under exceptional circumstances.” Such authorization is intended for products
for which the sponsor can demonstrate that it is unable to provide comprehensive data on the efficacy and safety under normal conditions of use, because the
indications for which the product in question is intended are encountered so rarely that the sponsor cannot reasonably be expected to provide comprehensive
evidence, or in the present state of scientific knowledge, comprehensive information cannot be provided, or it would be contrary to generally accepted principles
of medical ethics to collect such information. Consequently, marketing authorization under exceptional circumstances may be granted subject to certain specific
obligations, which may include the following:
•
the sponsor must complete an identified program of studies within a time period specified by the competent authority, the results of which form
the basis of a reassessment of the benefit/risk profile;
•
the medicinal product in question may be supplied on medical prescription only and may in certain cases be administered only under strict
medical supervision, possibly in a hospital and in the case of a radiopharmaceutical, by an authorized person; and
•
the package leaflet and any medical information must draw the attention of the medical practitioner to the fact that the particulars available
concerning the medicinal product in question are as yet inadequate in certain specified respects.
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Regulatory Data Protection in the European Union
In the European Union, innovative medicinal products approved on the basis of a complete independent data package qualify for eight years of data
exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to Directive 2001/83/EC. Regulation (EC) No 726/2004
repeats this entitlement for medicinal products authorized in accordance the centralized authorization procedure. Data exclusivity prevents sponsors for
authorization of generics of these innovative products from referencing the innovator’s data to assess a generic (abridged) application for a period of eight years.
During an additional two-year period of market exclusivity, a generic marketing authorization application can be submitted and authorized, and the innovator’s
data may be referenced, but no generic medicinal product can be placed on the EU market until the expiration of the market exclusivity.
Periods of Authorization and Renewals
A marketing authorization has an initial validity for five years in principle. The marketing authorization may be renewed after five years on the basis of a
re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the EU Member State. The European Commission or the competent
authorities of the EU Member States may decide, on justified grounds relating to pharmacovigilance, to proceed with one further five-year period of marketing
authorization. Once subsequently definitively renewed, the marketing authorization shall be valid for an unlimited period. Any authorization which is not
followed by the actual placing of the medicinal product on the EU market (in case of centralized procedure) or on the market of the authorizing EU Member
State within three years after authorization ceases to be valid.
Orphan Drug Designation and Exclusivity
Regulation (EC) No. 141/2000, as implemented by Regulation (EC) No. 847/2000 provides that a drug can be designated as an orphan drug by the
European Commission if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of (i) a life-threatening or chronically
debilitating condition affecting not more than five in ten thousand persons in the European Union when the application is made, or (ii) a life-threatening,
seriously debilitating or serious and chronic condition in the European Union and that without incentives it is unlikely that the marketing of the drug in the
European Union would generate sufficient return to justify the necessary investment. For either of these conditions, the sponsor must demonstrate that there
exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the European Union or, if such method
exists, the drug will be of significant benefit to those affected by that condition.
Once authorized, orphan medicinal products are entitled to ten years of market exclusivity in all EU Member States and a range of other benefits during
the development and regulatory review process including scientific assistance for study protocols, authorization through the centralized marketing authorization
procedure covering all member countries and a reduction or elimination of registration and marketing authorization fees. However, marketing authorization may
be granted to a similar medicinal product with the same orphan indication during the ten-year period with the consent of the marketing authorization holder for
the original orphan medicinal product or if the manufacturer of the original orphan medicinal product is unable to supply sufficient quantities. Marketing
authorization may also be granted to a similar medicinal product with the same orphan indication if this product is safer, more effective or otherwise clinically
superior to the original orphan medicinal product. The period of market exclusivity may, in addition, be reduced to six years if it can be demonstrated on the
basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity.
Regulatory Requirements after a Marketing Authorization has been Obtained
In case an authorization for a medicinal product in the European Union is obtained, the holder of the marketing authorization is required to comply with a
range of requirements applicable to the manufacturing, marketing, promotion and sale of medicinal products. These include compliance with the European
Union’s stringent pharmacovigilance or safety reporting rules must be ensured; the manufacturing of authorized medicinal products, for which a separate
manufacturer’s license is mandatory, must also be conducted in strict compliance with the applicable EU laws, regulations and guidance. These requirements
include compliance with EU cGMP standards when manufacturing medicinal products and
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active pharmaceutical ingredients, including the manufacture of active pharmaceutical ingredients outside of the European Union with the intention to import the
active pharmaceutical ingredients into the European Union; and the marketing and promotion of authorized drugs, including industry-sponsored continuing
medical education and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the EU notably under Directive
2001/83EC, as amended, and EU Member State laws. Direct-to-consumer advertising of prescription medicines is prohibited across the European Union.
Pricing Decisions for Approved Products
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed
only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a
particular product candidate to currently available therapies or so-called health technology assessments, in order to obtain reimbursement or pricing approval.
For example, the European Union provides options for its Member States to restrict the range of products for which their national health insurance systems
provide reimbursement and to control the prices of medicinal products for human use. Member States may approve a specific price for a product or it may
instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other EU Member States allow
companies to fix their own prices for products, but monitor and control prescription volumes and issue guidance to physicians to limit prescriptions. Recently,
many countries in the European Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt
to manage health care expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European Union. The downward
pressure on health care costs in general, particularly prescription products, has become intense. As a result, increasingly high barriers are being erected to the
entry of new products. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after
reimbursement has been obtained. Reference pricing used by various EU Member States, and parallel trade, i.e., arbitrage between low-priced and high-priced
Member States, can further reduce prices. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical
products will allow favorable reimbursement and pricing arrangements for any products, if approved in those countries.
Brexit and the Regulatory Framework in the United Kingdom
The United Kingdom’s withdrawal from the European Union took place on January 31, 2020. The European Union and the United Kingdom reached
an agreement on their new partnership in the Trade and Cooperation Agreement, or the Agreement, which was applied provisionally beginning on January 1,
2021 and which entered into force on May 1, 2021. The Agreement focuses primarily on free trade by ensuring no tariffs or quotas on trade in goods, including
healthcare products such as medicinal products. Thereafter, the European Union and the United Kingdom will form two separate markets governed by two
distinct regulatory and legal regimes. As such, the Agreement seeks to minimize barriers to trade in goods while accepting that border checks will become
inevitable as a consequence that the United Kingdom is no longer part of the single market. As of January 1, 2021, the Medicines and Healthcare Products
Regulatory Agency, or the MHRA, became responsible for supervising medicines and medical devices in Great Britain, comprising England, Scotland and Wales
under domestic law whereas Northern Ireland continues to be subject to EU rules under the Northern Ireland Protocol. The MHRA will rely on the Human
Medicines Regulations 2012 (SI 2012/1916) (as amended), or the HMR, as the basis for regulating medicines. The HMR has incorporated into the domestic law
the body of EU law instruments governing medicinal products that pre-existed prior to the United Kingdom’s withdrawal from the European Union.
Healthcare Law and Regulation
Health care providers and third-party payors play a primary role in the recommendation and prescription of drug products that are granted marketing
approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse, anti-kickback, false
claims laws, patient privacy laws and regulations and other health care laws and regulations that may constrain business and/or financial arrangements.
Restrictions under applicable federal and state health care laws and regulations, include the federal Anti-Kickback Statute, which prohibits, among other
things, persons and entities from knowingly and
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willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an
individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal health
care program such as Medicare and Medicaid; the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties
laws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for
payment that are false, fictitious or fraudulent or knowingly making, using or causing to made or used a false record or statement to avoid, decrease or conceal an
obligation to pay money to the federal government; the Foreign Corrupt Practices Act, which prohibits companies and their intermediaries from making, or
offering or promising to make, improper payments to non-U.S. officials for the purpose of obtaining or retaining business or otherwise seeking favorable
treatment; and the federal transparency requirements known as the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs,
devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services, or CMS, within the U.S. Department of Health and
Human Services, information related to payments and other transfers of value made by that entity to physicians, other healthcare providers and teaching
hospitals, as well as ownership and investment interests held by physicians and their immediate family members.
Further, some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government in addition to requiring manufacturers to report information related to payments to physicians and
other health care providers or marketing expenditures. Additionally, some state and local laws require the registration of pharmaceutical sales representatives in
the jurisdiction. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other
in significant ways and often are not preempted by the federal Health Insurance Portability and Accountability Act of 1996, thus complicating compliance
efforts.
Pharmaceutical Insurance Coverage and Healthcare Reform
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed
services generally rely on third-party payors to reimburse all or part of the associated health care costs. Significant uncertainty exists as to the coverage and
reimbursement status of products approved by the FDA and other government authorities. Thus, even if a product candidate is approved, sales of the product will
depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid,
commercial health insurers and managed care organizations, provide coverage and establish adequate reimbursement levels for, the product. The process for
determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will
pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity and
reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific
products on an approved list, also known as a formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive
pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or
other comparable marketing approvals. Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision by a third-party
payor not to cover a product could reduce physician utilization once the product is approved and have a material adverse effect on sales, results of operations and
financial condition. Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved.
Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage and reimbursement for the
product, and the level of coverage and reimbursement can differ significantly from payor to payor.
The containment of health care costs also has become a priority of federal, state and foreign governments and the prices of products have been a focus in
this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on
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reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive
policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of any approved products.
Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more
products for which a company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in
the future.
There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical
products, limiting coverage and reimbursement for drugs and biologics and other medical products, government control and other changes to the health care
system in the United States. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Affordability Reconciliation Act, or collectively the ACA. In addition, other legislative changes have been proposed and adopted since the ACA was
enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee
on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach
required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to
Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2031 under the Coronavirus
Aid, Relief, and Economic Security Act. These Medicare sequester reductions have been suspended through the end of March 2022. From April 2022 through
June 2022 a 1% sequester cut will be in effect, with the full 2% cut resuming thereafter. The American Taxpayer Relief Act of 2012, among other things, reduced
Medicare payments to several providers and increased the statute of limitations period for the U.S. government to recover overpayments to providers from three
to five years. These laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of
our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the ACA, there have been, and continue to be, numerous legal challenges and Congressional actions to repeal and replace provisions of
the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by President Trump on December 22, 2017, Congress repealed the
“individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective in 2019.
Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential
and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as
well. In June 20121, the U.S. Supreme Court dismissed this action after finding that the plaintiffs do not have standing to challenge the constitutionality of the
ACA. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
The Trump Administration also took executive actions to undermine or delay implementation of the ACA, including directing federal agencies with
authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would
impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On
January 28, 2021, however, President Biden issued a new Executive Order which directs federal agencies to reconsider rules and other policies that limit
Americans’ access to health care, and consider actions that will protect and strengthen that access. Under this Executive Order, federal agencies are directed to
re-examine: policies that undermine protections for people with pre-existing conditions, including complications related to COVID-19; demonstrations and
waivers under Medicaid and the ACA that may reduce coverage or undermine the programs, including work requirements; policies that undermine the health
insurance marketplace or other markets for health insurance; policies that make it more difficult to enroll in Medicaid and the ACA; and policies that reduce
affordability of coverage or financial assistance, including for dependents.
Pharmaceutical Prices
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The prices of prescription pharmaceuticals have also been the subject of considerable discussion in the United States. There have been several recent U.S.
congressional inquiries, as well as proposed and enacted state and federal legislation designed to, among other things, bring more transparency to pharmaceutical
pricing, review the relationship between pricing and manufacturer patient programs, and reduce the costs of pharmaceuticals under Medicare and Medicaid. In
2020, President Trump issued several executive orders intended to lower the costs of prescription products and certain provisions in these orders have been
incorporated into regulations. These regulations include an interim final rule implementing a most favored nation model for prices that would tie Medicare Part
B payments for certain physician-administered pharmaceuticals to the lowest price paid in other economically advanced countries, effective January 1, 2021.
That rule, however, has been subject to a nationwide preliminary injunction and, on December 29, 2021, CMS issued a final rule to rescind it. With issuance of
this rule, CMS stated that it will explore all options to incorporate value into payments for Medicare Part B pharmaceuticals and improve beneficiaries' access to
evidence-based care.
In addition, in October 2020, the U.S. Department of Health and Human Services, or HHS, and the FDA published a final rule allowing states and other
entities to develop a Section 804 Importation Program, or SIP, to import certain prescription drugs from Canada into the United States. The final rule is currently
the subject of ongoing litigation, but at least six states (Vermont, Colorado, Florida, Maine, New Mexico, and New Hampshire) have passed laws allowing for
the importation of drugs from Canada with the intent of developing SIPs for review and approval by the FDA. Further, on November 20, 2020, HHS finalized a
regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through
pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed by the Biden administration from
January 1, 2022 to January 1, 2023 in response to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as
well as a new safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers, the implementation of which has been
delayed until January 1, 2026 pursuant to the Infrastructure Investment and Jobs Act.
On July 9, 2021, President Biden signed Executive Order 14063, which focuses on, among other things, the price of pharmaceuticals. The Executive
Order directs HHS to create a plan within 45 days to combat “excessive pricing of prescription pharmaceuticals and enhance domestic pharmaceutical supply
chains, to reduce the prices paid by the federal government for such pharmaceuticals, and to address the recurrent problem of price gouging.” On September 9,
2021, HHS released its plan to reduce pharmaceutical prices. The key features of that plan are to: (a) make pharmaceutical prices more affordable and equitable
for all consumers and throughout the health care system by supporting pharmaceutical price negotiations with manufacturers; (b) improve and promote
competition throughout the prescription pharmaceutical industry by supporting market changes that strengthen supply chains, promote biosimilars and generic
drugs, and increase transparency; and (c) foster scientific innovation to promote better healthcare and improve health by supporting public and private research
and making sure that market incentives promote discovery of valuable and accessible new treatments.
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and
biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure
and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. A number of states, for example,
require drug manufacturers and other entities in the drug supply chain, including health carriers, pharmacy benefit managers, wholesale distributors, to disclose
information about pricing of pharmaceuticals. In addition, regional healthcare organizations and individual hospitals are increasingly using bidding procedures
to determine what pharmaceutical products and which suppliers will be included in their prescription pharmaceutical and other healthcare programs. These
measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal
healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare
products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed
only after a reimbursement price has been agreed.
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Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular drug candidate to currently available
therapies (so-called health technology assessment) in order to obtain reimbursement or pricing approval. For example, the European Union provides options for
its member states to restrict the range of products for which their national health insurance systems provide reimbursement and to control the prices of medicinal
products for human use. European Union member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls
on the profitability of the company placing the product on the market. Other member states allow companies to fix their own prices for products, but monitor and
control prescription volumes and issue guidance to physicians to limit prescriptions.
Recently, many countries in the European Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as
countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European
Union. The downward pressure on healthcare costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are
being erected to the entry of new products. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing
negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states, and parallel trade
(arbitrage between low-priced and high-priced member states), can further reduce prices. There can be no assurance that any country that has price controls or
reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in
those countries.
C. Organizational structure.
Stealth BioTherapeutics Corp was incorporated in Grand Cayman, Cayman Islands as Stealth Peptides International, Inc. in April 2006. Its wholly owned
subsidiary, Stealth BioTherapeutics Inc., was incorporated in Delaware as Stealth Peptides Inc. in October 2007. In addition, a wholly owned subsidiary, Stealth
BioTherapeutics (HK) Limited, was incorporated in Hong Kong in September 2017. Stealth BioTherapeutics Corp, Stealth BioTherapeutics Inc. and Stealth
BioTherapeutics (HK) Limited are collectively referred to herein as the “Company.”
D. Property, plants and equipment.
Our operations are conducted at Stealth Delaware, which is located in Needham, Massachusetts, where it occupies 6,051 square feet of office space. The
lease expires October 31, 2022.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
A.
Operating results.
The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements
and the related notes included elsewhere in this annual report on Form 20-F. Some of the information contained in this discussion and analysis or set forth
elsewhere in this annual report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking
statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements.” As a result of many factors, including
those factors set forth under “Item 3.D.—Risk Factors”, our actual results could differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis. Additionally, please see our Annual Report on Form 20-F for our fiscal year ended December 31,
2020, filed with the Securities and Exchange Commission on April 6, 2021, for a discussion covering our fiscal year ended December 31, 2020.
Overview
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We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving
mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal
organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases and many common age-related diseases, leading to devastating
cardiac, ophthalmic and neurological symptoms. We believe our product candidates have significant potential to treat the cardiac, ophthalmic and neurological
symptoms of both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have
assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.
Our first clinical product candidate, elamipretide, is a small peptide that targets and binds reversibly to cardiolipin, an essential structural element of
mitochondria, stabilizing the inner mitochondrial membrane under conditions of oxidative stress. This novel mechanism of action has shown potential clinical
benefit in both rare genetic and common age-related ophthalmic and cardiac diseases entailing mitochondrial dysfunction. Elamipretide has been generally well
tolerated in clinical trials with over 1,000 subjects systemically exposed to it to date.
We are studying elamipretide in the following indications:
▪
Geographic atrophy or GA, an advanced form of dry age-related macular degeneration, for which we conducted ReCLAIM, a Phase 1 clinical trial
in the United States and are expecting to announce data from ReCLAIM-2, our fully enrolled Phase 2b clinical trial early in the second quarter of
2022; and
▪
Primary mitochondrial myopathy due to nuclear DNA, or nDNA, mutations, or nPMM, for which we are currently recruiting patients for
enrollment in NuPOWER, a Phase 3 clinical trial. We have designed this trial to focus upon patients with nDNA mutations because we observed
improvements in this prespecified subgroup of patients in our previous Phase 3 primary mitochondrial myopathy trial.
We are evaluating the potential for additional clinical trials of elamipretide in the following neuromuscular and cardiac diseases in which mitochondrial
dysfunction is implicated:
▪
Duchenne muscular dystrophy, or DMD, where deficits in dystrophin and associated mitochondrial dysfunction lead to a progressive decline in
skeletal and cardiac muscle function; and
▪
Barth syndrome, or BTHS, where deficits in cardiolipin lead to a progressive decline in skeletal and cardiac muscle function.
Subject to continued planning efforts and partnering discussions, we hope to submit one or more investigational new drug applications for elamipretide in
DMD during 2022. Subject to ongoing regulatory discussions, we are evaluating the feasibility of conducting another Phase 3 clinical trial in BTHS, where we
have previously conducted a Phase 2/3 clinical trial and a Phase 3 retrospective natural history controlled clinical trial.
Our second clinical product candidate, SBT-272, is a novel peptidomimetic that has been shown to increase adenosine triphosphate production and
decrease levels of reactive oxygen species in dysfunctional mitochondria in preclinical studies. In early experiments, SBT-272 demonstrated higher
mitochondrial uptake and greater concentrations in the brain relative to elamipretide. We are developing SBT-272 for rare neurological diseases involving
mitochondrial dysfunction, with a preliminary focus on amyotrophic lateral sclerosis and frontotemporal lobar degeneration. Results from a Phase 1 clinical trial
of orally administered SBT-272 in healthy human volunteers completed during 2020 showed that orally administered SBT-272 did not reach desired drug
exposure levels. We have initiated a Phase 1 clinical trial of subcutaneous SBT-272 in healthy human volunteers and to plan initiate chronic toxicology studies
to support the potential initiation of a Phase 2 clinical trial in patients. We are also conducting additional preclinical studies in other neurological disease models
to inform our decisions regarding potential additional indications.
We have discovered and own over 100 compounds, including SBT-272 and the SBT-550 family, that also target the mitochondria and form the basis of our
broad proprietary pipeline of mitochondrial-targeted product candidates. We are evaluating compounds in the SBT-550 family for rare neurological indications.
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In addition, our internal discovery platform has generated a library of over 100 differentiated proprietary compounds which could have clinical benefit for
diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds
as part of our carrier program, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.
Since our inception in 2006, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital,
acquiring and developing our proprietary technology, identifying potential product candidates and conducting preclinical and clinical studies of our product
candidates. We have not generated any product revenue and have financed our operations primarily through the private placement of Series A convertible
preferred shares and convertible notes, borrowings under a term loan, through our February 2019 initial public offering and through public offerings and private
placements of our American depositary shares, or ADSs. We have also received proceeds from a development funding agreement, or the Development Funding
Agreement, with Morningside Venture (I) Investments Limited, or MVIL and an option agreement, or the Option Agreement and share purchase agreement, or
the Equity Agreement (collectively referred to as the Alexion Arrangement), with Alexion Pharmaceuticals, Inc., or Alexion. As of December 31, 2021, our
principal source of liquidity was cash and cash equivalents, which totaled $47.1 million.
As of December 31, 2021, we had an accumulated deficit of $608.0 million. Our net loss was $52.5 million, $57.5 million and $71.7 million for the years
ended December 31, 2021, 2020 and 2019, respectively. We have incurred significant net operating losses in every year since our inception and expect to
continue to incur increasing net operating losses and significant expenses for the foreseeable future. We are required to comply with an unrestricted minimum
cash level in accordance with the terms of our venture loan and security agreement, until certain cash financing conditions are met. Our net losses may fluctuate
significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:
•
continue to advance our clinical programs and initiate additional clinical programs;
•
continue our current research programs and development activities;
•
seek to identify additional research programs and additional product candidates;
•
initiate preclinical testing and clinical trials for any product candidates we identify;
•
develop, maintain, expand and protect our intellectual property portfolio;
•
hire additional research, clinical and scientific personnel; and
•
incur additional costs associated with operating as a public company, including expanding our operational, finance and management teams.
We believe our existing cash and cash equivalents at December 31, 2021 will be sufficient to fund our operating expenses into the third quarter of 2022.
We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern within one year after the issuance date of our
consolidated financial statements for the year ended December 31, 2021. See Note 1 to our consolidated financial statements for additional information on our
assessment.
We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for a
product candidate, which is subject to significant uncertainty. We currently use contract research organizations, or CROs, and contract manufacturing
organizations, or CMOs, to carry out our preclinical and clinical development activities, and we do not yet have a commercial organization. If we obtain
regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and
distribution. Accordingly, we may seek to fund our operations through public or private equity or debt financings or other sources, including strategic
collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, if at all. Our failure
to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our
current product candidates, or any additional product candidates, if developed.
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Financial Overview
Revenue
We have not generated any revenue from product sales and do not expect to do so in the near future. We expect that any revenue will be less than our
expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our
product candidates and begin to commercialize any approved products. Our ability to generate revenues for any product candidate for which we receive
regulatory approval will depend on numerous factors, including competition, commercial manufacturing capability and market acceptance of our products.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including development of our preclinical and clinical
product candidates, which include:
•
employee-related expenses, including salaries, benefits and share-based compensation expense;
•
expenses incurred under agreements with CROs, CMOs and independent contractors that conduct research and development, preclinical and clinical
activities on our behalf;
•
costs of purchasing lab supplies and non-capital equipment used in our preclinical activities and in manufacturing preclinical study and clinical trial
materials;
•
consulting, licensing and professional fees related to research and development activities; and
•
facility costs, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and
other supplies.
We expense research and development costs as incurred. We recognize costs for certain development activities, such as preclinical studies and clinical
trials, based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors such as patient enrollment or
clinical site activations for services received and efforts expended.
Research and development activities are central to our business model. We expect research and development costs to increase significantly for the
foreseeable future as our current development programs progress and new programs are added.
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We track certain external research and development expenses for our lead product candidates. We manage certain activities, such as contract research and
manufacturing of our product candidates and our discovery programs, through our third-party vendors and have captured the costs of these activities on an
individual product basis from our financial records. We use our employee, consultant and infrastructure resources across our development programs and do not
track and do not allocate the cost of these activities on a program-by-program basis. The following summarizes our research and development expenses:
Year Ended December 31,
2021
2020
2019
(in thousands)
Product expenses:
Elamipretide
$
11,091 $
15,919 $
20,633
SBT-255
273
—
—
SBT-272
3,190
1,851
2,143
SBT-550 Series
515
—
—
Other
—
—
2
Total costs directly allocated to products
15,069
17,770
22,778
Expenses not directly allocated to products:
Research and development programs
1,029
1,026
1,615
Consultants and professional expenses
2,572
1,965
6,547
Employee expenses including cash
compensation, benefits and
share-based compensation
7,886
8,544
13,664
Total expenses not directly allocated
to products
11,487
11,535
21,826
Total research and development expenses
$
26,556 $
29,305 $
44,604
Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion
costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of
our product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of preclinical
studies and clinical trials and development of our product candidates will depend on a variety of factors, including:
•
successful completion of preclinical studies and investigational new drug-enabling studies;
•
successful enrollment in and completion of clinical trials;
•
receipt of marketing approvals from applicable regulatory authorities;
•
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
•
obtaining and maintaining patent and trade secret protection and non-patent exclusivity;
•
launching commercial sales of the product, if and when approved, whether alone or in collaboration with others;
•
acceptance of the product, if and when approved, by patients, the medical community and third-party payors;
•
effectively competing with other therapies and treatment options;
•
continued acceptable safety profile following approval;
•
enforcing and defending intellectual property and proprietary rights and claims; and
•
achieving desirable therapeutic properties for the intended indications.
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A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current
and future preclinical and clinical product candidates. For example, if the U.S. Food and Drug Administration, or FDA, or other regulatory authority were to
require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience
significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial
resources and time on the completion of preclinical and clinical development.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and share-based compensation for
personnel in executive, finance, pre-commercial, facility operations and administrative functions. Significant costs are incurred in our pre-commercial activities
including market research, public relations, patient advocacy, advisory boards and conferences and professional consulting. Other significant costs include
facility costs not otherwise included in research and development expenses, legal fees relating to intellectual property and patent prosecution and maintenance,
other legal fees, insurance for directors and officers and fees for accounting, tax and consulting services.
We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential
commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include costs related to the hiring
of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. We expect the increased costs associated with being a
public company to include expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, director and
officer insurance and investor and public relations costs.
Other Income (Expense), Net
Other income (expense), net, primarily consists of amortization of debt discount and interest expense incurred on our term loan facility and incurred on
our venture loan, loss recognized upon extinguishment of our term loan facility, interest income earned on cash and cash equivalents and changes in the fair
value of our derivative liability.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following tables summarizes our results of operations for the years ended December 31, 2021, and 2020, together with the dollar change in those
items on a year over year basis:
Year Ended
December 31,
Dollar
2021
2020
Change
(in thousands)
Operating expenses:
Research and development
$
26,556 $
29,305 $
(2,749 )
General and administrative
19,747
19,366
381
Total operating expenses
46,303
48,671
(2,368 )
Loss from operations
(46,303 )
(48,671 )
2,368
Other expense, net
(6,224 )
(8,786 )
2,562
Net loss
$
(52,527 ) $
(57,457 ) $
4,930
Research and Development Expenses
Research and development expenses decreased by $2.7 million to $26.6 million for the year ended December 31, 2021, from $29.3 million for the year
ended December 31, 2020. The decrease was due to a net decrease of $4.0 million in clinical cost driven by the closeout of our previous Primary Mitochondrial
Myopathy clinical trials, a decrease of $0.8 million in manufacturing costs, and a net decrease of $0.6
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million in employee related costs driven by the strategic repositioning in 2020. These decreases were partially offset by increases of $2.5 million in preclinical
costs to develop and expand our current pipeline and $0.2 million in professional service costs.
General and Administrative Expenses
General and administrative expenses increased by $0.3 million to $19.7 million for the year ended December 31, 2021, from $19.4 million for the year
ended December 31, 2020. The increase was driven by an increase of $1.2 million in precommercial costs and an increase of $0.2 million in insurance costs
offset by a $0.8 million decrease in facility related costs and a $0.3 million decrease in employee related costs due to the strategic repositioning in 2020.
Other Expense
Other expense decreased by $2.6 million to $6.2 million for the year ended December 31, 2021 from $8.8 million for the year ended December 31, 2020.
Other expenses in 2021 consisted of a $4.9 million loss due to the change in fair value of the derivative liability, $1.2 million in interest expense, $0.1 million in
loss from extinguishment of term loan facility. Other expense in 2020 consisted of a $7.1 million loss due to the change in fair value of the derivative liability
and $1.8 million in interest expense offset by $0.1 million in interest income.
Recent Accounting Pronouncements
Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to the consolidated financial statements includes a discussion of recent
accounting pronouncements. There were no new accounting pronouncements adopted during 2021 that had a material effect on our consolidated financial
statements.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to
comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have
elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised
accounting standards as other public companies. As a result, our financial statements may not be comparable to the financial statements of reporting companies
that are required to comply with the effective dates for new or revised accounting standards that are otherwise applicable to public companies.
Quantitative and Qualitative Disclosures about Market Risk
We are minimally exposed to market risk related to changes in interest rates. As of December 31, 2021, we had cash and cash equivalents of $47.1
million, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general
level of U.S. interest rates, particularly because our cash equivalents are held in short-term money market funds. We do not believe we are materially at risk to
sudden drops in interest rates based on the amounts subject to these potential changes.
Our venture loan facility has a floating per annum rate equal to the Wall Street Journal prime rate plus 5.5%, subject to a prime rate floor of 3.25% which
exposes us to market interest rate risk when we have outstanding borrowings. As of December 31, 2021, we had $15.0 million of outstanding borrowings under
the venture loan facility. Assuming our outstanding debt remains constant for an entire year and the applicable annual interest rate increases by 1.0%, our annual
interest expense would increase by $0.2 million.
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B.
Liquidity and capital resources.
Overview
We have funded our operations from inception through December 31, 2021 primarily through aggregate gross proceeds from the sale of Series A
convertible preferred shares, the issuance of convertible promissory notes, a term loan, the sale of ordinary shares and the sale and issuance of ADSs, as well as
proceeds received under the Alexion Arrangement, and the Development Funding Agreement. As of December 31, 2021, we had cash and cash equivalents of
$47.1 million.
Indebtedness
Term Loan Facility
On June 30, 2017, we entered into a loan and security agreement with Hercules Capital, Inc., or Hercules, which we refer to as the Term Loan Facility.
The Term Loan Facility was amended in March, July and October of 2018, March and October of 2019 and July of 2020. We borrowed an aggregated principal
amount of $20.0 million under the Term Loan Facility. In September 2021, we entered into a payoff letter with respect to the Term Loan Facility, repaid the
outstanding obligations under the Term Loan Facility, and the loan documents were terminated.
In connection with our entry into the Term Loan Facility, we issued to Hercules a warrant to purchase our ordinary shares. For a description of the warrant,
see “Description of Share Capital and Articles of Association—Warrant” in our preliminary prospectus dated August 5, 2021, filed with the SEC on Form F-1,
which information is incorporated by reference in this annual report.
Venture Loan
On September 30, 2021, we entered into a $25.0 million venture loan and security agreement, or the Venture Loan, with Horizon Technology Finance
Corporation and Powerscourt Investments XXV, LP , or the Lenders. On the closing date, we received $15.0 million, with the remaining $10.0 million available
upon achievement of certain predetermined milestones.
The Venture Loan will be repaid in 48 months from the first day of the month following the funding of the advance and accrues interest at a per annum
rate of interest equal to 5.5% plus the prime rate, as reported in the Wall Street Journal, subject to a prime rate floor of 3.25%.
We may prepay all of the outstanding advances by paying the entire principal balance and all accrued and unpaid interest, subject to prepayment charges
of up to 3% of the then outstanding principal balance. Upon the earlier of (i) payment in full of the principal balance, (ii) an event of default, or (iii) the maturity
date, we are also required to pay an additional final payment of 6% of the principal loan amount to the Lenders.
The Venture Loan is secured by a lien on substantially all of our assets, other than intellectual property and excluded collateral. The Venture Loan
contains customary covenants and representations, including a financial reporting covenant and limitations on dividends, indebtedness, collateral, investments,
distributions, transfers, mergers or acquisitions taxes, corporate changes, deposit accounts, and subsidiaries. An event of default had not occurred as of December
31, 2021.
In connection with our Venture Loan, we are requirement to maintain an unrestricted minimum cash balance until certain cash financing conditions are
met.
In connection with our entry into the Venture Loan, we issued to the Lenders a warrant to purchase our ordinary shares. For a description of the warrant,
see “Description of Share Capital and Articles of Association—Warrant” in our preliminary prospectus dated August 5, 2021, filed with the SEC on Form F-1,
which information is incorporated by reference in this annual report.
Lincoln Park Agreement
In June 2020, we entered into a $20.0 million purchase agreement, or the Purchase Agreement, together with a registration rights agreement, with
Lincoln Park Capital Fund, LLC, or Lincoln Park. Under
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the terms and subject to the conditions of the Purchase Agreement, we have the right to sell to Lincoln Park, and Lincoln Park is obligated to purchase, up to
$20.0 million of our ordinary shares, subject to certain limitations, from time to time, over the 36-month period commencing on June 22, 2020. As of December
31, 2021 and 2020, pursuant to the Purchase Agreement a total of 41,094,552 and 4,680,000 ordinary shares were sold to Lincoln Park for net proceeds totaling
$4.2 million and $0.7 million, respectively.
At- the-Market Offering Agreement
In August 2020, we and H.C. Wainwright & Co., LLC, or Wainwright, entered into an At The Market, or ATM, Offering Agreement pursuant to which we
may offer and sell, from time to time, through Wainwright, ADSs, each representing 12 ordinary shares, with a nominal or par value of $0.0003 per share. We
have no obligation to sell any ADSs pursuant to the ATM Offering Agreement and may at any time suspend sales pursuant to the ATM Offering Agreement. Each
party may terminate the ATM Offering Agreement at any time without liability. As of December 31, 2021 and 2020, we have not sold any shares under the ATM
Offering Agreement.
Development Funding Agreement
In October 2020, we entered into the Development Funding Agreement, under which MVIL agreed to provide funding of $35.0 million to support our
efforts to secure regulatory approval for elamipretide and to develop elamipretide for the treatment of BTHS, dry AMD, FRDA, DMD, replisome-related
disorders and LHON.
In May 2021, we amended the Development Funding Agreement, under which MVIL agreed to provide an additional funding of $30.0 million. As of
December 31, 2021, we have received $65.0 million pursuant to the terms of the Development Funding Agreement as amended.
In connection with the respective funding tranches we have issued warrants for 161,823,177 ordinary shares. We are also obligated to make success
payments to MVIL upon receipt of certain regulatory approvals of elamipretide in the designated indications.
Other Offerings
In April 2020, the Company entered into an ordinary share purchase agreement, pursuant to which the Company issued and sold to MVIL 152,858,460
ordinary shares, par value $0.0003 per share, at a price of $0.13084 per share, for an aggregate purchase price of $20.0 million.
In November 2020, we entered into a Securities Purchase Agreement with certain institutional investors for a registered direct offering, or the 2020 Public
Offering, of an aggregate of 2,844,446 ADSs at a public offering price of $1.125 per ADS for net proceeds of approximately $2.6 million. In February 2021, we
entered into a Securities Purchase Agreement with certain institutional investors for a registered direct offering, or the 2021 Public Offering, of an aggregate of
2,339,000 ADSs at a public offering price of $2.00 per ADS for net proceeds of approximately $4.1 million.
Cash Flows
The following table provides information regarding our cash flows for each of the years presented:
Year ended December 31,
2021
2020
(in thousands)
Net cash provided by (used in):
Operating activities
$
(44,971 ) $
(53,539 )
Investing activities
183
(60 )
Financing activities
59,136
35,618
Net increase (decrease) in cash and cash
equivalents
$
14,348 $
(17,981 )
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Net Cash Used in Operating Activities
The use of cash for operating activities in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of
working capital.
Net cash used in operating activities decreased by $8.5 million to $45.0 million during the year ended December 31, 2021, from $53.5 million year
ended December 31, 2020. Cash used in operating activities during the year ended December 31, 2021, consisted of our net loss of $52.5 million, offset by non-
cash charges of $9.6 million, which includes $4.9 million change in fair value of derivative, $4.2 million in share-based compensation, $0.3 million in other non-
cash charges and $0.2 million in non-cash interest expense. Changes in operating assets and liabilities included $1.6 million in decreases in accounts payable,
accrued expenses and other current liabilities and a $0.5 million increase in prepaid expenses and other current assets.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $0.2 million during the year ended December 31, 2021, and net cash used in investing activities was $0.1
million during the year ended December 31, 2020.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $59.1 million during the year ended December 31, 2021, compared to $35.6 million during the year ended
December 31, 2020. Cash provided by financing activities during the year ended December 31, 2021, was primarily attributable to the receipt of $45.0 million in
connection with the Development Funding Agreement, $14.8 million of net proceeds from the Venture Loan, $9.0 million in connection with the issuance of
ADSs as part of various financing activities during the year, offset in part by $9.1 million of payments made on the Term Loan Facility and $0.6 million of
payments for deferred financing costs and issuance costs for the Venture Loan.
Funding Requirements
We expect our expenses to increase in connection with our ongoing clinical activities, particularly as we continue to develop and conduct clinical trials
with respect to elamipretide and new compounds, including our ongoing and planned clinical trials; advance the development of pipeline programs; initiate new
research and preclinical development efforts; and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain
marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing,
distribution and other commercial infrastructure to commercialize such products. We have incurred, and expect to continue to incur, additional costs associated
with operating as a public company.
Our existing cash and cash equivalents will not be sufficient to support our clinical development of elamipretide and SBT-272 for rare cardiomyopathies
and neurological indications and rare and common ophthalmic indications, any additional protocols or studies we may conduct in BTHS to support a
resubmission of a new drug application or any clinical development for SBT-550 or any other product candidates we may develop in the future. We will be
required to expend significant funds in order to advance the development of elamipretide, SBT-272, and SBT-550, as well as any other product candidates we
may develop in the future. We are also required to comply with an unrestricted minimum cash balance in accordance with the terms of our Venture Loan until
certain cash financing conditions are met, and there is a risk that we may be unable to remain in compliance with this financial covenant in the future in which
case the debt may become immediately due and payable. Accordingly, we will need to obtain substantial additional funding in connection with our continuing
operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development
programs or future commercialization efforts.
We believe that our existing cash and cash equivalents as of December 31, 2021, will be sufficient to fund our operating expenses into the third quarter of
2022.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available
capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the research, development and commercialization of
our
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product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many
factors, including:
•
the scope, progress, timing, costs and results of our current and future clinical trials;
•
research and preclinical development efforts for any future product candidates that we may develop;
•
our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;
•
the number of future product candidates that we pursue and their development requirements;
•
the outcome, timing and costs of seeking regulatory approvals;
•
costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the
responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing
capabilities;
•
subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;
•
our headcount growth and associated costs if and as we expand our research and development and establish a commercial infrastructure;
•
costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against
intellectual property related claims; and
•
costs of operating as a public company.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that
takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In
addition, our product candidates, if approved, may not achieve commercial success. Accordingly, we will need to continue to rely on additional financing to
achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.
Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings, debt
financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, the ownership interests of existing investors will be diluted, and the terms of the securities we issue may include liquidation or other preferences
that adversely affect the rights of holders of ADSs. 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 funds through future 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 to 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 future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Off-balance sheet arrangements.
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable
regulations of the SEC.
Contractual Obligations
We enter into contracts in the normal course of business with CROs and clinical sites for the conduct of clinical trials, professional consultants and other
vendors for clinical supply, manufacturing or other services.
We have entered into several license agreements with Cornell Research Foundation, Inc., a subsidiary of Cornell University, or Cornell, and Institut de
recherches cliniques de Montréal, or the IRCM, pursuant to which Cornell and IRCM granted us an exclusive, worldwide rights under patents related to
elamipretide, SBT-20 and other technology. In connection with the licenses granted under the original Cornell agreement, we issued Cornell 666,667 ordinary
shares. With respect to the other Cornell license agreements, we paid Cornell upfront license fees of $60,000, annual fees of approximately $60,000 and are
obligated to pay Cornell royalties on net sales, if any, by us and our sublicensees of any licensed product. Subject to specified reductions and royalty offsets, such
royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the Cornell license agreements, except that
for licensed products under the original Cornell agreement, such royalties are calculated as a tiered, low single-digit to sub-teen double-digit percentage of net
sales, depending on patent coverage, amount of net sales and type of licensed product. Our obligation to pay royalties as to any licensed product extends until the
later of the expiration of the last-to-expire valid claim of any licensed patent covering such licensed product or 15 years after the date of our first commercial sale
of such licensed product. If a licensed product is covered by licenses granted under the original Cornell agreement and another Cornell license agreement, then,
for each unit of product, royalties will only be due under the original Cornell agreement.
We are obligated to pay Cornell a low double-digit percentage of specified payments we receive in connection with granting a sublicense under the
Cornell license agreements. We have also agreed to reimburse Cornell for its out-of-pocket expenses incurred in preparing, filing, prosecuting and maintaining
the licensed patents, except for any licensed patents as to which we elect to waive our licensed rights. We also have agreed to pay Cornell annual license
maintenance fees in dollars in the mid-five-digits for the original Cornell agreement, and mid-four-digits for each of the other Cornell license agreements starting
on the date specified in each such agreement, in all cases until the first commercial sale of a specified type of licensed product under such agreement.
Our contractual obligations relate to the lease of our office space and a term loan facility. We have summarized in the table below our fixed contractual
cash obligations as of December 31, 2021.
Total
Less than
1 year
1 to 3
years
3 to 5
years
More than
5 years
(in thousands)
Operating leases
$
126 $
126 $
— $
— $
—
Venture loan facility
15,900
—
10,000
5,900
—
Total
$
16,026 $
126 $
10,000 $
5,900 $
—
(1) Represents principal amount of the outstanding Venture Loan Facility as of December 31, 2021 as well as an end of term charge of $0.9 million due under the
Venture Loan Facility. The loan is subject to variable interest that will be calculated as payments become due.
C.
Research and development, patents and licenses, etc.
Full details of our research and development activities and expenditures are given in “Item 4.B. —Business Overview” and “Item 5.A. —Operating
Results” within this annual report.
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(1)
D.
Trend information.
See “Item 5.A. —Operating Results” and “Item 5.B. —Liquidity and Capital Resources” within this annual report.
E.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which
we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. We believe that several accounting
policies are important to understanding our historical and future financial performance. We refer to these policies as critical because these specific areas
generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and we could have used different
estimates which also would have been reasonable. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail
below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this
annual report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated
financial statements.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. This process involves
reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed for us and estimating the level of
service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of
our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses
as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the
accuracy of our estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses
include fees paid to:
•
CROs in connection with clinical trials;
•
CMOs with respect to clinical materials, intermediates, drug substance and drug product;
•
vendors in connection with research and preclinical development activities; and
•
vendors related to manufacturing, development and distribution of clinical supplies.
We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with CROs that
conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result
in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment
of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical
trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of subjects and the level of effort to be
expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid
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expense accordingly. To date, there have been no material differences from our estimates to the amounts actually incurred.
Development Derivative Liability
Under the Development Funding Agreement, MVIL paid us $20.0 million upon execution of the Agreement, $10.0 million upon completing enrollment of
our ReCLAIM-2 Phase 2 clinical trial of elamipretide for the treatment of dry AMD, or Tranche 2 Milestone Event and $5.0 million upon the submission of a
new drug application to the FDA for elamipretide for the treatment of BTHS, or Tranche 3 Milestone Event.
On May 17, 2021,we amended the Development Funding Agreement, under which MVIL agreed to provide an additional $30.0 million in funding.
Pursuant to the amended Development Funding Agreement we received $8.0 million in May 2021, $6.0 million in September 2021, $5.0 million in October 2021
and $11.0 million in December 2021. We were required to issue a warrant to MVIL, in connection with each such additional funding, under the same terms and
conditions of the Development Funding Agreement. As of December 31, 2021, we have received a total of $65.0 million pursuant to the terms of the
Development Funding Agreement and the amended Development Funding Agreement.
Upon receipt of funding for each tranche, we are required to issue a warrant exercisable for ordinary shares at an exercise price that is 115% of the
implied price of our ordinary shares on the date of issuance, with such number of ordinary shares being equal to the quotient of 30% of the amount of each
funding received divided by the exercise price or the Future Warrants.
In accordance with the Development Funding Agreement we have issued the following warrants in 2021:
Description
Timing
Amount
(in millions)
Warrants issued for
ordinary shares
Exercise Price
Full enrollment of our ReCLAIM-2 trial
February 2021
$
10.0
18,750,000 $
0.16
Amendment of Development Funding Agreement
May 2021
$
8.0
18,461,538 $
0.13
Filing our BTHS NDA
September 2021
$
5.0
10,714,286 $
0.14
Oct 1, 2021 funding (early payment-partial)
September 2021
$
6.0
12,857,143 $
0.14
Oct 1, 2021 funding (remaining payment)
October 2021
$
5.0
13,636,364 $
0.11
Dec 1, 2021 funding
December 2021
$
11.0
41,250,000 $
0.08
Total
$
45.0
115,669,331
The warrants issued were immediately exercisable and have a term of three years.
The Development Funding Agreement is presented as a derivative liability on our consolidated balance sheet as of December 31, 2021 and 2020. The
success payments featured in the Development Funding Agreement meets the criteria for derivative accounting as it the has multiple underlyings, payment
provisions, nominal initial net investment and a net settlement provision. The Development Funding Agreement also includes provisions that allow for the
issuance of Future Warrants upon receipt of additional funding. At inception, the Future Warrants were not considered “fixed-for-fixed” as the exercise price and
number of ordinary shares are dependent on the date and share price at the date of issuance. As such the Future Warrants were deemed to be liability classified.
The Development Funding Agreement and the Future Warrants were considered to be a hybrid instrument recorded as the development derivative liability on our
consolidated balance sheets.
At the inception of the arrangement, the Company identified two units of account (i) the Initial Warrant and (ii) derivative liability, which included the
success payments feature and the Future Warrants. The derivative liability was initially recorded at the value of $18.1 million, the estimated fair value at
inception of the arrangement, and is remeasured at fair value at each reporting date. The remaining amount
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of $1.9 million of the initial cash received of $20.0 million was attributed to the Initial Warrants, which met the criteria for equity classification. The fair value of
the Future Warrants was estimated as of the inception of the agreement and at each reporting period using the Black Scholes Merton valuation model.
Upon the receipt of each respective funding tranche, each respective Future Warrant was deemed to meet the criteria for equity classification, or Warrants.
The Warrants meets the “fixed-for-fixed” criteria and were recognized as a component of additional paid in capital and were not remeasured. As of December 31,
2021, there were no Future Warrants within the derivative liability instrument.
The development derivative liability is considered a level 3 fair value measurement, as it is dependent upon significant unobservable inputs. The
derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions regarding the probability and timing of cash
flows, and the present value of such cash flows is determined valued using a risk-adjusted discount rate. Key inputs to the level 3 fair value model at inception
and as of the reporting date include (i) the probability (100%) and timing of achieving stated development milestones to receive the next tranches of funding and
the related issuance of Future Warrants upon receipt of the respective tranches of funding, (ii) the probability and timing of achieving FDA and European
Medicines Agency approval of the designated indications, and (iii) the Company’s implied cost of borrowing (18.7% at inception, 18.3% and 16.6% as of
December 2021 and 2020, respectively).
If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial
condition and results of operations could be materially affected. See Note 3 to the consolidated financial statements included in Item 17 in this Annual Report on
Form 20-F for more information.
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Item 6. Directors, Senior Management and Employees
A.
Directors and senior management.
The following table sets forth the name and position of each of the directors of Stealth BioTherapeutics Corp and of the executive officers of Stealth
Delaware and their ages as of March 31, 2022. Stealth BioTherapeutics Corp does not have any executive officers other than Irene McCarthy, its Chief Executive
Officer.
Name
Age
Position
Executive Officers
Irene (Reenie) McCarthy
57
Chief Executive Officer, Director
Robert Weiskopf
71
Chief Financial Officer
Brian D. Blakey, Pharm.D.
60
Chief Business Officer
James R. Carr, Pharm.D.
59
Chief Clinical Development Officer
Martin P. Redmon
60
Chief Research and Development Officer
Non-Employee Directors
Gerald L. Chan, Sc.D.
71
Director, Chairman of the Board
Francis W. Chen, Ph.D.
73
Director
Louis Lange, M.D., Ph.D.
73
Director
Kevin F. McLaughlin
65
Director
Edward P. Owens
75
Director
Eve Slater, M.D.
76
Director
Member of Audit Committee
Member of Nominating Committee
Member of Remuneration Committee
Executive Officers
Irene (Reenie) McCarthy has served as Director of Stealth BioTherapeutics Corp since June 2018 and as Chief Executive Officer of Stealth BioTherapeutics
Corp since October 2018. She has served as Chief Executive Officer of Stealth Delaware since February 2016, as President and Secretary of Stealth Delaware
since August 2015 and as a director of Stealth Delaware since July 2009. Prior to Stealth, Ms. McCarthy was a member of the investment team at Morningside
Technology Advisory, LLC (and affiliates), a private advisory company, from January 2009 to April 2016, and she remains a director of Morningside Technology
Advisory, LLC. She has served as a director for numerous private biotechnology companies developing drugs across a broad spectrum of therapeutic focus areas.
She holds a J.D. from the University of Pennsylvania Law School and a B.A. in English and Political Science from Bates College. We believe that Ms. McCarthy
is qualified to serve on our board of directors because of her extensive experience investing in life sciences companies, her service on several life science
company boards and her decade of service to our company, as an investor, board member and officer.
Robert Weiskopf has served as Chief Financial Officer of Stealth Delaware since September 2019. Mr. Weiskopf previously served as Senior Vice President,
Chief Financial Officer, and Treasurer of ArQule, Inc., a biopharmaceutical company, from May 2015 to March 2019 and as Vice President of Finance,
Corporate Controller, and Treasurer of ArQule, Inc. from February 2007 to May 2015. Mr. Weiskopf is a Certified Public Accountant and holds a B.S.B.A.
magna cum laude and M.S.B.A. in accounting from the University of Massachusetts at Amherst.
Brian D. Blakey, Pharm.D., has served as Chief Business Officer of Stealth Delaware since February 2014. Previously, Dr. Blakey was the Chief Strategy and
Operations Officer of Element Marketing Group, a medical marketing agency, from June 2010 to February 2014, and was the Vice President of Commercial
Development at Salutria Pharmaceuticals, LLC (formerly AtheroGenics Inc.), a biotechnology company, from May 2006 to May 2010. He also worked in
multiple roles at GlaxoSmithKline, plc, a pharmaceutical
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(1)(2)
(1)(3)
(1)(2)
(3)
(3)
(1)
(2)
(3)
company, beginning in March 1998, ultimately serving in the position of director between July 2003 and February 2004. Dr. Blakey holds a Pharm.D. from the
University of Florida.
James R. Carr, Pharm.D., has served as Chief Clinical Development Officer of Stealth Delaware since January 2017 and previously served as our Vice
President, Clinical Development since March 2014. Previously, Dr. Carr was the Executive Director in the Cardiovascular Metabolic Franchise at
GlaxoSmithKline plc, a pharmaceutical company, from October 2010 to March 2014 and the Vice President of Clinical Development at ARCA biopharma, Inc.,
a pharmaceutical company, from May 2008 to November 2010. Dr. Carr holds a Pharm.D. and a B.S. in pharmacy from the University of Minnesota.
Martin Redmon has served as Chief Research & Development Officer at Stealth Delaware since March 2021. Previously, Dr. Redmon was Executive Vice
President of Discovery, Development and Technical Operations from 2019-2021, and, from May 2015 to 2019, Dr. Redmon served as our Vice President,
Pharmaceutical Sciences and Technical Operations. Dr. Redmon has more than 30 years of experience in pharmaceutical research and development, operations,
and project and functional line management. Prior to joining Stealth, he served as Senior Vice President of Research, Development and Technical Operations at
Precision Dermatology, and has previously held pharmaceutical development scientific management positions at Eli Lilly and Company, Focal Inc., Sepracor,
Inc. (subsequently Sunovion Pharmaceuticals, Inc.), Praecis Pharmaceuticals Inc, and ArQule, Inc. Dr. Redmon holds a BS in Chemical Engineering and a PhD
in Pharmaceutical Sciences, both from the University of Kentucky.
Non-Employee Directors
Gerald L. Chan, Sc.D., was appointed as a Director of Stealth BioTherapeutics Corp and as Chairman of the Board in June 2018. He has served as a director of
Stealth Delaware since October 2007. Dr. Chan co-founded the Morningside group in 1986. He served on the board of directors of Aduro Biotech Inc.
(subsequently, renamed Chinook Therapeutics, Inc.) from 2014 until 2018, and currently serves as a member and the chairman of the board of Apellis
Pharmaceuticals, Inc. (Nasdaq: APLS). Dr. Chan received a B.S. and M.S. in engineering from the University of California, Los Angeles, and a M.S. in medical
radiological physics and an Sc.D. in radiation biology from Harvard University. He did his post-doctoral training at the Dana-Farber Cancer Institute as a fellow
of the Leukemia Society of America. We believe that Dr. Chan is qualified to serve on our board of directors because of his extensive experience investing in and
serving on the boards of directors of life sciences companies.
Francis W. Chen, Ph.D., was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. He has served as a director of Stealth Delaware since April
2006. In November 2011, he founded, and currently serves as the chairman of, SinoAmerican Partners Limited, an advisory services firm that specializes in
cross-border transactions of technology companies. Dr. Chen was also a venture partner at WI Harper Group, an early-stage venture capital firm with investment
activities in Silicon Valley and China from June 2009 to December 2012. Dr. Chen has more than 20 years of prior management experience in the healthcare
industry and has served on the board of directors of several private companies. Dr. Chen holds a Ph.D. in immunology from Harvard University and an M.S. and
a B.S. in chemistry from Tufts University. We believe Dr. Chen is qualified to serve on our board of directors because of his extensive experience investing in
and serving on the boards of directors of life science companies.
Kevin F. McLaughlin was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. He has served as a director of Stealth Delaware since March
2017. Mr. McLaughlin served as Senior Vice President, Chief Financial Officer and Treasurer of Acceleron Pharma, Inc., a biotechnology company, from
November 2010 through December 2021, following the company’s acquisition by Merck & Co. in November 2021. Mr. McLaughlin has also served on the
board of directors of Vericel Corporation (NASDAQ – VCEL), a biopharmaceutical company, since January 2015. He previously served as Senior Vice President
and Chief Financial Officer of Qteros, Inc., a cellulosic biofuels company, from 2009 through 2010 and as co-founder, Chief Operating Officer and director of
Aptius Education, Inc., a publishing company, from 2007 through 2009. Mr. McLaughlin held several executive positions with PRAECIS Pharmaceuticals, Inc.,
a biopharmaceutical company, from 1996 through 2007, initially as Chief Financial Officer, before becoming Chief Operating Officer and eventually President
and Chief Executive Officer, and he served as a member of the board of directors. Mr. McLaughlin began his career in senior financial roles at Prime Computer
and Computervision Corporation. Mr. McLaughlin received a B.S. in business from Northeastern University and an M.B.A. from Babson College. We believe
Mr. McLaughlin
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is qualified to serve on our board of directors because of his extensive operational experience and serving on the boards of directors of life science companies.
Edward P. Owens was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. He has served as a director of Stealth Delaware since May 2017.
Mr. Owens has been a Director of Ironwood Pharmaceuticals, Inc. (Nasdaq: IRWD) since March 2013. He is a retired Partner of Wellington Management
Company LLP and the founding portfolio manager of Vanguard Health Care Fund, which he managed from 1984 until his retirement at the end of 2012. Mr.
Owens holds a B.S. in Physics from the University of Virginia and an M.B.A. from Harvard Business School. We believe Mr. Owens is qualified to serve on our
board of directors because of his experience in serving on the board of directors of life sciences companies, as well as his investment expertise.
Louis Lange, M.D., Ph.D., was appointed as a Director of Stealth BioTherapeutics Corp in July 2019. Dr. Lange is currently a general partner at Asset
Management Ventures, an investment firm, where he has worked since June 2009. Dr. Lange was the co-founder and served as the President and Chief Executive
Officer of Cardiogen Sciences, Inc., a biotechnology company, from April 2014 until it was acquired by Audentes Therapeutics, Inc. (Nasdaq: BOLD) in August
2015. Dr. Lange also co-founded CV Therapeutics, Inc. in 1990 and served as the Chairman, Chief Executive Officer and Chief Scientific Officer until it was
acquired by Gilead Sciences, Inc. (Nasdaq: GILD) in 2009. Dr. Lange has also served as the Chief of Cardiology and Professor of Medicine at Jewish Hospital at
Washington University. Dr. Lange served as a member of Audentes Therapeutics, Inc.’s board of directors from August 2015 until January 2020 where he was
the Lead Director from 2017 to 2019. Dr. Lange also served as a member of the Board of Trustees at the University of Rochester from 1998 to 2018, and The
Gladstone Foundation from 2010 to 2019. Dr. Lange was a senior advisor to Gilead from April 2009 until November 2019. He was on the board of directors of
BIO (the trade organization of biotech companies) from 1998 to 2009, as well as other private companies. He is currently a director of BIOPlus, a SPAC from
2021 to present. Dr. Lange holds a B.A. from the University of Rochester, an M.D. from Harvard Medical School and a Ph.D. from Harvard University. We
believe Dr. Lange is qualified to serve on our board of directors because of his experience in serving in leadership positions at and on the board of directors of
life sciences companies, as well as his investment expertise.
Eve Slater, M.D., F.A.C.C., was appointed as a Director of Stealth BioTherapeutics Corp in December 2020. Dr. Slater currently is a Professor of Clinical
Medicine at Columbia University Vagelos College of Physicians and Surgeons, where she has taught in various positions since 1983. Dr. Slater is board certified
in internal medicine and cardiology and brings considerable experience from the pharmaceutical industry. Dr. Slater was Senior Vice President, Worldwide
Policy at Pfizer, Inc. from May 2007 until June 2009. Dr. Slater was the Assistant Secretary for Health, U.S. Department of Health and Human Services from
February 2002 until March 2003 and was the Acting Assistant Secretary for Health from 2001 until her confirmation by the United States Senate in 2002. Dr.
Slater held senior management positions at Merck Research Laboratories from 1983 to 2001, including Senior Vice President of External Policy, Vice President
of Corporate Public Affairs, Senior Vice President of Clinical and Regulatory Development, Executive Director of Biochemistry and Molecular Biology, and
Senior Director of Biochemical Endocrinology. Dr. Slater was trained in Internal Medicine and Cardiology at Massachusetts General Hospital, is board certified
in Internal Medicine and Cardiology and is a Fellow of the American College of Cardiology. We believe Dr. Slater is qualified to serve on our board of directors
because of her experience in the medical and pharmaceutical industries and her long tenure as an academic in the medical field.
Family Relationships
There are no family relationships among any of our directors or executive officers.
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B.
Compensation.
For the year ended December 31, 2021, the aggregate compensation accrued or paid to our executive officers for services in all capacities was $3.4 million
plus option awards exercisable for 10,921,272 ordinary shares at a weighted-average exercise price of $0.15 per share. Options for 10,921,272 shares expire on
February 28, 2031. For the year ended December 31, 2021, the aggregate restricted American depositary shares, or ADS, units awarded to our executive officers
for service in all capacities was 1,979,712 ordinary shares, represented by 164,976 ADSs. The compensation that we pay to our Chief Executive Officer Reenie
McCarthy, who is also a Director, is received solely in her capacity as Chief Executive Officer.
For the year ended December 31, 2021, the aggregate compensation accrued or paid to our non-employee directors for services in all capacities was $0.3
million plus option awards exercisable for 2,044,728 ordinary shares at a weighted-average average exercise price of $0.15 per share. Options for 2,044,728
shares expire on February 28, 2031.
We have adopted a non-employee director compensation policy that provides to each non-employee director:
•
$40,000 per year for his or her service as a non-employee director;
•
$30,000 per year for his or her service as a non-executive chair;
•
$15,000 per year for his or her service as the audit committee chair;
•
$13,000 per year for his or her service as the remuneration committee chair;
•
$8,000 per year for his or her service as nomination committee chair;
•
$7,500 per year for his or her service as an audit committee member (other than for the committee chair);
•
$5,000 per year for his or her service as a remuneration committee member (other than for the committee chair);
•
$4,000 per year for his or her service as a nomination committee member (other than for the committee chair); and
•
at the discretion of the board of directors, an annual grant of options or restricted share units in respect of ordinary shares.
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The following table sets forth information concerning outstanding equity awards for ordinary shares of each of our non-employee directors as of
December 31, 2021:
OPTION AWARDS
NAME
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE
(#)
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE
(#)
OPTION
EXERCISE
PRICE ($)
OPTION
EXPIRATION
DATE
Gerald L. Chan, Sc.D.
2,500,000
—
0.84
8/26/2024
99,688
45,312
1.02
2/28/2029
266,100
—
0.18
2/20/2030
—
340,788
0.15
2/28/2031
Francis W. Chen, Ph.D.
50,000
—
0.45
12/13/2022
99,688
45,312
1.02
2/28/2029
266,100
—
0.18
2/20/2030
—
340,788
0.15
2/28/2031
Kevin F. McLaughlin
50,000
—
1.38
03/15/2027
99,688
45,312
1.02
2/28/2029
266,100
—
0.18
2/20/2030
—
340,788
0.15
2/28/2031
Edward P. Owens
50,000
—
1.38
5/23/2027
99,688
45,312
1.02
2/28/2029
266,100
—
0.18
2/20/2030
—
340,788
0.15
2/28/2031
Louis Lange
150,000
—
1.01
7/23/2029
266,100
—
0.18
2/20/2030
—
340,788
0.15
2/28/2031
Eve Slater
75,000
—
0.16
7/1/2030
266,104
354,800
0.11
12/3/2030
—
340,788
0.15
2/28/2031
We also reimburse our non-employee directors for reasonable travel and out-of-pocket expenses incurred in connection with attending our board of
director and committee meetings.
Equity and Non-Equity Incentive Plans
The four equity incentive plans described in this section are our 2019 share incentive plan, as amended, or the Amended 2019 Plan, our 2020 ADS
incentive plan, or the ADS Plan, our 2019 employee share purchase plan, or ESPP, and our 2006 share incentive plan, as amended to date, or the 2006 Plan.
Amended 2019 Plan
Our board of directors approved an amendment of the Amended 2019 Plan, which became effective on March 25, 2020 upon approval from our
shareholders. The Amended 2019 Plan provides for the grant of incentive share options, non-statutory share options, share appreciation rights, awards of
restricted shares, restricted share units or other share-based awards. The number of our ordinary shares that is reserved for issuance under the Amended 2019
Plan is the sum of 22,692,938 shares plus (1) the number of our ordinary shares subject to outstanding awards under our 2006 Plan that expire, terminate or are
otherwise surrendered, cancelled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right and (2) an annual
increase, which we refer to as the Evergreen Provision, to be added the first day of each fiscal year, beginning with the fiscal year ending December 31, 2020 and
continuing until, and including, the fiscal year ending December 31, 2029, equal to the lowest of 31,780,518 of our ordinary shares, 4.0% of the number of
ordinary shares outstanding on the first day of the fiscal year and an amount determined by our board of directors. On January 1, 2020, prior to the amendment of
our Amended 2019 Plan, 17,468,832 ordinary shares were added to the plan pursuant to the Evergreen Provision. In connection with the amendment of the plan,
the number of shares reserved under the plan was reduced by 24,999,996 shares, as those shares are now reserved under the ADS Plan. On
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January 1, 2021, an additional 22,228,225 ordinary shares were added to the Amended 2019 Plan, pursuant to the Evergreen provision.
Pursuant to the Evergreen Provision, effective January 1, 2022, an additional 28,490,000 ordinary shares were added to the Amended 2019 Plan.
As of March 31, 2022, the total reserve under the Amended 2019 Plan is 95,057,355 shares of which 30,162,538 shares will be available for grant. Our
employees, officers, directors, consultants and advisors and of any business ventures in which we have a controlling interest are eligible to receive awards under
the Amended 2019 Plan; however, incentive share options may only be granted to our employees. In any calendar year, the value of awards under the Amended
2019 Plan and the ADS Plan made to any non-employee director for service as a director shall not exceed $1,000,000, unless otherwise approved by our board of
directors at their discretion in extraordinary circumstances.
Pursuant to the terms of the Amended 2019 Plan, our board of directors (or a committee delegated by our board of directors) administers the Amended
2019 Plan and, subject to any limitations set forth in the Amended 2019 Plan, selects the recipients of awards and determines:
•
the number of ordinary shares covered by options and the dates upon which those options become exercisable;
•
the type of options to be granted;
•
the exercise price of options, which price must be at least equal to the fair market value of our ordinary shares on the date of grant;
•
the duration of options, which may not be in excess of 10 years;
•
the methods of payment of the exercise price of options; and
•
the number of our ordinary shares subject to and the terms of any share appreciation rights, awards of restricted shares, restricted share units or
other share-based awards and the terms and conditions of such awards, including the issue price, conditions for repurchase, repurchase price and
performance conditions (though the measurement price of share appreciation rights must be at least equal to the fair market value of our ordinary
shares on the date of grant and the duration of such awards may not be in excess of ten years), if any.
In the event of any share split, reverse share split, share consolidation, share dividend, recapitalization, combination of shares, reclassification of shares,
spin-off or other similar change in capitalization or event, or any dividend or distribution to holders of our ordinary shares other than an ordinary cash dividend,
we are required by the Amended 2019 Plan to make equitable adjustments (or make substitute awards, if applicable), in a manner determined by our board, to:
•
the number and class of securities available under the Amended 2019 Plan;
•
the share counting rules under the Amended 2019 Plan;
•
the number and class of shares and exercise price per share of each outstanding option;
•
the share and per-share provisions and measurement price of each outstanding share appreciation right;
•
the number of shares and the repurchase price per share subject to each outstanding restricted share award; and
•
the share and per-share related provisions and purchase price, if any, of any outstanding restricted share unit award and other share-based award.
Upon a merger or other reorganization event (as defined in the Amended 2019 Plan), our board of directors may, on such terms as our board determines
(except to the extent specifically provided otherwise in an applicable award agreement or other agreement between the participant and us), take any one or more
of the following actions pursuant to the Amended 2019 Plan, as to some or all outstanding awards, other than restricted share awards:
•
provide that all outstanding awards will be assumed or substantially equivalent awards will be substituted by the acquiring or successor
corporation (or an affiliate thereof);
•
upon written notice to a participant, provide that the participant’s unvested and/or unexercised awards will terminate or be forfeited immediately
prior to the consummation of such transaction unless exercised by the participant;
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•
provide that outstanding awards will become exercisable, realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in
part, prior to or upon the reorganization event;
•
in the event of a reorganization event pursuant to which holders of our ordinary shares will receive a cash payment for each share surrendered in
the reorganization event, make or provide for a cash payment to the participants with respect to each award held by a participant equal to (i) the
number of shares of our ordinary shares subject to the vested portion of the award (after giving effect to any acceleration of vesting that occurs
upon or immediately prior to such reorganization event) multiplied by (ii) the excess, if any, of the cash payment for each share surrendered in the
reorganization event over the exercise, measurement or purchase price of such award and any applicable tax withholdings, in exchange for the
termination of such award;
•
provide that, in connection with a liquidation or dissolution, awards convert into the right to receive liquidation proceeds (if applicable, net of
exercise, measurement or purchase price thereof and any applicable tax withholdings); or
•
any combination of the foregoing. Our board of directors is not obligated by the Amended 2019 Plan to treat all awards, all awards held by a
participant, or all awards of the same type, identically. In the case of certain outstanding restricted share units, no assumption or substitution is
permitted, and the restricted share units will instead be settled in accordance with the terms of the applicable restricted share unit agreement.
Upon the occurrence of a reorganization event other than a liquidation, winding up or dissolution, the repurchase and other rights under each outstanding
restricted share award will continue for the benefit of the successor company and will, unless our board of directors may otherwise determine, apply to the cash,
shares, securities or other property which our ordinary shares are converted into or exchanged for pursuant to the reorganization event, unless our board of
directors provided for the termination or deemed satisfaction of such repurchase or other rights under the restricted share award agreement or any other
agreement between the participant and us.
Upon the occurrence of a reorganization event involving a liquidation, winding up or dissolution, all restrictions and conditions on each outstanding
restricted share award will automatically be deemed terminated or satisfied, unless otherwise provided in the agreement evidencing the restricted share award or
in any other agreement between the participant and us. Our board of directors may at any time provide that any award under the Amended 2019 Plan shall
become immediately exercisable in whole or in part, free of some or all restrictions or conditions, or otherwise realizable in whole or in part, as the case may be.
Except with respect to certain actions requiring shareholder approval under the Nasdaq Listing Rules, the Amended 2019 Plan, and our Articles of
Association, our board of directors may amend, modify or terminate any outstanding award under the Amended 2019 Plan, including but not limited to,
substituting therefor another award of the same or a different type, changing the date of exercise or realization, and converting an incentive share option into a
non-statutory share option, subject to certain participant consent requirements. Unless our shareholders approve such action, the Amended 2019 Plan provides
that we may not (except as otherwise permitted in connection with a change in capitalization or reorganization event):
•
amend any outstanding share option or share appreciation right granted under the Amended 2019 Plan to provide an exercise or measurement price
per share that is lower than the then-current exercise or measurement price per share of such outstanding award;
•
cancel any outstanding option or share appreciation right (whether or not granted under the Amended 2019 Plan) and grant in substitution therefor
new awards under the Amended 2019 Plan (other than substitute awards permitted in connection with a merger or consolidation of an entity with
us or our acquisition of property or share of another entity) covering the same or a different number of our ordinary shares and having an exercise
or measurement price per share lower than the then-current exercise or measurement price per share of the cancelled award;
•
cancel in exchange for a cash payment any outstanding option or share appreciation right with an exercise or measurement price per share above
the then-current fair market value of our ordinary shares; or
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•
take any other action that constitutes a “repricing” within the meaning of the Nasdaq Listing Rules.
No award may be granted under the Amended 2019 Plan after February 14, 2029, but awards previously granted may extend beyond that date. Our board
of directors may amend, suspend or terminate the Amended 2019 Plan at any time, except that shareholder approval will be required to comply with applicable
law or the Nasdaq Listing Rules.
ADS Plan
On February 18, 2020, our board of directors adopted the ADS Plan, which became effective on March 25, 2020 upon approval from our shareholders.
Pursuant to the Evergreen Provision, effective January 1, 2021, an additional 9,526,380 ordinary shares or 793,865 ADSs were added to the ADS Plan.
Pursuant to the Evergreen Provision, effective January 1, 2022, an additional 14,244,996 ordinary shares or 1,187,083 ADSs were added to the ADS Plan.
Types of Awards
The ADS Plan provides for the grant of Restricted ADSs, Restricted ADS Units and other ADS-based awards as described below.
Restricted ADS Awards. Restricted ADS awards entitle recipients to acquire ADSs, subject to the right of the Company to repurchase all or part of such
ADSs at their issue price or other stated or formula price (or to require forfeiture of such ADSs if issued at no cost) from the recipient in the event that the
conditions specified in the applicable award are not satisfied prior to the end of the applicable restriction period established for such award. Dividends paid by
the Company with respect to restricted ADSs will only be paid to the recipient if and when the ADSs become free from the restrictions on transferability and
forfeitability provisions that apply to such ADSs.
Restricted ADS Unit Awards. Restricted ADS Unit awards entitle the recipient to receive ADSs, an amount of cash equal to the fair market value of the
number of ADSs set forth in the applicable award agreement, or the grant of an award under the Amended 2019 Plan to be delivered at the time such award vests
or is settled pursuant to the terms and conditions established by the board of directors. Restricted ADS Unit awards may provide the recipient with the right to
receive an amount equal to any dividends or other distributions declared and paid on an equal number of ADSs, which amount may be settled in cash and/or
ADSs and may be subject to the same restrictions on transfer and forfeitability as the Restricted ADS Units with respect to which they are paid, to the extent
provided in the applicable award agreement.
Other ADS-Based Awards. Under the ADS Plan, the board of directors may grant other awards of ADSs and other awards that are valued in whole or in
part by reference to, or are otherwise based on, ADSs or other property. These are referred to as Other ADS-Based awards. Other ADS-Based awards will be
available as a form of payment in the settlement of other awards granted under the ADS Plan or as payment in lieu of compensation to which a participant is
otherwise entitled. Other ADS-Based awards may be paid in ADSs, cash or awards under the Amended 2019 Plan, as the board of directors shall determine.
Number of Shares Reserved
The number of our ordinary shares that is reserved for issuance under the ADS Plan is the sum of (1) 2,083,333 ADSs plus (2) an annual increase to be
added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2021 and continuing for each fiscal year until, and including, the
fiscal year ending December 31, 2030, equal to the least of (i) that number of ADSs representing 4% of the outstanding ordinary shares on such date and (ii) an
amount determined by the board of directors.
If any award expires or is terminated, surrendered, canceled or forfeited in whole or in part (including as a result of ADSs subject to such award being
repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or otherwise results in any ADSs not being issued, the
unused ADSs covered by such award will again be available for grant under the ADS Plan. ADSs delivered (by actual delivery, attestation or net exercise) to the
Company by a participant to satisfy tax withholding obligations with respect to awards (including ADSs retained from the award creating the tax obligation) will
be added back to the number of ADSs available for the future grant of awards.
Transferability of Awards
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Except as the board of directors may otherwise determine or provide in an award, awards may not be sold, assigned, transferred, pledged or otherwise
encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order. During the life of the participant, awards are exercisable only by the participant.
Eligibility to Receive Awards
Our employees, officers, directors, consultants and advisors and of any business ventures in which we have a controlling interest are eligible to be granted
awards under the ADS Plan.
Limit on Awards to Non-Employee Directors
In any calendar year, the value of awards under the Amended 2019 Plan and the ADS Plan made to any non-employee director for service as a director
(calculated based on the grant date fair value of such awards for financial reporting purposes) shall not exceed $1,000,000. The board of directors may make
exceptions to this limit for individual non-employee directors in extraordinary circumstances, as the board of directors may determine in its discretion, provided
that the non-employee director receiving such additional compensation may not participate in the decision to award such compensation.
Administration
The ADS Plan is administered by the board of directors. The board of directors has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the ADS Plan and to interpret the provisions of the ADS Plan. Pursuant to the terms of the ADS Plan, the board of directors
may delegate authority under the ADS Plan to one or more committees or subcommittees of the board of directors. The board of directors has authorized our
Remuneration Committee to administer certain aspects of the ADS Plan, including the granting of awards to executive officers, and has authorized the Stock
Option Committee of the board of directors, consisting of Ms. McCarthy to grant awards, subject to limitations set by the Board or the Remuneration Committee,
to eligible participants other than members of the board of directors and executive officers. For purposes of this summary, where appropriate in the relevant
context, the term “board of directors” may include the Remuneration Committee or any other committee to whom the board of directors delegates authority, as
indicated in the ADS Plan.
Subject to any applicable limitations contained in the ADS Plan, the board of directors selects the recipients of awards and determines (i) the number of
ADS subject to any Restricted ADS award, Restricted ADS Unit award or other ADS-based awards and (ii) the terms and conditions of such awards, including
conditions for vesting, repurchase, issue price and repurchase price, if any.
The board of directors will determine the effect on an award of the disability, death, termination or other cessation of employment, authorized leave of
absence or other change in the employment or other status of a participant and the extent to which, and the period during which, the participant (or the
participant’s representative) may exercise rights under the award.
The board of directors may at any time provide that any award will become immediately exercisable in full or in part, free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
Changes in Capitalization and Reorganization
We are required to make equitable adjustments (or make substitute awards, if applicable) in connection with the ADS Plan and any outstanding awards, as
determined by the board of directors, to reflect share splits, share dividends, recapitalizations, spin-offs and other similar changes in capitalization or any
dividends or distributions to holders of ADSs other than an ordinary cash dividend. The ADS Plan also contains provisions addressing the consequences of any
reorganization event, which is defined as (a) any merger or consolidation of the Company with or into another entity as a result of which all of the ordinary
shares of the Company are converted into or exchanged for the right to receive cash, securities or other property, or are cancelled, or (b) any transfer, disposition,
exchange or conversion of all of the ordinary shares of the Company for cash, securities or other property pursuant to a share exchange transaction or other
transaction, or (c) any liquidation or dissolution of the Company. In connection with a reorganization event, the board of directors may take any one or more of
the following actions as to all or any (or any portion of) outstanding awards other than restricted ADS awards on such terms as the board of
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directors (except to the extent specifically provided otherwise in an applicable award agreement or another agreement between the Company and the participant):
•
provide that awards will be assumed, or substantially equivalent awards will be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof);
•
upon written notice, provide that all unvested awards will be forfeited immediately prior to the consummation of such reorganization event and/or
unexercised awards will terminate immediately prior to the consummation of such reorganization event unless exercised by the participant (to the
extent then exercisable) within a specified period following the date of such notice;
•
provide that outstanding awards will become exercisable, realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in
part prior to or upon such reorganization event;
•
in the event of a reorganization event pursuant to which holders of our ADSs will receive a cash payment for each ADS surrendered in the
reorganization event, make or provide for a cash payment to the participants with respect to each award held by a participant equal to (i) the
number of shares of our ADSs subject to the vested portion of the award (after giving effect to any acceleration of vesting that occurs upon or
immediately prior to such reorganization event) multiplied by (ii) the excess, if any, of the cash payment for each ADS surrendered in the
reorganization event over the exercise, measurement or purchase price of such award and any applicable tax withholdings, in exchange for the
termination of such award;
•
provide that, in connection with a liquidation or dissolution of the Company, awards will convert into the right to receive liquidation proceeds (if
applicable, net of the exercise, measurement or purchase price thereof and any applicable tax withholdings); and
•
any combination of the foregoing.
The board of directors is not obligated by the ADS Plan to treat all awards, all awards held by a participant, or all awards of the same type, identically. In
the case of certain outstanding Restricted ADS Units, no assumption or substitution is permitted, and the Restricted ADS Units will instead be settled in
accordance with the terms of the applicable Restricted ADS Unit award agreement.
In connection with a reorganization event other than a liquidation, winding up or dissolution of the Company, the repurchase and other rights of the
Company with respect to outstanding Restricted ADSs will inure to the benefit of the Company’s successor and will, unless the board of directors determines
otherwise, apply to the cash, shares, securities or other property which the ADSs were converted into or exchanged for pursuant to the reorganization event in the
same manner and to the same extent as they applied to the Restricted ADSs. The board of directors has the discretion to provide for termination or deemed
satisfaction of the repurchase or other rights in the award agreement or any other agreement between the participant and the Company, either initially or by
amendment. In connection with a reorganization event involving the liquidation, winding up or dissolution of the Company, except to the extent specifically
provided to the contrary in the award agreement or any other agreement between a participant and the Company, all restrictions and conditions on all Restricted
ADSs then outstanding will automatically be deemed terminated or satisfied.
Authorization of Sub-Plans
The board of directors may from time to time establish one or more sub-plans under the ADS Plan to satisfy applicable securities, tax or other laws of
various jurisdictions. The board of directors will establish any such sub-plans by adopting supplements to the ADS Plan containing any limitations on the board
of director’s discretion under the ADS Plan and any additional terms and conditions not inconsistent with the ADS Plan as the board of directors deems necessary
or desirable. Any supplement adopted by the board of directors will be deemed to be part of the ADS Plan but will only apply to participants within the affected
jurisdiction.
Amendment or Termination
No award may be made under the ADS Plan after the expiration of 10 years from the date on which the ADS Plan was adopted by the board, but awards
previously granted may extend beyond that date. The board of directors may at any time amend, suspend or terminate the ADS Plan; provided that no
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amendment requiring shareholder approval under any applicable legal, regulatory or listing requirement will become effective until such shareholder approval is
obtained. No award will be made that is conditioned upon shareholder approval of any amendment to the ADS Plan unless the award provides that (i) it will
terminate or be forfeited if shareholder approval of such amendment is not obtained within no more than 12 months from the date of grant and (ii) it may not be
exercised or settled (or otherwise result in the issuance of ADSs) prior to such shareholder approval.
Except with respect to actions requiring shareholder approval, the board of directors may amend, modify or terminate any outstanding award. A
participant’s consent to such amendment will be required unless the board of directors determines that the amendment, taking into account any related action,
does not materially and adversely affect the participant’s rights under the ADS Plan or that the change is permitted under the ADS Plan in connection with a
change in capitalization or reorganization event.
2019 Employee Share Purchase Plan
In January 2019, our board of directors adopted, and our shareholders approved, the ESPP, which became effective on February 14, 2019. The ESPP is
administered by our board of directors or by a committee appointed by our board of directors. The ESPP initially provides participating employees with the
opportunity to purchase up to an aggregate of 3,972,565 ordinary shares. The number of ordinary shares reserved for issuance under the ESPP will automatically
increase on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2020 and continuing until, and including, the fiscal year ending
December 31, 2030, equal to the lowest of (i) 7,945,130 ordinary shares, (ii) 1.0% of the number of ordinary shares outstanding on the first day of the fiscal year
and (iii) an amount determined by our board of directors. On January 1, 2020, 4,367,208 ordinary shares were added to the ESPP pursuant to this provision. On
January 1, 2021, an additional 6,351,768 ordinary shares were added to the ESPP. Pursuant to the Evergreen Provision, effective January 1, 2022, an additional
7,122,500 ordinary shares were added to the 2019 ESPP.
All of our employees or employees of any designated subsidiary, as defined in the ESPP, are eligible to participate in the ESPP, provided that:
•
such person is customarily employed by us or a designated subsidiary for more than 20 hours a week and for more than five months in a calendar
year;
•
such person has been employed by us or by a designated subsidiary for at least three months prior to enrolling in the ESPP; and
•
such person was our employee or an employee of a designated subsidiary on the first day of the applicable offering period under the ESPP.
No employee may be granted an option which permits them to purchase ordinary shares under the ESPP and any of our other employee share purchase
plans to accrue at a rate which exceeds $25,000 of the fair market value of our ordinary shares in any calendar year in which the option is outstanding. In
addition, no employee may purchase ordinary shares under the ESPP that would result in the employee owning 5% or more of the total combined voting power
or value of our shares.
We expect to make one or more offerings to our eligible employees to purchase shares under the ESPP beginning at such time as our board of directors or
committee may determine. Each offering will consist of a six-month offering period during which payroll deductions will be made and held for the purchase of
our ordinary shares at the end of the offering period. Our board of directors may, at its discretion, choose a different period of not more than 12 months for an
offering.
On the commencement date of each offering period, each eligible employee may authorize up to a maximum of 15% of his or her compensation to be
deducted by us during the offering period. Each employee who continues to be a participant in the ESPP on the last business day of the offering period will be
deemed to have exercised an option to purchase from us the number of whole ordinary shares that his or her accumulated payroll deductions on such date will
pay for, not in excess of the maximum numbers set forth above. Under the terms of the ESPP, the purchase price shall be determined by our board of directors for
each offering period and will be at least 85% of the applicable closing price of our ordinary shares. If our board of directors does not make a determination of the
purchase price, the purchase price will be 85% of the lesser of the closing price of our ordinary shares on the first business day of the offering period or on the
last business day of the offering period.
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An employee may for any reason withdraw from participation in an offering prior to close of business on the fifteenth business day prior to the end of an
offering period and permanently draw out the balance accumulated in the employee’s account. If an employee elects to discontinue his or her payroll deductions
during an offering period but does not elect to withdraw his or her funds, funds previously deducted will be applied to the purchase of ordinary shares at the end
of the offering period. If a participating employee’s employment ends before the last business day of an offering period, no additional payroll deductions will be
made and the balance in the employee’s account will be paid to the employee.
We will be required to make equitable adjustments to the number and class of securities available under the ESPP, the share limitations under the ESPP,
and the purchase price for an offering period under the ESPP to reflect share splits, reverse share splits, share consolidation, share dividends, recapitalizations,
combinations of shares, reclassifications of shares, spin-offs and other similar changes in capitalization or events or any dividends or distributions to holders of
our ordinary shares other than ordinary cash dividends.
In connection with a merger or other reorganization event, as defined in the ESPP, our board of directors or a committee of our board of directors may take
any one or more of the following actions as to outstanding options to purchase ordinary shares under the ESPP on such terms as our board or committee
determines:
•
provide that options shall be assumed, or substantially equivalent options shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof);
•
upon written notice to employees, provide that all outstanding options will be terminated immediately prior to the consummation of such
reorganization event and that all such outstanding options will become exercisable to the extent of accumulated payroll deductions as of a date
specified by our board of directors or committee in such notice, which date shall not be less than ten days preceding the effective date of the
reorganization event;
•
upon written notice to employees, provide that all outstanding options will be cancelled as of a date prior to the effective date of the reorganization
event and that all accumulated payroll deductions will be returned to participating employees on such date;
•
in the event of a reorganization event under the terms of which holders of our ordinary shares will receive upon consummation thereof a cash
payment for each share surrendered in the reorganization event, change the last day of the offering period to be the date of the consummation of
the reorganization event and make or provide for a cash payment to each employee equal to (i) the cash payment for each share surrendered in the
reorganization event times the number of ordinary shares that the employee’s accumulated payroll deductions as of immediately prior to the
reorganization event could purchase at the applicable purchase price, where the acquisition price is treated as the fair market value of our ordinary
shares on the last day of the applicable offering period for purposes of determining the purchase price and where the number of shares that could
be purchased is subject to the applicable limitations under the ESPP minus (ii) the result of multiplying such number of shares by the purchase
price; and/or
•
provide that, in connection with our liquidation or dissolution, options shall convert into the right to receive liquidation proceeds (net of the
purchase price thereof).
Our board of directors may at any time, and from time to time, amend or suspend the ESPP or any portion thereof. We will obtain shareholder approval for
any amendment if such approval is required by Section 423 of the Internal Revenue Code of 1986, as amended, or the Code. Further, our board of directors may
not make any amendment that would cause the ESPP to fail to comply with Section 423 of the Code. The ESPP may be terminated at any time by our board of
directors. Upon termination, we will refund all amounts in the accounts of participating employees.
2006 Share Incentive Plan
Our board of directors adopted and our shareholders approved previously approved the 2006 Plan. The 2006 Plan provides for the grant of options,
restricted shares and other awards that are valued in whole or in part by reference to, or are otherwise based on, ordinary shares or other property. Our
employees,
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officers, directors, consultants and advisers were eligible to receive awards under our 2006 Plan. Our board of directors administers the 2006 Plan.
The 2006 Plan expired in 2019 and no additional awards can be made under it. As of March 31, 2022, a total of 11,559,211 options remain outstanding
under the 2006 Plan.
In the event of any share split, reverse share split, share dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other
similar change in capitalization or event, or any distribution to holders of ordinary shares other than an ordinary cash dividend, we shall appropriately adjust, to
the extent determined by the board of directors:
•
the number and class of securities available under the 2006 Plan;
•
the number and class of securities and exercise price per share of each outstanding option;
•
the repurchase price per share subject to each outstanding restricted share award; and
•
the terms of each other outstanding award under the 2006 Plan.
In the event of any merger or consolidation of our company with or into another entity as a result of which all of our ordinary shares are converted into or
exchanged for the right to receive cash, securities or other property or are cancelled; an exchange of all of our ordinary shares for cash, securities or other
property pursuant to a share exchange transaction; or a liquidation or dissolution of our company, our board of directors shall, on such terms as our board of
directors determines, take any one or more of the following actions pursuant to the 2006 Plan, as to some or all outstanding awards, except as to restricted share
awards:
•
provide that awards shall be assumed, or substantially equivalent awards shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof);
•
upon written notice to a plan participant, provide that the participant’s unexercised options or other awards shall be exercisable in full and will
terminate immediately prior to the consummation of such event unless exercised by the participant within a specified period following the date of
such notice;
•
provide that outstanding awards shall become realizable, or deliverable, or restrictions applicable to an award shall lapse, in whole or in part prior
to or upon such event;
•
if under the terms of such event, holders of ordinary shares will receive upon consummation thereof a cash payment for each share surrendered in
the event, make or provide for a cash payment to a plan participant in exchange for the termination of such awards;
•
provide that, in connection with a liquidation of dissolution of the company, awards shall convert into the right to receive liquidation proceeds; or
•
any combination of the foregoing.
401(k) Retirement Plan
We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Code. In general, all of
our employees are eligible to participate. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current
compensation by up to the statutorily prescribed limit and have the amount of the reduction contributed to the 401(k) plan. We contribute up to 3% of an
employee’s salary, subject to statutory limits. During the year ended December 31, 2021, we contributed $0.2 million.
Rule 10b5-1 Sales Plans
Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they contract with a broker to buy or sell ordinary
shares on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the
plan, without further direction from the director or officer. The director or officer may amend or terminate the plan in some circumstances. Our directors and
executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.
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Insurance and Indemnification
Every director and officer is indemnified and secured harmless out of our assets and funds against all actions, proceedings, costs, charges, expenses,
losses, damages or liabilities incurred or sustained by such director or officer (other than by reason of such director’s or officer’s own dishonesty, willful default
or fraud as determined by a court of competent jurisdiction) in or about the conduct of our affairs or in the execution of such director or officer’s duties, powers,
authorities or discretions, including any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise)
any civil proceedings concerning us or our affairs in any court whether Cayman Islands or elsewhere.
Insofar as indemnification of liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our board,
executive officers, or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the U.S. Securities and Exchange
Commission, or SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
C.
Board practices.
Board Composition
Our board of directors consists of Reenie McCarthy, Gerald L. Chan, Francis W. Chen, Kevin F. McLaughlin, Dr. Louis Lange, Edward P. Owens and Dr.
Eve Slater. Our directors will hold office until their successors have been elected and qualified or until the earlier of their resignation or removal. For more
information on the length of time each director has served, see “Item 6.A.—Directors and Senior Management.”
Our Articles of Association provide that the minimum and maximum number of directors to be appointed shall be set by our board of directors. Our
Articles of Association also provide that our directors may be removed by the affirmative vote of the holders of a majority of our ordinary shares present in
person or by proxy and entitled to vote, and that our board of directors has the power to appoint a director, either as a result of a casual vacancy or as an
additional director.
In accordance with the terms of our Articles of Association, our board of directors is divided into three classes, class I, class II and class III, with members
of each class serving staggered three-year terms. The members of the classes are divided as follows:
•
the class I directors are Gerald L. Chan, Edward P. Owens and Dr. Eve Slater, and their term will expire at the annual meeting of shareholders to
be held in 2023;
•
the class II directors are Dr. Louis Lange and Francis W. Chen, and their term will expire at the annual meeting of shareholders to be held in 2024;
and
•
the class III directors are Kevin F. McLaughlin and Reenie McCarthy, and their term will expire at the annual meeting of shareholders to be held
in 2022.
Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting
of shareholders in the year in which their term expires.
As a foreign private issuer, under the listing requirements and rules of Nasdaq, we are not required to have independent directors on our board of directors,
except that our audit committee is required to consist fully of independent directors, subject to certain phase-in schedules. However, our board of directors has
determined that, of our seven directors, five do not have a relationship that would interfere with the exercise of independent judgment in carrying out the
responsibilities of director and that each of these directors is “independent” as that term is defined under Nasdaq rules.
Board Committees
Our board of directors has established audit, remuneration and nominating committees.
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Audit Committee
During the year ended December 31, 2021, the members of our audit committee were Francis W. Chen, Dr. Louis Lange and Kevin F. McLaughlin, and
Kevin F. McLaughlin serves as the chair of our audit committee. Our board of directors has determined that he is an “audit committee financial expert” as
defined by applicable SEC rules. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the
audits of our financial statements. Our audit committee’s responsibilities include:
▪
appointing, approving the compensation of and assessing the independence of our registered public accounting firm;
▪
overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such
firm;
▪
reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements
and related disclosures;
▪
monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
▪
overseeing our internal audit function, if any;
▪
discussing our risk management policies;
▪
establishing procedures for the receipt and retention of accounting-related complaints and concerns;
▪
meeting independently with our internal auditing staff, our independent registered public accounting firm and management;
▪
reviewing and approving or ratifying any related person transactions; and
▪
preparing the audit committee report required by SEC rules.
All audit services to be provided to us and all non-audit services to be provided to us by our registered public accounting firm must be approved in
advance by our audit committee.
We believe that the composition of our committee meets the requirements for independence under current Nasdaq and SEC rules and regulations.
Nominating Committee
During the year ended December 31, 2021, the members of our nominating committee were Francis W. Chen and Kevin F. McLaughlin, and Francis W.
Chen serves as the chair of our nominating committee. Our nominating committee’s responsibilities include:
▪
identifying individuals qualified to become members of our board of directors;
▪
recommending to our board of directors the persons to be nominated for election as directors and to each of our board of directors’ committees;
▪
developing and recommending to our board of directors corporate governance principles; and
▪
overseeing periodic evaluations of our board of directors.
Remuneration Committee
During the year ended December 31, 2021, the members of our remuneration committee were Dr. Louis Lange, Edward P. Owens and Dr. Eve Slater, and
Edward P. Owens serves as the chair of our remuneration committee. Our remuneration committee assists our board of directors in the discharge of its
responsibilities relating to the compensation of our executive officers. Our remuneration committee’s responsibilities include:
▪
reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our Chief Executive Officer;
▪
reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our other executive officers;
▪
overseeing the evaluation of our senior executives;
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▪
reviewing and making recommendations to our board of directors with respect to our incentive compensation and equity-based compensation
plans;
▪
overseeing and administering our equity-based plans;
▪
reviewing and making recommendations to our board of directors with respect to director compensation;
▪
reviewing and discussing with management our “Compensation Discussion and Analysis” disclosure to the extent such disclosure is required by
SEC rules; and
▪
preparing the remuneration committee report required by SEC rules.
Agreements with our Executive Officers
We have entered into offer letters with each of our executive officers that set forth the terms of the executive officer’s compensation, including his or her
initial base salary and an annual cash bonus target percentage. The offer letters provide that the executive officers are eligible to participate in company-
sponsored benefit programs that are available generally to all of our employees.
In addition, our offer letters with Dr. Blakey and Dr. Carr provide for the payment of six months’ base salary in the event that we terminate their
employment without cause, subject to the execution of a release of claims. Under the letters, cause is defined as one or more of (i) willful malfeasant, dishonest
or grossly negligent conduct that relates to us and causes us harm or damage; (ii) a continued breach of conduct required by the invention and non-disclosure
agreement, including a material breach of any non-competition, non-solicitation or confidentiality covenant or under any applicable legal principle; (iii) a
material breach of duty of loyalty to us; (iv) a commission of an act of fraud, theft, misappropriation or embezzlement; or (iv) a conviction of, or pleading nolo
contendere to, a felony or any other crime involving moral turpitude. Severance payments to either of Dr. Blakey or Dr. Carr could be delayed for six months in
certain circumstances for compliance with Section 409A of the Internal Revenue Code of 1986, as amended, or the Code.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics, that applies to our directors, officers, and employees, including our principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is posted on the
Corporate Governance section of our website, which is located at www.investor.stealthbt.com. If we make any substantive amendments to, or grant any waivers
from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a report
on Form 6-K.
D.
Employees.
As of December 31, 2021, we had 38 full-time employees, 24 of whom were primarily engaged in research and development activities and 11 of whom
had a Ph.D. or Pharm.D. degree. All of our full-time employees are based in the United States.
Our employees are not represented by any collective bargaining agreements.
E.
Share ownership.
For information regarding the share ownership of our directors and executive officers, see “Item 6.B. — Compensation” and “Item 7.A. —Major
Shareholders.”
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Item 7. Major Shareholders and Related Party Transactions
A.
Major shareholders.
The following table sets forth information with respect to the beneficial ownership of the ordinary shares, as of February 28, 2022, except as otherwise
noted, by:
•
each of our directors;
•
each of our executive officers;
•
all of our directors and executive officers as a group; and
•
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of the ordinary shares.
The percentage ownership calculations are based on a total of 715,801,894 ordinary shares outstanding as of February 28, 2022.
The number of shares beneficially owned by each shareholder is determined under rules issued by the SEC and includes voting or investment power with
respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or
investment power. In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, ordinary shares
subject to options or other rights held by such person that are currently exercisable or will become exercisable within 60 days of February 28, 2022 are
considered outstanding, although such shares subject to options or other rights are not considered outstanding for purposes of computing the percentage
ownership of any other person. Unless otherwise indicated, the address of all listed shareholders is c/o Stealth BioTherapeutics Inc., 140 Kendrick Street,
Needham, Massachusetts 02494. Each of the shareholders listed has sole voting and investment power with respect to the shares beneficially owned by the
shareholder unless noted otherwise, subject to community property laws where applicable.
NAME OF BENEFICIAL OWNER
SHARES
BENEFICIALLY
OWNED
PERCENTAGE
OF SHARES
BENEFICIALLY
OWNED
5% Shareholders
Morningside Venture (I) Investments Limited
639,983,188
72.9 %
Executive Officers and Directors
Reenie McCarthy
14,936,870
2.0 %
Robert Weiskopf
1,461,736
*%
Brian D. Blakey, Pharm.D.
3,375,240
*%
James R. Carr, Pharm.D.
2,889,547
*%
Martin, Redmon
2,656,595
*%
Gerald L. Chan, Sc.D.
3,218,659
*%
Francis W. Chen, Ph.D.
768,659
*%
Louis Lange, M.D., Ph.D.
756,888
*%
Kevin F. McLaughlin
768,659
*%
Edward P. Owens
1,740,659
*%
Eve Slater
741,025
*%
All executive officers and directors as a group (11 persons)
33,314,537
4.6 %
* Less than 1%.
(1)
Based on information set forth in Schedule 13 D/A filed with the SEC on December 1, 2021 Includes (1) 581,383,192 ordinary shares beneficially
owned by Morningside Venture (I) Investments Limited or MVIL et al, consisting of (i) 418,960,015 ordinary shares, (ii) 161,823,177 ordinary shares
upon exercise of warrants and (iii) 600,000 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022;
(2) 3,255,523 American
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(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
depositary shares, or ADSs, representing 39,066,276 ordinary shares, beneficially owned by Season Pioneer Investments Limited, or SPIL; and (3)
1,627,810 ADSs, representing 19,533,720 ordinary shares, beneficially owned by Equal Talent Investments Limited, or ETIL. Francis Ann Elizabeth
Richards, Jill Marie Franklin, Peter Stuart Allenby Edwards and Cheung Ka Ho, the directors of MVIL, share voting and dispositive control over the
shares held by MVIL. As a result, Ms. Richards, Ms. Franklin, Mr. Edwards and Mr. Ho may be deemed to possess voting and investment control over
and may be deemed to have indirect beneficial ownership with respect to, all shares held by MVIL. MVIL is ultimately beneficially owned by a family
trust established by Madam Chan Tan Ching Fen. Each of Ms. Richard, Ms. Franklin, Mr. Edwards and Mr. Ho disclaims beneficial ownership of such
shares, except to the extent of their respective pecuniary interests therein. Suk Ying Pauli Ng is the sole director of SPIL and ETIL and has sole voting
and dispositive power with respect to securities held by SPIL and ETIL. SPIL is ultimately wholly beneficially owned by a trust over which Mr.
Edwards has sole authority to remove the trustee. ETIL is ultimately wholly beneficially owned by a trust over which Mr. Edwards has sole authority to
remove the trustee. Ms. Ng disclaims beneficial ownership of the securities owned directly by SPIL and ETIL, except to the extent of her pecuniary
interest therein. MVIL, SPIL and ETIL may act together with respect to the voting and disposition of the securities held by such entities. The principal
business address for MVIL, SPIL and ETIL is 2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, MC 98000, Monaco.
(2)
Consists of 13,215,878 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(3)
Consists of 971,404 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(4)
Consists of 2,704,404 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(5)
Consists of 2,185,315 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(6)
Consists of 1,925,075 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(7)
Consists of 3,218,659 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(8)
Consists of 768,659 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(9)
Consists of 756,888 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(10)
Consists of 768,659 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(11)
Consists of 768,659 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(12)
Consists of 741,025 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
(13)
Consists of 28,024,625 ordinary shares issuable upon the exercise of options exercisable within 60 days after February 28, 2022.
See “Item 3.D.—Risk Factors—Risks Related to Ownership of ADSs” for a discussion of MVIL’s controlling interest in the company.
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Holdings by U.S. Shareholders
Citibank N.A., or Citibank, is the holder of record for the company’s American Depositary Receipt program, pursuant to which each ADS represents 12
ordinary shares. As of December 31, 2021, Citibank held 251,881,716 ordinary shares representing 35.4% of the outstanding share capital held at that date. As of
December 31, 2021, we had 14 holders of record with addresses in the United States, and such holders held 2.3% of the outstanding share capital held at that
date. As a result, the number of holders of record or registered holders in the United States is not representative of the number of beneficial holders or of the
residence of beneficial holders.
B.
Related party transactions.
Since January 1, 2021, we have engaged in the following transactions with our directors, executive officers or holders of more than 5% of our outstanding
share capital and their affiliates, which we refer to as our related parties.
Development Funding Agreement
In October 2020, we entered into a development funding agreement, or the Development Funding Agreement, with MVIL under which MVIL agreed to
provide funding of $35.0 million to us to support our efforts to secure regulatory approval of elamipretide. In May 2021, we amended the Development Funding
Agreement, under which MVIL agreed to provide additional funding of $30.0 million. In 2021, we received a total of $45.0 million pursuant to the terms of the
Development Funding Agreement.
Upon receipt of each funding tranche we are required to issue a warrant exercisable for ordinary shares at an exercise price that is 115% of the implied
price of the Company’s ordinary shares on the date of issuance, with such number of ordinary shares being equal to the quotient of 30% of the amount of each
funding received divided by the exercise price. We are also obligated to make success payments to MVIL upon receipt of certain regulatory approvals of
elamipretide in certain indications.
In 2021, upon receipt of funding from MVIL, we have issued the following warrants:
Description
Timing
Amount
(in millions)
Warrants issued for
ordinary shares
Exercise Price
Full enrollment of our ReCLAIM-2 trial
February 2021
$
10.0
18,750,000 $
0.16
Amendment of Development Funding Agreement
May 2021
$
8.0
18,461,538 $
0.13
Filing our BTHS NDA
September 2021
$
5.0
10,714,286 $
0.14
Oct 1, 2021 funding (early payment-partial)
September 2021
$
6.0
12,857,143 $
0.14
Oct 1, 2021 funding (remaining payment)
October 2021
$
5.0
13,636,364 $
0.11
Dec 1, 2021 funding
December 2021
$
11.0
41,250,000 $
0.08
Total
$
45.0
115,669,331
The warrants issued were immediately exercisable and have a term of three years. Upon the receipt of the respective milestone payment, the warrant was
deemed to meet the criteria for equity classification as it was considered “fixed-for-fixed” and was recognized as a component of additional paid in capital and
was not remeasured.
Employment Agreements
See “Item 6.C.—Board practices—Agreements with Our Executive Officers” for information about agreements between us and our executive officers.
Indemnification of Officers and Directors
As more fully described in our Articles of Association, our Articles of Association provide that our board of directors and officers shall be indemnified
from and against all liability which they incur in execution of their duty in their respective offices out of our assets and funds, except liability incurred by reason
of such director’s or officer’s dishonesty, willful deceit or fraud. See “Item 6.B.—Compensation” of this annual report for a further discussion of these
arrangements. We have entered into indemnification agreements with each of our directors.
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C.
Interests of experts and counsel.
Not applicable.
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Item 8. Financial Information
A.
Consolidated statements and other financial information.
Our consolidated financial statements are appended at the end of this annual report, starting at page F-1, and incorporated herein by reference.
Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We
are not currently involved in any material legal proceedings. We may become involved in material legal proceedings in the future.
Dividends
We have never declared or paid cash dividends to our shareholders and we do not intend to pay cash dividends in the foreseeable future.
B.
Significant changes.
Not applicable.
Item 9. The Offer and Listing
A. Offer and listing details.
Not applicable.
B. Plan of distribution.
Not applicable.
C. Markets.
Not applicable.
D. Selling shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the issue.
Not applicable.
Item 10. Additional Information
A. Share capital.
Not applicable.
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B. Memorandum and articles of association.
On July 14, 2021, at our Annual General Meeting, our shareholders approved the increase to our authorized share capital from US$360,000 divided into
1,200,000,000 Ordinary Shares of a nominal or par value of US$0.0003 each to US$480,000 divided into 1,600,000,000 Ordinary Shares of a nominal or par
value of US$0.0003 each. Subject to the update set forth in the previous sentence, the information set forth in our preliminary prospectus dated August 5, 2021,
filed with the U.S. Securities and Exchange Commission, or SEC, on Form F-1, under the headings “Description of Share Capital and Articles of Association—
General,” “Description of Share Capital and Articles of Association—Issued Share Capital,” “Description of Share Capital and Articles of Association—Articles
of Association,” “Description of Share Capital and Articles of Association—Differences in Corporate Law,” and “Enforcement of Civil Liabilities” is
incorporated herein by reference.
C. Material contracts.
Except as otherwise disclosed in this annual report (including the exhibits thereto), we are not currently, and have not been in the last two years, party to
any material contract, other than contracts entered into in the ordinary course of our business.
D. Exchange controls.
There are no governmental laws, decrees, regulations or other legislation of the Cayman Islands which may affect the import or export of capital,
including the availability of cash and cash equivalents for use by us, or which may affect the remittance of dividends, interest or other payments to nonresident
holders of our ordinary shares or American depositary shares, or ADSs.
E. Taxation.
Material U.S. Federal Income Tax Considerations for U.S. Holders
The following discussion describes the material U.S. federal income tax consequences relating to the ownership and disposition of our ordinary shares or
ADSs by U.S. Holders (as defined below). This discussion applies to U.S. Holders of our ADSs who hold such ADSs as a capital asset (generally, property held
for investment). This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial
decisions and final, temporary, and proposed U.S. Treasury Regulations, all as in effect on the date hereof and all of which are subject to change, possibly with
retroactive effect. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to specific U.S. Holders in light of their
particular circumstances, including state and local tax consequences, estate tax consequences, alternative minimum tax consequences and tax consequences
applicable to U.S. Holders subject to special rules, such as:
•
banks, insurance companies and certain other financial institutions;
•
U.S. expatriates and certain former citizens or long-term residents of the United States;
•
dealers or traders in securities who use a mark-to-market method of tax accounting;
•
persons holding ordinary shares or ADSs as part of a hedging transaction, “straddle,” wash sale, conversion transaction or integrated transaction or
persons entering into a constructive sale with respect to ordinary shares or ADSs;
•
persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;
•
brokers, dealers or traders in securities, commodities or currencies;
•
tax-exempt entities or government organizations;
•
S corporations, partnerships or other entities or arrangements classified as partnerships for U.S. federal income tax purposes;
•
regulated investment companies or real estate investment trusts;
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•
persons who acquired our ordinary shares or ADSs pursuant to the exercise of any employee share option or otherwise as compensation;
•
persons that own or are deemed to own ten percent or more of our shares; and
•
persons holding our ordinary shares or ADSs in connection with a trade or business, permanent establishment or fixed base outside the United
States.
If an entity treated as a partnership for U.S. federal income tax purposes holds our ordinary shares or ADSs, the U.S. federal income tax consequences relating to
an investment in such ordinary shares or ADSs will depend upon the status of the partner and the activities of the partnership.
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ordinary shares or ADSs and is:
•
an individual who is a citizen or resident of the United States;
•
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the
District of Columbia;
•
an estate the income of which is subject to U.S. federal income tax regardless of its source; or
•
a trust if (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U. S. persons have authority to
control all substantial decisions of the trust or (ii) the trust has made a valid election to be treated as a U.S. person under applicable U.S. Treasury
Regulations.
Holders of our ADSs should consult their own tax advisors as to the particular tax consequences applicable to them relating to the purchase, ownership
and disposition of our ordinary shares or our ADSs, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and
any related agreement will be complied with in accordance with their terms. Generally, a holder of an ADS should be treated for U.S. federal income tax
purposes as holding the ordinary shares represented by the ADS. Accordingly, no gain or loss will be recognized upon an exchange of ADSs for the underlying
ordinary shares represented by such ADSs. The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an
ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying security.
Accordingly, the creditability of foreign taxes, if any, as described below, could be affected by actions taken by intermediaries in the chain of ownership between
the holders of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of the underlying ordinary
shares.
Passive Foreign Investment Company Rules
We are a foreign corporation, within the meaning of the Code. If we are classified as a passive foreign investment company, or PFIC, in any taxable year,
certain adverse U.S. federal income tax consequences could apply to a U.S. Holder as a result of that classification.
A non-U.S. corporation will be classified as a PFIC for any taxable year in which, after applying certain look-through rules, either:
•
at least 75% of its gross income is passive income, or the PFIC income test; or
•
on average at least 50% of the value of its assets, determined on a quarterly basis, is attributable to assets that produce passive income (or no
income) or are held for the production of passive income, or the PFIC asset test.
Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents and gains from the sale or exchange of
property that gives rise to passive income (or no income). Assets that produce or are held for the production of passive income generally include cash, even if
held as working capital or raised in a public offering, marketable securities and other assets that may produce passive income. Generally, in determining whether
a non-U.S. corporation is a PFIC, a proportionate share
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of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
Based on our estimated gross income and the average value of our gross assets, taking into account the price of our ADSs and the nature of our business,
we do not believe that we were a PFIC for our tax year ended December 31, 2021, and do not currently expect to be a PFIC during our tax year ending December
31, 2022. However, there can be no assurance that we will not be classified as a PFIC for the current taxable year or any prior or future taxable year. The
determination of whether we are a PFIC is a fact-intensive determination made on an annual basis and the applicable law is subject to varying interpretation.
A separate determination must be made after the close of each taxable year as to whether we are a PFIC for that year. As a result, our PFIC status may
change from year to year. The total value of our assets for purposes of the PFIC asset test frequently (though not invariably) may be inferred using the market
price of our ordinary shares or ADSs, which may fluctuate considerably and thereby affect the determination of our PFIC status for any given taxable year.
If we are a PFIC in any taxable year during which a U.S. Holder owns our ordinary shares or ADSs, the U.S. Holder could be liable for additional taxes
and interest charges under the “PFIC excess distribution regime” upon (i) a distribution paid during a taxable year, if that distribution is greater than 125% of the
average annual distributions paid in the three preceding taxable years, or, if shorter, the U.S. Holder’s holding period for our ordinary shares or ADSs, and (ii)
any gain recognized on a sale, exchange or other disposition, including a pledge, of our ordinary shares or ADSs, whether or not we continue to be a PFIC.
Under the PFIC excess distribution regime, the tax on such distribution or gain would be determined by allocating the distribution or gain ratably over the U.S.
Holder’s holding period for our ordinary shares or ADSs. The amount allocated to the current taxable year (i.e., the year in which the distribution occurs or the
gain is recognized) and any year prior to the first taxable year in which we are a PFIC will be taxed as ordinary income earned in the current taxable year. The
amount allocated to other taxable years will be taxed at the highest marginal rates in effect for individuals or corporations, as applicable, to ordinary income for
each such taxable year, and an interest charge, in the amounts generally applicable to underpayments of tax over the relevant period, will be added to the tax.
If we are classified as a PFIC for any year during which a U.S. Holder holds our ordinary shares or ADSs, we must generally continue to be treated as a
PFIC by that holder for all succeeding years during which the U.S. Holder holds such ordinary shares or ADSs, regardless of whether we continue to meet the
tests described above, unless we cease to be a PFIC and the U.S. Holder makes a “deemed sale” election under the PFIC rules with respect to our ordinary shares
or ADSs. If the “deemed sale” election is made, the U.S. Holder will be deemed to have sold our ordinary shares or ADSs it holds at their fair market value on
the last day of the last taxable year in which we qualified as a PFIC, and any gain recognized from such deemed sale would be taxed under the PFIC excess
distribution regime. After the deemed sale election, the U.S. Holder’s ordinary shares or ADSs would not be treated as shares of a PFIC unless we subsequently
become a PFIC. If we are a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares or ADSs, and one of our non-U.S. subsidiaries is
also a PFIC (i.e., a lower-tier PFIC), such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and
would be taxed under the PFIC excess distribution regime on distributions by the lower-tier PFIC and on gain from the disposition of shares of the lower-tier
PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions. Any of our non-U.S. subsidiaries that have elected to
be disregarded as entities separate from us or as partnerships for U.S. federal income tax purposes would not be corporations under U.S. federal income tax law
and accordingly, cannot be classified as lower-tier PFICs. However, non-U.S. subsidiaries that have not made such election may be classified as lower-tier PFICs
if we are a PFIC during a U.S. Holder’s holding period and the subsidiary meets the PFIC income test or PFIC asset test.
If we are a PFIC, a U.S. Holder will not be subject to tax under the PFIC excess distribution regime on distributions or gain recognized on our ordinary
shares or ADSs if a valid “mark-to-market” election is made by the U.S. Holder for our ordinary shares or ADSs, provided that the ordinary shares or ADSs are
“marketable.” Our ordinary shares or ADSs will be considered marketable if they are “regularly traded” on
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a “qualified exchange” within the meaning of applicable U.S. Treasury Regulations. A class of stock is regularly traded during any calendar year during which
such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Our ADSs will be considered marketable as
long as they remain listed on The Nasdaq Global Market and are regularly traded. A mark-to-market election will not apply to our ordinary shares or ADSs for
any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC. Such
election will not apply to any of our non-U.S. subsidiaries. Accordingly, a U.S. Holder may continue to be subject to tax under the PFIC excess distribution
regime with respect to any lower-tier PFICs notwithstanding the U.S. Holder’s mark-to-market election for our ordinary shares or ADSs.
An electing U.S. Holder generally must take into account as ordinary income each year an amount equal to the excess, if any, of the fair market value of
our ordinary shares or ADSs held at the end of such taxable year over the adjusted tax basis of such ordinary shares or ADSs. The U.S. Holder may also claim an
ordinary loss deduction for the excess, if any, of the U.S. Holder’s adjusted tax basis of such ordinary shares or ADSs over their fair market value at the end of
the taxable year, but only to the extent of any net mark-to-market gains for prior years. The U.S. Holder’s tax basis in our ordinary shares or ADSs would be
adjusted to reflect any income or loss recognized as a result of the mark-to-market election. Any gain from a sale, exchange or other disposition of our ordinary
shares or ADSs in any taxable year in which we are a PFIC would be treated as ordinary income and any loss from such sale, exchange or other disposition
would be treated first as ordinary loss (to the extent of any net mark-to-market gains for prior years) and thereafter as capital loss. If, after having been a PFIC
for a taxable year, we cease to be classified as a PFIC because we no longer meet the PFIC income or PFIC asset test, the U.S. Holder would not be required to
take into account any latent gain or loss in the manner described above and any gain or loss recognized on the sale or exchange of the ordinary shares or ADSs
would be classified as a capital gain or loss. Once made, the election cannot be revoked without the consent of the Internal Revenue Service, or the IRS, unless
the ADSs cease to be marketable.
The tax consequences that would apply if we are a PFIC would also be different from those described above if a U.S. Holder were able to make a valid
qualified electing fund, or QEF, election. As we do not expect to provide U.S. Holders with the information necessary for a U.S. Holder to make a QEF election,
U.S. holders should assume that a QEF election will not be available.
Unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file an annual report containing such information as the
U.S. Treasury may require. A U.S. Holder’s failure to file the annual report will cause the statute of limitations for such U.S. Holder’s U.S. federal income tax
return to remain open with regard to the items required to be included in such report until three years after the U.S. Holder files the annual report, and, unless
such failure is due to reasonable cause and not willful neglect, the statute of limitations for the U.S. Holder’s entire U.S. federal income tax return will remain
open during such period.
Distributions
While we do not expect to pay any dividends in the near future, in the event any dividends are paid, subject to the discussion above under “Passive
Foreign Investment Company Rules,” a U.S. Holder that receives a distribution with respect to our ordinary shares or ADSs generally will be required to include
the gross amount of such distribution in gross income as a dividend when actually or constructively received to the extent of the U.S. Holder’s pro rata share of
our current and/or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent a distribution received by a U.S.
Holder is not a dividend because it exceeds the U.S. Holder’s pro rata share of our current and accumulated earnings and profits, it will be treated first as a tax-
free return of capital and reduce (but not below zero) the adjusted tax basis of the U.S. Holder’s ordinary shares or ADSs. To the extent the distribution exceeds
the adjusted tax basis of the U.S. Holder’s ordinary shares or ADSs, the remainder will be taxed as capital gain. Because we may not account for our earnings
and profits in accordance with U.S. federal income tax principles, U.S. Holders should expect all distributions to be reported to them as dividends. Subject to
applicable limitations, dividends paid to certain non-corporate U.S. Holders may be taxable at preferential rates applicable to “qualified dividend income.”
However, the qualified dividend income treatment may not apply if we are treated as a PFIC with respect to the U.S. Holder. Distributions on our ordinary shares
or
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ADSs that are treated as dividends generally will constitute income from sources outside the United States for foreign tax credit purposes and generally will
constitute passive category income. Such dividends will not be eligible for the “dividends received’’ deduction generally allowed to corporate shareholders with
respect to dividends received from U.S. corporations.
Dividends will be included in a U.S. Holder’s income on the date of the depositary’s receipt of the dividend. The amount of any dividend income paid in
foreign currency will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of actual or constructive receipt, regardless of
whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be
required to recognize foreign currency gain or loss with respect to the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is
converted into U.S. dollars after the date of receipt.
Sale, Exchange or Other Disposition of Our Ordinary Shares or ADSs
Subject to the discussion above under “Passive Foreign Investment Company Rules,’’ a U.S. Holder generally will recognize capital gain or loss for U.S.
federal income tax purposes upon the sale, exchange or other disposition of our ordinary shares or ADSs in an amount equal to the difference, if any, between the
amount realized (i.e., the amount of cash plus the fair market value of any property received) on the sale, exchange or other disposition and such U.S. Holder’s
adjusted tax basis in the ordinary shares or ADSs. Such capital gain or loss generally will be long-term capital gain taxable at a reduced rate for non-corporate
U.S. Holders or long-term capital loss if, on the date of sale, exchange or other disposition, the ordinary shares or ADSs were held by the U.S. Holder for more
than one year. Any capital gain of a non-corporate U.S. Holder that is not long-term capital gain is taxed at ordinary income rates. The deductibility of capital
losses is subject to limitations. Any gain or loss recognized from the sale or other disposition of our ordinary shares or ADSs will generally be gain or loss from
sources within the United States for U.S. foreign tax credit purposes.
Medicare Tax
Certain U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally are subject to a 3.8% tax on all or a
portion of their net investment income, which may include their gross dividend income and net gains from the disposition of our ordinary shares or ADSs.
Information Reporting and Backup Withholding
U.S. Holders may be required to file certain U.S. information reporting returns with the IRS with respect to an investment in our ordinary shares or ADSs,
including, among others, IRS Form 8938 (Statement of Specified Foreign Financial Assets). As described above under “Passive Foreign Investment Company
Rules,” each U.S. Holder who is a shareholder of a PFIC must file an annual report containing certain information. U.S. Holders paying more than $100,000 for
our ordinary shares or ADSs may be required to file IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) reporting this payment.
Substantial penalties may be imposed upon a U.S. Holder that fails to timely comply with the required information reporting.
Dividends on and proceeds from the sale or other disposition of our ADSs may be reported to the IRS unless the U.S. Holder establishes a basis for
exemption. Backup withholding may apply to amounts subject to reporting if the holder (i) fails to provide an accurate U.S. taxpayer identification number or
otherwise establish a basis for exemption or (ii) is described in certain other categories of persons. However, U.S. Holders that are corporations generally are
excluded from these information reporting and backup withholding tax rules.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit
against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.
Cayman Islands Taxation
Holders should consult their professional advisors on the possible tax consequences of buying, holding or selling any ADSs under the laws of their
country of citizenship, residence or domicile.
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The following is a discussion on certain Cayman Islands income tax consequences of an investment in the ADSs. The discussion is a general summary of
present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular circumstances and
does not consider tax consequences other than those arising under Cayman Islands law.
No stamp duty, capital duty, registration or other issue or documentary taxes are payable in the Cayman Islands on the creation, issuance or delivery of the
ADSs. The Cayman Islands currently have no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax. There are currently no
Cayman Islands taxes or duties of any nature on gains realized on a sale, exchange, conversion, transfer or redemption of the ADSs. Payments of dividends and
capital in respect of the ADSs or ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of
interest and principal or a dividend or capital to any holder of the ADSs, nor will gains derived from the disposal of the ADSs be subject to Cayman Islands
income or corporation tax as the Cayman Islands currently have no form of income or corporation taxes.
Pursuant to section 6 of the Tax Concessions Law (2018 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-
Cabinet:
•
that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciation shall apply to us or our
operations; and
•
that no such tax or any tax in the nature of estate duty or inheritance tax shall be payable on or in respect of the ADSs or ordinary shares,
debentures or other obligations of ours.
The undertaking for the Company is for a period of twenty years from April 11, 2006.
F. Dividends and paying agents.
Not applicable.
G. Statement by experts.
Not applicable.
H. Documents on display.
We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-229097), as amended, including the prospectus contained
therein, to register our ADSs, each representing 12 ordinary shares, in relation to our IPO. We have also filed with the SEC a related registration statement on
Form F-6 (Registration No. 333-229509), as amended, to register our ADSs.
We are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, applicable to foreign
private issuers and file reports under those requirements with the SEC. Those reports may be inspected without charge at the locations described below. As a
foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act.
We maintain a corporate website at www.stealthbt.com. Information contained in, or that can be accessed through, our website is not a part of, and shall
not be incorporated by reference into, this annual report. We have included our website address in this annual report solely as an inactive textual reference.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as
us, that file electronically with the SEC.
With respect to references made in this annual report to any contract or other document of our company, such references are not necessarily complete and
you should refer to the exhibits attached or incorporated by reference to this annual report for copies of the actual contract or document.
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I. Subsidiary information.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are minimally exposed to market risk related to changes in interest rates. As of December 31, 2021, we had cash and cash equivalents of $47.1
million, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general
level of U.S. interest rates, particularly because our cash equivalents are held in short-term money market funds. We do not believe we are materially at risk to
sudden drops in interest rates based on the amounts subject to these potential changes.
Our Venture Loan (as defined in Item 5.B. above) has a floating per annum rate equal to the Wall Street Journal prime rate plus 5.5% subject to a prime
rate floor of 3.25% which exposes us to market interest rate risk when we have outstanding borrowings. As of December 31, 2021, we had $15.0 million of
outstanding borrowings under the Venture Loan. Assuming our outstanding debt remains constant for an entire year and the applicable annual interest rate
increases by 1.0%, our annual interest expense would increase by $0.2 million.
Item 12. Description of Securities Other than Equity Securities
A. Debt securities.
Not applicable.
B. Warrants and rights
Not applicable.
C. Other securities
Not applicable.
D. American depositary shares.
Citibank, N.A., as depositary bank, registers and delivers our American Depositary Shares, also referred to as ADSs. Each ADS represents 12 ordinary
shares (or a right to receive 12 ordinary shares) deposited with Citibank, N.A.—Hong Kong, located at 9/F, Citi Tower, One Bay East, 83 Hoi Bun Road, Kwun
Tong, Kowloon, Hong Kong, or any successor, as custodian for the depositary. Each ADS will also represent any other securities, cash or other property which
may be held by the depositary in respect of the depositary facility. The depositary’s corporate office at which our ADSs are administered is located at 388
Greenwich Street, New York, New York 10013. A deposit agreement among us, the depositary and the ADS holders sets out ADS holder rights as well as the
rights and obligations of the depositary. A form of the deposit agreement is incorporated by reference as an exhibit to this annual report.
Fees and Charges Payable by ADS Holders
The table below summarizes the fees and charges that a holder of our ADSs may have to pay, directly or indirectly, to our depositary, Citibank, N.A.,
pursuant to the deposit agreement and the types of services and the amount of the fees or charges paid for such services. The actual fees payable by us and the
holders of ADSs are negotiated between the depositary and us. In connection with these arrangements, we have agreed to pay various fees and expenses of the
depositary. Currently, ADS holders are responsible for paying a fee upon the delivery of ordinary shares against the surrender of ADSs.
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The fees and charges that an ADS holder may be required to pay can be changed in the future upon mutual agreement between the depositary and us and
may include:
SERVICE
FEE
Issuance of ADSs (e.g., an issuance of ADS upon a deposit of ordinary shares
or upon a change in the ADS(s)-to-ordinary shares ratio), excluding ADS
issuances as a result of distributions of ordinary shares
Up to $5.00 per 100 ADSs (or fraction thereof) issued
Cancellation of ADSs (e.g., a cancellation of ADSs for delivery of deposited
property or upon a change in the ADS(s)-to-ordinary shares ratio)
Up to $5.00 per 100 ADSs (or fraction thereof) cancelled
Distribution of cash dividends or other cash distributions (e.g., upon a sale of
rights and other entitlements)
Up to $5.00 per 100 ADSs (or fraction thereof) held
Distribution of ADSs pursuant to (i) share dividends or other free share
distributions, or (ii) exercise of rights to purchase additional ADSs
Up to $5.00 per 100 ADSs (or fraction thereof) held
Distribution of securities other than ADSs or rights to purchase additional
ADSs (e.g., upon a spin-off)
Up to $5.00 per 100 ADS (or fraction thereof) held
ADS Services
Up to $5.00 per 100 ADSs (or fraction thereof) held on the applicable record
date(s) established by the depositary
In addition, ADS holders are responsible for certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
•
taxes (including applicable interest and penalties) and other governmental charges;
•
the registration fees as may from time to time be in effect for the registration of ordinary shares on the share register and applicable to transfers of
ordinary shares to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;
•
certain cable, telex and facsimile transmission and delivery expenses;
•
the expenses and charges incurred by the depositary in the conversion of foreign currency;
•
the fees and expenses incurred by the depositary in connection with compliance with exchange control regulations and other regulatory
requirements applicable to ordinary shares, ADSs and ADRs; and
•
the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited property.
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Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients)
receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering our ADSs to the depositary for cancellation. The
brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary
services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (e.g.,
stock dividend, rights), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered
in the name of the investor, the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian
accounts (via DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of our ADSs held in
DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn
charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay taxes or other governmental charges by the holder of an ADS, the depositary may, under the terms of the deposit agreement,
refuse the requested service until payment is received or may set off the amount of such tax or other governmental charge from any distribution to be made to the
ADS holder, and the ADS holder would remain liable for any deficiency.
The disclosure under this heading “Fees and Charges Payable by ADS Holders” is subject to and qualified in its entirety by reference to the full text of the
deposit agreement.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
A. Not applicable.
B. Not applicable.
C. Not applicable.
D. Not applicable.
E. Not applicable
Item 15. Controls and Procedures
A. Disclosure Controls and Procedures
We have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) under the supervision and the participation of the company’s management, which is responsible for the
management of the internal controls, and which includes our Chief Executive Officer (our principal executive officer and principal financial officer). The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate,
to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation of our disclosure controls and procedures as
of December 31, 2021, our Chief Executive Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable level of
assurance.
B. Management’s annual report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial
reporting is a process designed, under the supervision of our Chief Executive Officer (our principal executive officer and principal financial officer), to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Moreover, projections of any
evaluation of the effectiveness of internal control to future periods are subject to a risk that controls may become inadequate because of changes in conditions
and that the degree of compliance with the policies or procedures may deteriorate.
-153-
Our management has assessed the effectiveness of internal control over financial reporting as of December 31, 2021, based on the Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, our
management has concluded that our internal control over financial reporting as of December 31, 2021, was effective.
C. Attestation report of the registered public accounting firm.
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the
company’s registered public accounting firm due to a transition period established by rules of the SEC for emerging growth companies.
D. Changes in internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
year ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. Kevin McLaughlin, an independent director and member of the Audit Committee, qualifies as an “audit
committee financial expert,” as defined in Item 16A of Form 20-F.
Item 16B. Code of Ethics
We have adopted a written code of business conduct and ethics, that applies to our directors, officers, and employees, including our principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is posted on the
Corporate Governance section of our website, which is located at investor.stealthbt.com. If we make any substantive amendments to, or grant any waivers from,
the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a report on
Form 6-K.
Item 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte &
Touche LLP, our independent registered public accounting firm, as well as Deloitte Tax LLP for the periods indicated.
Year Ended December 31,
2021
2020
(in thousands)
Audit fees
$
517 $
510
Audit-related fees
83
165
Tax fees
—
—
All other fees
—
—
Total
$
600 $
675
Audit fees consist of fees for the audit of our financial statement and fees for accounting consultations.
Audit-related fees are fees related to services performed in connection with registration statements or other regulatory filings with the SEC, comfort
letters, and consents.
Tax fees consist of fees for professional services with respect to tax advisory services.
The policy of our audit committee or our board of directors is to pre-approve all auditing services and permitted non-audit services to be performed for us
by our independent auditor, Deloitte & Touche LLP,
-154-
(1)
(2)
(3)
(1)
(2)
(3)
including the fees and terms thereof for audit services, audit-related services, tax services and other non-audit services, subject to de minimis exception described
in Section 10A(i)(l)(B) of the Exchange Act.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
We are a “foreign private issuer,” as defined by the SEC. As a result, in accordance with the rules and regulations of Nasdaq, we will comply with home
country governance requirements and certain exemptions thereunder rather than complying with Nasdaq corporate governance standards. While we voluntarily
follow most Nasdaq corporate governance rules, we may choose to take advantage of the following limited exemptions afforded to foreign private issuers:
•
exemption from the requirement to have independent director oversight of director nominations;
•
exemption from the requirements that our board of directors have a compensation committee that is composed entirely of independent directors;
•
exemption from the requirement that our board of directors shall have regularly scheduled meetings at which only independent directors are present
as set forth in Nasdaq Rule 5605(b)(2); and
•
exemption from the requirement to obtain shareholder approval of certain equity issuances in connection with acquisition of stock or assets of
another company, the establishment of or amendments to equity-based compensation plans for employees, a change of control of us and certain
private placements.
We intend to follow our home country practices in lieu of the foregoing requirements. Although we may rely on home country corporate governance
practices in lieu of certain of the rules in the Nasdaq Rule 5600 Series and Rule 5250(d), we must comply with Nasdaq’s Notification of Noncompliance
requirement (Rule 5625), the Voting Rights requirement (Rule 5640) and have an audit committee that satisfies Rule 5605(c)(3), consisting of committee
members that meet the independence requirements of Rule 5605(c)(2)(A)(ii). Although we currently intend to comply with the applicable Nasdaq corporate
governance rules other than as noted above, we may in the future decide to use the foreign private issuer exemption with respect to some or all of the other
Nasdaq corporate governance rules.
In addition, as a foreign private issuer, we expect to take advantage of the following exemptions from SEC reporting obligations:
•
exemption from filing quarterly reports on Form 10-Q or current reports on Form 8-K, disclosing significant events within four days of their
occurrence; and
•
exemption from Section 16 rules regarding sales of common shares by insiders, which will provide less data in this regard than shareholders of U.S.
companies that are subject to the Exchange Act.
Accordingly, our shareholders will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance
requirements of Nasdaq and the domestic reporting requirements of the SEC. We may utilize these exemptions for as long as we continue to qualify as a foreign
private issuer.
-155-
Item 16H. Mine Safety Disclosure
Not applicable.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
Not applicable.
-156-
PART III
Item 17. Financial Statements
See pages beginning on F-1 of this annual report on Form 20-F.
Item 18. Financial Statements
Not Applicable
Item 19. Exhibits
Exhibit
Number
Description
1.1
Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by reference to Exhibit 1.1 to the
Registrant’s Annual Report on Form 20-F, dated April 1, 2020)
2.1
Deposit Agreement among the Company, Citibank, N.A., as depositary, and all Owners and Holders of ADSs issued thereunder (incorporated
by reference to Exhibit 99.3 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange Commission on March
5, 2019)
2.2
Form of American Depository Receipt (included in Exhibit 2.1)
2.3
Description of the Registrant’s Securities pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated herein by reference to
Exhibit 2.3 to the Registrant’s Annual Report on Form 20-F, dated April 1, 2020)
4.1
Warrant Agreement, dated June 30, 2017, by and between the Company and Hercules Capital Inc., as amended and restated on June 7, 2018
(incorporated by reference to Exhibit 4.3 of our Registration Statement on Form F-1 filed with the Securities and Exchange Commission
December 28, 2018)
4.2
2006 Share Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 of our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission December 28, 2018)
4.3
Form of Incentive Option Agreement under 2006 Share Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 of our
Registration Statement on Form F-1 filed with the Securities and Exchange Commission December 28, 2018)
4.4
Form of Nonstatutory Option Agreement under 2006 Share Incentive Plan, as amended (incorporated by reference to Exhibit 10.3 of our
Registration Statement on Form F-1 filed with the Securities and Exchange Commission December 28, 2018)
4.5
2019 Share Incentive Plan, as amended (incorporated herein by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 20-F,
dated April 1, 2020)
4.6
Form of Share Option Agreement under 2019 Share Incentive Plan (incorporated by reference to Exhibit 10.5 of our Registration Statement
on Form F-1, as amended, filed with the Securities and Exchange Commission January 30, 2019)
4.7
Form of Restricted Share Agreement under 2019 Share Incentive Plan (incorporated by reference to Exhibit 10.6 of our Registration
Statement on Form F-1, as amended, filed with the Securities and Exchange Commission January 30, 2019)
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4.8
Form of Director and Officer Indemnification Agreement by and between the Registrant and each of its officers and directors (incorporated
by reference to Exhibit 10.7 of our Registration Statement on Form F-1 filed with the Securities and Exchange Commission December 28,
2018)
4.9†
Exclusive License Agreement, dated April 20, 2006, among the Company, Cornell Research Foundation, Inc. and Institut de recherches
cliniques de Montréal, as amended by First Amendment to Exclusive License Agreement dated October 7, 2010 (incorporated by reference
to Exhibit 10.8 of our Registration Statement on Form F-1 filed with the Securities and Exchange Commission December 28, 2018)
4.10†
Exclusive License Agreement, dated November 22, 2010, between the Company and Cornell University (incorporated by reference to
Exhibit 10.9 of our Registration Statement on Form F-1 filed with the Securities and Exchange Commission December 28, 2018)
4.11†
Exclusive License Agreement, dated November 3, 2011, by and between the Company and Cornell University (incorporated by reference to
Exhibit 10.10 of our Registration Statement on Form F-1 filed with the Securities and Exchange Commission December 28, 2018)
4.12
Sublease Agreement dated September 22, 2020 by and between the Company and PTC Inc (incorporated by reference to Exhibit 4.21 of our
Annual Report on Form 20-F filed on April 6, 2021)
4.13
Loan and Security Agreement, dated June 30, 2017, by and between the Company and Hercules Capital Inc., as amended on March 12, 2018,
July 26, 2018 and October 10, 2018 (incorporated by reference to Exhibit 10.15 of our Registration Statement on Form F-1 filed with the
Securities and Exchange Commission December 28, 2018)
4.14
Fourth Amendment to Loan and Security Agreement dated as of March 29, 2019, by and between Hercules Capital Inc. and the Company
(incorporated by reference to Exhibit 4.19 of our Annual Report on Form 20-F (File No.001-38810) filed on April 4, 2019)
4.15
Fifth Amendment to Loan and Security Agreement dated as July 28, 2020, by and between
Hercules Capital Inc and the Company (incorporated by reference to Exhibit 10.1 of our Report on Form 6-K (File No. 001-38810), filed
with the Securities and Exchange Commission on August 6, 2020)
4.16
Sixth Amendment to Loan and Security Agreement dated as of April 29, 2021, by and between
Hercules Capital Inc and the Company (incorporated by reference to Exhibit 10.1 of our Report on Form 6-K (File No. 001-38810), filed
April 30, 2021)
4.17
2019 Employee Share Purchase Plan (incorporated by reference to Exhibit
10.16 of our Registration Statement on Form F-1, as amended, filed with the Securities and Exchange Commission January 30, 2019)
4.18
Development Funding Agreement, dated as of October 30, 2020, by and between the Company and Morningside Venture (I) Investments
Limited (incorporated by reference to Exhibit 10.1 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange
Commission on November 4, 2020)
4.19
Amendment to Development Funding Agreement dated as of May 17, 2021, by and between Morningside Venture (I) Investments Limited
and the Company (incorporated by reference to Exhibit 10.1 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and
Exchange Commission on May 18, 2021)
4.20
Form of Warrant (incorporated by reference to Exhibit 10.2 of our Report on Form 6-K (File
No. 001-38810), filed with the Securities and Exchange Commission on May 18, 2021)
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4.21
Ordinary Share Purchase Warrant, dated as of October 30, 2020, by and between the Company
and Morningside Venture (I) Investments Limited (incorporated by reference to Exhibit 10.2 of our Report on Form 6-K (File No. 001-
38810), filed with the Securities and Exchange
Commission on November 4, 2020)
4.22
Purchase Agreement, between the Company and Lincoln Park Capital Fund, LLC, dated June
2, 2020 (incorporated by reference to Exhibit 1.1 of our Report on Form 6-K (File No.
001-38810), filed June 3, 2020)
4.23
2020 ADS Incentive Plan (incorporated herein by reference to Exhibit 4.20 to the Registrant’s
Annual Report on Form 20-F, dated April 1, 2020)
4.24
Form of Restricted ADS Unit Award Agreement under 2020 ADS Incentive Plan (incorporated herein by reference to Exhibit 4.21 to the
Registrant’s Annual Report on Form 20-F, dated April 1, 2020)
4.25
Venture Loan and Security Agreement, dated September 30, 2021 (incorporated by reference to Exhibit 10.1 of our Report on Form 6-K (File
No. 001-38810), filed with the Securities and
Exchange Commission on October 4, 2021)
4.26
Ordinary Share Purchase Warrant issued pursuant to Venture Loan and Security Agreement, dated September 30, 2021 (incorporated by
reference to Exhibit 10.2 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange Commission on October 4,
2021)
4.27
Ordinary Share Purchase Warrant issued pursuant to Venture Loan and Security Agreement, dated September 30, 2021 (incorporated by
reference to Exhibit 10.3 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange Commission on October 4,
2021)
4.28
Ordinary Share Purchase Warrant issued pursuant to Venture Loan and Security Agreement, dated September 30, 2021 (incorporated by
reference to Exhibit 10.4 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange Commission on October 4,
2021)
4.29
Ordinary Share Purchase Warrant issued pursuant to Venture Loan and Security Agreement, dated September 30, 2021 (incorporated by
reference to Exhibit 10.5 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange Commission on October 4,
2021)
4.30
Ordinary Share Purchase Warrant issued pursuant to Venture Loan and Security Agreement, dated September 30, 2021 (incorporated by
reference to Exhibit 10.6 of our Report on Form 6-K (File No. 001-38810), filed with the Securities and Exchange Commission on October 4,
2021)
8.1*
Subsidiaries of the Registrant
12.1*
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1*
Certification by the 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
15.1*
Consent of Deloitte & Touche, LLP, independent registered public accounting firm
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded
within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
† Confidential treatment granted as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.
-160-
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
Stealth BioTherapeutics Corp
Date: April 7, 2022
By:
/s/ Irene P. McCarthy
Name:
Irene P. McCarthy
Title:
Chief Executive Officer
-161-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements as of December 31, 2021 and 2020 and for the Years Ended December 31, 2021, 2020 and 2019
PAGE
Report of Independent Registered Public Accounting Firm (PCAOB ID No 34)
F-2
Consolidated Balance Sheets
F-3
Consolidated Statements of Operations
F-4
Consolidated Statements of Convertible Preferred Shares and Shareholders’ Equity (Deficit)
F-5
Consolidated Statements of Cash Flows
F-6
Notes to Consolidated Financial Statements
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Stealth BioTherapeutics Corp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Stealth BioTherapeutics Corp and subsidiaries (the "Company") as of December 31, 2021 and
2020, the related consolidated statements of operations, convertible preferred shares and shareholders' equity (deficit), and cash flows, for each of the three years
in the period ended December 31, 2021, and the related notes (collectively referred to as 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, 2021 and 2020, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of
America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company's recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future, and
potential inability to remain in compliance with certain financing covenants required under the venture loan and security agreement raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the 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 audits 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 audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 7, 2022
We have served as the Company's auditor since 2014.
F-2
STEALTH BIOTHERAPEUTICS CORP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
2021
2020
Assets
Current assets:
Cash and cash equivalents
$
47,135
$
32,787
Prepaid expenses and other current assets
2,467
2,253
Total current assets
49,602
35,040
Property and equipment, net
97
106
Deferred financing costs and other non-current assets
527
702
Total assets
$
50,226
$
35,848
Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable
$
3,467
$
3,526
Accrued expenses and other current liabilities
7,283
7,024
Accrued interest payable
78
1,499
Current portion of debt
—
9,000
Total current liabilities
10,828
21,049
Long-term debt, less current portion
13,656
—
Long-term deferred rent, less current portion
—
16
Development derivative liability - related party
71,037
25,155
Total liabilities
95,521
46,220
Commitments and contingencies (Note 14)
Shareholders’ deficit:
Ordinary shares, $0.0003 par value; 1,600,000,000 shares authorized and 712,131,058 shares issued
and outstanding at December 31, 2021;
1,200,000,000 shares authorized and 635,092,150 shares issued and outstanding at December 31, 2020
214
191
Additional paid-in capital
562,472
544,891
Accumulated deficit
(607,981 )
(555,454 )
Total shareholders’ deficit
(45,295 )
(10,372 )
Total liabilities and shareholders’ deficit
$
50,226
$
35,848
See the accompanying notes to these audited consolidated financial statements.
F-3
STEALTH BIOTHERAPEUTICS CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31,
2021
2020
2019
Revenue
$
— $
— $
21,087
Operating expenses:
Research and development
26,556
29,305
44,604
General and administrative
19,747
19,366
22,315
Total operating expenses
46,303
48,671
66,919
Loss from operations
(46,303 )
(48,671 )
(45,832 )
Other income (expense):
Interest income
3
139
988
Interest expense
(1,242 )
(1,808 )
(6,666 )
Change in valuation of derivative liability
(4,899 )
(7,117 )
2,782
Change in valuation of warrant liability
—
—
(300 )
Loss on extinguishment of debt
(86 )
—
(22,700 )
Total other expense, net
(6,224 )
(8,786 )
(25,896 )
Net loss attributable to ordinary shareholders
$
(52,527 ) $
(57,457 ) $
(71,728 )
Net loss per share attributable to ordinary shareholders —
basic and diluted
$
(0.08 ) $
(0.10 ) $
(0.19 )
Weighted average ordinary shares used in net loss per share
attributable to ordinary shareholders — basic and diluted
682,388,906
556,169,255
375,669,759
See the accompanying notes to these audited consolidated financial statements
F-4
STEALTH BIOTHERAPEUTICS CORP
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ DEFICIT
(in thousands, except share amounts)
SERIES A
CONVERTIBLE
PREFERRED SHARES
ORDINARY SHARES
ADDITIONA
L
PAID-IN
ACCUMULATE
D
TOTAL
SHAREHOLDER
S’
SHARES
AMOUNT
SHARES
AMOUN
T
CAPITAL
DEFICIT
DEFICIT
Balance at December 31, 2018
91,600,398 $ 211,377 68,487,948 $
21 $
39,542 $
(426,269 ) $
(386,706 )
Issuance of ordinary shares
from initial public offering, net of
underwriting fees and issuance costs
of $8,482
—
— 85,058,784
26
76,482
—
76,508
Conversion of convertible preferred shares
into ordinary shares
(91,600,39
8 ) (211,377 ) 91,600,398
27
211,349
—
211,376
Conversion of convertible notes
—
—
175,210,37
3
52
175,158
—
175,210
Issuance of ordinary shares
—
— 16,304,347
5
8,908
—
8,913
Exercise of share options
—
—
58,960
—
50
—
50
Share-based compensation expense
—
—
—
—
3,244
—
3,244
Reclassification of warrant liability to
equity
—
—
—
—
400
—
400
Net loss
—
—
—
(71,728 )
(71,728 )
Balance at December 31, 2019
—
—
436,720,81
0 $
131 $
515,133 $
(497,997 ) $
17,267
Issuance of ordinary shares net of issuance
costs of $640
—
—
191,671,81
2
58
23,204
—
23,262
Ordinary shares issued under the 2020
share incentive plan
—
—
4,495,716
2
—
2
Issuance of commitment shares
—
—
2,203,812
—
368
—
368
Issuance of equity-classified warrants
—
—
—
—
1,962
—
1,962
Share-based compensation expense
—
—
—
—
4,224
—
4,224
Net loss
—
—
—
(57,457 )
(57,457 )
Balance at December 31, 2020
—
—
635,092,15
0 $
191 $
544,891 $
(555,454 ) $
(10,372 )
Issuance of ordinary shares net of issuance
costs of $998
—
— 69,162,552
21
8,237
—
8,258
Ordinary shares issued under the 2020
share incentive plan
—
—
7,876,356
2
(2 )
—
—
Issuance of equity-classified warrants
—
—
—
—
5,167
—
5,167
Share-based compensation expense
—
—
—
—
4,179
—
4,179
Net loss
—
—
—
(52,527 )
(52,527 )
Balance at December 31, 2021
—
—
712,131,05
8 $
214 $
562,472 $
(607,981 ) $
(45,295 )
See the accompanying notes to these audited consolidated financial statements
F-5
STEALTH BIOTHERAPEUTICS CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2021
2020
2019
Cash flows from operating activities:
Net loss
$
(52,527 )
$
(57,457 )
$
(71,728 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
77
232
284
Change in fair value of derivative liability
4,899
7,117
(2,782 )
Change in fair value of warrant liability
—
—
300
Loss on extinguishment of debt
86
—
22,700
Amortization of debt discount
151
240
3,006
Non-cash interest expense
260
351
1,731
Share-based compensation
4,179
4,224
3,244
Loss on disposal of asset
—
43
—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
(440 )
(622 )
1,214
Accounts payable
(59 )
(6,140 )
(1,503 )
Accrued expenses, accrued interest payable and other current liabilities
(1,497 )
(1,527 )
(4,450 )
Other assets
(100 )
—
—
Net cash used in operating activities
(44,971 )
(53,539 )
(47,984 )
Cash flows from investing activities:
Purchase of property and equipment
(67 )
(35 )
(130 )
Payment for security deposit
250
(25 )
—
Net cash used in investing activities
183
(60 )
(130 )
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable
—
—
5,000
Proceeds from venture debt issuance, net of costs
14,805
—
—
Proceeds from issuance of ordinary shares, net of commissions and underwriters' fees
8,975
23,437
8,913
Proceeds from development funding agreement
45,000
20,000
—
Proceeds from issuance from the IPO, net of commissions
—
—
79,105
Payment of debt issuance costs
(125 )
—
(85 )
Payment of offering costs
(408 )
(337 )
(2,151 )
Principal payments on term debt
(9,111 )
(7,482 )
(2,805 )
Proceeds from exercise of share options and warrant
—
—
50
Net cash provided by financing activities
59,136
35,618
88,027
Net increase (decrease) in cash and cash equivalents
14,348
(17,981 )
39,913
Cash and cash equivalents, beginning of period
32,787
50,768
10,855
Cash and cash equivalents, end of period
$
47,135
$
32,787
$
50,768
Supplemental disclosure of noncash investing and financing activity:
Noncash items:
Commitment shares issued to Lincoln Park
$
—
$
368
$
—
Issuance cost in accounts payable
$
58
$
147
$
—
Fair value of derivatives recorded in connection with the 2018 MVIL
Note and 2018 New Investor Notes
$
—
$
—
$
1,256
Conversion of convertible preferred shares into ordinary shares
$
—
$
—
$
211,377
Conversion of convertible notes and accrued interest into ordinary shares
$
—
$
—
$
175,210
Reclassification of deferred offering cost to additional paid-in capital
$
251
$
—
$
447
Reclassification of Future Warrants to equity
$
4,017
$
1,962
$
—
Reclassification of warrant liability to equity
$
—
$
—
$
400
Supplemental cash flow information-cash paid for end of term charge
$
1,661
$
—
$
—
Supplemental cash flow information-cash paid for interest
$
905
$
1,195
$
1,918
See the accompanying notes to these audited consolidated financial statements.
F-6
STEALTH BIOTHERAPEUTICS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2021 and 2020
1.
Organization and Operations
The Company
Stealth BioTherapeutics Corp was incorporated in Grand Cayman, Cayman Islands as Stealth Peptides International, Inc. in April 2006. Its wholly owned
subsidiary, Stealth BioTherapeutics Inc., was incorporated in Delaware as Stealth Peptides Inc. in October 2007. In addition, a wholly owned subsidiary, Stealth
BioTherapeutics (HK) Limited, was incorporated in Hong Kong in September 2017. In May 2018, Stealth BioTherapeutics (Shanghai) Limited was formed as a
wholly foreign owned enterprise in China. In 2020, Stealth BioTherapeutics (Shanghai) limited was dissolved. Hereinafter, Stealth BioTherapeutics Corp, Stealth
BioTherapeutics Inc., and Stealth BioTherapeutics (HK) Limited are collectively referred to as the “Company.” The Company is a clinical-stage biotechnology
company focused on the discovery and development of novel pharmaceutical agents to treat patients suffering from diseases involving mitochondrial dysfunction
through its mitochondrial medicine platform. The consolidated financial statements include the assets, liabilities and operating results of the Company and its
wholly owned subsidiaries. Since inception, the Company has devoted substantially all of its efforts to research and development, business planning, acquiring
operating assets, seeking intellectual property protection for its technology and product candidates, and raising capital.
The Company has entered into numerous debt and equity issuances with Morningside Venture Investments Limited (“MVIL”). As of December 31, 2021,
MVIL and certain entities associated with MVIL together held approximately 67.1% of the Company’s outstanding shares. See Notes 8 and 9 regarding the terms
of such debt and equity issuances.
The Company has incurred net losses and negative cash flows from operations in each year since inception and had an accumulated deficit of $608.0
million as of December 31, 2021. The Company has financed its operations to date with proceeds from the issuance of preferred shares, initial public offering
(“IPO”), American depositary share (“ADS”) offerings, convertible debt and long-term debt and the development funding agreement.
On February 20, 2019, the Company closed its IPO, in which it issued and sold 6,500,000 ADSs, each representing 12 ordinary shares, for a total of
78,000,000 ordinary shares. The price to the public was $12.00 per ADS. The Company received gross proceeds of $78.0 million from the IPO. On March 4,
2019, the Company issued an additional 588,232 ADSs in connection with the underwriters’ partial exercise of their over-allotment option, pursuant to which the
Company raised additional gross proceeds of $7.1 million. Net proceeds received in 2019 after deducting underwriting discounts and commissions of $6.0
million and offering expenses of approximately $2.2 million were $76.9 million. Upon closing of the IPO, all shares of the Company’s outstanding Series A
convertible preferred shares (“Series A preferred shares”) automatically converted into 91,600,398 ordinary shares and the outstanding convertible notes payable,
including principal, interest and premium thereon, converted into 175,210,373 ordinary shares. See Notes 8 and 9 regarding the terms of the convertible notes
payable and Series A preferred shares.
Liquidity and Going Concern
These consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities
in the normal course of business. Since its inception, the Company has incurred recurring losses, including net losses of $52.5 million for the year ended
December 31, 2021. The Company expects to continue to incur operating losses in the foreseeable future.
Management believes that cash and cash equivalents of $47.1 million at December 31, 2021 will not be sufficient to fund its operating expenses for
twelve months from the date these annual consolidated financial statements are issued. The Company may seek to obtain financing through equity and debt
issuances, collaborative agreements, and grants from government and private sponsors. The Company is required to comply with an unrestricted minimum cash
balance in accordance with its Venture Loan and Security Agreement with Horizon Technology Finance Corporation and Powerscourt Investments XXV, LP (
collectively the “Lenders”) until certain cash financing conditions are met and there is a risk that the Company may be unable to remain in compliance with
F-7
this financial covenant in the future in which case the debt may become immediately due and payable. Because the ability to obtain additional financing is
outside of the Company’s control, the foregoing conditions raise substantial doubt in regard to the Company’s ability to continue as a going concern. If the
Company is unable to obtain additional funding when needed, or to the extent needed, it may be necessary to scale back operations or halt certain research and
development activities, which could prevent the Company from successfully executing on its operating plan. The consolidated financial statements do not
include any adjustments related to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to
continue its operations.
2.
Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States
of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to authoritative GAAP, as found in the Accounting Standards
Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates related to, but not limited to, share-based compensation expense,
the fair value of derivative liability, the fair value of warrants, recoverability of the Company’s net deferred tax asset-related valuation allowances, and certain
prepaid expenses and accrued expenses. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it
believes to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as the Company to take advantage of an extended
transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private
companies. The Company has elected to avail itself of this exemption from new or revised accounting standards and, therefore, the Company will not be subject
to the same new or revised accounting standards as other public companies. As a result, the Company’s financial statements may not be comparable to the
financial statements of reporting companies that are required to comply with the effective dates for new or revised accounting standards that are otherwise
applicable to public companies.
Principles of Consolidation
All intercompany balances and transactions have been eliminated in consolidation.
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief
operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. Management views the Company’s
operations and manages its business as a single operating segment.
Cash Equivalents
Cash equivalents include highly liquid investments maturing within 90 days from the date of purchase. Cash equivalents consist primarily of money
market funds at December 31, 2021 and 2020 and are valued at cost, which approximates fair value.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of money market funds. The Company
places these investments in highly rated financial institutions and limits the amount of credit exposure to any one financial institution. These amounts at times
may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant
credit risk on these funds.
F-8
Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to
measure fair value are performed in a manner to maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting standard
describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to
measure fair value, which are the following:
Level 1—Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Short-term money market funds within cash equivalents are classified as Level 1 and as of December 31, 2021 and 2020 were $47.0 million and $32.6
million, respectively.
Management believes that the carrying amounts of the Company’s cash equivalents, accounts payable and accrued expenses approximate the fair value
due to the short term nature of those instruments. The Company has classified these financial instruments as Level 2. As of December 31, 2021 and 2020, the
Company had an outstanding debt from the Venture Loan and the Term Loan (see Note 7), respectively, the fair value of which is measured using Level 2 inputs.
The Company believes that its debt obligations bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and,
accordingly, the carrying values for these instruments approximate fair value.
As of December 31, 2021 and 2020, the Company had a derivative liability (see Note 3), the fair value of which is measured using Level 3 inputs.
The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels
during the years ended December 31, 2021 and 2020. The change in fair value of the derivative and warrant liability is included in other income (expense).
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Major improvements are capitalized as additions to property
and equipment, whereas expenditures for maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operating
expenses as incurred.
Depreciation and amortization is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows:
Asset
Estimated useful life
Computer equipment and software
3 years
Furniture, fixtures, and other
5 years
Laboratory equipment
5 years
Leasehold improvements
Shorter of useful life
or term of lease
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to the undiscounted expected future cash flows the assets
are expected to generate and recognizes an impairment loss equal to the excess of the carrying value over the fair value of the related asset. For the years ended
December 31, 2021 and 2020, no impairments have been recorded.
F-9
Operating Leases
The Company leases facilities under a non-cancelable operating lease agreement. The lease agreement contains free or escalating rent payment
provisions. The Company recognizes rent expense under such leases on a straight-line basis over the term of the lease with the difference between the expense
and the payments recorded as deferred rent on the consolidated balance sheets. Any reimbursements by the landlord for tenant improvements are considered
lease incentives, the balance of which is recorded as a lease incentive obligation within deferred rent on the consolidated balance sheets and amortized over the
life of the lease. Lease renewal periods are considered in determining the lease term.
Convertible Preferred Shares
The Company classifies convertible preferred shares as temporary equity in the consolidated balance sheets due to certain change in control clauses that
are outside of the Company’s control, including liquidation, sale, or transfer of control of the Company, as holders of the convertible preferred shares could cause
redemption of the shares in these situations.
Revenue Recognition Policy
Revenues consist mainly of research and development services performed under a contract with a customer. Effective January 1, 2019, the Company
adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). This standard applies to all contracts with customers, except for contracts
that are within the scope of other standards, such as collaboration arrangements and leases. Prior to and subsequent to 2019, the Company did not have any
revenue-generating arrangements and, therefore, there was no transition impact from the adoption of ASC 606.
Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the
consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity
determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company assesses the goods or services promised within each contract, to determine whether the promised good or service is distinct for the
purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make
judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods
and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are
readily available to the customer (that is, the good or service is capable of being distinct); and (ii) the entity’s promise to transfer the good or service to the
customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the
contract). In assessing whether a promised good or service is distinct in the evaluation of an arrangement subject to ASC 606, the Company considers factors
such as the research, manufacturing and commercialization capabilities of the collaboration partner or customer and the availability of the associated expertise in
the general marketplace. The Company also considers the intended benefit of the contract in assessing whether a promised good or service is separately
identifiable from other promises in the contract. If a promised good or service is not distinct, the Company is required to combine that good or service with other
promised goods or services until it identifies a bundle of goods or services that is distinct.
The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices.
Determining the standalone selling prices for performance obligations requires significant judgment. However, the Company identified only one performance
obligation and as such was not required to estimate the standalone selling price.
If an arrangement includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates
the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the
associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control are generally not considered
probable of being achieved until those milestones have occurred.
In determining the transaction price, the Company adjusts consideration for the effects of the time value of money if the timing of payments provides the
Company with a significant benefit of financing. The Company does
F-10
not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the
customer and the transfer of the promised goods or services to the customer will be one year or less. The Company assessed its revenue-generating arrangement
in order to determine whether a significant financing component exists and concluded that a significant financing component does not exist in the arrangement.
The Company also assesses if contracts entered on or near the same time with the same customer should be accounted for as a single contract, and if any portion
of consideration received should to be allocated to the transaction price.
The Company then recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as)
each performance obligation is satisfied at a point in time or over time. Revenue is recognized over time if either: (i) the customer simultaneously receives and
consumes the benefits provided by the entity’s performance; (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced; or (iii) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to
payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a
point in time by transferring the control of a promised good or service to a customer.
Alexion Arrangement
In October 2019, the Company entered into an option agreement (“Agreement”) with Alexion Pharmaceuticals Inc. (“Alexion”), under which Alexion
had an option to negotiate a license, co-development and co-promotion arrangement for primary mitochondrial myopathy (“PMM”) and the Company was
required to perform certain services for Alexion. Under the terms of the Agreement, the Company is responsible for all costs to be incurred in the performance of
these services, and as such, the arrangement falls in scope of ASC 606 and Alexion is the customer in the arrangement.
Simultaneously with the entry into the Agreement, the Company entered into a share purchase agreement (the “Equity Agreement”, and collectively
with the Agreement, the “Alexion Arrangement”). Pursuant to the terms of the Equity Agreement, Alexion purchased 16,304,347 of the Company’s ordinary
shares at a purchase price of $0.92 per share, for an aggregate purchase price of $15.0 million. The purchase price represented a 41% premium over the average
closing price of the Company’s American Depositary Shares prior to the Alexion Arrangement. The estimated fair market value of the ordinary shares purchased
of $8.9 million was recognized as equity and the premium over the fair market value in the amount of $6.1 million was recognized as a contract liability upon
receipt of payment and allocated to the transaction price.
Under the Agreement, the Company was obligated to provide topline data for its Phase 3 clinical trial (“PMM Topline Data”) in PMM. Upon the receipt
of the PMM Topline Data, Alexion would have the opportunity to exercise its option to negotiate a license and co-promote agreement. In connection with its
entry into the Alexion Arrangement, the Company received an upfront non-refundable payment of $15.0 million, which together with the $6.1 million premium
received from the issuance of shares, resulted in $21.1 million of transaction price recorded as a contract liability at contract inception.
The Company identified the following promises under the arrangement: (i) research and development services for completion of its Phase 3 clinical
trial; (ii) regulatory responsibilities for its Phase 3 clinical trial; (iii) manufacturing responsibilities for its Phase 3 clinical trial; and (iv) the option to negotiate a
license and co-promote agreement for PMM. The research and development services, manufacturing and regulatory responsibilities for PMM were deemed not
capable of being distinct and not distinct in the context of the contract. The Company provides a significant service of integrating these services promised in the
contract into a bundle of services that were combined into a single performance obligation. The Company determined that the option to negotiate for a license
agreement was not deemed to be a performance obligation, as it represents the right of first offer, which the Company is not contractually or economically
compelled to accept.
Accordingly, the Company identified one performance obligation for the Agreement. The transaction price of $21.1 million was allocated to the
performance obligation identified. As of December 31, 2019, the Company satisfied its performance obligation under the Agreement and the revenue associated
with the performance obligation was recognized in full.
Alexion terminated the Agreement in January 2020 and, as such, no additional revenue was recognized under the Alexion Arrangement.
Research and Development Costs
F-11
Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses include (i)
employee-related expenses, including salaries, benefits, travel and share-based compensation expense; (ii) external research and development expenses incurred
under arrangements with contract research organizations and contract manufacturing organizations, investigational sites and consultants, including share-based
compensation expense for consultants; (iii) the cost of acquiring, developing and manufacturing clinical study materials; and (iv) costs associated with
preclinical and clinical activities and regulatory operations. Non-refundable advance payments for goods or services to be received in the future for use in
research and development activities are capitalized and recorded in the accompanying consolidated balance sheets as prepaid research and development. The
capitalized amounts are expensed as the related goods are delivered or the services are performed. If expectations change such that the Company does not expect
it will need the goods to be delivered or the services to be rendered, capitalized non-refundable advance payments would be charged to expense.
The Company enters into consulting, research and other agreements with commercial entities, researchers, universities and others for the provision of
goods and services. Under such agreements, the Company may pay for services on an hourly, monthly, quarterly, project or other basis. Such arrangements are
generally cancellable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion
of specific tasks under each contract using information and data provided by the Company’s clinical sites and vendors. These costs consist of direct and indirect
costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company.
Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs.
These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved and experience
with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.
Share-based Compensation
The Company accounts for share-based compensation awards as compensation expense based on their grant date fair values. For share-based awards
granted to employees and non-employees, the Company allocates share-based compensation expense on a straight-line basis over the associated service or
vesting period. The Company recognizes compensation expense for the portion of awards that have vested each period. Share-based compensation is classified in
the accompanying consolidated statements of operations within research and development or general and administrative operating expenses depending on where
the related services are provided.
The Company determines the fair value of restricted share units by using the ordinary share price on the date of grant. The Company estimates the fair
value of its share options using Black-Scholes, which requires the input of subjective assumptions, including (a) expected share price volatility, (b) expected term
of the award, (c) risk-free interest rate, (d) expected dividends and (e) estimated fair value of its ordinary shares on the measurement date. Due to the lack of a
public market for the trading of its ordinary shares and a lack of Company specific historical and implied volatility data, the Company has based its estimate of
expected volatility on the historical volatility of a group of similar companies, which are publicly traded. When selecting these public companies on which it has
based its expected share price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position
within the industry and with historical share price information sufficient to meet the expected term of the share-based awards. The Company computes historical
volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the share-based
awards. The expected term of options granted represents the weighted average of previously transacted awards plus the minimum and maximum expected life of
the outstanding awards based on vesting and expiry. The expected term for nonemployee awards is the remaining contractual term of the option. The risk-free
interest rates are based on the U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has
never paid and does not expect to pay dividends in the foreseeable future.
F-12
The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from its estimates. The
Company uses historical plan data to estimate forfeitures and records share-based compensation expense only for those awards that are expected to vest. Share-
based compensation expense recognized in the consolidated financial statements is based on awards that are ultimately expected to vest.
Income Taxes
Deferred income taxes are recorded using an asset and liability approach. The Company records deferred tax assets and liabilities based on differences
between financial reporting and tax bases of assets and liabilities which are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be
realized, which is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2021
and 2020, the Company does not have any material uncertain tax positions.
Guarantees and Indemnification
The Company indemnifies its officers and directors for certain events or occurrences that happen by reason of the relationship with, or position held at,
the Company. The Company has not experienced any losses related to these indemnification obligations, and no claims are outstanding.
Net Loss Per Share Attributable to Ordinary Shareholders
Basic net loss per share attributable to ordinary shareholders is calculated by dividing net loss attributable to ordinary shareholders by the weighted
average shares outstanding during the period, without consideration for ordinary share equivalents. During periods of income, the Company allocates
participating securities a proportional share of income determined by dividing total weighted average participating securities by the sum of the total weighted
average ordinary shares and participating securities (the “two-class method”). The Company’s convertible preferred shares participate in any dividends declared
by the Company and are, therefore, considered to be participating securities. Participating securities have the effect of diluting both basic and diluted earnings
per share during periods of income. During periods of loss, the Company allocates no loss to participating securities because they have no contractual obligation
to share in the losses of the Company. Diluted net loss per share attributable to ordinary shareholders is calculated by adjusting weighted average shares
outstanding for the dilutive effect of ordinary share equivalents outstanding for the period, determined using the treasury-share and if-converted methods. For
purposes of the diluted net loss per share attributable to ordinary shareholders’ calculation, convertible preferred shares, share options, restricted share units,
warrants and convertible notes are considered to be ordinary share equivalents, but have been excluded from the calculation of diluted net loss per share
attributable to ordinary shareholders, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share are the same
for all periods presented.
Deferred Financing Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as
deferred financing costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in shareholders’ equity
(deficit) as a reduction of proceeds generated as a result of the offering. Should a planned equity financing be abandoned, the deferred financing costs would be
expensed immediately as a charge to operating expenses in the consolidated statement of operations.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new guidance most significantly impacts lessee accounting
and disclosures but also requires enhanced disclosures for lessors. The guidance requires lessees to identify arrangements that should be accounted for as leases.
For lease arrangements exceeding a 12-month term, a right-of-use asset and lease obligation is recorded by the lessee for all leases, whether
F-13
operating or financing, while the statement of operations reflects lease expense for operating leases and amortization and interest expense for financing leases.
Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The Company will adopt the new standard
effective January 1, 2022. The Company believes the adoption of this standard will not have a material impact on its consolidated financial statements and
related disclosures.
3.
Fair Value of Financial Assets and Liabilities
Fair Value Hierarchy
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the
level of the fair value hierarchy utilized to determine such fair values as of December 31, 2021 and December 31, 2020 (in thousands):
Fair Value Measurements as of
December 31, 2021 using:
Level 1
Level 2
Level 3
Total
Assets:
Short-term money market funds
$
47,036 $
— $
— $
47,036
Total financial assets
$
47,036 $
— $
— $
47,036
Liabilities:
Derivative liability- related party
$
— $
— $
71,037 $
71,037
Total financial liabilities
$
— $
— $
71,037 $
71,037
Fair Value Measurements as of
December 31, 2020 using:
Level 1
Level 2
Level 3
Total
Assets:
Short-term money market funds
$
32,643 $
— $
— $
32,643
Total financial assets
$
32,643 $
— $
— $
32,643
Liabilities:
Derivative liability- related party
$
— $
— $
25,155 $
25,155
Total financial liabilities
$
— $
— $
25,155 $
25,155
As of December 31, 2021, and 2020, the carrying amounts of cash, accounts payable, and accrued expenses approximated their estimated fair values
because of the short-term nature of these financial instruments. The Company’s cash equivalents, which are in money market funds, are classified within Level 1
of the fair value hierarchy because they are valued using quoted prices as of December 31, 2021 and 2020.
As of December 31, 2021 and 2020, the outstanding debt from the Venture Loan and the Term Loan (Note 7), respectively, bears interest at rates which
approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair
value.
There have been no transfers between fair value measure levels during the years ended December 31, 2021 and 2020.
Development Derivative Liability
On October 30, 2020, the Company entered into a development funding agreement (“Development Agreement”) with MVIL under which MVIL agreed
to provide funding to us to support our efforts to secure regulatory approval for elamipretide and to develop elamipretide for the treatment of Barth syndrome
(“BTHS”), geographic atrophy, an advanced form of dry-age related macular degeneration (“dry AMD”), Friedreich’s ataxia (“FRDA”), Duchenne
cardiomyopathy (“DMDC”), Leber hereditary optic neuropathy (“LHON”) and mitochondrial replisome-related disorders, which we collectively refer to as the
Designated Indications.
F-14
Under the Development Agreement, MVIL paid $20.0 million to the Company upon execution of the Agreement, $10.0 million upon completing
enrollment of its ReCLAIM 2 Phase 2 clinical trial of elamipretide for the treatment of dry AMD (the “Tranche 2 Milestone Event’) and $5.0 million upon the
submission by the Company of a new drug application to the U.S. Food and Drug Administration (the “FDA”) for elamipretide for the treatment of BTHS (the
“Tranche 3 Milestone Event”) for a total of $35.0 million.
Under the Development Agreement, upon receipt of each funding tranche, the Company is required to issue a warrant exercisable for ordinary shares at
an exercise price that is 115% of the implied price of the Company’s ordinary shares on the date of issuance, with such number of ordinary shares being equal to
the quotient of 30% of the amount of each funding received divided by the exercise price (“Future Warrants”).
On May 17, 2021, the Company and MVIL amended the Development Agreement, under which MVIL agreed to provide an additional funding of $30.0
million ( the "Additional Funding"). Pursuant to the amended Development Agreement the Company received $8.0 million in May 2021 and an additional $6.0
million in September 2021, $5.0 million in October 2021 and $11.0 million in December 2021. The Company was required to issue a warrant to MVIL, in
connection with each such additional funding, under the same terms and conditions of the Development Agreement.
Under the Development Agreement, the Company is required to make success payments to MVIL (“Success Payments”) upon receipt of an approval of
elamipretide (a “Regulatory Approval”) of a new drug application by the FDA or a marketing authorization application by the European Medicines Agency (the
“EMA”) for the treatment of (i) dry AMD (a “Common Approval”) and (ii) BTHS, FRDA, DMDC, replisome-related disorders or LHON (each, an “Orphan
Approval”), subject to certain adjustments with most payments due in the 5th through 7th year following regulatory approval. No payments are owed should
regulatory approval not be achieved for elamipretide in the designated indications.
If the first Regulatory Approval is an Orphan Approval, the Company will pay Success Payments of $2 million upon approval and then an additional
$158 million in the aggregate in seven additional annual payments. All Success Payments will be proportionately adjusted in the event that the actual funding
received by the Company from Investors is lower or greater than $70.0 million including as a result of the payment of the Additional Funding. If the first
Regulatory Approval is a Common Approval, or upon a second regulatory approval (whether a Common Approval or an Orphan Approval), the Company will
make total Success Payments reflecting a 27% internal rate of return over a seven-year term following such approval.
If the Company’s board of directors determines to seek a Regulatory Approval from both the FDA and EMA, then 66% of each applicable Success
Payment will be due upon Regulatory Approval by the FDA and each applicable anniversary thereof and 34% of each applicable Success Payment will be due
upon Regulatory Approval by the EMA and each applicable anniversary thereof.
In addition, the Company has agreed that its obligations to MVIL under the Development Agreement will be subordinated to its existing indebtedness
owed to Lenders under the Company’s Venture Loan and Security Agreement (Note 7). The Company, the Lenders and MVIL have entered in a customary
subordination agreement.
Upon execution of the Development Agreement, the Company issued a warrant to MVIL exercisable for 46,153,846 ordinary shares (“Initial Warrant”) at
an exercise price of $0.13 with such number of ordinary shares being equal to the quotient of 30% of the amount of MVIL’s commitment divided by the exercise
price. The warrant was immediately exercisable and has a term of three years.
The Development Agreement is presented as a derivative liability on the consolidated balance sheet as of December 31, 2021 and 2020. The Success
Payments feature in the Development Agreement meets the criteria for derivative accounting as it the has multiple underlying, payment provisions, nominal
initial net investment and a net settlement provision. The Development Agreement also includes provisions that allow for the issuance of Future Warrants upon
receipt of additional funding. At inception, the Future Warrants were not considered “fixed-for-fixed” as the exercise price and number of ordinary shares are
dependent on the date and share price at the date of the issuance. As such the Future Warrants were deemed to be liability classified. The Development
Agreement and the Future Warrants are considered to be a hybrid instrument recorded as the development derivative liability on our consolidated balance sheets.
At the inception of the arrangement, the Company identified two units of account (i) the Initial Warrant and (ii) derivative liability, which included the
Success Payments feature and the Future Warrants. The development
F-15
derivative liability was initially recorded at the value of the $18.1 million, the estimated fair value at inception of the arrangement, and is remeasured at fair
value at each reporting date. The remaining amount of $1.9 million of the initial cash received of $20.0 million, was attributed to the Initial Warrant, which met
the criteria for equity classification and was recognized as a component of additional paid in capital and was not remeasured. The fair value of the Future
Warrants was estimated as of the inception of the agreement and as of December 31, 2020, using the Black Scholes Merton valuation model, with the following
ranges of assumptions: volatility of 80.36% - 80.76%, simulated share price of $0.11 based on a Monte Carlo model, risk-free rate of 0.17% - 0.19%, a term of 3
years and 9.6%- 10.5% discount for lack of marketability.
Upon the receipt of each respective milestone payment, each respective Future Warrant was deemed to meet the criteria for equity classification (the
"Warrants"). The Warrants meets the “fixed-for-fixed” criteria and were recognized as a component of additional paid in capital and were not remeasured. As of
December 31, 2021, there were no Future Warrants within the development derivative liability.
Upon receipt of the milestone payments in 2021, the Company, in accordance with the Development Agreement issued the following warrants:
▪
In February 2021, the Company received a milestone payment of $10.0 million from MVIL and issued a warrant to MVIL exercisable for
18,750,000 ordinary shares at an exercise price of $0.16.
▪
In May 2021, the Company received $8.0 million, and issued a warrant to MVIL exercisable for 18,461,538 ordinary shares at an exercise price of
$0.13.
▪
In September 2021, the Company received a payment of $11.0 million, which represent $5.0 million for the Tranche 3 Milestone Event and a $6.0
million partial payment for the October 1 payment. The Company issued warrants to MVIL exercisable for 10,714,286 and 12,857,143 ordinary
shares, respectively, at an exercise price of $0.14.
▪
In October 2021, the Company received a payment of $5.0 million, which represent the remaining portion for the October 1 milestone payment. In
connection with this funding the Company issued a warrant exercisable for 13,636,364 to MVIL, at an exercise price of $0.11.
▪
In December 2021, the Company received a payment of $11.0 million, which represent the December 1 milestone payment. In connection with
this funding the Company issued warrants exercisable for 41,250,000 to MVIL, at an exercise price of $0.08.
The warrants issued were immediately exercisable and have a term of three years.
The fair value of the Warrants and Initial Warrant were estimated during the years ended December 31, 2021 and 2020, respectively, using the Black
Scholes Merton valuation model, with the following ranges of assumptions:
Year Ended December 31,
2021
2020
Risk free interest rate
0.3% - 0.97%
0.19%
Share price
$0.08 - $0.16
$0.11
Discount for lack of marketability
9.6% - 15.5%
10.5%
Expected term (in years)
3.0
3.0
Expected volatility
67.61% - 78.25%
80.76%
The development derivative liability is considered a level 3 fair value measurement, as it is dependent upon significant unobservable inputs. The
derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions regarding the probability and timing of cash
flows, and the present value of cash flows is determined using a risk-adjusted discount rate.
Key inputs to the level 3 fair value model at inception and as of the reporting date include (i) the probability (100%) and timing of achieving stated
development milestones to receive the next tranches of funding and the related issuance of Future Warrants upon receipt of the respective tranches of funding
(ii) the probability and timing of achieving FDA and EMA approval of the designated indications, and (iii) the Company’s implied cost of borrowing (18.7% at
inception, 18.28% and 16.6% as of December 2021 and 2020, respectively).
The development derivative liability was remeasured at fair value on December 31, 2021 as a level 3 financial instrument, with the total change in
valuation of the development derivative liability of $4.9 million recorded as a loss for the year ended December 31, 2021 on the consolidated statement of
operations. The development derivative liability has a remeasured fair value on December 31, 2021, of $71.0 million.
F-16
The following table presents the development derivative liability measured at fair value using unobservable inputs (Level 3) as of year ended December
31, 2021 (in thousands):
Fair value at January 1, 2021
$
25,155
Amounts received under the Development Agreement
15,000
Amounts received under the Development Agreement as amended
30,000
Loss recorded in loss from remeasurement of development derivative liability
4,899
Reclassification of equity classified warrants
(4,017 )
Fair value at December 31, 2021
$
71,037
4.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
As of December 31,
2021
2020
Research and development
$
1,463 $
357
Prepaid insurance
661
1,378
Other
343
518
Total
$
2,467 $
2,253
5.
Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
As of December 31,
2021
2020
Computer equipment and software
$
116 $
116
Furniture, fixtures and other
154
147
Laboratory equipment
350
289
Leasehold improvements
16
16
636
568
Accumulated depreciation
(539 )
(462 )
Property and equipment, net
$
97 $
106
Depreciation expense was $0.1 million, $0.2 million and $0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
6.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
As of December 31,
2021
2020
Research and development
$
3,456 $
3,098
Employee compensation costs
3,000
2,983
Consulting and professional services
558
647
Legal expenses
225
245
Deferred rent
16
6
Other
28
45
Total
$
7,283 $
7,024
F-17
7.
Debt
Term Loan
In June 2017, the Company entered into a Loan and Security Agreement with a lender that permitted the Company to borrow up to an aggregate principal
amount of $40.0 million through a multiple tranche term loan (the “Term Loan”), the total gross amount borrowed under the Term Loan was $20.0 million. The
Term Loan was amended in March, July and October of 2018 and March and October of 2019, July 2020, and April 2021. For consideration of the amendments,
the Company agreed to pay an end of term charge of $1.5 million at maturity which is being accrued and recorded to interest expense over the life of the loan
using the effective interest method. As of December 31, 2020, the total end of term charge was $1.5 million, which was paid in 2021. As of September 30, 2021,
the interest rate was 9.5%. The Term Loan was paid in full as of September 30, 2021.
As consideration for the Term Loan, the Company and the lender entered into a warrant agreement pursuant to which the lender, as Warrant holder, has
the right to purchase a quantity of shares equal to the quotient derived by dividing (a) the Warrant coverage by (b) the exercise price. Warrant coverage means the
greater of (a) $312,500 plus 2.5% of future tranche advances in the event all or part of the tranches are funded or (b) $375,000. The exercise price is (a) the
purchase price of Series A preferred shares, $2.30769 per share, or (b) the price per share paid in the next equity round of financing of ordinary shares or
preferred shares, which results in aggregate gross proceeds of at least $30 million. Upon the closing of the IPO, the Warrant became exercisable for 500,000
ordinary shares at an exercise price of $1.00 per ordinary share. The Warrant was exercisable beginning in June 2017, in whole or in part, and expires in ten
years. The Warrant was originally recorded as a liability and a discount to the debt and was being amortized through interest expense using the effective interest
rate method over the remaining term of the Term Loan. Upon the completion of the IPO, the Warrant met the criteria for equity classification as it was indexed to
the Company’s shares and as such was reclassified to an equity instrument and was included in additional paid-in capital. See Note 3 for fair value considerations
and disclosures.
On September 30, 2021, the Company entered into a payoff letter with respect to the Term Loan (the "Payoff Letter"), which resulted in a loss on
extinguishment of debt of $0.1 million including both cash and non-cash expenses. Pursuant to the Payoff Letter, the Company paid a total of $5.7 million to
Hercules, representing $5.5 million in outstanding principal, $0.1 million end of term charge, $0.1 million in early termination fee due and accrued interest owed
to Hercules under the Term Loan. In connection with the execution of the Payoff Letter and the repayment of the Company’s outstanding obligations under the
Term Loan, the Term Loan and the related loan documents were terminated.
Interest expense related to the Loan for the year ended December 31, 2021, 2020 and 2019 was $0.7 million, $1.8 million and $2.7 million, respectively.
Accrued interest related to the Term Loan as of December 31, 2021 and 2020 was $0 and $1.5 million, respectively.
Venture Loan
On September 30, 2021, the Company entered into a $25.0 million Venture Loan and Security Agreement (“Venture Loan”) with the Lenders. On the
closing date, the Company borrowed $15.0 million, with the remaining $10.0 million available upon the Company achieving certain predetermined milestones.
Each advance under the Venture Loan will be repaid in 48 months from the first day of the month following the funding of the advance. Each advance
accrues interest at a per annum rate of interest equal to 5.5% plus the prime rate, as reported in the Wall Street Journal, subject to a prime rate floor of 3.25%. As
of December 31, 2021 the interest rate was 8.75%. The Venture Loan provided for interest-only payments for each advance for the first 18 months. The interest-
only period may be extended to 24 months if the Company satisfies the Interest Only Extension Milestone (as defined in the Venture Loan). Thereafter,
amortization payments will be payable in monthly installments of principal and interest through each advance’s maturity date. Upon ten business days’ prior
written notice, the Company may prepay all of the outstanding advances by paying the entire principal balance and all accrued and unpaid interest, subject to
prepayment charges of up to 3% of the then outstanding principal balance. Upon the earlier of (i) payment in full of the principal balance, (ii) an event of default,
or (iii) the maturity date, the Company will pay an additional final payment of 6% of the principal loan amount to the Lenders.
The Venture Loan is secured by a lien on substantially all of the assets of the Company, other than Intellectual Property and Excluded Collateral (in each
case as defined in the Venture Loan), and contains customary covenants and representations, including a financial reporting covenant and limitations on
dividends, indebtedness,
F-18
collateral, investments, distributions, transfers, mergers or acquisitions taxes, corporate changes, deposit accounts, and subsidiaries. The Company is required to
comply with an unrestricted minimum cash level in accordance with the terms of the Venture Loan until certain cash financing conditions are met.
The events of default under the Venture Loan include but are not limited to, failing to make a payment, breach of covenant, or occurrence of a material
adverse change. If an event of default occurs, the Lenders are entitled to accelerate the loan amounts due or take other enforcement actions. As of December 31,
2021, the Company did not breach any covenants or specified event that could result in an event of default.
The initial funding of $15.0 million will mature on October 1, 2025 (“Maturity Date”). The Company is required to make interest-only payments on the
Venture Loan through March 1, 2023 with monthly amortization payments of principal and interest thereafter through the Maturity Date.
On September 30, 2021, pursuant to the Venture Loan, the Company issued warrants to the Lenders to purchase up to 13,636,364 of the Company’s
ordinary shares with an exercise price of $0.11 (the “Venture Warrants”). The Venture Warrants are exercisable for ten years from the date of issuance. The
Venture Warrants, which met equity classification, were recognized as a component of permanent shareholders’ equity within additional paid-in-capital and were
recorded at the issuance date using a relative fair value allocation method. The Company valued the Venture Warrants at issuance, which resulted in a discount on
the debt, and allocated the proceeds from the loan proportionately to the Venture Loan and to the Venture Warrants, of which $1.2 million was allocated to the
Warrants.
In the connection with the Venture Loan the Company also paid $0.3 million nonrefundable commitment fee representing 1% of the total Venture Loan
capacity, of which $0.2 million was recognized as debt discount and the remaining was recorded as an asset to be amortized on a straight-line basis over the term
of the Venture Loan. The Company also incurred $0.1 million in debt issuance costs, including legal fees in connection with the Venture Loan Agreement, fees
paid directly to the lender, and other direct costs paid to a third party. All fees, warrants, and costs paid to the Lenders and all direct costs incurred by the
Company are recognized as a debt discount and are amortized to interest expense using the effective interest method over the term of the loan. Interest expense
related to the Venture Loan for the year ended December 31, 2021 was $0.5 million. Accrued interest as of December 31, 2021 was $0.1 million.
Future principal payments under the Loan as of December 31, 2021 are as follows (in thousands):
2022
$
—
2023
4,000
2024
6,000
2025
5,000
Total future principal payments
15,000
Less unamortized debt discount
(1,344 )
Total balance, balance sheet
$
13,656
Term loan—current portion
—
Total balance as depicted on the balance sheet
$
13,656
8.
Convertible Notes Payable
Upon the closing of the IPO, the outstanding convertible notes payable referenced below, including principal, interest and premium thereon, converted
into 175,210,373 ordinary shares. Interest expense relating to the convertible notes referenced above for the year ended December 31, 2019 was $1.3 million.
Interest expense related to the debt discount amortization was $2.7 million for the year ended December 31, 2019.There were no convertible notes payable as of
December 31, 2021 and 2020.
F-19
During 2017, the Company issued six convertible promissory notes payable to MVIL, resulting in proceeds of $50.0 million (the “2017 MVIL Notes”).
The notes accrued interest at 8% per annum. Effective upon the closing of a qualified financing, as defined, the outstanding principal and accrued interest
automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. MVIL also had the right to
convert some or all of the outstanding amount into shares of Series A preferred shares at a conversion price of $2.30769 after December 31, 2018. In January
2018, the Company entered into a note exchange agreement with MVIL in the amount of $52.4 million, which represents the total principal and accrued interest
of the 2017 MVIL Notes at the time of the execution of the note exchange agreement. The exchange terminated the 2017 MVIL Notes and created a new
convertible note under substantially the same terms as the notes described in the following paragraph. The note exchange agreement was accounted for as a debt
extinguishment and resulted in no gain or loss upon recognition of the new debt.
In January 2018, the Company entered into a note purchase agreement with investors, whereby the Company was eligible to borrow an aggregate
principal amount of $30.0 million in exchange for notes convertible into ordinary shares of the Company. In April 2018, the note purchase agreement was
amended to allow the Company to borrow up to $65.0 million in the aggregate. Between January and May 2018, the Company issued notes in an aggregate
principal amount of $50.0 million (the “2018 New Investor Notes”). The 2018 New Investor Notes accrued interest at 7% per annum. Accrued interest on the
2018 New Investor Notes compounded annually. The 2018 New Investor Notes, as amended, were convertible upon (i) the closing of an initial public offering or
(ii) a subsequent financing occurring after January 10, 2019. Effective upon the closing of a qualified financing, as defined, the outstanding principal and accrued
interest plus a 25% premium, defined as the sum of principal plus interest multiplied by 25%, automatically convert into shares of the same class and series of
our shares issued to other investors in the qualified financing. The 2018 Investor Notes converted in accordance with their terms upon the closing of the IPO.
The Company evaluated the 2018 New Investor Notes as well as the exchange agreement and concluded that certain of the redemption and conversion
features met the bifurcation criteria under ASC 815, Derivatives and Hedging and should be accounted for separately from the debt.
The derivative liability was recorded at fair value on the Company’s consolidated balance sheet as a liability and subject to revaluation at each balance
sheet date, and any changes in value were recorded as a component of gain or loss in the change in valuation of derivative liability on the statements of
operations. The initial values of the derivative, along with legal fees, were recorded as a debt discount and are being amortized as interest expense using the
effective interest method over the life of the note. See Note 3 for fair value considerations and disclosures.
In October 2018, the Company entered into the 2018 MVIL Note, under which the Company borrowed $30.0 million, of which it has borrowed $25.0
million as of December 31, 2018. In January 2019, the Company borrowed the remaining $5.0 million. The notes contain similar terms as the notes described in
the paragraph above describing the 2018 New Investor Notes except that a qualified financing is limited to a U.S. IPO and that there was no change of control
conversion feature. The 2018 MVIL Note was convertible upon a qualified initial public offering of the Company’s ordinary shares in the United States at the
initial public offering price per share. Effective upon the closing of a qualified financing, the outstanding principal and accrued interest plus a 25% premium of
such principal and interest automatically converts into shares of the same class and series of our shares issued to other investors in the qualified financing. The
automatic conversion upon the IPO was a settlement of the debt and the difference between the fair value of the shares issued in exchange for the convertible
notes and the net carrying amount of the convertible notes was recorded as a loss on extinguishment of debt. The 2018 MVIL Note accrued interest at 7% per
annum and accrued interest compounded annually, and upon such compounding, was added to the outstanding principal amount. The 2018 MVIL Note converted
in accordance with its terms upon the closing of the IPO.
9.
Convertible Preferred Shares
Upon the closing of the IPO in February 2019, all shares of the Company’s outstanding Series A preferred shares automatically converted into 91,600,398
ordinary shares. At December 31, 2021 and 2020, the Company had no Series A convertible preferred shares authorized or outstanding.
F-20
10.
Shareholders’ Equity
Ordinary Shares
At December 31, 2021 and 2020, 1,600,000,000 and 1,200,000,000 ordinary shares, $0.0003 par value, were authorized for issuance, and 712,131,058
and 635,092,150 ordinary shares were issued and outstanding, respectively.
The Company has reserved for future issuance the following number of ordinary shares as of December 31, 2021:
2019 Share Incentive Plan, as amended
78,126,567
2020 ADS Plan
22,154,304
Employee Share Purchase Plan
14,691,541
Ordinary share warrants-MVIL (related party)
161,823,177
Ordinary share warrants- Venture Loan Issuance
13,636,364
Ordinary share warrant- Term Loan Issuance
500,000
Total
290,931,953
Other Offerings
In April 2020, the Company entered into an ordinary share purchase agreement (the “Purchase Agreement”), pursuant to which the Company issued and
sold to MVIL 152,858,460 ordinary shares, par value $0.0003 per share (the “Shares”), at a price of $0.13084 per share, for an aggregate purchase price of $20.0
million.
In November 2020, the Company entered into a Securities Purchase Agreement with certain institutional investors for a registered public offering of an
aggregate of 2,844,446 ADSs or 34,133,352 ordinary shares at a public offering price of $1.125 per ADS for net proceeds of approximately $2.6 million.
In February 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for a registered public offering of an
aggregate of 2,339,000 ADSs or 28,068,000 ordinary shares at a public offering price of $2.00 per ADS for net proceeds of approximately $4.1 million.
Lincoln Park Capital
On June 2, 2020, the Company entered into a $20.0 million purchase agreement (the “LPC Purchase Agreement”), together with a registration rights
agreement with Lincoln Park Capital Fund, LLC (“LPC”). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right
to sell to and Lincoln Park is obligated to purchase up to $20.0 million in shares of the Company’s ordinary shares, subject to certain limitations, from time to
time, over the 36-month period commencing on June 22, 2020.
The purchase price of the Ordinary Shares purchased by LPC under the LPC Purchase Agreement will be derived from prevailing market prices of the
Company’s ADSs immediately preceding the time of sale. The Company may direct LPC, at its sole discretion and subject to certain conditions, to purchase up
to 900,000 Ordinary Shares on any business day on which the closing sale price of the Company’s ADSs is not below $1.00 per ADS (such purchases, a “Regular
Purchase”). The maximum number of Ordinary Shares that the Company may direct LPC to purchase in any single Regular Purchase under the Purchase
Agreement increases, up to a maximum of 1,800,000 Ordinary Shares, if on the purchase date for such Regular Purchase the closing sale price of the Company’s
ADSs is above certain threshold prices set forth in the LPC Purchase Agreement, provided that LPC’s total purchase obligation under any single Regular
Purchase shall not exceed $2,000,000.
Sales of shares of ordinary shares to LPC under the LPC Purchase Agreement are limited to no more than the number of shares that would result in the
beneficial ownership by Lincoln Park and its affiliates, at any single point in time of more than 4.99% of the outstanding Ordinary Shares. Furthermore, under
applicable rules of The Nasdaq Global Market, in no event may the Company issue or sell to LPC under the Purchase Agreement more than 19.99% of the
Ordinary Shares outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless (i) the Company obtains shareholder
approval to issue Ordinary Shares in excess of the Exchange Cap or (ii) the average price of ADSs that represent the equivalent of all applicable sales of
Ordinary Shares to LPC under the Purchase Agreement equals or exceeds $1.9674 per share, such that the transactions contemplated by the Purchase Agreement
are exempt from the Exchange Cap limitation under applicable Nasdaq rules.
F-21
The LPC Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination
provisions by, between and for the benefit of the parties. The Company agreed with LPC that it will not enter into any “variable rate” transactions with any third
party for a period defined in the LPC Purchase Agreement. LPC has agreed not to cause or engage in any direct or indirect short selling or hedging of the
Company’s ADSs. The Purchase Agreement may be terminated by the Company at any time, at its sole discretion, without any cost or penalty.
Upon the execution of the LPC Purchase Agreement, the Company issued 2,203,812 shares of its ordinary shares as commitment shares in accordance
with the closing conditions contained within the LPC Purchase Agreement. The commitment shares were valued using the closing price of the Company’s ADSs
on the effective date of the LPC Purchase Agreement resulting in a fair market value of approximately $0.4 million. The fair market value of the commitment
shares as well as other issuance costs associated with the LPC Purchase Agreement totaled $0.7 million. These issuance costs are classified as prepaid expenses
and other current assets in the accompanying consolidated balance sheet. As shares of ordinary shares are sold in accordance with the LPC Purchase Agreement,
the issuance costs, including the fair value of the commitment shares, will be reclassified to additional paid-in capital on the Company’s consolidated balance
sheet. Additionally, as consideration for entering into the Purchase Agreement, the Company paid LPC a commitment fee of 2,203,812 ordinary shares.
As of December 31, 2021 and 2020, pursuant to the LPC Purchase Agreement a total of 41,094,552 and 4,680,000 ordinary shares were sold to LPC for
net proceeds totaling $4.2 million and $0.7 million, respectively. To date the Company has sold 45,774,552 ordinary shares to LPC for gross proceeds totaling
$5.3 million.
At the Market Offering
On August 6, 2020, The Company and H.C. Wainwright & Co., LLC (“Wainwright”) entered into an At The Market Offering (“ATM”) Agreement
pursuant to which the Company may offer and sell, from time to time, through Wainwright, ADSs, each representing 12 ordinary shares, with a nominal or par
value of $0.0003 per share. Any such sales would be effective pursuant to the Company’s registration statement on Form F-3 (“Shelf Registration”), which was
declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on April 10, 2020. The Company has no obligation to sell any ADSs pursuant to
the agreement and may at any time suspend sales pursuant to the agreement. Each party may terminate the agreement at any time without liability. As of
December 31, 2021 and 2020, the Company has not sold any shares under the ATM.
Refer to Note 3 for a description of warrants issued under the Development Agreement and Note 7 for warrants issued under the Venture Loan agreement.
11.
Share Incentive Plan
The Company’s 2006 Plan provides for the grant of share options or other awards to employees, directors, advisors and consultants for the purchase of up
to 25,544,054 ordinary shares. Share options vest over varying schedules as determined by the Company’s board of directors and typically expire 10 years from
the date of grant. Certain options provide for accelerated vesting if there is a change in control, as defined in the 2006 Plan. The 2006 Plan expired in 2019 and
no additional awards can be made under it.
In January 2019, the Company adopted the 2019 Share Incentive Plan (“2019 Plan”) and as a result no further awards will be made under the 2006 Plan.
In addition, any ordinary shares subject to awards under the 2006 Plan that expire, are forfeited, or are otherwise surrendered, without having been fully
exercised or resulting in any ordinary shares being issued will become available for issuance under the 2019 Plan, up to an additional 15,794,199 shares, which is
the number of shares issuable pursuant to outstanding awards granted under the 2006 Plan. The 2019 Plan provides for the grant of shares or other awards to
employees, directors, advisors and consultants for the purchase of up to 63,487,133 ordinary shares. Share options vest over varying schedules as determined by
the Company’s board of directors and typically expire 10 years from the date of grant. Certain options provide for accelerated vesting if there is a change in
control, as defined in the 2019 Plan.
On January 1, 2020, 17,468,832 ordinary shares were added to the 2019 Plan pursuant to the Evergreen Provision. In March 2020, upon shareholder
approval the 2019 Plan was amended (“Amended 2019 Plan”) and the number of shares reserved under the plan was reduced by 24,999,996 shares, as those
shares are now reserved under the 2020 ADS incentive plan (“2020 ADS Plan”). The Amended 2019 Plan provides for the grant of shares or other awards to
employees, directors, advisors and consultants for the purchase of up to 55,898,342 ordinary shares. Share
F-22
options vest over varying schedules as determined by the Company’s board of directors and typically expire 10 years from the date of grant. Certain options
provide for accelerated vesting if there is a change in control, as defined in the Amended 2019 Plan. Pursuant to the Evergreen Provision, effective January 1,
2021, an additional 22,228,225 ordinary shares were added to the Amended 2019 Plan.
In March 2020, upon shareholder approval, the Company adopted the 2020 ADS Plan to provide for grants of restricted ADSs, restricted ADS units and
other ADS-based awards. The 2020 ADS Plan provides for the grant of ADS-based awards to employees, directors, advisors and consultants of up to 24,999,996
ordinary shares or 2,083,333 ADSs. Pursuant to the Evergreen Provision, effective January 1, 2021, an additional 9,526,380 ordinary shares, or 793,865 ADSs
were added to the 2020 ADS Plan.
At December 31, 2021, there were 14,548,005 ordinary shares available for future grant under the Amended 2019 Plan and 9,066,456 ordinary shares, or
755,538 ADSs, available for future grant under the 2020 ADS Plan.
The fair value of each share option granted to employees and directors was estimated on the date of grant using the following assumptions:
Year Ended December 31,
2021
2020
2019
Risk free interest rate
0.51% - 1.17%
0.28% - 1.38%
1.43% - 2.61%
Expected dividend yield
—
—
—
Expected term (in years)
5.5 - 6.7
4.6 - 7.0
5.4 - 6.4
Expected volatility
76% - 79%
74% - 82%
55% - 58%
The following table summarizes share option plan activity for the year ended December 31, 2021:
Number of
Ordinary Shares
Weighted-
Average
Exercise Price
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic Value
Outstanding at December 31, 2020
44,959,938 $
0.69
$
11,650
Granted
22,175,244 $
0.15
Exercised
—
Cancelled or forfeited
(3,556,620 ) $
0.64
Outstanding at December 31, 2021
63,578,562 $
0.50
7.4 $
—
Exercisable at December 31, 2021
32,701,811 $
0.71
6.3 $
—
Vested and expected to vest at December 31, 2021
60,345,324 $
0.51
7.4 $
—
The weighted average grant date fair value per share for awards granted during the year ended December 31, 2021, 2020 and 2019, was $0.10, $0.12 and
$0.53, respectively.
The following table summarizes restricted share unit activity for the 2020 ADS Plan for the year ended December 31, 2021 (in ordinary shares):
Number of
Shares
Weighted-
Average
Grant Date Fair Value
Non-vested at December 31, 2020
15,013,296 $
0.11
Granted
6,604,356 $
0.14
Vested and released
(7,876,356 ) $
0.11
Cancelled or forfeited
(653,448 ) $
0.13
Non-vested as of December 31, 2021
13,087,848 $
0.12
The fair value of restricted share units is measured using the ordinary share price on the date of grant and share-based compensation expense for the
restricted share units is recorded ratably over their vesting period. The total fair value of restricted share units vested during the year ended December 31, 2021
was approximately $1.1 million.
F-23
Total share-based compensation expense is as follows (in thousands):
Year Ended December 31,
2021
2020
2019
Research and development
$
1,146 $
1,171 $
1,195
General and administrative
3,033
3,053
2,049
Total
$
4,179 $
4,224 $
3,244
As of December 31, 2021, total unrecognized compensation expense related to non-vested share options, net of related forfeiture estimates, was $4.2
million and $0.9 million for non-vested restricted share units, net of related forfeitures estimates. The Company expects to recognize its remaining unrecognized
share-based compensation expense over a weighted-average period of approximately 1.83 years for non-vested options and approximately 1.71 years for non-
vested restricted share units.
12.
401(k) Savings Plan
In 2014, the Company adopted a tax-qualified employee savings and retirement 401(k) Plan, covering all qualified employees. Eligible employees may
make pretax contributions to the 401(k) Plan up to statutory limits. The Company contributes up to 3% of an employee’s annual salary, within statutory limits.
During the years ended December 31, 2021, 2020 and 2019, the Company contributed $0.2 million, $0.2 million and $0.4 million, respectively.
13.
License Agreements
In 2006, the Company entered into a license agreement, as amended, with Cornell Research Foundation, Inc. (“Cornell”) and a research institute
(collectively with Cornell, the “Licensor”) for certain intellectual property rights and, subsequently, entered into four additional license agreements with Cornell.
Under the terms of the original license agreement, the Company issued an aggregate of 666,667 ordinary shares to Cornell between 2006 and 2009. The
Company has also paid an upfront license fee of $60,000 and annual fees of approximately $60,000. The Company is also required to pay royalties on the
commercial sale of products that result from the licensed intellectual property, as well as a percentage of any sublicensing revenue. Subject to specified
reductions and royalty offset, such royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the
license agreements, except that for licensed products under the original agreement, such royalties are calculated as a tiered, low single-digit to sub-teen
percentage of net sales, depending on patent coverage, amount of net sales and type of licensed product. Under this license agreement, the Company was
required to commercialize a product by the date specified in the respective agreement, which with respect to the original Cornell agreement was December 31,
2020. The Licensor may terminate the license, subject to specified exceptions for causes due to scientific, regulatory, and other events over which the Company
cannot exert direct control. The Company believes that failure to commercialize is subject to the named exceptions, and to date has not received any notice of
termination from the Licensor. Any actual terminations of the license would be subject to cure periods and appeals before taking effect.
14.
Commitments and Contingencies
Lease commitments
In November 2020, the Company entered into a new two-year sublease arrangement for a facility in Needham, Massachusetts. The Company has
accounted for the current lease as an operating lease. The expense is being recorded on a straight-line basis over the term of the lease. Incentives received from
the landlord related to the operating lease are recorded as deferred rent. The rent expense was $0.1 million for year ended December 31, 2021 and $0.7 million
and $0.6 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the Company recorded deferred rent of
$15,758 and $ 22,060, respectively, which is included in
F-24
accrued expenses and other current liabilities and long-term deferred rent on the accompanying consolidated balance sheet.
Future minimum payments payable under all operating leases as of December 31, 2021 are as follows (in thousands):
Year Ending December 31,
2022
126
Total minimum lease payments
$
126
15.
Income Taxes
As a Cayman Islands entity, Stealth BioTherapeutics Corp is not currently subject to taxation. Stealth BioTherapeutics Inc. is subject to U.S. income tax
and certain state income taxes.
The following table presents domestic and foreign components of loss before income tax benefit for the periods presented (in thousands):
Year Ended December 31,
2021
2020
2019
U.S.
$
11,297 $
5,868 $
3,633
Non-U.S.
41,230
51,589
68,095
Loss before income tax benefit
$
52,527 $
57,457 $
71,728
A reconciliation setting forth the differences between the Company’s effective tax rate and the U.S. statutory tax rate is as follows (in thousands):
Year Ended December 31,
2021
2020
2019
Income tax benefit at federal statutory rate
$
2,373
$
1,232
$
763
State and local income taxes net of federal tax
benefit
7,059
787
247
Federal credits
718
1,210
2,454
IP Transfer
22,176
—
—
Nondeductible/nontaxable permanent items
(1 )
4
(89 )
Share based compensation benefit and other
2
1,644
—
Change in valuation allowance
(32,327 )
(4,877 )
(3,376 )
Income tax benefit
$
—
$
—
$
—
Effective tax rate
0.0 %
0.0 %
0.0 %
F-25
The significant components of the Company’s deferred tax assets are as follows (in thousands):
Year Ended December 31,
2021
2020
Deferred tax assets:
Federal and state net operating loss carryforwards
$
3,495 $
1,012
Credits
9,718
8,903
Deferred rent
4
6
Other accrued liabilities
614
509
Depreciation
3
5
Share based compensation
2,875
2,336
Deferred interest
2,053
1,871
Intangible Assets
28,207
—
Total deferred tax assets
46,969
14,642
Deferred tax liabilities:
Other accrued liabilities
—
—
Depreciation
—
—
Total deferred tax liabilities
—
—
Valuation allowance
46,969
14,642
Net deferred tax liability
$
— $
—
As of December 31, 2021, Stealth BioTherapeutics Inc. had federal and state net operating loss carryforwards of $13.4 million and $10.9 million,
respectively. The net operating loss carryforwards expire at various dates beginning in 2034 through 2037 for U.S. and state tax purposes. As of December 31,
2021, the Company had federal and state research and development credit carryforwards of approximately $4.8 million and $2.0 million, respectively, which, if
unused, will expire in years 2035 through 2041 (federal) and 2030 through 2036 (state). As of December 31, 2021, the Company also had an orphan drug credit
of $3.4 million, which, if unused, will expire in year 2037 through 2041.
Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating
loss carryforward period. As of December 31, 2021, the Company maintains a full valuation allowance for its deferred tax assets due to uncertainty regarding
their realization. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more or less than
the net amount the Company has recorded. The valuation allowance increased $32.3 million and $4.9 million during the years ended December 31, 2021 and
2020, respectively, due primarily to the generation of net operating losses during the period and the recognition of potential research and development tax credits.
F-26
The Company is not currently under any income tax examinations. Due to the Company’s net operating losses, all tax years generally remain open in each
jurisdiction. No interest or penalties have been recorded on any unrecognized tax benefits since its inception. The Company does not believe material uncertain
tax positions have arisen to date.
Under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, certain substantial changes in the Company’s ownership,
including a sale of the Company, or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net
operating loss carryforwards and tax credits, which could be used annually to offset future taxable income.
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in the United States on March 27, 2020. While the CARES Act
provides extensive tax changes in response to the COVID-19 pandemic, the provisions are not expected to have a significant impact on the Company’s financial
results.
16.
Net Loss Per Share Attributable to Ordinary Shareholders
Basic and diluted net loss per ordinary share are calculated as follows (in thousands, other than share and per share data):
Year Ended December 31,
2021
2020
2019
Numerator:
Net loss attributable to ordinary shareholders—
basic and diluted
$
(52,527 ) $
(57,457 ) $
(71,728 )
Denominator:
Weighted-average ordinary shares used in net
loss per share attributable to ordinary
shareholders—basic and diluted
682,388,906
556,169,255
375,669,759
Net loss per share attributable to ordinary
shareholders—basic and diluted
$
(0.08 ) $
(0.10 ) $
(0.19 )
The following ordinary share equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods
presented, as their effect is anti-dilutive:
Year Ended December 31,
2021
2020
2019
Ordinary share warrants- Term Loan issuance
500,000
500,000
500,000
Ordinary share warrants issued to MVIL- related
party
161,823,177
46,153,846
—
Ordinary share warrants- Venture Loan Issuance
13,636,364
—
—
2020 Restricted share units (in ordinary shares)
13,087,848
15,013,296
—
Outstanding share options
63,578,562
44,959,938
36,126,371
Total
252,625,951
106,627,080
36,626,371
F-27
17.
Related Party
Except as disclosed elsewhere in the notes to the accompanying consolidated financial statements, there were no other material transactions with related
parties.
18.
Subsequent Events
Except as disclosed above and elsewhere in the notes to the accompanying consolidated financial statements, the Company has concluded that no further
subsequent events have occurred that require disclosure.
F-28
Exhibit 8.1
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Jurisdiction of Incorporation or Organization
Stealth BioTherapeutics, Inc.
Delaware
Stealth BioTherapeutics (HK) Limited
Hong Kong
Exhibit 12.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. §1350)
I, Irene P. McCarthy, certify that:
1.
I have reviewed this annual report on Form 20-F of Stealth BioTherapeutics Corp;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
I am 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 company and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to
me by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report my conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d.
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting; and
5.
I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit
committee of the company’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Date: April 7, 2022
By:
/s/ Irene P. McCarthy
Name: Irene P. McCarthy
Title: Chief Executive Officer (principal executive officer and principal
financial officer)
Exhibit 13.1
Officer Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of Stealth BioTherapeutics Corp (the “Company”), hereby certifies, to such officer’s knowledge, that:
The annual report on Form 20-F for the year ended December 31, 2021 (the “Report”) of the Company 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: April 7, 2022
By:
/s/ Irene P. McCarthy
Name: Irene P. McCarthy
Title: Chief Executive Officer (principal executive officer and principal
financial officer)
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-230452, 333-237541, and 333-253601 on Form S-8 and Registration Statement
No. 333-237542 on Form F-3 of our report dated April 7, 2022, relating to the consolidated financial statements of Stealth BioTherapeutics Corp appearing in
this Annual Report on Form 20-F for the year ended December 31, 2021.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 7, 2022