Overview
We are a clinical stage biopharmaceutical
company with an emphasis on identifying the genetic drivers of disease and applying this understanding to the pursuit of differentiated
novel therapies primarily for pediatric onset, life-altering diseases, including rare and orphan diseases. We look to find treatments
for genetically defined diseases for which there are limited therapeutic options currently available, with a primary focus on pediatric
patients. This strategy begins with identifying and genetically validating a therapeutic target and using genomics to guide product
development. The strategy also involves identifying and acquiring otherwise abandoned or overlooked drug candidates and matching
targets and mechanisms of action to novel genetic discoveries.
We have partnered with the Center for Applied
Genomics, or CAG, at The Children’s Hospital of Philadelphia, or CHOP, to implement a genomic medicine driven approach to
drug development. Included in the assets at CAG is a fully automated biorepository containing specimens from more than 75,000 pediatric
patients and 150,000 relatives of those patients. The sample is highly enriched for rare and orphan diseases and the large majority
of patients have been genotyped. Their phenotypes are recorded in a modern electronic health record that is linked to the genomics
database and biorepository. The patients in the database have consented to anonymized use of their data for research and follow
up contact if needed.
CAG continues to discover important and
novel genetic biomarkers by both genome-wide association studies and exome sequencing and analysis of affected individuals and
their family members. Such markers not only identify patients with the disease but frequently point to the cause of the disease
and suggest targets and feasible intervention strategies that include protein or peptide therapy, monoclonal antibodies, drugs
or gene therapy. By working initially in pediatric populations of specific diseases, we can minimize the confounding environmental
factors seen in older patients. In addition, the availability of robust genetic biomarkers allows us to design trials that focus
on a highly-enriched patient population that we believe is more likely to respond to targeted therapies and further enhance the
likelihood of clinical and regulatory success. We believe this will allow us to implement clinical development programs that will
lead to higher value medicines that can address critical needs in patients suffering from rare and orphan diseases.
Our Product Pipeline
The following table summarizes the status
of our development programs as of the date of this Annual Report:
AEVI-001
(mGluR+ Genetic Subset ADHD)
The lead program from our genomic research
collaboration with CHOP is the development candidate AEVI-001, an oral, non-stimulant glutamatergic neuromodulator. Through our
acquisition of neuroFix, LLC, or neuroFix, in September 2015, we acquired the rights to develop AEVI-001 (then known as NFC-1),
as well as the rights to certain data derived from a clinical trial and other studies of AEVI-001.
The selection of AEVI-001 for development
in the mGluR+ ADHD patients was the result of a rational search process conducted to specifically identify therapeutic candidates
with a demonstrated ability to modulate glutamate signaling via the mGluR network. The role of glutamate in ADHD and other CNS
disorders is supported by recent neuroimaging studies that suggest glutamate levels are abnormal in children with ADHD. These abnormalities
appear to be concentrated in the anterior singular cortex region of the brain, as evidenced by volumetric and functional magnetic
resonance imagery studies, as well as targeted studies of magnetic resonance spectroscopy. Additional supportive evidence for targeting
glutamate modulation is provided by genetic studies that have identified mutations in glutamatergic genes that are enriched in
children with ADHD.
Our ADHD Opportunity
We are developing AEVI-001 to treat a sub-population
of ADHD patients who have genetic mutations that disrupt the mGluR network, resulting in glutamate imbalance. ADHD is one of the
most common childhood neurodevelopmental disorders of childhood. In the United States, the Center for Disease Control estimates
that 6.4 million children 4-17 years of age (11%) have been diagnosed with ADHD. It is usually first diagnosed in childhood and
often lasts into adulthood. Approximately 25% of ADHD patients are mGluR mutation positive, thereby representing approximately
1.5 million pediatric and 2.5 million adult patients in the United States. Based on pricing assumptions of currently available
ADHD therapies, as well as established compliance and adherence rates, this equates to a potential $2 billion to $3 billion market
opportunity for the drug.
ADHD is defined as a persistent pattern
of inattention and/or hyperactivity-impulsivity that interferes with functioning or development. ADHD causes significant impairment
in childhood and throughout the lifespan, as well as increased mortality and psychosocial adversity. There is no definitive management
for ADHD; current management frequently includes a combination of educational support, behavioral interventions, and pharmacotherapy.
Current standard of care is the stimulant class of medications including immediate- and extended-release methylphenidate and amphetamine;
these products represent 90% of sales in the United States. In 2016, ADHD pharmaceutical product sales in the United States were
approximately $11 billion, and grew at a compounded annual growth rate of approximately 2% from 2012 to 2016. However, while conferring
great benefit for many individuals, currently available ADHD medications also have significant limitations including decreased
appetite, weight loss, and insomnia.
Prevalence of mGluR Network Mutations
To examine the prevalence of mGluR network
mutations in the broader pediatric and adolescent ADHD populations, we conducted a large-scale non-interventional phenotype/genotype
study at 32 sites across the United States. The study genotyped 1,876 ADHD patients aged 6-17 years, with
420 children and adolescents being mGluR+ (22.4%). A higher prevalence (75/292, 26%) was seen in patients aged 6-12 years than
patients aged 13-17 years (344/1584, 21%). The data also showed that patients with the mGluR mutations had significantly higher
prevalence of symptoms associated with inappropriate movements, disruptive behavior, and anger control.
mGluR Network Mutations Highly Predictive of ADHD
A study genotyped 3,445 ADHD patients from
the CHOP Psychiatry and Behavioral Sciences Clinics to classify the prevalence of copy number variation mGluR+ mutations and the
proportion of those patients who had already been diagnosed with ADHD. The research demonstrated the association between the excitatory
glutamate neurotransmitter in the brain, mutations in the mGluR pathway, and ADHD in pediatric patients who possess these mutations.
The study also clearly demonstrated the highly predictive capabilities of the genetic biomarker, as demonstrated by the fact that
98% of the patients with the identified mGluR network mutations had a positive diagnosis of ADHD (the study was conducted on a
blinded basis). We believe the genomic validation for AEVI-001 addresses a key inefficiency in the current ADHD diagnosis and treatment
paradigm and may lead to improved safety and ultimately a personalized approach to treatment.
Development of AEVI-001 in mGluR+ Genetic Subset ADHD
AEVI-001 completed a Phase 2/3 trial (which
we refer to as the SAGA trial) in adolescent ADHD patients with specific mutations in their mGluR gene network, which we refer
to as mGluR+ ADHD, in the first quarter of 2017. Although AEVI-001 did not meet the primary endpoint of reduction on the ADHD rating
scale (ADHD-RS) compared to placebo, in the SAGA trial, the drug did demonstrate statistically significant and clinically meaningful
improvement compared to placebo in a pre-specified responder analysis of ADHD-RS improvement of 30% or more [ADHD-RS reduction
of 17.6, p < .005]. In a second pre-specified responder analysis of Clinical Global Impression of Improvement scale (CGI-I),
a key secondary endpoint, AEVI-001 demonstrated a statistically significant and clinically meaningful improvement compared to placebo
[57% of patients treated with AEVI-001 achieved a score of much improved or very much improved compared to 33% on placebo, p=0.0155].
Additionally, the safety analysis demonstrated that AEVI-001 was well tolerated at all doses and the majority of adverse events
were generally mild to moderate in severity. There were no serious adverse events.
Subsequent analysis of responder data from
a subset of genomically identified patients in the SAGA trial identified nine genes (genetic subset) that appear to be predictive
of clinically meaningful and statistically significant response on the ADHD-RS scales and CGI-I scales. These genes include certain
glutamate metabotropic receptors and neurodevelopmental genes that are found in approximately 10% of pediatric ADHD patients.
One of the neurodevelopmental genes, contactin-4
(CNTN4), has been previously identified as being important in Autism Spectrum Disorder (ASD) representing approximately 5% of the
overall pediatric ADHD patient population. The CNTN4 mutation phenotype is relatively severe, with an increased prevalence of emotional
dysregulation, which includes issues related to anger control, risk taking, and inappropriate movements and sounds. All of the
CNTN4 mutation positive (CNTN4+) patients on treatment (n=6, 100%) had clinically meaningful and statistically significant response
to therapy with AEVI-001 [ADHD-RS reduction of 20.8, p=0.03].
Importantly, these results clarify a path
forward for the continued development of AEVI-001 in ADHD, as well as in other potential neurodevelopmental disorders, including
but not limited to ASD and Pediatric Generalized Anxiety Disorder. We have initiated a Phase 2 trial in the mGluR mutation positive
genetic subset ADHD (“mGluR+ Genetic Subset ADHD”) to confirm genetic responders to AEVI-001. Patient screening began
in the third quarter of 2017 and data is expected by mid-2018.
In the United States, mGluR+ Genetic Subset
ADHD represents approximately 10% of ADHD patients, estimated at 600,000 pediatric and 1.5 million adult. Based on pricing assumptions
of currently available ADHD therapies, as well as established compliance and adherence rates, this equates to a potential $2 billion
to $3 billion market opportunity for AEVI-001.
Diagnostic Development in ADHD
As part of our precision medicine strategy,
Aevi is looking to develop and commercialize novel diagnostic tests to support therapies in development. For AEVI-001, Aevi
is developing a stand-alone diagnostic to be used as an aid in the diagnosis of ADHD in patients aged 6-17, based on the discovery
that mutations in the mGluR network are highly associated with ADHD. Aevi has engaged the US FDA on seeking a path to clearance
for the diagnostic test. In addition to providing valuable information for the diagnosis of pediatric patients with mGluR+
ADHD, the diagnostic would support pre-identification of patients for future clinical trials in ADHD.
Previous Study of AEVI-001
The originator company for AEVI-001, Nippon Shinyaku, conducted
research showing the ability of AEVI-001 to cross the blood-brain barrier and ameliorate cognitive impairment in animal behavioral
models, at concentrations achievable in humans. AEVI-001 was shown to have a compelling pharmacokinetic and metabolic profile and
to be a pan-selective activator and modulator of multiple mGluRs. Nippon Shinyaku studied AEVI-001 in vascular dementia, where
approximately 1,000 adult patients were exposed to AEVI-001 for periods up to 12 months, in a development program that progressed
to Phase 3. AEVI-001 was shown to be well tolerated with no treatment-emergent serious adverse events in this patient population,
but was not effective for the treatment of vascular dementia.
The GREAT Study
A Phase Ib proof of concept trial (which
we refer to as the GREAT trial) of AEVI-001 in adolescent patients with ADHD was completed in 2015. The study enrolled 30 adolescents
aged 12-17 with severe and genetically confirmed mGluR+ ADHD. Of the 30 enrolled patients, 17 had Tier 1 mGluR mutations, which
are mutations in genes in the mGluR receptors or in genes that directly influence mGluR signaling. Seven patients had Tier 2 mutations,
which are mutations in genes that encode proteins that influence mGluR. The remaining six patients had more distal Tier 3 mutations,
which are mutations in genes that encode proteins that influence Tier 1 and Tier 2 genes.
Part 1 of the study measured safety and
the pharmacokinetic profile of single ascending doses of 50-800mg of AEVI- 001. Part 2 of the study was single-blinded to patients
and caregivers. Dosing was one week with placebo followed by four weeks of ascending doses from 50mg BID to 400mg BID of AEVI-001.
The study used the Clinical Global Impression of Symptom Improvement (CGI-I) and the Vanderbilt Parent Rating Score (similar to
the ADHD Rating Scale) to assess efficacy. Despite not being powered to show efficacy, the study demonstrated dose and duration-dependent
improvements and response rates comparable to best-in-class ADHD therapies.
The treatment effect was more robust over
time and at higher doses. In all patients, AEVI-001 showed weekly improvements in mean CGI-I from 3.79 during week 1 on placebo
(baseline), 3.13 during week 2 (50mg BID), 2.79 during week 3 (100mg BID), 2.79 during week 4 (200mg BID) and 2.21 during week
5 (400mg BID). In all patients, AEVI-001 likewise showed weekly improvements in mean Vanderbilt scores from 29.1 during week 1
on placebo (baseline), 26.4 during week 2 (50mg BID), 24.0 during week 3 (100mg BID), 23.3 during week 4 (200mg BID) and 22.5 during
week 5 (400mg BID).
The GREAT study also confirmed the previously
observed pharmacokinetic profile of AEVI-001, showing the therapy to be well tolerated with no treatment-related SAEs. Following
the conclusion of the study, a majority of patients enrolled in an open label long-term safety study. Full data from the study
was presented at the American Academy of Child and Adolescent Psychiatry meeting in October 2015.
Development of AEVI-001 in 22q Deletion Syndrome (22q DS)
We completed work on a signal-finding trial
for the treatment of the psychiatric symptoms of 22q Deletion Syndrome (22q DS) in 2017. 22q DS is an orphan, severe autism spectrum
disorder with significant co-morbidities. The disease has a prevalence of between 1:2000-1:4000, roughly equivalent with the more
recognized Down’s Syndrome. Enrolling patients into the signal-finding study was difficult, with only two patients enrolled
by the time the study ended. Due to the limited enrollment, it was not feasible to meaningfully interpret the resulting data, and
the program was terminated.
Future Development of AEVI-001 in ASD
We are exploring a development opportunity
for AEVI-001 for the treatment of mGluR+ patients with ASD to better define the patient phenotype and intend to initiate work on
a proof-of-concept study to begin in the second half of 2018. In 2012, 1 in 68 children were diagnosed with ASD in the United States,
increasing from 1 in 150 in 2000. There is a high unmet need for pharmaceutical treatments for ASD as currently approved medications
are indicated only for the symptoms of irritability in ASD patients. There are currently limited pharmacotherapy options available
to treat ASD.
AEVI-002
(Anti-LIGHT Monoclonal Antibody)
The second program arising out of our genomic
research collaboration with CHOP is the development candidate AEVI-002, a first-in-class anti-LIGHT monoclonal antibody, or the
Antibody, being developed for use in Pediatric Onset Crohn’s disease. Pediatric Onset Crohn’s disease has a more aggressive
phenotype at younger ages. The genomic rationale for the use of anti-LIGHT antibody in Crohn’s disease was validated by CAG
research showing the association to a loss of function mutation in decoy receptor 3 (DcR3).
In June 2016, we entered into a Clinical
Development and Option Agreement, or the Development and Option Agreement, with Kyowa Hakko Kirin Co., Ltd., or KHK, pursuant to
which we acquired certain rights with respect to the development and potential commercialization of the Antibody. Under the Development
and Option Agreement, we received an exclusive option for exclusive rights to develop products containing the Antibody, or an Antibody
Licensed Product, exclusive rights to commercialize Antibody Licensed Product in various countries and to conduct various development
activities with respect to the Antibody Licensed Product, including the conduct of a signal finding study testing the Antibody
in Severe Pediatric Onset Inflammatory Bowel Disease, or the Study. The terms of the Development and Option Agreement with KHK
are more fully described under the section entitled “Licenses.”
An 8-week Phase Ib proof-of-concept study
has been initiated at CHOP with the goal of enrolling up to 12 patients with a Pediatric Onset Crohn’s disease diagnosis
with most patients being refractory to treatment with TNF-α inhibitors, with or without a DcR3 mutation. The endpoints of
the trial will include endoscopic evaluation, Crohn’s Disease Activity Index ratings and safety. Initial data from the proof-of-concept
study is expected by year-end 2018, at which point we will make a determination on our option to license exclusive rights to the
Antibody for further development. Active recruitment for the trial is underway, although the identification and recruitment of
patients into the proof-of-concept study has been extremely challenging, and to date no patients have been enrolled. The ability
to produce initial data by year-end 2018 is highly dependent on timely recruiting; thus, continued difficulties in recruitment
could cause a delay in the delivery of initial data for the program. In an effort to address the recruitment challenges, we are
currently initiating three additional trial sites for the program.
Business Strategy
Our goal is to translate key scientific
insights relating to underlying genomic drivers of disease into the development of effective and highly selective therapeutics.
To execute our strategy, we intend to:
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Advance our lead product candidate AEVI-001 through clinical development.
AEVI-001, a first-in-class non-stimulant mGluR
modulator, is being developed for the treatment of mGluR+ Genetic Subset ADHD. AEVI-001 is currently being studied in a Phase 2
trial to confirm genetic responders to AEVI-001. Patient screening began in the third quarter of 2017 and data is expected by mid-2018.
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Pursue development of AEVI-001 for various other diseases where our genomic insights suggest it may be an effective therapy.
In addition to mGluR
+
Genetic Subset ADHD
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we intend to develop AEVI-001 for the treatment of certain genetically
defined patient subsets with other neurological and neuropsychological indications, including but not limited to ASD.
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Advance our second clinical candidate AEVI-002 through clinical development.
The second program arising out of our genomic
research collaboration with CHOP is the development candidate AEVI-002, a first-in-class anti-LIGHT monoclonal antibody being developed
for use in Pediatric Onset Crohn’s disease. An 8-week signal finding study at CHOP has been initiated and will enroll up
to 12 patients with the DcR3 mutation and a Pediatric Onset Crohn’s disease diagnosis, with most subjects being refractory
to treatment with TNF-α inhibitors. Initial data from the proof-of-concept study is expected by year-end 2018, at which
point we will make a determination on our option to license exclusive rights to the antibody for further development.
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Leverage our strategic collaborations to continue to implement a genomic medicine driven approach to drug development.
Our strategy is to work closely with our collaborators at CAG to identify populations of need with well-characterized, novel, genetically-defined
targets. We then designate an actionable therapeutic development approach based upon the target and the biology and human pathophysiology
of the relevant disease and likely clinical and regulatory pathways. The collaboration affords us with unique and proprietary insight
into these diseases and allows us to better select therapeutic approaches.
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Work with experienced third parties in the field of diagnostics.
Because we often target genetic alterations that are
detectable, companion diagnostics can be developed to identify these alterations. Once we have identified a target, we will initially
use existing diagnostic tools to identify patient subsets that we believe will derive increased benefit from our product candidates.
As we advance our targets clinically and determine the most important screening criteria, we will develop companion diagnostics
as appropriate, with the help of technology partners, to identify patients and support registration and marketing of our product
candidates.
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Opportunistically in-license and acquire novel therapies for the treatment of rare and orphan disease.
We plan to leverage
our clinical drug development expertise and our relationships in the rare and orphan diseases community to identify and in-license
or acquire additional product candidates that we believe have the potential to become novel treatments for diseases with significant
unmet medical needs.
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Potentially seek strategic collaborative relationships while maintaining flexibility in commercializing and maximizing the
value of our development programs.
We plan to develop and seek regulatory approval for multiple product candidates in our development
pipeline. While we may develop these products independently, we still may enter into strategic relationships with biotechnology
or pharmaceutical companies to realize the full value of these products.
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Intellectual Property
Our goals are to obtain, maintain, and enforce
patent and trademark protection for our products, processes, methods, and other proprietary technologies, including the platform
collaboration with CHOP and to preserve our trade secrets both in the United States and elsewhere in the world. Our policy is to
actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our products, processes
and methods that arise from our genomics platform collaboration with CHOP through a combination of contractual arrangements, trade
secrets, patents, and trademarks both in the United States and abroad.
Our ability to compete depends on our ability
to maintain and enforce our intellectual property rights and operating without infringing the intellectual property of others and
our ability to enforce our licenses. Our business could be materially harmed, and we could be subject to liabilities, because of
lawsuits brought by others against us or our licensors and licensees. We will be able to protect our technology from unauthorized
use by third parties only to the extent it is covered by valid and enforceable patents or is effectively maintained as trade secrets.
Patents and other proprietary rights are an essential and material element of our business. Applications for patents and other
intellectual property rights capable of being registered have been, and will be, filed in certain key jurisdictions. As we identify
additional rare and orphan disease targets, we will seek protection for the related intellectual property rights in the United
States and other relevant jurisdictions. There can be no assurance that the pending applications will result in patents ultimately
being issued.
Our patent portfolio for AEVI-001 and AEVI-002
consists of licensed patents and patent applications. The applicable licenses are discussed below.
We also depend upon the skills, knowledge
and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors, none
of which is patentable. To help protect our proprietary knowledge and experience that is not patentable, and for inventions for
which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements with our employees,
consultants, vendors, collaborators, advisors, customers and other third parties to protect our interests. To this end, we require
all employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure
of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business. We also require confidentiality or material transfer agreements from third parties that
receive our confidential data or materials. We intend to continue to take all appropriate steps to protect our intellectual property,
including maintaining an active program for patent protection for novel elements in the development of our products and technology.
Licenses
neuroFix License
Immediately prior to and in connection with
our acquisition of neuroFix in September 2015, neuroFix entered into a license agreement with CHOP, pursuant to which CHOP licensed
to neuroFix certain technology owned and controlled by CHOP related to ADHD and certain other neurological and neuropsychological
indications. Pursuant to this license agreement, CHOP licensed to neuroFix (coupled with a right to sublicense) certain patent
rights and compound know-how on an exclusive, worldwide, royalty-bearing right and license basis, and certain CHOP know-how (other
than compound know-how) on a non-exclusive, worldwide, royalty-bearing right and license basis. CHOP also granted to neuroFix an
exclusive option during the term of the license agreement to negotiate an exclusive license to certain future CHOP intellectual
property.
Pursuant to this license agreement, CHOP
retained rights to the licensed patent rights and know-how to conduct teaching, educational, research and patient care activities
itself and to conduct collaborations with certain not-for-profit, governmental, educational or non-commercial third parties and
for purposes outside of the field of the license. Under the license agreement, neuroFix granted to CHOP a non-exclusive, worldwide,
fully paid-up, royalty-free license under all intellectual property rights controlled by neuroFix to make and use certain products
for education and non-commercial research purposes.
In addition to neuroFix having issued equity
to CHOP in partial consideration for the rights granted under the license agreement (which equity was issued immediately prior
to, and subsequently purchased by us in, to the acquisition), CHOP is eligible for certain milestone and royalty payments under
the license agreement as further described below:
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up to $1.5 million in regulatory and sales milestone payments in connection with each FDA-approved indication obtained by neuroFix
utilizing intellectual property licensed under the license agreement;
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royalty payments equal to a percentage of certain product sales by neuroFix using a fluctuating rate in the low single digits
(adjusted downward to the extent third party royalty payments exceed a certain percentage in a given calendar quarter);
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annual maintenance fees of equal to or less than $100,000 depending on the year; and
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a certain percentage (ranging from mid-single digits to the mid-teens depending on if other rights of neuroFix are also licensed
to the sublicensee at the same time) of all sublicensee income (except any amounts attributable to sublicensed sales by a certain
party in Japan).
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The license agreement will terminate, with
respect to each product and each territory covered by the license agreement, upon the later of (i) the expiration of certain CHOP
patent rights and (ii) January 1, 2025, at which time the license rights granted to neuroFix become perpetual, irrevocable, fully
paid-up and royalty-free. The license agreement could also be subject to termination by CHOP if neuroFix is not achieving certain
specified development plans and diligence events and is not undertaking commercially reasonable efforts to achieve such events.
CHOP License Agreement and Sponsored Research
Agreement
In November 2014, we entered into a license
agreement, or the License Agreement, and a sponsored research agreement, or the Research Agreement, each with CHOP. Under the terms
of the License Agreement, CHOP granted us (i) an exclusive, sublicensable license to use certain patent rights covering potential
diagnostic and therapeutic targets, (ii) an exclusive, non-sublicensable license to use certain biospecimen and phenotypic data
collected from patients with rare and orphan diseases and their family members, or the Biobank, (iii) a non-exclusive, sublicensable
license to use certain know-how related to such patent rights, biospecimen and phenotypic data, (iv) a non-exclusive and non-sublicensable
license to use certain biospecimen and phenotypic data collected from patients with non-rare and orphan diseases, and (v) an exclusive
option to negotiate licenses to commercialize certain inventions that may be created in the future that target rare and orphan
diseases. In consideration of the licenses and option granted under the License Agreement, we agreed to pay to CHOP a license issuance
fee of $500,000, certain maintenance fees, certain milestone payments, low single-digit royalties on net sales of all licensed
products and a percentage of amounts received from sublicensing activities. In February 2017, we amended the License Agreement.
The amendment allows us to extend the period of our exclusive commercial access to the Biobank for rolling two year periods. The
cost of each extension is $125,000 per year.
Under the terms of the Research Agreement,
we agreed to sponsor research at CHOP with respect to the recruitment and genetic analysis of patients with rare and/or orphan
diseases to accelerate discovery of diagnostic and therapeutic targets. In February 2017, we amended the License Agreement. The amendment allows us to extend the period of our exclusive commercial access to the Biobank for rolling two year periods. The cost of each extension is $125,000 per year. In June 2017, we entered into an amendment to the Research Agreement, which extended the Research Agreement through June 30, 2019, for which payments totaling $5.94 million will be due in 2018 and $2.38 million will be due in 2019.
The License Agreement would terminate upon
the expiration date of the last-to-expire royalty term under the License Agreement, however (i) CHOP may terminate the License
Agreement upon an uncured default by us or the failure by us to meet certain development and/or commercialization milestones under
the License Agreement or if we become insolvent or enter into bankruptcy proceedings, and (ii) we may terminate the License at
any time with six months prior written notice to CHOP.
Development and Option Agreement, with
Kyowa Hakko Kirin Co., Ltd. (KHK)
In June 2016, we entered into the Development
and Option Agreement with KHK pursuant to which we acquired certain rights with respect to the development and potential commercialization
of the Antibody. If we exercise our option under the Development and Option Agreement, KHK has 60 days to select one of two development
and commercialization structures as follows:
PLAN A: Co-Development/Co-Commercialization
Arrangement
If KHK selects the co-development/co-commercialization
arrangement (Plan A), we will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products
in the treatment, prevention, and diagnosis of specified pediatric onset rare and orphan inflammatory diseases (including severe
pediatric onset inflammatory bowel diseases such as Crohn’s disease and ulcerative colitis, or IBD) and other specified pediatric
onset rare and orphan auto-immune diseases, or collectively, the Field, in the United States and Canada. We will also be responsible
for development and regulatory approval of the first Antibody Licensed Product in the European Union and then transferring such
regulatory approval to KHK or its designee. We will be responsible for the manufacture of the Antibody Licensed Products for use
by the parties in clinical trials as well as for commercialization in their respective fields and/or territories, with KHK purchasing
the Antibody Licensed Products from us.
We will be required to pay KHK an initial
license fee in the low single-digit millions of dollars upon the co-development/co-commercialization arrangement becoming effective.
We may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Antibody Licensed
Products. The parties will share the anticipated costs of development of the first Antibody Licensed Product in the Field in the
United States, Canada and the European Union with us being responsible for any costs in excess of an agreed cap. The parties will
split profits from our sales of Antibody Licensed Products in the United States and Canada equally. KHK will pay us low double-digit
royalties for sales of Antibody Licensed Products outside the United States and Canada and outside the Field in the United States
and Canada.
PLAN B: Licensing Arrangement
If KHK selects the licensing arrangement
(Plan B), we will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products in the Field
in the United States, Canada and the European Union. We will be responsible for the manufacture of the Antibody Licensed Products
for use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories.
We will be required to pay KHK an initial
license fee in the low single-digit millions of dollars upon the licensing arrangement becoming effective. We may pay KHK up to
an additional $28 million upon the achievement of certain regulatory milestones related to the Antibody Licensed Products. The
parties will split profits from our sales of Antibody Licensed Products in the United States, Canada and the European Union with
us being entitled to approximately 74% of such profits and KHK being entitled to approximately 26% of such profits. KHK will pay
us low double-digit royalties for sales of Antibody Licensed Products outside the United States, Canada and the European Union
and outside the Field in the United States, Canada and the European Union. We will be responsible for costs of development of Licensed
Products in the United States, Canada and the European Union. KHK will have the right to purchase the Antibody Licensed Products
from us.
Trademarks
Certain names utilized for our products
and tools are trademarked, and certain names utilized for our products and tools are the subject of trademark registrations and
applications in certain jurisdictions. The final choice of names for products and tools has not yet been made and will be subject
to marketing considerations and other factors.
There can be no assurance that a third party
will not oppose any registration, that the respective Trademark Offices will issue a registration certificate or that we will otherwise
be successful in perfecting trademark rights for the marks in the United States or in foreign countries, the results of any of
which would likely have a material adverse effect on our company.
Government Regulation
General
The production, distribution, and marketing
of products employing our technology, and our development activities, are subject to extensive governmental regulation in the United
States and in other countries. In the United States, our products are subject to the Federal Food, Drug, and Cosmetic Act, as amended,
or FDCA, and the regulations of the FDA, as well as to other federal, state, and local statutes and regulations. These laws, and
similar laws outside the United States, govern the clinical and preclinical testing, manufacture, safety, effectiveness, approval,
labeling, distribution, sale, import, export, storage, record-keeping, reporting, advertising, and promotion of our products. Product
development and approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial
resources. Violations of regulatory requirements at any stage may result in various adverse consequences, including the FDA’s
and other regulatory health agencies’ delay in approving or refusal to approve a product. Violations of regulatory requirements
also may result in enforcement actions.
The following paragraphs provide further
information on certain legal and regulatory issues with a particular potential to affect our operations or future marketing of
products employing our technology.
FDA Approval Process
To obtain approval of a new product from
the FDA, we must, among other requirements, submit data demonstrating the product’s safety and efficacy as well as detailed
information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests
and preclinical and clinical trials. This testing and the preparation of necessary applications and processing of those applications
by the FDA are expensive and typically take many years to complete. The FDA may deny our applications or may not act quickly or
favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA
approvals that could delay or preclude us from marketing any products we may develop. The FDA also may require post-marketing testing
and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial
applications of these products. Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards
or if we encounter problems following initial marketing. With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which we may have the exclusive right to exploit the products
or technologies.
Currently all of our product candidates
as well as other therapies we are exploring, regardless of therapeutic modality, will be considered to be a drug or biologic from
a regulatory standpoint. The process required by the FDA before a new drug or biologic may be marketed in the United States generally
involves the following:
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completion of pre-clinical laboratory tests or studies and formulation studies;
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submission to the FDA of an IND for a new drug or biologic, which must become effective before human clinical trials may begin;
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performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug
or biologic for its intended use;
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detailed information on product characterization and manufacturing process; and
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submission and approval of a New Drug Application, or NDA, for a drug, or a BLA for a biologic.
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Pre-clinical tests include laboratory evaluation
of product chemistry formulation and stability, as well as animal and other studies to evaluate toxicity. Under FDA regulations,
the results of any pre-clinical testing, together with manufacturing information and analytical data, are submitted to the FDA
as part of an IND. Additionally, for certain pediatric products, the sponsor may be required to submit an initial Pediatric Study
Plan (discussed below) as a pre-IND submission. The FDA requires a 30-day waiting period after the filing of each IND before clinical
trials may begin, in order to ensure that human research patients will not be exposed to unreasonable health risks. At any time
during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, may authorize trials
only on specified terms, or may require additional trials. The IND process may become extremely costly and substantially delay
development of our products. Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in
clinical trials.
The sponsor typically conducts human clinical
trials in three sequential phases, which may overlap. These phases generally include the following:
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Phase 1: The product candidate is usually first introduced into healthy humans or, on occasion, into patients, and is tested
for safety, dosage tolerance, absorption, distribution, excretion and metabolism;
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Phase 2: The product candidate is introduced into a limited patient population to:
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assess its efficacy in specific, targeted indications;
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assess dosage tolerance and optimal dosage; and
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identify possible adverse effects and safety risks.
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Phase 3: These are commonly referred to as pivotal studies. If a product candidate is found to have an acceptable safety profile
and to be potentially effective in Phase 2 clinical trials, clinical trials in Phase 3 will be initiated to further demonstrate
clinical efficacy, optimal dosage and safety within an expanded and diverse patient population at geographically dispersed clinical
trial sites; and
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If the FDA does ultimately approve the product candidate, it may require post-marketing testing, including potentially expensive
Phase 4 studies, to confirm or further evaluate its safety and effectiveness. Continued ability to commercialize the product may
be based on the successful completion of these additional studies.
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Before proceeding with a trial, the sponsor
may seek a written agreement from the FDA regarding the design, size, and conduct of a clinical trial. This is known as a Special
Protocol Assessment, or SPA. Among other things, SPAs can cover clinical trials for pivotal studies whose data will form the primary
basis to establish a product’s efficacy. SPAs thus help establish up-front concurrence with the FDA about the adequacy of
a clinical trial design to support a regulatory approval, but the agreement is not binding if new circumstances arise. Even if
the FDA agrees to a SPA, the agreement may be changed by the sponsor or the FDA on written agreement by either parties, or if a
senior FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness of the
product was identified after the testing began. There is no guarantee that a study will ultimately be adequate to support an approval,
even if the study is subject to a SPA. The FDA retains significant latitude and discretion in interpreting the terms of the SPA
and the data and results from any study that is the subject of the SPA.
Pediatric product development is subject
to additional FDA regulations, including the Best Pharmaceuticals for Children Act and the Pediatric Research Equity Act, as amended
by the FDA Reauthorization Act of 2017, which may impact whether FDA grants orphan designation for pediatric subpopulations of
common diseases (discussed below) and could require pediatric studies. Sponsors may be required to submit an initial Pediatric
Study Plan (iPSP) before the initiation of any phase 3 studies unless certain exemptions apply. Where a sponsor is required to
submit an iPSP, the sponsor must reach an agreement with FDA before submitting a marketing application or supplement. FDA agreement
on a iPSP does not guarantee that the study will ultimately be adequate to support an approval.
Clinical trials must meet requirements for
Institutional Review Board, or IRB, oversight, patient informed consent and the FDA’s Good Clinical Practice, or GCP. Prior
to commencement of each clinical trial, the sponsor must submit to the FDA a clinical plan, or protocol, accompanied by the approval
of the committee responsible for overseeing clinical trials at the clinical trial sites. The FDA or the IRB at each institution
at which a clinical trial is being performed may order the temporary or permanent discontinuation of a clinical trial at any time
if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk
to the clinical trial patients. Data safety monitoring committees, which monitor certain studies to protect the welfare of study
patients, may also require that a clinical trial be discontinued or modified.
The sponsor must submit to the FDA the results
of the pre-clinical and clinical trials, together with, among other things, detailed information on the manufacturing and composition
of the product, and proposed labeling, in the form of an NDA, or, in the case of a biologic, a BLA. The applicant must also submit
with the NDA or BLA a substantial user fee payment, unless a waiver or reduction applies. In some cases, a sponsor may be able
to expand the indications in an approved NDA or BLA through a submission of a Prior Approval Supplement. Each NDA or BLA submitted
for FDA approval is usually reviewed for administrative completeness and reviewability within 60 days following submission of the
application. If deemed complete, the FDA will “file” the NDA or BLA, thereby triggering substantive review of the application.
The FDA can refuse to file any NDA or BLA that it deems incomplete or not properly reviewable. Once the submission has been accepted
for filing, the FDA will review the application and will usually respond to the applicant in accordance with performance goals
the FDA has established for the review of NDAs and BLAs - six months from the receipt of the application for priority applications
and ten to twelve months for regular applications. The review process is often significantly extended by FDA requests for additional
information, pre-clinical studies or clinical trials, clarification, or a risk evaluation and mitigation strategy, or REMS, or
by changes to the application submitted by the applicant in the form of amendments. The FDA may refer applications for novel product
candidates which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians
and other experts, for review, evaluation, and a recommendation as to whether the application should be approved and under what
conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully
when making decisions.
Before approving an NDA or BLA, the FDA
will often inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing
facilities are in compliance with current Good Manufacturing Practice, or cGMP, requirements which govern the manufacture, holding
and distribution of a product.
It is possible that our product candidates
will not successfully proceed through this approval process or that the FDA will not approve them in any specific period of time,
or at all. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria, or if the FDA determines
that the clinical data does not adequately establish the safety and efficacy of the product. Satisfaction of FDA pre-market approval
requirements for a new product candidate is a process that may take a number of years and the actual time required may vary substantially
based upon the type, complexity and novelty of the product or disease. The FDA reviews these applications and, when and if it decides
that adequate data is available to show that the product is both safe and effective and that other applicable requirements have
been met, approves the product candidate for marketing. Government regulation may delay or prevent marketing of potential products
for a considerable period of time and imposes costly procedures upon our activities. Success in early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible
to varying interpretations that could delay, limit or prevent regulatory approval. Upon approval, a product candidate may be marketed
only for those indications approved in the NDA or BLA and will be subject to labeling and promotional requirements or limitations,
including warnings, precautions, contraindications and use limitations, which could materially impact profitability. Once approved,
the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards and requirements are not
maintained or if safety, efficacy or other problems occur after the product reaches the marketplace.
The FDA may, during its review of an NDA
or BLA, ask for additional study data. If the FDA does ultimately approve the product, approval may be subject to limitations based
on the FDA’s interpretation of the existing pre-clinical and clinical data and the FDA may require post-marketing testing,
including potentially expensive Phase 4 studies, to confirm or otherwise further evaluate the safety and effectiveness of the product.
The FDA also may require, as a condition to approval or continued marketing of a drug, a REMS to ensure that the benefits of a
drug or biologic product outweigh its risks. REMS can include additional educational materials for healthcare professionals and
patients such as Medication Guides and Patient Package Inserts, a plan for communicating information to healthcare professionals,
and restricted distribution of the product. In addition, the FDA may, in some circumstances, impose restrictions on the use of
the product, which may be difficult and expensive to administer and may require prior approval of promotional materials. Following
approval, the FDA may require labeling changes or impose new post-approval study, risk management, or distribution restriction
requirements.
The FDA has developed four distinct approaches
intended to make drugs that address unmet medical needs for serious or life threatening conditions available as rapidly as possible,
especially when the drugs are the first available treatment or have advantages over existing treatments: accelerated approval,
fast track, breakthrough therapy, and priority review. The FDA requires a manufacturer who receives certain designations to make
publicly available its policy for responding to requests for individual patient expanded access.
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Accelerated Approval. The FDA may grant “accelerated approval” status to drugs or biologics that treat serious
or life-threatening illnesses and that provide meaningful therapeutic benefits to patients over existing treatments. Under this
pathway, the FDA may approve a product based on surrogate endpoints, or clinical endpoints other than survival or irreversible
morbidity. When approval is based on surrogate endpoints or clinical endpoints other than survival or morbidity, the sponsor will
be required to conduct additional post-approval clinical trials to verify and describe clinical benefit. Under the agency’s
accelerated approval regulations, if the FDA concludes that a product that has been shown to be effective can be safely used only
if distribution or use is restricted, it may require certain post-marketing restrictions as necessary to assure safe use. In addition,
for products approved under accelerated approval, sponsors will be required to submit all copies of their promotional materials,
including advertisements, to the FDA at least thirty days prior to initial dissemination unless otherwise informed by the FDA.
After a hearing, the FDA may withdraw a previously granted accelerated approval if, for instance, post-marketing studies fail to
verify any clinical benefit, it becomes clear that restrictions on the distribution of the product are inadequate to ensure its
safe use, or if a sponsor fails to comply with the conditions of the accelerated approval.
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Breakthrough Therapy. The FDA may grant “breakthrough therapy” status to drugs or biologics designed to treat,
alone or in combination with another drug(s) or biologic(s), a serious or life-threatening disease or condition and for which preliminary
evidence suggests a substantial improvement on clinically-meaningful endpoints over existing therapies. Such products need not
address an unmet need, but are nevertheless eligible for expedited review if they offer the potential for an improvement over existing
therapies. Breakthrough therapy status entitles the sponsor to earlier and more frequent meetings with the FDA regarding the development
of nonclinical and clinical data and permits the FDA to offer product development or regulatory advice for the purpose of shortening
the potential time to product approval. Breakthrough therapy status does not guarantee that a product will be developed or reviewed
more quickly and does not ensure FDA approval.
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Fast Track. The FDA may grant “fast track” status to drugs or biologics that treat serious diseases or illness
and fill an unmet medical need. Fast track is a process designed to expedite the review of such products by providing, among other
things, more frequent meetings with the FDA to discuss the product’s development plan, more frequent written correspondence
from the FDA about trial design, eligibility for accelerated approval if certain criteria are met, and rolling review, which allows
submission of individually completed sections of a NDA or BLA for the FDA’s review before the entire filing is completed.
Fast track status does not ensure that a product will be developed more quickly or receive FDA approval more quickly, if at all.
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Priority Review. The FDA may grant “priority review” status to products that, if approved, would be significant
improvements in safety or effectiveness of the treatment, diagnosis or prevention of serious conditions. Priority review is intended
to reduce the time it takes for the FDA to review a NDA or BLA.
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Additionally, there are various designations
available to drugs and biologics which provide a sponsor with incentives to support approval of the product candidate, including,
but is not limited to, orphan drug designation and rare pediatric disease designation.
Orphan Drug Designation
Under the U.S. Orphan Drug Act, as amended
by the FDA Reauthorization Act of 2017, the FDA may grant orphan drug designation to drugs or biologics intended to treat a “rare
disease or condition,” which is defined as having a prevalence of less than 200,000 individuals in the United States. FDA
is currently implementing a modernization plan which may include new requirements or procedures that could impact the success of
an orphan drug designation request. In certain circumstances, a sponsor may need to demonstrate that the product is clinically
superior to a previously-approved drug in order to obtain orphan drug status, and FDA may issue regulations to implement this requirement.
These regulations will also affect Rare Pediatric Disease Designation Requests, which were previously exempted from the clinical
trial requirements of the Pediatric Research Equity Act; FDA may now require clinical studies in pediatric populations for these
requests to obtain orphan drug designation. Orphan drug designation must be requested before submitting a NDA or BLA for the product.
The FDA aims to respond to all orphan drug designation requests within 90 days of submission. Orphan drug designation does not
shorten the regulatory review and approval process, nor does it provide any advantage in the regulatory review and approval process.
However, if an orphan drug later receives approval for the indication for which it has designation, the relevant regulatory authority
may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for
seven years in the United States. Although obtaining approval to market a product with orphan drug exclusivity may be advantageous,
we cannot be certain:
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that we will be the first to obtain approval for any drug for which we obtain orphan drug designation;
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that orphan drug designation will result in any commercial advantage or reduce competition; or
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that the limited exceptions to this exclusivity will not be invoked by the relevant regulatory authority.
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Additionally, orphan drug exclusive marketing
rights may be lost under certain conditions, such as if the request for designation was materially defective or if the manufacturer
is unable to assure sufficient quantity of the drug.
Ongoing FDA Requirements and Post-Marketing
Obligations
The Food and Drug Administration Amendments
Act of 2007 expanded FDA authority over drug products after approval. All approved drug products are subject to continuing regulation
by the FDA, including record-keeping requirements, reporting of adverse experiences with the product, sampling and distribution
requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic
records and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy
information to the FDA, and complying with FDA promotion and advertising requirements. Failure to comply with the statutory and
regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension
of manufacturing, seizure of product, injunctive action, criminal prosecution, or civil penalties.
The FDA may require post-marketing studies
or clinical trials to develop additional information regarding the safety of a product. These studies or trials may involve continued
testing of a product and development of data, including clinical data, about the product’s effects in various populations
and any side effects associated with long-term use. The FDA may require post-marketing studies or trials to investigate possible
or known serious risks or signals of serious risks, or to identify unexpected serious risks, and may require periodic status reports
if new safety information develops. Failure to conduct these studies in a timely manner may result in substantial civil fines,
or withdrawal of product approval.
Also, newly discovered or developed safety
or efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications,
additional pre-clinical studies or clinical trials, or even in some instances, withdrawal of the approval. Violations of regulatory
requirements at any stage, including after approval, may result in various adverse consequences, including the FDA’s withdrawal
of an approved product from the market, other voluntary or FDA-initiated action that could delay or restrict further marketing,
and the imposition of civil fines and criminal penalties against the manufacturer and NDA or BLA holder. In addition, later discovery
of previously unknown problems may result in restrictions on the product, manufacturer or NDA or BLA holder, including withdrawal
of the product from the market.
The labeling, advertising, promotion, marketing
and distribution of a drug or biologic product also must be in compliance with FDA requirements which include, among others, promotional
activities, standards and regulations for direct-to-consumer advertising, promotional activities involving the internet, and industry
sponsored scientific and educational activities. In general, all product promotion must be consistent with the labeling approved
by the FDA for such product, contain a balanced presentation of information on the product’s uses, benefits, risks, and important
safety information and limitations on use, and otherwise not be false or misleading. The FDA has very broad enforcement authority,
and failure to abide by these regulations can result in penalties, including the issuance of a warning letter directing a company
to correct deviations from regulatory standards and enforcement actions that can include seizures, injunctions and criminal prosecution.
Failure to comply with applicable FDA requirements and restrictions also may subject a company to adverse publicity and enforcement
action by the FDA, the U.S. Department of Justice, or DOJ, or the Office of the Inspector General of the U.S. Department of Health
and Human Services, or HHS, as well as state authorities. This could subject the 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 its products.
Drug and biologic manufacturers and their
subcontractors are required to register their establishments with the FDA and certain state agencies, and to list their products
with the FDA. The FDA periodically inspects manufacturing facilities in the United States and abroad in order to assure compliance
with the applicable cGMP regulations and other requirements. Facilities also are subject to inspections by other federal, foreign,
state or local agencies. In complying with the cGMP regulations, manufacturers must continue to assure that the product meets applicable
specifications, regulations and other post-marketing requirements. Failure to comply with these requirements subjects the manufacturer
to possible legal or regulatory action, such as suspension of manufacturing or recall or seizure of product.
Sponsors and their third-party contractors
are also subject to various laws and regulations governing laboratory practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances in connection with their research. In each of the above areas, the FDA
has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance
of approvals, seize or recall products and deny or withdraw approvals.
Furthermore, new government requirements
may be established that could delay or prevent regulatory approval of our products under development, or affect the conditions
under which approved products are marketed.
Potential Competition with “Biosimilar”
Products
The Biologics Price Competition and Innovation
Act, or BPCIA, was enacted as part of the Patient Protection and Affordable Care Act of 2010, or the ACA, Pub. L. No. 111-148 (2010).
The BPCIA authorizes the FDA to approve “abbreviated” BLAs for products whose sponsors demonstrate they are “biosimilar”
to reference products previously approved under BLAs. The FDA may also separately determine whether “biosimilar” products
are “interchangeable” with their reference products. However, the FDA may not approve an “abbreviated”
BLA for a biosimilar product until at least twelve years after the date on which the BLA for the reference product was approved.
FDA approval could be further delayed if the reference products are subject to unexpired and otherwise valid patents.
Prior to the enactment of the BPCIA, information
in approved BLAs could not be relied upon by other manufacturers to establish the safety and efficacy of their products for which
they were seeking FDA approval. (In contrast, since at least 1984, pharmaceutical manufacturers have been able to submit Abbreviated
New Drug Applications for “generic drugs” that are materially identical to reference drugs approved under NDAs.) Accordingly,
if our products are approved under a BLA, other manufacturers potentially could develop and seek FDA approval of “biosimilar”
products at some point in the future.
In Vitro Companion Diagnostics
FDA defines an In Vitro, or IVD, companion
diagnostic device is as an in vitro diagnostic device that provides information that is essential for the safe and effective use
of a corresponding therapeutic product. The use of an IVD companion diagnostic device with a therapeutic product is stipulated
in the instructions for use in the labeling of both the diagnostic device and the corresponding therapeutic product, including
the label. Such tests include genetic diagnostic tests. Approval of such of treatment with the therapeutic product may be dependent
on the approval of an IVD to:
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Monitor response to treatment with the therapeutic product for the purpose of adjusting treatment (e.g., schedule, dose, discontinuation)
to achieve improved safety or effectiveness; and/or
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Identify patients in the population for whom the therapeutic product has been adequately studied and found safe and effective,
i.e., there is insufficient information about the safety and effectiveness of the therapeutic product in any other population.
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Applications for an IVD companion diagnostic
device and its corresponding therapeutic product will be reviewed and approved according to applicable regulatory requirements.
The IVD companion diagnostic device application will be reviewed and approved or cleared under the device authorities of the Federal
Food, Drug, and Cosmetic Act (FD&C Act) and relevant medical device regulations; the therapeutic product application will be
reviewed and approved under section 505 of the FD&C Act (i.e., drug products) or section 351 of the Public Health Service Act
(i.e., biological products) and relevant drug and biological product regulations. FDA intends to review each IVD companion diagnostic
device submission within the context of, or in conjunction with, its corresponding therapeutic product, and FDA review of the IVD
companion diagnostic device and the therapeutic product will be carried out collaboratively among relevant FDA offices.
Ideally, a therapeutic product and its corresponding
IVD companion diagnostic device should be developed contemporaneously, with the clinical performance and clinical significance
of the IVD companion diagnostic device established using data from the clinical development program of the corresponding therapeutic
product. Many of our current and future product development candidates, including AEVI-001 and AEVI-002, will depend upon co-development
of accurate genetic and potentially other IVDs. Thus, we will likely need to comply with both FDA drug and medical device regulations.
This adds additional cost and complexity to our development programs. The availability of IVD companion diagnostics can allow more
efficient development programs and more appropriate use of products in the marketplace with more predictable outcomes for patients
and higher value medicines.
Ultimately FDA approval of the IVD will
be required to allow approval of many of our products. However, technical difficulties or other issues could delay or disrupt the
development of our products.
HIPAA Requirements
Other federal legislation may affect our
ability to obtain certain health information in conjunction with our research activities. We may be subject to data privacy and
security regulation by both the federal government and the states in which we conduct our business. The Health Insurance Portability
and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act
of 2009, or HITECH, and its implementing regulations, imposes requirements relating to the privacy, security and transmission of
individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly
applicable to “business associates”— independent contractors or agents of covered entities that receive or obtain
protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil
and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state
attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA
laws and seek attorney’s fees and costs associated with pursuing federal civil actions. The 21
st
Century Cares
Act, Pub. L. 114-255, signed into law on December 13, 2016, among other changes, directs HHS to issue new HIPAA guidance which
might differ from current regulations. In addition, state laws govern the privacy and security of health information in specified
circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance
efforts.
Other U.S. Regulatory Requirements
In the United States, the research, manufacturing,
distribution, sale, and promotion of drug and biologic products are potentially subject to regulation by various federal, state
and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care
Financing Administration), other divisions of the HHS (e.g., the Office of Inspector General), the DOJ and individual U.S. Attorney
offices within the DOJ, and state and local governments. For example, sales, marketing and scientific/educational grant programs
must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, and similar state laws,
each as amended.
If a drug or biologic product is reimbursed
by Medicare or Medicaid, pricing and rebate programs must comply with, as applicable, the Medicare Modernization Act as well as
the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990, or OBRA, and the Veterans Health Care Act of
1992, or VHCA, each as amended. Among other things, the OBRA imposes certain reporting requirements on pharmaceutical manufacturers
and requires pharmaceutical manufacturers to pay rebates on prescription products to state Medicaid programs and empowers states
to negotiate rebates on pharmaceutical prices, which may result in prices for our future products that will likely be lower than
the prices we might otherwise obtain. If products are made available to authorized users of the Federal Supply Schedule of the
General Services Administration, additional laws and requirements apply. Under the VHCA, drug companies are required to offer some
products at a reduced price to a number of federal agencies including the U.S. Department of Veterans Affairs and the U.S. Department
of Defense, the Public Health Service and some private Public Health Service designated entities in order to participate in other
federal funding programs including Medicaid. Participation under the VHCA requires submission of pricing data and calculation of
discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed
by the Federal Acquisition Regulation. All of these activities are also potentially subject to federal and state consumer protection,
unfair competition, and other laws.
In March 2010, President Obama signed the
Affordable Care Act of 2010, or the ACA. The ACA substantially changes the way healthcare will be financed by both governmental
and private insurers, and significantly impacts the pharmaceutical industry. The ACA was a sweeping law intended to broaden access
to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency
requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional
health policy reforms. The ACA has resulted in downward pressure on coverage and the price of products covered by Medicare and
other government programs. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction
in payments and coverage from private payors. The implementation of cost containment measures or other healthcare reforms may prevent
us from being able to generate revenue, attain profitability, or commercialize our products. In addition, it is possible that there
will be further legislation or regulation that could harm our business, financial condition and results of operations.
The federal Anti-Kickback Statute prohibits,
among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing,
leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare,
Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory
exemptions and regulatory safe harbors protecting some business arrangements from prosecution, the exemptions and safe harbors
are drawn narrowly and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject
to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria
for safe harbor protection from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by
the ACA, which, among other things, amends the intent requirement of the federal Anti-Kickback Statute.
Pursuant to the statutory amendment, a person
or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed
a violation. In addition, the ACA provides that the government may assert that a claim including items or services resulting from
a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims
Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who is determined to
have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item
or service that was not provided as claimed or is false or fraudulent.
The federal False Claims Act prohibits any
person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly
making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal
government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request
or demand” for money or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare
companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the
customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted
because of the companies’ marketing of the product for unapproved, and thus non-reimbursable, uses. HIPAA created new federal
criminal statutes that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefit program, including
private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially
false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid
and other state programs, or, in several states, apply regardless of the payor.
Foreign Regulatory Requirements
We may be subject to widely varying foreign
regulations, which may be quite different from those of the FDA, governing clinical trials, manufacturing, product registration
and approval, and pharmaceutical sales.
Whether or not FDA approval has been obtained,
we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement
of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement
criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA
approval.
In addition, pharmaceutical products may
not be imported into, or manufactured or marketed in, the State of Israel absent drug registration or the appropriate license/approval
to import/manufacture for clinical trials use.
Reimbursement and Pricing Controls
Third-party payers (Medicare, Medicaid,
private health insurance companies and other organizations) may affect the pricing or relative attractiveness of our product candidates
by regulating the level of reimbursement provided to the physicians and clinic utilizing our product candidates or by refusing
reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long, our ability
to market our technology and product candidates may be adversely and materially affected. In international markets, reimbursement
by private third-party medical insurance providers, including government insurers and independent providers, varies from country
to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party
government reimbursement.
In many of the markets where we or our collaborative
partners would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject, by law,
to direct price controls and to drug reimbursement programs with varying price control mechanisms. Public and private health care
payers control costs and influence drug pricing through a variety of mechanisms, including the setting of reimbursement amounts
for drugs and biological products covered by Medicare Part B based on their Average Sales Prices calculated by manufacturers in
accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2010, Pub. L. No. 108-173 (2003), as amended,
through negotiating discounts with the manufacturers, and through the use of tiered formularies and other mechanisms that provide
preferential access to certain drugs over others within a therapeutic class. Drug manufacturers also may be subject to drug rebate
agreements with public or private health care payers in exchange for the manufacturers’ products being included on plan formularies.
Payers also set other criteria to govern
the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. If a payer concludes
that a drug is experimental or investigational, in many cases it will deny coverage on that basis alone. Further, many public and
private health care payers limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are
supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium.
Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses
of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For
example, in the case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993,
with certain exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved drug if the unapproved
use is supported by one or more citations in the American Hospital Formulary Service Drug Information the American Medical Association
Drug Evaluations, or the United States Pharmacopoeia Drug Information. Another commonly cited compendium, for example under Medicaid,
is the DRUGDEX Information System.
Employees
We currently employ 17 full-time employees.
None of our employees are represented by a labor union and we have not experienced any strikes or work stoppages. We generally
provide our employees with benefits and working conditions beyond the required minimums. We believe our relations with our employees
are good.
Additional Information
Aevi Genomic Medicine, Inc., a Delaware
corporation was organized on January 27, 2000. Our principal executive offices are located at 435 Devon Park Drive, Suite 715,
Wayne, Pennsylvania 19087. Our telephone number is (610) 254-4201.
Our website address is
www.aevigenomics.com
.
The information on or accessible through our website is not part of this Annual Report on Form 10-K. Copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available without
charge on our website or upon request to us. In addition, our Code of Business Conduct and Ethics, Audit Committee Charter, Compensation
Committee Charter and Nominating and Corporate Governance Committee Charter are all available without charge on our website or
upon request to us. All such requests should be sent to Aevi Genomic Medicine, Inc., Corporate Secretary, 435 Devon Park Drive,
Suite 715, Wayne, Pennsylvania 19087, or by email request from our website at
www.aevigenomics.com
. Amendments to, or waivers
from, our Code of Business Conduct and Ethics that apply to our executive officers will be posted to our website. We also post
or otherwise make available on our website from time to time other information that may be of interest to our investors.
ITEM 1A - Risk Factors.
Business-Related Risks
Our recurring losses from operations raise substantial doubt
regarding our ability to continue as a going concern.
Our recurring losses from operations raise
substantial doubt about our ability to continue as a going concern. There is no assurance that sufficient financing will be available
when needed to allow us to continue as a going concern. The perception that we may not be able to continue as a going concern may
cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
We are a clinical stage biopharmaceutical company and have
a history of significant and continued operating losses and a substantial accumulated earnings deficit and we may continue to incur
significant losses and may never achieve or maintain profitability.
We are a clinical stage biopharmaceutical
company and since our inception have been focused on research and development and have not generated any substantial revenues.
We have incurred net losses of approximately $34.71 million, $41.90 million and $37.99 million for the years ended December 31,
2017, 2016 and 2015, respectively. As of December 31, 2017, we had stockholders’ equity of approximately $30.62 million.
We expect to incur significant expenses and increasing operating losses, as well as negative cash flow from operations, for the
foreseeable future, as we continue to expand our research and development and commence commercialization of our potential product
candidates. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. It could be several years,
if ever, before we have a commercialized product. Our ability to generate revenues from sales of our potential products will depend
on:
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successful completion of necessary clinical trials;
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commercialization (through partnership or licensing deals or through internal development) and market acceptance of new technologies
and product candidates under development;
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medical community awareness; and
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changes in regulation or regulatory policy.
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We will need substantial additional capital for the continued
development of our product candidates and for our long-term operations.
As of December 31, 2017, our cash and cash
equivalents were approximately $33.73 million. We believe our existing cash and cash equivalents should be sufficient to meet our
operating and capital requirements into the first quarter of 2019. However, changes in our business, whether or not initiated by
us, may affect the rate at which we deplete our cash and cash equivalents. Our present and future capital requirements depend on
many factors, including:
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the rate and level of patient recruitment into our clinical trials, particularly those in Phase 2 and Phase 3 stages of development,
including those trials for which we are currently recruiting; for example, the identification and recruitment of patients into
the AEVI-002 proof-of-concept study has been challenging. The ability to produce initial data by year-end 2018 is highly dependent
on timely recruiting; thus, continued difficulties in recruitment could cause a delay in the delivery of data for the program,
and potentially result in increased costs to complete the study;
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the level of research and development investment required to develop our product candidates;
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changes in product development plans needed to address any difficulties that may arise in manufacturing, pre-clinical activities,
clinical trials or commercialization;
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our ability and willingness to enter into new agreements with strategic partners, and the terms of these agreements;
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our success rate in pre-clinical and clinical efforts;
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the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any
of our product candidates for which we receive marketing approval;
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revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing
approval;
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costs of recruiting and retaining qualified personnel;
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the timing and amount of milestone payments we are required to make under our license agreements;
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time and costs involved in obtaining regulatory approvals; and
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costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights.
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We will require significant amounts of additional
capital in the future, and such capital may not be available when we need it on terms that we find favorable, if at all. Identifying
potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain
process that takes years to complete. We may never progress to the point where we have commercially successful product sales which
generate sufficient commercial revenue or such revenue may not be achieved for many years. Accordingly, we may seek to raise these
funds through public or private equity offerings, debt financings, credit facilities, or partnering or other corporate collaborations
and licensing arrangements. If adequate funds are not available or are not available on acceptable terms, our ability to fund our
operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures
could be significantly delayed or limited, and we may need to downsize or halt our operations.
Raising additional capital may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish rights.
Until such time, if ever, as we can generate
substantial product revenues, we expect to finance our cash needs through a combination of equity offerings and debt financings.
We do not have any committed external source of funds. We may seek additional capital through a combination of private and public
equity offerings, debt financings, collaborations and strategic and licensing arrangements. To the extent that we raise additional
capital through the sale of common stock or securities convertible or exchangeable into common stock, the ownership interest of
our stockholders in our company will be diluted. In addition, the terms of any such securities may include liquidation or other
preferences that materially adversely affect the rights of our stockholders. Debt financing, if available, would increase our fixed
payment obligations and 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.
We cannot be certain that additional funding
will be available on acceptable terms, or at all. If we raise additional funds through collaboration, strategic partnerships and
licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our intellectual
property, future revenue streams or grant licenses on terms that are not favorable to us.
We are still in the process of clinical trials and do not
have a commercialized product and may never be able to commercialize our product candidates.
Only a small number of research and development
programs ultimately result in commercially successful drugs and drug delivery systems. Potential products that appear to be promising
at early stages of development may not reach the market for a number of reasons, including:
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failure to obtain regulatory approvals for AEVI-001, AEVI-002 or any of our product candidates or companion products;
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lack of familiarity of health care providers and patients;
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low market acceptance as a result of lower demonstrated clinical safety or efficacy compared to other products or other potential
disadvantages relative to alternative treatment methods;
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inability to obtain favorable coverage determinations from health plans and third-party payers;
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insufficient or unfavorable levels of reimbursement from government or third-party payers;
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infringement on proprietary rights of others for which we (or our licensees, if any) have not received licenses;
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incompatibility with other therapeutic products;
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potential advantages of alternative treatment methods;
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ineffective marketing and distribution support;
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lack of cost-effectiveness; or
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timing of market introduction of competitive products.
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If any of these potential problems occur,
we may never successfully commercialize our product candidates, including AEVI-001 and AEVI-002. If we are unable to develop commercially
viable products, our business, results of operations and financial condition will be materially and adversely affected.
We have limited history as an organization in conducting
clinical trials.
We have limited history as an organization
in conducting advanced clinical trials and may not possess the necessary resources and expertise to complete such trials, and we
may need to seek additional partnerships or collaborations with third parties to advance these trials. Our most advanced clinical
program is an ongoing Phase 2 trial in mGluR+ Genetic Subset ADHD to confirm genetic responders to AEVI-001. For potential marketing
application approval, additional clinical testing will be required, which involves significantly greater resources, commitments
and expertise and so it is likely that we would need to enter into a collaborative relationship with a pharmaceutical company that
could assume responsibility for late-stage development and commercialization.
Our product candidates are still being developed and have
not been tested on a large patient population, and, therefore, we do not know all of the possible adverse events and may not be
able to commercialize our product candidates as planned.
Our product candidates have not been tested
on a large number of patients, and are still in an early stage of development. While we have attained acceptable adverse event
profile (or safety results) in our early stages of development and early clinical trials for AEVI-001, our product candidates are
not yet fully developed or proven, and disappointing results and problems could delay or prevent the completion of our development
programs and commercialization of our product candidates.
Our previous safety tests and results obtained
in previous clinical trials of our product candidates may not be representative of either a larger multi-centric test or the commercial
version of the technology in the general population. Specifically, the Phase 1b clinical trial for AEVI-001 completed prior to
our acquisition of neuroFix was conducted on a single-blinded basis and may have been subject to bias and such results may not
be replicated in a double-blinded clinical trial. In addition, the full impact of our product candidates, and their many possible
variations, on the body is, as yet, unknown.
Treatment-related adverse events or complications
in clinical trials, or post-approval, could result in limitations on the use of our product candidates and may also result in financial
claims and losses against us, damage our reputation, and increase our expenses and reduce our assets. In addition, our product
candidates may not gain commercial acceptance or ever be commercialized.
We are currently dependent upon the successful development
of our lead product candidates, AEVI-001 and AEVI-002. If we or our strategic partners, licensees and sublicensees fail to successfully
complete their development and commercialization, we will not generate operating revenues.
A substantial portion of our efforts and
expenses are currently focused on the development of AEVI-001 and AEVI-002. Our ability to generate product revenues, which we
do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization
of AEVI-001 and AEVI-002. There is no guarantee that we will succeed in developing AEVI-001 or AEVI-002. If the development of
both AEVI-001 and AEVI-002 fails, we may be unable to generate any revenues. There is no certainty as to our success, whether within
a given time frame or at all. Any delays in our schedule for clinical trials, regulatory approvals or other stages in the development
of our technology are likely to cause us additional expense and may even prevent the successful commercialization of any or all
of our product candidates. Delays in the timing for development of our technology may also have a material adverse effect on our
business, financial condition and results of operations due to the possible absence of financing sources for our operations during
such additional periods of time. Although we may pursue other technologies (either developed in-house or acquired), there is no
assurance that any other technology will be successfully identified or exploited.
Clinical trials involve lengthy and expensive processes
with uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.
The risk of failure of our product candidates
is high. We cannot predict whether we will encounter problems with any of our completed, ongoing, planned or future clinical trials,
which would cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from completed
or ongoing clinical trials. The FDA Reauthorization Act, signed into law in August 2017, authorizes FDA to impose additional clinical
trial requirements on manufacturers seeking orphan drug designation and/or pediatric indications. The impact of these future regulations
is uncertain and could result in the need for additional clinical trials. We estimate that clinical trials involving AEVI-001 and
AEVI-002 will continue for several years; however, such trials may also take significantly longer to complete and may cost more
money than we expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as
a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced,
version of our product candidates, including but not limited to:
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delays in obtaining regulatory approvals to commence a clinical trial;
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failure or inability to recruit qualified investigators;
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difficulty finding qualified patients for clinical studies, including slower than anticipated patient recruitment and enrollment;
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negative or inconclusive results from clinical trials;
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inability, delay, or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be
engaged in other clinical programs;
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lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays,
requirements to conduct additional clinical studies and increased expenses associated with the services of our clinical research
organizations, or CROs, and other third parties;
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clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may
require us, to conduct additional clinical trials or abandon product development programs;
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our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in
a timely manner, or at all;
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there may be changes in governmental regulations or administrative actions;
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unforeseen safety issues;
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an inability to monitor patients adequately during or after treatment; and
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problems with investigator or patient compliance with the trial protocols.
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A number of companies in the biopharmaceutical
and pharmaceutical industries including those with greater resources and experience than us have suffered significant setbacks
in advanced clinical trials, even after seeing promising results in earlier clinical trials. We do not know whether any clinical
trials we or any future clinical partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval
to market AEVI-001, AEVI-002 or any other product. If subsequent clinical trials involving AEVI-001 or AEVI-002 do not produce
favorable results, we may be required to perform additional clinical trials or our ability to obtain regulatory approval may be
adversely impacted, either of which would have an adverse material effect on our business, financial condition and the results
of our operations.
Potential difficulty with, and delays in, recruiting patients
for human clinical trials may adversely affect the timing of our clinical trials and our working capital requirements.
Our research and development is highly dependent
on timely recruitment of the requisite number and type of patients for our clinical trials. We have previously found it very difficult
to recruit such patients, and the increased volume and ethnic backgrounds required for future testing may render such testing even
more difficult. Such larger studies will likely be based on the use of multicenter, multinational design, which can prove difficult
to manage and could result in delays in patient recruitment. In addition, as we pursue development of our product candidates in
orphan and rare disease applications, including for pediatric populations, we may find it difficult to find sufficient treatment-naïve
patients needed for initial trials, especially within commercially-reasonable geographical regions. Delays in the recruitment of
such patients could delay our trials and negatively impact our working capital requirements and ability to raise capital.
We may not successfully establish and maintain relationships
with third-party service providers and collaborators, which could adversely affect our ability to develop, manufacture and commercialize
our product candidates.
Our ability to develop and commercialize
our product candidates is dependent on our ability to reach strategic licensing and other development agreements with appropriate
partners, including biopharmaceutical and pharmaceutical companies and CROs. If we are unable to successfully negotiate such agreements,
we may not be able to continue to develop our product candidates, including AEVI-001 and AEVI-002, without raising significant
additional capital for development and commercialization.
Our core business strategy is to develop
our product candidates for use in specific indications and disease markets that we would internally develop and launch. However,
we do plan to explore collaborative relationships or strategic partnerships and/or license our product candidates. We may not be
able to identify such collaborators and partners on a timely basis, and we may not be able to enter into relationships with any
future collaborator(s) or partner(s) on terms that are commercially beneficial to us or at all. In addition, such relationships
and partnerships may not come to fruition or may not be successful. Our agreements with these third parties may also contain provisions
that restrict our ability to develop and test our product candidates or that give third parties rights to control aspects of our
product development and clinical programs.
The third-party contractors may not assign
as great of a priority to our clinical development programs or pursue them as diligently as we would if we were undertaking such
programs directly and, accordingly, may not complete activities on schedule, or may not conduct the studies or our clinical trials
in accordance with regulatory requirements or with our trial design. If these third parties do not successfully carry out their
contractual duties or meet expected deadlines, or if their performance is substandard, we may be required to replace them.
In addition, conflicts may arise with our
collaborators (e.g. those concerning the interpretation of clinical data), the achievement of milestones, the interpretation of
financial provisions or the ownership of intellectual property developed during the collaboration. If any conflicts arise with
our existing or future collaborators, they may act in their self-interest, which may be adverse to our best interests. The third-party
contractors may also have relationships with other commercial entities, some of whom may compete with us. If the third-party contractors
work with our competitors, our competitive position may be harmed.
In addition, although we attempt to audit
and control the quality of third-party data, we cannot guarantee the authenticity or accuracy of such data, nor can we be certain
that such data has not been fraudulently generated. The failure of third parties to carry out their obligations towards us would
materially adversely affect our ability to develop and market product candidates.
We have no marketing experience, sales force or distribution
capabilities. If our product candidates are approved, and we are unable to recruit key personnel to perform these functions, we
may not be able to successfully commercialize the products.
Although we do not currently have any marketable
products, our ability to produce revenues ultimately depends on our ability to commercialize our product candidates if and when
they are approved by the FDA and/or other regulatory health agencies. We currently do not have a marketing and sales staff or distribution
capabilities. Developing a marketing and sales force is also time-consuming and expensive and these costs may be incurred in advance
of any approval of our product candidates. Failure to develop these capabilities could delay the launch of new products or expansion
of existing product sales. In addition, we will compete with many companies that currently have extensive and well-funded marketing,
sales and distribution operations. If we fail to establish successful marketing, sales and distribution capabilities or fail to
enter into successful marketing sales or distribution arrangements with third parties, our ability to generate revenues will suffer.
Furthermore, even if we enter into marketing,
sales and distributing arrangements with third parties, these third parties may not be successful or effective in marketing, selling
or distributing our product candidates. If we fail to create successful and effective marketing, sales and distribution channels,
our ability to generate revenue and achieve our anticipated growth could be adversely affected. If these distributors experience
financial or other difficulties, sales of our products could be reduced, and our business, financial condition and results of operations
could be harmed.
We are subject to intense government regulation and we
may not be able to successfully complete the necessary clinical trials.
Approval for clinical trials depends, among
other things, on data obtained from our pre-clinical and clinical activities, including completion of pre-clinical animal and
in
vitro
studies in a timely manner. These pre-clinical and clinical activities must meet stringent quality assurance and compliance
requirements. Data obtained from such activities are susceptible to varying interpretations, which could delay, limit or prevent
regulatory approvals.
We currently have limited experience in
and resources for conducting the large-scale clinical trials which may hamper our ability to obtain or comply with regulatory approval.
The failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties, product recalls,
withdrawal of product approval, mandatory restrictions and other actions, which could impair our ability to conduct business.
Use of third parties to manufacture our product candidates
or diagnostics may increase the risk that we will not have sufficient quantities of our product candidates or such quantities at
an acceptable cost or that development of the diagnostics will be delayed. Clinical development and commercialization of our product
candidates could be delayed, prevented or impaired.
We do not own or operate manufacturing facilities
for production of our product candidates or diagnostics. We lack the resources and the capabilities to manufacture any of our product
candidates or diagnostics on a clinical or commercial scale. We currently outsource the manufacturing and packaging of our pre-clinical
and clinical product candidates to third parties and if we pursue a diagnostic product, we anticipate that we would outsource manufacturing
to a third party. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the
development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter
difficulties in production, particularly in scaling up initial production. These problems include difficulties with production
costs and yields and quality control, including stability of the product candidate. The occurrence of any of these problems could
significantly delay our clinical trials or the commercial availability of our products.
We do not currently have any agreements
with third party manufacturers for the long-term commercial supply of any of our product candidates or agreements with any third
party for development of diagnostics. We may be unable to enter into agreements for development and commercial supply with third
party manufacturers or with a third party for development of diagnostics, or may be unable to do so on acceptable terms. Even if
we enter into these agreements, the manufacturers of each product candidate and developer of diagnostics will likely be single
source suppliers to us for a significant period of time.
Reliance on third party manufacturers entails
risks, to which we would not be subject if we manufactured product candidates or products ourselves, including:
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reliance on the third party for regulatory compliance and quality assurance;
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limitations on supply availability resulting from capacity and scheduling constraints of the third parties;
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impact on our reputation in the marketplace if manufacturers of our products, once commercialized, fail to meet the demands
of our customers;
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the quality or stability of the product candidates falling below acceptable standards;
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the inability to produce sufficient quantities of our product candidates;
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the timely development of the required diagnostics;
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exceeding budgeted costs due to difficulties in accurately predicting such costs or other factors impacting the cost of manufacturing
our product candidates or developing diagnostics;
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the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and
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the possible termination or non-renewal of the agreement by the third party, based on its own business priorities, at a time
that is costly or inconvenient for us.
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The failure of any of our contract manufacturers
to maintain high manufacturing standards could result in injury or death of clinical trial participants or patients using products.
Such failure could also result in product liability claims, product recalls, product seizures or withdrawals, delays or failures
in testing or delivery, cost overruns or other problems that could seriously harm our business or profitability.
Our contract manufacturers are required
to adhere to FDA regulations setting forth cGMP. These regulations cover all aspects of the manufacturing, testing, quality control
and recordkeeping relating to our product candidates and any products that we may commercialize. Our manufacturers may not be able
to comply with cGMP regulations or similar regulatory requirements outside the United States. Our failure or the failure of our
third party manufacturers, to comply with applicable regulations could significantly and adversely affect regulatory approval and
supplies of our product candidates.
Our product candidates and any products
that we may develop or acquire may compete with other product candidates and products for access to manufacturing facilities. There
are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and
willing to do so. If the third parties that we engage to manufacture products for our pre-clinical tests and clinical trials should
cease to continue to do so for any reason, we likely would experience delays in advancing these trials while we identify and qualify
replacement suppliers and we may be unable to obtain replacement supplies on terms that are favorable to us. Later relocation to
another manufacturer will also require notification, review and other regulatory approvals from the FDA and other regulators and
will subject our production to further cost and instability in the availability of our product candidates. In addition, if we are
not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more
difficult for us to develop our product candidates and compete effectively.
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 develop
product candidates and commercialize any products that obtain regulatory approval on a timely and competitive basis.
Materials necessary to manufacture our product candidates
may not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our
product candidates.
We rely on the manufacturers of our product
candidates to purchase from third party suppliers the materials necessary to produce the compounds for our preclinical and clinical
studies and will rely on these other manufacturers for commercial distribution if we obtain marketing approval for any of our product
candidates. Suppliers may not sell these materials to our manufacturers at the time we need them or on commercially reasonable
terms and all such prices are susceptible to fluctuations in price and availability due to transportation costs, government regulations,
price controls and changes in economic climate or other foreseen circumstances. We do not have any control over the process or
timing of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial
production of these materials. If our manufacturers are unable to obtain these materials for our preclinical and clinical studies,
product testing and potential regulatory approval of our product candidates would be delayed, significantly impacting our ability
to develop our product candidates. If our manufacturers or we are unable to purchase these materials after regulatory approval
has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be
a shortage in supply, which would materially affect our ability to generate revenues from the sale of our product candidates.
We may not be successful in our efforts to in-license or
acquire additional product candidates.
A significant element of our strategy is
to build and expand our pipeline of product candidates through in-licensing or acquiring additional product candidates. Currently,
we do not have the internal expertise, nor do we intend to develop the internal expertise, necessary to discover new chemical entities
for therapeutic purposes. As a result, if we are not able to identify and acquire additional product candidates, we will not be
able to expand our pipeline. Even if we are successful in continuing to build our pipeline through in-licensing or acquisitions,
the potential product candidates that we in-license or acquire may not be suitable for clinical development, including as a result
of being shown to have harmful side effects or other characteristics that indicate that they are unlikely to be drugs that will
receive marketing approval and achieve market acceptance.
Our business activities involve the use of hazardous materials,
which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these
laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our research and development programs involve
the controlled use of hazardous materials, including microbial agents and other hazardous compounds in addition to certain biological
hazardous waste. Ultimately, the activities of our third party product manufacturers when a product candidate reaches commercialization
will also require the use of hazardous materials. Accordingly, we are subject to federal, state and local laws governing the use,
handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials
comply in all material respects with the standards prescribed by local, state and federal regulations, we cannot completely eliminate
the risk of accidental contamination or injury from these materials. In addition, our collaborators may not comply with these laws.
In the event of an accident or failure to comply with environmental laws, we could be held liable for damages that result, and
any such liability could exceed our assets and resources or we could be subject to limitations or stoppages related to our use
of these materials which may lead to an interruption of our business operations or those of our third-party contractors. While
we believe that our existing insurance coverage is generally adequate for our normal handling of these hazardous materials, it
may not be sufficient to cover pollution conditions or other extraordinary or unanticipated events. Furthermore, an accident could
damage or force us to shut down our operations. Changes in environmental laws may impose costly compliance requirements on us or
otherwise subject us to future liabilities and additional laws relating to the management, handling, generation, manufacture, transportation,
storage, use and disposal of materials used in or generated by the manufacture of our products or related to our clinical trials.
In addition, we cannot predict the effect that these potential requirements may have on us, our suppliers and contractors or our
customers.
The FDA and other regulatory health agencies will regulate
our product candidates and we may never receive regulatory approval to market and sell our product candidates.
Our product candidates will require regulatory
approvals prior to sale. In particular, our product candidates are subject to stringent approval processes, prior to commercial
marketing, by the FDA and other regulatory health agencies in all countries where we operate and desire to introduce our product
candidates, whether sold via a strategic partner or directly by us. These requirements range from efficacy and safety assessments
in multiple clinical trials to long-term follow-up assessments on treated patients in clinical trials for product approval for
sale. The process of obtaining FDA and corresponding foreign approvals is costly and time-consuming, and we cannot assure that
such approvals will be granted. Also, the regulations we are subject to change frequently and such changes could cause delays in
the development of our product candidates.
It typically takes a company several years
or longer to satisfy the substantial requirements imposed by the FDA and other regulatory health agencies in other countries for
the introduction of therapeutic pharmaceutical and biological products. Pharmaceutical or biological products must be registered
in accordance with applicable law before they can be manufactured, marketed and distributed. This registration must include medical
data proving the product’s safety, efficacy and clinical testing. Also included in product registration should be references
to medical publications and information about the production methods and quality control.
To obtain regulatory approvals in the United
States or other jurisdictions, we or a collaborator must ultimately demonstrate to the satisfaction of the FDA and other health
regulatory agencies that our product candidates are sufficiently safe and effective for their proposed administration to humans.
Many factors, both known and unknown, can adversely impact the development of our product candidates and our ability to obtain
regulatory approval for our product candidates, including:
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the FDA or other health regulatory authorities or instructional review boards decision(s) not to approve a clinical trial protocol
or place a clinical trial on hold;
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suitable patients not enrolling in a clinical trial in sufficient numbers or at the expected rate, for reasons such as the
size of the prospective patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial,
the perceptions of investigators and patients regarding safety, and the availability of other treatment options;
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clinical trial data being adversely affected by trial conduct or patient withdrawal prior to completion of the trial;
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competition with ongoing clinical trials and scheduling conflicts with participating clinicians;
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patients that experience adverse events, including treatment-related adverse events of our product candidates, for a variety
of reasons that may or may not be related to our product candidates, including the advanced stage of their disease and other medical
problems;
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patients in the placebo or untreated control group exhibiting greater than expected improvements or fewer than expected adverse
events;
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third-party clinical investigators not performing the clinical trials on the anticipated schedule or consistently with the
clinical trial protocol and GCP, or other third-party organizations not performing data collection and analysis in a timely or
accurate manner;
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service providers, collaborators or co-sponsors not adequately performing their obligations in relation to the clinical trial
or cause the trial to be delayed or terminated;
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being unable to obtain a sufficient supply of manufactured clinical trial materials;
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regulatory inspections of manufacturing facilities requiring us or a co-sponsor to undertake corrective action or suspend the
clinical trials;
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interim results of the clinical trial being inconclusive or negative;
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clinical trials, although approved and completed, generating data that are not considered by the FDA or other health regulatory
agencies to be sufficient to demonstrate safety and efficacy;
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clinical trials, although approved and completed outside the United States, not considered by the FDA or others outside the
jurisdiction hosting such clinical trials to be sufficient to demonstrate safety and efficacy; and
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changes in governmental regulations or administrative actions affecting the conduct of the clinical trial or the interpretation
of its results.
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There can be no assurance that our clinical
trials will in fact demonstrate, to the satisfaction of the FDA and others, that our product candidates are sufficiently safe or
effective. The FDA or we may also restrict or suspend our clinical trials at any time if either believes that we are exposing the
subjects participating in the trials to unacceptable health risks.
Delays in obtaining such clearances and/or
changes in existing requirements could have a material adverse effect on our company by making it difficult to advance product
candidates or by reducing or eliminating their potential or perceived value and, therefore, our ability to conduct our business
as currently planned could materially suffer. Failure to obtain required regulatory approvals could require us to delay, curtail
or cease our operations. Even if we invest the necessary time, money and resources required to advance through the FDA approval
process, there is no guarantee that we will receive FDA approval of our product candidates.
Our failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA or other regulatory health agencies, which may include any of the following
sanctions:
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warning letters, fines, injunctions, consent decrees and civil penalties;
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repairs, replacements, refunds, recalls, or seizures of our products;
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operating restrictions, partial suspension, or total shutdown of production;
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refusing our requests for regulatory clearance or premarket approval of new products, new intended uses, or modifications to
existing products;
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withdrawing regulatory clearance or premarket approvals that have already been granted; and
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If any of these events were to occur, it
could adversely affect our business, financial condition and results of operations.
Even if we obtain regulatory approvals, our products will
be subject to ongoing regulatory review and if we fail to comply with continuing regulations, we could lose those approvals and
our business, financial condition and results of operations would be seriously harmed.
Even if our product candidates receive initial
regulatory approval or clearance for specific therapeutic applications, we will still be subject to ongoing reporting obligations,
and such product and the related manufacturing operations will be subject to continuing regulatory review, including FDA and other
health regulatory inspections. This ongoing review may result in the withdrawal of our product from the market, the interruption
of manufacturing operations and/or the imposition of labeling and/or marketing limitations related to specific applications of
our product. Since many more patients will be exposed to our product candidates following their marketing approval, serious but
infrequent adverse events that were not observed in clinical trials may be observed during the commercial marketing of such product.
In addition, the manufacturer(s) and the manufacturing facilities that we will use to produce our product candidates will be subject
to periodic review and inspection by the FDA and other health regulatory agencies. Late discovery of previously unknown problems
with any product, manufacturer or manufacturing process, or failure to comply with regulatory requirements, may result in actions,
such as:
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restrictions on such product, manufacturer or manufacturing process;
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warning letters from the FDA or other regulatory authorities;
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withdrawal of the product from the market;
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suspension or withdrawal of regulatory approvals;
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refusal by such regulator to approve pending applications or supplements to approved applications that we or our licensees
(if any) submit;
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voluntary or mandatory recall;
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refusal to permit the import or export of our product;
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product seizures or detentions;
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injunctions or the imposition of civil or criminal penalties; and
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In addition, from time to time, legislation
is drafted and introduced in the United States that could significantly change the statutory provisions governing any regulatory
clearance or approval that we receive from the U.S. regulatory authorities. FDA regulations and guidance are often revised or reinterpreted
by the FDA in ways that may significantly affect our business and our product. We cannot predict what these changes will be, how
or when they will occur or what effect they will have on the regulation of our product. If we, or our licensees, suppliers, collaborative
research partners or clinical investigators are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements
or the adoption of new regulatory requirements or policies, we may lose marketing approval for any of the therapeutic applications
of our product (to the extent that such applications are initially approved), resulting in decreased or lost revenue from milestones,
product rental or usage fees, or royalties.
Off-label use is common in the indications for which our
product candidates are under development, which may result in enforcement actions by the FDA and other regulatory health agencies
for violations of the laws and regulations prohibiting the promotion of off-label uses.
Although physicians, in the practice of
medicine, may prescribe approved drugs for unapproved indications, pharmaceutical companies are prohibited from marketing or promoting
their drug products for uses outside the approved label, a practice known as off-label promotion. Certain of our product candidates,
including AEVI -001 and AEVI -002, are under development for indications for which off-label use is common. To the extent the price
of our product candidates, if approved, is significantly higher than the prices of commercially available products that are frequently
prescribed off-label, physicians may recommend and prescribe these commercial alternatives instead of writing prescriptions for
our products. Either of these outcomes may adversely impact our results of operations by limiting how we price our product and
increasing our competition.
In addition, if any of our product candidates
are approved, our product labeling, advertising and promotional materials would be subject to regulatory requirements and continuing
review by the FDA, Department of Justice, Department of Health and Human Services’ Office of Inspector General, state attorneys
general, members of Congress and the public. If we are found to have improperly promoted off-label uses of our product candidates,
if approved, we may become subject to significant liability. Such enforcement has become more common in the industry. If we are
found to have promoted our products for any such off-label uses, the federal government could levy civil, criminal or administrative
penalties, and seek fines against us. The FDA or other regulatory authorities could also request that we enter into a consent decree
or a corporate integrity agreement, or seek a permanent injunction against us under which specified promotional conduct is monitored,
changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject
to significant liability, which would materially adversely affect our business and financial condition.
In the United States, engaging in the impermissible
promotion of our products, following approval, for off-label uses can also subject us to false claims litigation under federal
and state statutes, which can lead to civil and criminal penalties and fines, agreements with governmental authorities that materially
restrict the manner in which we promote or distribute drug products through, for example, corporate integrity agreements, and debarment,
suspension or exclusion from participation in federal and state healthcare programs. These false claims statutes include, among
others, federal civil False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf
of the federal government alleging submission of false or fraudulent claims, or causing others to present such false or fraudulent
claims, for payment by a federal program such as Medicare or Medicaid. If the government decides to intervene and prevails in the
lawsuit, the individual will share in the proceeds from any fines or settlement funds. If the government declines to intervene,
the individual may pursue the case alone. These false claims lawsuits against pharmaceutical companies have increased significantly
in volume and breadth, leading to several substantial civil and criminal settlements regarding certain sales practices promoting
off-label drug uses. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false
claim action, pay settlement fines or restitution, as well as criminal and civil penalties, agree to comply with burdensome reporting
and compliance obligations, and be excluded from Medicare, Medicaid and other federal and state healthcare programs. If we do not
lawfully promote our approved products, if any, we may become subject to such litigation and, if we do not successfully defend
against such actions, those actions may have an adverse effect on our business, financial condition, results of operations and
prospects.
Even if any 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.
Even if the FDA or any other regulatory
health agency approves the marketing of any product candidates that we develop, physicians, patients, third-party payors or the
medical community may not accept or use them. Efforts to educate the medical community and third-party payors on the benefits of
our product candidates may require significant resources and may not be successful. If AEVI-001, AEVI -002 or any future product
candidate that we develop does not achieve an adequate level of acceptance, we may not generate significant product revenue or
any profits from operations. The degree of market acceptance of AEVI-001, AEVI -002 or any of our future product candidates that
are approved for commercial sale will depend on a variety of factors, including:
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the efficacy and potential advantages compared to alternative treatments;
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effectiveness of sales and marketing efforts;
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the cost of treatment in relation to alternative treatments, including any similar generic treatments;
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our ability to offer our products, if approved, for sale at competitive prices;
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the convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support;
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the availability of third-party coverage and adequate reimbursement, and patients’ willingness to pay out-of-pocket in
the absence of third-party coverage or adequate reimbursement;
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the prevalence and severity of any side effects;
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any restrictions on the use of our products, if approved, together with other medications; and
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other potential advantages over alternative treatment methods.
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Our efforts to educate physicians, patients,
third-party payors and others in the medical community on the benefits of our products, if approved, may require significant resources
and may never be successful. Such efforts may require more resources than are typically required due to the complexity and uniqueness
of our product candidates. Because we expect sales of our product candidates, if approved, to generate substantially all of our
product revenue for the foreseeable future, the failure of our product candidates to find market acceptance would harm our business
and could require us to seek additional financing.
Our efforts to comply with federal and state fraud and
abuse laws could be costly, and, if we are unable to fully comply with such laws, we could face substantial penalties.
We are subject to extensive federal and
state healthcare fraud and abuse laws and regulations, including, but not limited to, the following:
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federal Anti-Kickback Statute, which prohibits, among other things, persons 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, order or recommendation of, any good or service, for which payment may be made under federal healthcare
programs, such as Medicare and Medicaid;
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federal False Claims Act, which prohibits, among other things, individuals or entities from 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;
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federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which creates federal criminal laws that prohibit
executing a scheme to defraud any healthcare benefit program and which also imposes certain obligations on entities with respect
to the privacy, security and transmission of individually identifiable health information;
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federal False Statements Statute, which 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;
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federal Foreign Corrupt Practices Act (FCPA), which prohibits, among other things, making payments to foreign officials of
any country outside of the United States for the purpose of obtaining or retaining business; and
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state laws analogous to each of the above federal laws, such as state anti-kickback and false claims laws (some of which may
apply to healthcare items or services reimbursed by any third-party payer, including commercial insurers), as well as certain state
laws that require pharmaceutical and medical device companies to comply with industry voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government.
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If our past or present 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, exclusion from third-party payer programs such as Medicare and Medicaid
and/or the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we
may do business are found to be non-compliant with applicable laws, they may be subject to criminal, civil or administrative sanctions
including exclusions from government-funded health care programs, which could also negatively impact our operations. Our ongoing
efforts to comply with these laws may be costly, and our failure to comply with these laws could have a material adverse effect
on our business, financial condition and results of operations. The risk of our being found in violation of these laws is increased
by the fact that many of them have not been definitively interpreted by the regulatory authorities or the courts, and their provisions
are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change. Any
action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses, divert our management’s attention from the operation of our business and damage our reputation.
Governments outside the United States tend to impose strict
price controls, which may adversely affect our revenues, if any.
In some countries, particularly the countries
of the European Union, 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 may be required to conduct a clinical trial that compares the cost-effectiveness
of our product candidate 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 harmed, possibly materially.
We expect to rely on third-party contractors and organizations
to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for
the completion of such trials.
We rely and expect to continue to rely on
third-party third-party contractors, clinical data management organizations, independent contractors, medical institutions and
clinical investigators to conduct our clinical trials of AEVI-001 and AEVI-002, and for our other programs. These agreements may
terminate for a variety of reasons, including a failure to perform by the third parties. If we needed to enter into alternative
arrangements, our product development activities could be delayed.
We compete with many other companies, some
of which may be our competitors, for the resources of these third parties. Large pharmaceutical companies often have significantly
more extensive agreements and relationships with such third-party providers, and such third-party providers may prioritize the
requirements of such large pharmaceutical companies over ours. The third parties on whom we rely may terminate their engagements
with us at any time, which may cause delay in the development and commercialization of our product candidates. If any such third
party terminates its engagement with us or fails to perform as agreed, we may be required to enter into alternative arrangements,
which would result in significant cost and delay to our product development program. Moreover, our agreements with such third parties
generally do not provide assurances regarding employee turnover and availability, which may cause interruptions in the research
on our product candidates by such third parties.
Our reliance on these third parties to conduct
our clinical trials will reduce our control over these activities but will not relieve us of our responsibilities. For example,
we will 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 and other regulatory authorities require us to comply with standards, commonly
referred to as good clinical practices, or GCPs, 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. We are also required to register ongoing clinical trials and post the results of completed clinical trials on a
government-sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do so can result in fines, adverse publicity
and civil and criminal sanctions.
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 will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates
and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
If any of our key employees discontinue his or her services
with us, our efforts to develop our business may be delayed.
Our success will depend on the retention
of our directors and other current and future members of our management and technical team, including Michael F. Cola, our President
and Chief Executive Officer, Brian D. Piper, our Chief Financial Officer, and Garry A. Neil, our Chief Scientific Officer, and
on our ability to continue to attract and retain highly skilled and qualified personnel. There can be no assurance that we will
retain the services of any of our directors, officers or employees, or attract or retain additional senior managers or skilled
employees. Furthermore, we do not carry key man insurance with respect to any of such individuals.
Our lead product candidates, including AEVI-001
and AEVI-002, are still in development and are dependent on further development and testing. We currently employ a small number
of key personnel including top managers, scientists, engineers and clinical experts who are important to developing AEVI-001 and
AEVI-002 and have a high level of accumulated knowledge which would be lost if they left our Company. If these employees leave
our Company or otherwise are unable to provide services, there could be significant implications on the timing and cost of future
development of the technology. Because competition for qualified personnel in our industry is intense, we may be unable to timely
find suitable replacements with the necessary scientific expertise. We cannot assure you that our efforts to attract or retain
such personnel will be successful.
If we are not able to obtain and maintain adequate patent
protection for our product candidates, we may be unable to prevent our competitors from using our technology.
Our ability to commercialize AEVI-001, AEVI-002
or our other product candidates, will depend, in part, on our ability, both in the United States and in other countries, to obtain
patents, enforce those patents, preserve trade secrets and operate without infringing the proprietary rights of third parties.
We have licensed certain intellectual property in connection with AEVI-001 and AEVI-002. Applications for patents and other intellectual
property rights capable of being registered have been, and will be, filed in certain key jurisdictions. We may not successfully
obtain patents in the countries in which patent applications have been or will be filed, and we may not develop other patentable
products or processes. In addition, any future patents may not prevent other persons or companies from developing similar or medically
equivalent products, and other persons or companies may be issued patents that may prevent the sale of our products or that will
require us to license or pay significant fees or royalties. Furthermore, our own issued and in-licensed patents may not be valid
or enforceable or be able to provide our company with meaningful protection. Patent litigation is costly and time-consuming, and
there can be no assurance that we will have, or will be able to devote, sufficient resources to pursue such litigation. In addition,
potentially unfavorable outcomes in such proceedings could limit our intellectual property rights and activities and have an adverse
effect on our business.
We cannot be certain that any of our patent
applications, or those of our licensors, will result in issued patents. In addition, because the patent positions of biopharmaceutical
companies are highly uncertain and involve complex legal and factual questions, the patents we own and license, or any further
patents we may own or license, may not prevent other companies from developing similar or therapeutically equivalent products.
Patents also will not protect our product candidates if competitors devise ways of making or using these product candidates without
legally infringing our patents. In recent years, several companies have been extremely aggressive in challenging patents covering
pharmaceutical products, and the challenges have often been successful. We cannot be assured that our patents will not be challenged
by third parties or that we will be successful in any defense we undertake. Failure to successfully defend a patent challenge could
materially and adversely affect our business.
In addition, changes in either patent laws
or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual
property or narrow the scope of our patent protection. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith
Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include
provisions that affect the way patent applications will be prosecuted in the United States and may also affect patent defense and
enforcement in the United States.
We also rely on trade secrets, technical
know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information
by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure
and confidentiality agreements and our employees to execute assignment of invention agreements to us on commencement of their employment.
Agreements with our employees aim to prevent employees from bringing any proprietary rights of third parties to us. We also require
confidentiality or material transfer agreements from third parties that receive our confidential data or materials. However, if
our employees, consultants, contractors, outside scientific collaborators or other advisors breach their confidentiality or other
obligations to us, we may not be able to successfully or effectively prevent such breach and we could be adversely impacted if
the protection of our trade secrets or other intellectual property is compromised.
Even if our product candidates and the methods
for treating patients for prescribed indications using these product candidates are covered by valid and enforceable patents and
have claims with sufficient scope, disclosure and support in the specification, the patents will provide protection only for a
limited amount of time. Our and our licensors’ ability to obtain patents can be highly uncertain and involve complex and
in some cases unsettled legal issues and factual questions.
Furthermore, different countries have different
procedures for obtaining patents, and patents issued in different countries provide different degrees of protection against the
use of a patented invention by others. Therefore, if the issuance to us or our licensors, in a given country, of a patent covering
an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation
of the validity, enforceability, or scope of the claims in, or the written description or enablement in, a patent issued in one
country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect
our intellectual property in those countries may be limited.
Unauthorized parties may try to copy aspects
of our product candidates and technologies or obtain and use information we consider proprietary. Policing the unauthorized use
of our proprietary rights is difficult. We cannot guarantee that no harm or threat will be made to our or our collaborators’
intellectual property. In addition, changes in, or different interpretations of, patent laws in the United States and other countries
may also adversely affect the scope of our patent protection and our competitive situation. Further, we may not have sufficient
rights under our license agreements with collaborators to enforce the intellectual property licensed to us against third-party
infringers.
As we develop our product candidates, we
may need to obtain licenses to protect our rights to make and use our technology. These licenses may not be available on acceptable
terms or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties
or both, and the rights granted to us might be non-exclusive, which could result in our competitors gaining access to the same
intellectual property. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our
business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on
acceptable terms. All of the issues described above could also impact our collaborators, which would also impact the success of
the collaboration and therefore us.
Under certain of our in-licensed patents,
the licensor is responsible for maintaining, controlling or enforcing the licensed intellectual property portfolio. Thus, we cannot
ensure that the patent rights licensed to us will be adequately maintained, controlled or enforced by our licensor. In addition,
even when we have the right to control patent prosecution of licensed patents and patent applications, enforcement of licensed
patents, or defense of claims asserting the invalidity of those patents, we may still be adversely affected or prejudiced by actions
or inactions of our licensors and their counsel that took place prior to or after our assuming control.
There is certain subject matter that is
patent eligible in the United States but not generally patent eligible outside of the United States and vice versa. Differences
in what constitutes patent eligible subject matter in various countries may limit the protection we can obtain in the United States
and outside of the United States.
Third parties may bring patent infringement
or other intellectual property claims against us, which would cause us to incur substantial expenses and, if successful against
us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced
to stop or delay research, development, manufacturing or sales of the product candidate that is the subject of the suit. Additionally,
if it is determined that our product candidates infringe third-party patents or other intellectual property rights, there can be
no assurance that we can successfully develop non-infringing alternatives on a timely basis or license non-infringing alternatives,
if any exist, on commercially reasonable terms. A significant intellectual property impediment to our ability to develop and commercialize
our product candidates could materially adversely affect our business prospects.
Even if patents are issued to us or our
licensors covering embodiments of our product candidates, devices, or methods of using them, those patents can be challenged by
our competitors or other third parties who can argue such patents are invalid or unenforceable, dispute the ownership of the patents,
or that the claims of the issued patents should be limited or narrowly construed, which may place our company in a position without
meaningful patent rights. Patents also will not protect our product candidates if competitors devise ways of making or using these
product candidates without legally infringing our patent claims.
If we fail to comply with our obligations under our existing
and any future intellectual property licenses with third parties, we could lose license rights that are important to our business.
We are party to several license agreements
under which we in-license patent rights and other intellectual property related to our business, including a license agreement
with CHOP, under which we license certain technology owned and controlled by CHOP related to ADHD and certain other neurological
and neuropsychological indications. Pursuant to this license agreement, CHOP licensed to neuroFix (coupled with a right to sublicense)
certain patent rights and compound know-how on an exclusive, worldwide, royalty-bearing right and license basis, and certain CHOP
know-how (other than compound know-how) on a non-exclusive, worldwide, royalty-bearing right and license basis. We may enter into
additional license agreements in the future. Our license agreements impose, and we expect that future license agreements will impose,
various diligence, milestone payment, royalty, insurance and other obligations on us. Any uncured, material breach under these
license agreements could result in our loss of rights to practice the patent rights and other intellectual property licensed to
us under these agreements, and could compromise our development and commercialization efforts for AEVI-001 and AEVI-002, or any
future product candidates. See the section entitled “Business” for a more detailed description of our current license
agreements.
We may be required to make significant payments in connection
with our license and development agreements.
We are party to license agreements with
CHOP and a Development and Option Agreement with KHK pursuant to which we exclusively license certain technology related to the
development of AEVI-001 and AEVI-002. Under our license agreements with CHOP, we may be required to make significant payments in
connection with the achievement of certain milestones and royalties on the sale of resulting products. If we exercise our option
under the terms of KHK Development and Option Agreement, we will be obligated to cover significant development costs for AEVI-002
and make significant payments in connection with certain milestones and the sale of resulting products. If these obligations become
due under the terms of the CHOP license agreements or the Development and Option Agreement, we may not have sufficient funds available
to meet our obligations and our development efforts may be negatively impacted.
Our intellectual property in-licenses with third parties
may be subject to disagreements over contract interpretations, which could narrow the scope of our rights to the relevant intellectual
property or technology or increase our financial or other obligations to our licensors.
The agreements under which we currently
in-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 harm our business, financial condition,
results of operations and prospects. If any of our current or future licenses or material relationships or any in-licenses upon
which our current or future licenses are based are terminated or breached, we may:
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lose our rights to develop and market AEVI-001, AEVI-002 or any future product candidates;
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lose patent protection for AEVI-001, AEVI-002 or any future product candidates;
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experience significant delays in the development or commercialization of AEVI-001, AEVI-002 or any future product candidates;
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not be able to obtain any other licenses on acceptable terms, if at all; or
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incur liability for damages.
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If we experience any of the foregoing, it
could harm our business, financial condition and results of operations.
Our business is dependent on proprietary rights that may
be difficult to protect and such dependence could affect our ability to effectively compete.
In addition to our patents, we also rely
on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive
position especially where we do not believe that patent protection is appropriate or obtainable. However, others, including our
competitors, may independently develop substantially equivalent proprietary information and techniques or otherwise gain access
to our trade secrets or disclose our technology. We take precautionary measures to protect our proprietary rights and information,
including the use of confidentiality agreements with employees and consultants, and those with whom we have academic and commercial
relationships. However, we may not have such agreements in place with all such parties and, in spite of the measures, there can
still be no guarantee that agreements will not be violated or that there will be an adequate remedy available for a violation of
an agreement. Any of these events could prevent us from developing or commercializing our product candidates. Trade secrets are
by nature difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may
unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide
an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party illegally
obtained and is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable. Moreover, our competitors
may independently develop equivalent knowledge, methods and/or know-how. Failure to obtain or maintain trade secret protection
could adversely affect our competitive business position.
In addition, third parties may have trademarks
or pending applications on our contemplated marks, similar marks, or in confusingly similar fields of use (or may be using our
contemplated marks or similar marks). We may have to change our use of certain marks which could have an adverse impact on our
business and may require us to spend additional funds to develop new marks. We anticipate that we will spend both time and management
resources to develop and file trademark applications in the future.
We are subject to intense competition from companies with
greater resources and more mature products, which may result in our competitors developing or commercializing products before or
more successfully than us.
While we believe our product candidates
have significant advantages, there are a number of well-established and sizeable companies engaged in the development, production,
marketing, sale and distribution of products and product candidates that may potentially be competitive with our product candidates.
Many of these companies are more experienced than our company and represent significant competition. It is also possible that other
parties have in development product candidates substantially similar to or with properties that are more efficacious, less invasive
and more cost effectively delivered than our product candidates. The success of our competitors in developing, bringing to market,
selling and distributing their products could negatively affect our result of operations and/or general acceptance of our product
candidates.
We face risks related to the general economic conditions
that may adversely affect our business.
In general, our operating results can be
significantly and adversely affected by negative economic conditions, high labor, material and commodity costs, and unforeseen
changes in demand for our potential products. These conditions have resulted and could continue to result in slower adoption of
new technologies and cost containment efforts by governments and other payers for healthcare research and development, products
and services.
Health care policy changes may have a material adverse
effect on us.
Health care reform is often a subject of
attention in governments that are trying to control health care expenditures. Health care reform proposals have been the subject
of much debate in the U.S. Congress and some state legislatures, as well as in other countries. There is no assurance that legislation
or underlying rules and guidelines resulting in adverse effects on our company or our product candidates will not be adopted in
a country in which we intend to operate and/or upon the distribution of our product candidates in the United States.
In March 2010, President Obama signed into
law the ACA and the Health Care and Education Reconciliation Act of 2010. The legislation imposes significant new taxes on medical
device makers in the form of a 2.3% excise tax on all U.S. medical device sales that began January 1, 2013. The FDA classifies
IVD companion diagnostics as medical devices. Under the law, the total cost to the medical device industry from the tax is expected
to be approximately $29 billion over ten years. This significant increase in the tax burden on our industry could have a material,
negative impact on our results of operations and our cash flows, especially if any of our product candidates were determined to
be a medical device. Other elements of this legislation, such as comparative effectiveness research, an independent payment advisory
board, payment system reforms, including shared savings pilots, and other provisions, could meaningfully change the way health
care is developed and delivered, and may materially impact numerous aspects of our business. Finally, there are ongoing efforts
to modify or eliminate the ACA. It is unknown what form any such modifications or any law proposed to replace the ACA would take,
and how or whether it may affect our business in the future.
In August 2017, President Trump signed into
law the Food & Drug Administration Reauthorization Act (FDARA). This legislation imposes significant new requirements for clinical
trial sponsors which will affect, among other things, obtaining orphan drug designation, and the development of drugs and biological
products for pediatric use. This legislation will result in new regulations which might materially impact our business.
Reimbursement policies of third-party payers may negatively
affect the acceptance of our product candidates by subjecting the product candidates to sales and pharmaceutical pricing controls.
Third-party payers (Medicare, Medicaid,
private health insurance companies and other organizations) may affect the pricing or relative attractiveness of our product candidates
by regulating the level of reimbursement provided to the physicians and clinics utilizing our product candidates or by refusing
reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long, our ability
to market our technology and product candidates may be adversely and materially affected. In international markets, reimbursement
by private third-party medical insurance providers, including government insurers and independent providers, varies from country
to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party
government reimbursement. Pharmaceutical pricing is also subject to regulation in other countries within which we may wish to distribute
our product candidates.
The ACA reduces Medicare and Medicaid payments
to hospitals, clinical laboratories and pharmaceutical companies, and could otherwise reduce the volume of medical procedures.
Further, the Budget Control Act enacted in August 2011 committed the U.S. federal government to significantly reduce the federal
deficit over ten years. In addition to placing caps on discretionary spending through 2021, the Budget Control Act also established
a budget sequestration that calls for automatic spending cuts over a nine-year period. Across-the-board spending cuts went into
effect on March 1, 2013, and Medicare spending cuts that reduce Part A and Part B payments by 2% went into effect on April 1, 2013.
Further, the Bipartisan Budget Act of 2013, passed in December 2013, extends the sequestration automatic Medicare spending cuts
to 2023 from 2021. Although we cannot predict the full effect on our business of the implementation of existing legislation such
as the ACA and the Budget Control Act, or the enactment of additional legislation, we believe that legislation or regulation that
reduces reimbursement for our products could adversely affect how much or under what circumstances health care providers will prescribe
or administer our products. This could materially and adversely impact our business by reducing our ability to generate revenue,
raise capital, obtain additional collaborators and market our products. In addition, we believe the increasing emphasis on managed
care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely
impact product sales.
The pricing of pharmaceutical products,
in general, and specialty drugs, in particular, has also been a topic of concern in the U.S. government. There can be no assurance
as to how this scrutiny on pricing of pharmaceutical products will impact future pricing of our products or orphan drugs or pharmaceutical
products generally.
We may experience product liability claims, which could
adversely affect our business and financial condition.
We may become subject to product liability
claims. We have not experienced any product liability claims to date; however, the production at commercial scale, distribution,
sale and support of our product candidates may entail the risk of such claims, which is likely to be substantial in light of the
use of our product candidates in the treatment of medical conditions. We carry product liability insurance coverage in connection
with the clinical trials of our product candidates. If we are unable to obtain a renewal or if we suffer a successful product liability
claim in excess of our insurance coverage, such claim could result in significant monetary liability and could have a material
adverse impact on our business, operations, financial position and/or reputation.
Failure to maintain effective internal controls could have
a material adverse effect on our business and operating results. In addition, current and potential stockholders could lose confidence
in our financial reporting, which could have a material adverse effect on the price of our common stock.
Effective internal controls are necessary
for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our results of operation could be harmed.
Section 404 of the Sarbanes-Oxley Act of
2002 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report
by our independent registered public accounting firm addressing these assessments. We continuously monitor our existing internal
controls over financial reporting systems to confirm that they are effective, and we may identify deficiencies that we may not
be able to remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act. This process may divert internal resources
and will take a significant amount of time and effort to complete.
If at any time it is determined that our
internal controls are not effective, we may be required to implement new internal control procedures and reevaluate our financial
reporting. We may experience higher than anticipated operating expenses as well as increased independent auditor fees during the
implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel. If we fail to maintain
the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be
able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act, which could result in our being unable to obtain an unqualified report on internal controls from
our independent auditors. Failure to maintain an effective internal control environment could also cause investors to lose confidence
in our reported financial information, which could have a material adverse effect on the price of our common stock.
Compliance with changing regulation of corporate governance
and public disclosure may result in additional expenses, divert management’s attention from operating our business which
could have a material adverse effect on our business.
There have been changing laws, regulations
and standards relating to corporate governance and public disclosure, as well as new regulations promulgated by the SEC and rules
promulgated by the national securities exchanges, including the Nasdaq Global Market. These new or changed laws, regulations and
standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application
in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
As a result, our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased
general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance
activities. Our board members, principal executive officer and principal financial officer could face an increased risk of personal
liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified
board members and executive officers, which could have a material adverse effect on our business. If our efforts to comply with
new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, we may incur
additional expenses to comply with standards set by regulatory authorities or governing bodies which would have a material adverse
effect on our business, financial condition and results of operations.
Security breaches and other disruptions to our information
technology infrastructure could interfere with our operations or clinical trials, compromise information belonging to us and our
suppliers and expose us to liability, which could adversely impact our business and reputation.
In the ordinary course of business, we rely
on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic
information, and to manage or support a variety of business processes and activities, including the conduct of our clinical trials.
Additionally, we collect and store sensitive data, including proprietary business information and confidential patient health information.
Despite security measures and business continuity plans, our information technology networks and infrastructure may be vulnerable
to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer
viruses, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. Any such event
could result in legal claims or proceedings, liability or significant penalties under privacy laws, disruption in operations and
damage to our reputation, which could adversely affect our business.
The recently passed comprehensive tax reform bill could
adversely affect our business and financial condition.
On December 22, 2017, President Trump signed
into law the final version of the tax reform bill commonly known as the “Tax Cuts and Jobs Act,” or the TCJA, that
significantly reforms the Internal Revenue Code of 1986, as amended, with many of its provisions effective for tax years beginning
on or after January 1, 2018. The TCJA, among other things, contains significant changes to corporate taxation, including a permanent
reduction of the corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation
of the deduction for net operating loss carryforwards to 80% of current year taxable income, an indefinite net operating loss carryforward
and the elimination of the two-year net operating loss carryback, temporary, immediate expensing for certain new investments ,
and the modification or repeal of many business deductions and credits. We continue to examine the impact this tax reform legislation
may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain
and our business and financial condition could be adversely affected. The impact of this reform on our stockholders is uncertain.
Stockholders should consult with their tax advisors regarding the effect of the TCJA and other potential changes to the U.S. Federal
tax laws on them.
Risk Related to our Securities
Our securities are thinly traded, resulting in relative
illiquidity and price volatility, and there may not ever be an active market for our securities.
Although our common stock has been traded
on the Nasdaq Global Market since October 21, 2016 and, prior to that on the NYSE MKT since April 8, 2011, the volumes and trading
in our securities have been extremely sporadic. As a result, the ability of holders to purchase or sell our securities is limited,
with low-volume trading creating wide shifts in price. For our securities to continue to be listed on the Nasdaq Global Market,
we must meet the current listing requirements of that exchange. If we were unable to meet these requirements, our securities could
be delisted from the Nasdaq Global Market. Any such delisting of our securities could have an adverse effect on the market price
of, and the efficiency of the trading market for, our securities, not only in terms of the number of shares that can be bought
and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts,
if any. Also, if in the future we were to determine that we need to seek additional equity capital, it could have an adverse effect
on our ability to raise capital in the public or private equity markets.
Further, the share prices of public companies,
particularly those operating in high growth sectors, are often subject to significant fluctuations. The market price of our common
stock on the Nasdaq Global Market has been volatile, ranging from $0.98 per share to $6.18 per share during the 52-week trading
period ending March 9, 2018. We expect that the market price of our common stock will continue to fluctuate significantly due
to factors including, but not limited to, the following:
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results of our clinical trials, such as the Phase 2 trial in mGluR+ Genetic Subset ADHD to confirm genetic responders to AEVI-001,
for which data is expected by mid-2018 and the 8-week signal finding study at CHOP enrolling up to 12 patients with the DcR3 mutation
and a Pediatric Onset Crohn’s disease diagnosis, for which initial data is expected by year-end 2018;
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announcements of developments by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
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introduction of new products by us or our competitors;
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changes in market valuations of companies in our industry;
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actual or anticipated variations in our operating results;
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future issuances of our common stock or other securities;
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other events or factors, including those beyond our control; and
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general market or economic conditions.
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Securities analysts may not initiate coverage or continue
to cover our common stock, and this may have a negative impact on its market price.
The trading market for our securities could
depend in part on the research and reports that securities analysts publish about our business and us. We do not have any control
over these analysts. There is no guarantee that securities analysts will cover our securities. If securities analysts do not cover
our securities, the lack of research coverage may adversely affect their market prices. If we are covered by securities analysts,
and our securities are the subject of an unfavorable report, the prices for our securities would likely decline. If one or more
of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets,
which could cause our stock price and/or trading volume to decline.
The exercise of options and other issuances of shares of
common stock or securities convertible into or exercisable for shares of common stock will dilute the ownership interests of our
current stockholders and may adversely affect the future market price of our common stock.
Sales of our common stock in the public
market, either by us or by our current stockholders, or the perception that these sales could occur, could cause a decline in the
market price of our securities. Nearly all of the shares of our common stock held by those of our current stockholders who are
not affiliates may be immediately eligible for resale in the open market either in compliance with an exemption under Rule 144
promulgated under the Securities Act of 1933, as amended, or the Securities Act, or pursuant to an effective resale registration
statement that we have previously filed with the SEC. Such sales, along with any other market transactions, could adversely affect
the market price of our common stock.
In addition, as of December 31, 2017, there
were outstanding options and warrants to purchase an aggregate of 11,004,152 and 7,203,223 shares, respectively. Of the 11,004,152
outstanding options, ranging in exercise price from $1.07 per share to $8.80 per share, 6,778,945 shares were exercisable as of
December 31, 2017. The exercise of options at prices below the market price of our common stock could adversely affect the price
of shares of our common stock. Additional dilution may result from the issuance of shares of our common stock in connection with
collaborations or manufacturing arrangements or in connection with other financing efforts.
Any issuance of our common stock that is
not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock
split, will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding shares.
Moreover, if we issue options or warrants to purchase our common stock in the future and those options or warrants are exercised,
stockholders may experience further dilution. Delaware law and our corporate governance documents do not prohibit the number of
options or other securities that are convertible into, exchangeable for or represent the right to receive common stock that we
may issue in the future, except to the extent we are limited by the number of our authorized shares of common stock which is currently
200,000,000 shares. Holders of shares of our common stock have no preemptive rights that entitle them to purchase their pro rata
share of any offering of shares of any class or series.
We have a significant stockholder, which will limit your
ability to influence corporate matters and may give rise to conflicts of interest.
The Children’s Hospital of Philadelphia
Foundation (the “CHOP Foundation”) is our largest stockholder. As of March 9, 2018, the CHOP Foundation beneficially
owned 18,697,233 shares of our common stock. The shares of common stock beneficially owned by the CHOP Foundation represent
approximately 30.1% of our outstanding shares of common stock. Accordingly, the CHOP Foundation exerts significant influence
over us and any action requiring the approval of the holders of our common stock, including the election of directors and approval
of significant corporate transactions. This concentration of voting power makes it less likely that any other holder of common
stock or directors of our business will be able to affect the way we are managed and could delay or prevent an acquisition of
us on terms that other stockholders may desire. In addition, if the CHOP Foundation obtains a majority of our common stock, the
CHOP Foundation would be able to control all matters submitted to our stockholders for approval, as well as our management and
affairs. For example, the CHOP Foundation would be able to control the election of directors, amendments to our organizational
documents and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination
or reorganization. In addition, if the CHOP Foundation obtains a majority of our common stock, we would be deemed a “controlled
company” for purposes of NASDAQ listing requirements. Under NASDAQ rules, a “controlled company” may elect not
to comply with certain NASDAQ corporate governance requirements, including (i) the requirement that a majority of our board
of directors consist of independent directors, (ii) the requirement that the compensation of our officers be determined or
recommended to the board by a majority of independent directors or a compensation committee that is composed entirely of independent
directors and (iii) the requirement that director nominees be selected or recommended to the board by a majority of independent
directors or a nominating committee that is composed of entirely independent directors.
Furthermore, the interests of the CHOP Foundation
may not always coincide with your interests or the interests of other stockholders and the CHOP Foundation may act in a manner
that advances its best interests and not necessarily those of other stockholders, including seeking a premium value for its common
stock, and might affect the prevailing market price for our common stock. Our board of directors, which currently consists of eight
directors, including one designated by the CHOP Foundation, has the power to set the number of directors on our board from time
to time. Matthew D. Bayley, who currently serves as the Senior Vice President and Chief Strategy Officer at the CHOP Foundation,
is a member of our board of directors and some of its committees.
We have never declared or paid dividends on our capital
stock and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid dividends
on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain
future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends will be
at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements,
applicable contractual restrictions and other such factors as our Board of Directors may deem relevant.
Provisions of Delaware law may delay or prevent efforts
to acquire a controlling interest in us, even if such acquisition were in the best interests of our stockholders.
We are subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage
potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of
discouraging others from making tender offers for our common stock. These provisions may also prevent changes in our management.