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 June 30, 2018, we had stockholders’ equity of approximately $15.29 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 June 30, 2018, our cash and cash equivalents
were approximately $19.15 million. Based upon current management projections, we expect the current cash balance to fund operations
into early in 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 ongoing AEVI-002 proof-of-concept clinical trial has been challenging. No patients have yet been recruited into the clinical trial. The ability to produce initial data by year-end 2018 is directly based 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.
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.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain sufficient intellectual
property protection for our product candidates, or if the scope of the intellectual property protection obtained is not sufficiently
broad, our competitors could develop and commercialize product candidates similar or identical to ours, and our ability to successfully
commercialize our product candidates may be impaired.
As is the case
with other biopharmaceutical companies, our success depends in large part on our ability to obtain and maintain protection of the
intellectual property we may own solely and jointly with others, particularly patents, in the United States and other countries
with respect to our product candidates and technology. We seek to protect our proprietary position by filing patent applications
in the United States and abroad related to AEVI-001, AEVI-002, or other product candidates that we may identify.
Obtaining and enforcing
biopharmaceutical patents is costly, time consuming and complex, and we may not be able to file and prosecute all necessary or
desirable patent applications, or maintain, enforce and license any patents that may issue from such patent applications, at a
reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and
development output before it is too late to obtain patent protection. We may not have the right to control the preparation, filing
and prosecution of patent applications, or to maintain the rights to patents licensed to third parties. Therefore, these patents
and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.
The patent position
of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal, technological and factual
questions and has in recent years been the subject of much litigation. 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, the patents we own and license, or any further patents we may own or license, may not prevent other persons or companies
from developing similar or therapeutically 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. Patents also will not protect
our product candidates if competitors devise ways of making or using these product candidates without legally infringing our patents.
Furthermore, our own issued and in-licensed patents may not be valid or enforceable or be able to provide our company with meaningful
protection. 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. 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.
In addition, the
laws of foreign countries may not protect our rights to the same extent as the laws of the United States, or vice versa. Further,
we may not be aware of all third-party intellectual property rights potentially relating to our product candidates. Publications
of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States
and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, we cannot
know with certainty whether we were the first to make the inventions claimed in our patents or pending patent applications, or
that we were the first to file for patent protection of such inventions. Moreover, we may be subject to a third-party preissuance
submission of prior art to the United States Patent and Trademark Office, or the USPTO. As a result, the issuance, scope, validity,
enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not
result in patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from
commercializing competitive product candidates. Even if our patent applications issue as patents, they may not issue in a form
that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any
competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative product candidates
in a non-infringing manner.
In addition, even
if patents do issue to us or our licensors covering embodiments of our product candidates, devices, or methods of using them, the
issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and those patents can be challenged
by our competitors or other third parties in the courts or patent offices in the United States and abroad. For example, we may
become involved in opposition, derivation, reexamination,
inter partes
review, post-grant review or interference proceedings
challenging our patent rights or the patent rights of others. Such challenges may result in loss of exclusivity or freedom to operate
or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop
others from using or commercializing similar or identical product candidates, or limit the duration of the patent protection of
our product candidates. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or
invalidate, our patent rights, allow third parties to commercialize our product candidates and compete directly with us, without
payment to us, or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. In
addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of
the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product
candidates.
If we fail to comply with our obligations
in the agreements under which we license intellectual property rights from third parties or these agreements are terminated or
we otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual property 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. For example, we are party to 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 are also party to a Development and Option Agreement with KHK under which we may license certain technology related AEVI-002.
We may need to obtain additional licenses from others in the future to advance our research and development activities or allow
the commercialization of AEVI-001, AEVI-002, or any other product candidates we may identify and pursue. See the section entitled
“Business” for a more detailed description of our current license agreements.
Our license agreements impose, and we expect
that future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us.
In spite of our efforts, our licensors might conclude that we have materially breached our obligations under such license agreements
and might therefore terminate the license agreements, thereby removing or limiting our ability to develop and commercialize products
and technology covered by these license agreements. 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. 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, competitors or other third parties would have the freedom to seek regulatory approval of, and to market, products
identical to AEVI-001 and AEVI-002 and we may be required to cease our development and commercialization of AEVI-001 and AEVI-002,
or any future product candidates. Any of the foregoing could have a material adverse effect on our competitive position, business,
financial conditions, 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 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. Disputes may arise regarding intellectual property subject to
a licensing agreement, including:
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the
scope of rights granted under the license agreement and other interpretation-related issues;
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the
extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not
subject to the licensing agreement;
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the
sublicensing of patent and other rights under our collaborative development relationships;
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our
diligence obligations under the license agreement and what activities satisfy those diligence obligations;
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the
inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our
licensors and us and our partners; and
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the
priority of invention of patented technology.
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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 agreement,
either of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing
arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product
candidates, which could have a material adverse effect on our business, financial conditions, results of operations and prospects.
As we develop our product candidates, we
may need to obtain additional 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.
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.
Third-party claims of intellectual
property infringement may prevent or delay our development and commercialization efforts.
Our commercial
success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. However, our research,
development and commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual
property rights owned or controlled by third parties. There is a substantial amount of litigation, both within and outside the
United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including
patent infringement lawsuits, interferences, oppositions and
inter partes
reexamination proceedings before the USPTO, and
corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned
by third parties, exist in the fields in which we are pursuing development candidates. As the biotechnology and pharmaceutical
industries expand and more patents are issued, the risk increases that AEVI-001, AEVI-002, or other product candidates that we
may identify may be subject to claims of infringement of the patent rights of third parties.
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. There may be third-party patents or patent applications
with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of AEVI-001,
AEVI-002, or other product candidates that we may identify. Because patent applications can take many years to issue, there may
be currently pending patent applications which may later result in issued patents that AEVI-001, AEVI-002 or other product candidates
that we may identify may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies
infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing
process of AEVI-001, AEVI-002, or other product candidates that we may identify, any molecules formed during the manufacturing
process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product
candidate unless we obtained a license under the applicable patents, or until such patents expire.
Similarly, if any third-party patents were
held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including
combination therapy, the holders of any such patents may be able to block our ability to develop and commercialize the applicable
product candidate unless we obtained a license or until such patent expires. In either case, such a license may not be available
on commercially reasonable terms or at all, or it may be non-exclusive, which could result in our competitors gaining access to
the same intellectual property.
Parties making claims against us may obtain
injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize AEVI-001,
AEVI-002, or other product candidates that we may identify. Defense of these claims, regardless of their merit, would involve substantial
litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim
of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful
infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible
or require substantial time and monetary expenditure.
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.
Parties making
claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have
substantially greater resources. Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation or administrative proceedings, there is a risk that some of our confidential information could be compromised
by disclosure. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have material
adverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of
operations, financial condition and prospects.
Patent terms may be inadequate to
protect our competitive position on our product candidates for an adequate amount of time.
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. In the United States, if all maintenance fees are timely paid, the natural expiration
of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but
the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained,
once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. Given
the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such
candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent
portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
If we are not able to obtain patent
term extension or non-patent exclusivity in the United States under the Hatch-Waxman Act and in foreign countries under similar
legislation, thereby potentially extending the term of our marketing exclusivity for AEVI-001, AEVI-002, or other product candidates
that we may identify, our business may be materially harmed.
Depending upon
the timing, duration and specifics of FDA marketing approval of AEVI-001, AEVI-002, or other product candidates that we may identify,
one of the U.S. patents covering each of such product candidates or the use or manufacturing method thereof may be eligible for
up to five years of patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be
extended per FDA approved product as compensation for the patent term lost during the FDA regulatory review process. A patent term
extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only those
claims covering such approved drug product, a method for using it or a method for manufacturing it may be extended. Patent term
extension also may be available in certain foreign countries upon regulatory approval of our product candidates. Nevertheless,
we may not be granted patent term extension either in the United States or in any foreign country because of, for example, failing
to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines,
failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the
term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority
could be less than we request.
If we are unable
to obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which
we will have the right to exclusively market our product may be shortened and our competitors may obtain approval of competing
products following our patent expiration sooner, and our revenue could be reduced, possibly materially.
It is possible
that we will not obtain patent term extension under the Hatch-Waxman Act for a U.S. patent covering AEVI-001, AEVI-002 or other
product candidates that we may identify even where that patent is eligible for patent term extension, or if we obtain such an extension,
it may be for a shorter period than we had sought. Further, for certain of our licensed patents, we do not have the right to control
prosecution, including filing with the USPTO, a petition for patent term extension under the Hatch-Waxman Act. Thus, if one of
our licensed patents is eligible for patent term extension under the Hatch-Waxman Act, we may not be able to control whether a
petition to obtain a patent term extension is filed, or obtained, from the USPTO.
Also, there are
detailed rules and requirements regarding the patents that may be submitted to the FDA for listing in the Approved Drug Products
with Therapeutic Equivalence Evaluations, or the Orange Book. We may be unable to obtain patents covering our product candidates
that contain one or more claims that satisfy the requirements for listing in the Orange Book. Even if we submit a patent for listing
in the Orange Book, the FDA may decline to list the patent, or a manufacturer of generic drugs may challenge the listing. If one
of our product candidates is approved and a patent covering that product candidate is not listed in the Orange Book, a manufacturer
of generic drugs would not have to provide advance notice to us of any abbreviated new drug application filed with the FDA to obtain
permission to sell a generic version of such product candidate.
If we are unable to protect the
confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would
be harmed.
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 patents,
we also rely on trade secrets, technical know-how, licensing opportunities, and continuing innovation to develop and maintain our
competitive position especially where we do not believe that patent protection is appropriate or obtainable. Trade secrets are
by nature difficult to protect. 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. We also require confidentiality or material transfer agreements from third
parties that receive our confidential data or materials. These agreements are designed to protect our proprietary information.
However, we cannot be certain that such agreements have been entered into with all relevant parties, and even if they are all in
place, there can still be no guarantee that agreements have not been or will not be violated or that there will be an adequate
remedy available for a violation of an agreement. Accordingly, we cannot be certain that our trade secrets and other confidential
proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently
develop substantially equivalent information and techniques. For example, if 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, others, including our competitors, may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets or technology.
We also seek to preserve the integrity and
confidentiality of our confidential proprietary information by maintaining physical security of our premises and physical and electronic
security of our information technology systems, but it is possible that these security measures could be breached. If any of our
confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no
right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive
position.
We anticipate that we will spend both time
and management resources to develop and file trademark applications in the future. However, third parties may have trademarks or
pending trademark 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.
Although we are not currently involved
in any intellectual property litigation, we may become involved in lawsuits to protect or enforce our patents or other intellectual
property, which could be expensive, time consuming and unsuccessful.
Unauthorized parties may infringe our patents
or other intellectual property, 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.
Although we are
not currently involved in any litigation, if we were to initiate legal proceedings against a third party to enforce a patent covering
AEVI-001, AEVI-002, or other product candidates that we may identify, the defendant could counterclaim that the patent covering
our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging
invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of
several statutory requirements, including lack of novelty, obviousness, written description or non-enablement. Grounds for an unenforceability
assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO,
or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is
unpredictable. Interference or derivation proceedings provoked by third parties or brought by us or declared by the USPTO
may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome
could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business
could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or at all, or if a non-exclusive
license is offered and our competitors gain access to the same technology. Our defense of litigation or interference or derivation
proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees.
In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds
necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or
enter into development partnerships that would help us bring AEVI-001, AEVI-002, or other product candidates that we may identify
to market. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There
could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common
stock.
We may be subject to claims challenging
the inventorship of our patents and other intellectual property.
We or our licensors
may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed
patents, trade secrets, or other intellectual property as an inventor or co-inventor. For example, we or our licensors may have
inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our
product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our
licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property. If we or our licensors
fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such
as exclusive ownership of, or right to use, intellectual property that is important to our product candidates. Even if we are successful
in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
Any issued patents that may cover
our product candidates could be found invalid or unenforceable if challenged in court.
Third parties may
claim that our owned or in-licensed patents relating to AEVI-001, AEVI-002, or other product candidates that we may identify, are
invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or
unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory
requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation
that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement,
during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even
outside the context of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign
jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a
way that they no longer cover AEVI-001, AEVI-002, or other product candidates that we may identify. The outcome following legal
assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be
certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant
were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the
patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.
We may be subject to claims that
our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties
or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in
the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at universities or other biotechnology
or pharmaceutical companies, including our competitors or potential competitors. Agreements with our employees aim to prevent employees
from bringing any proprietary rights of third parties to us. Although we try to ensure that our employees, consultants and independent
contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that
we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property,
including trade secrets or other proprietary information, of any of our employee’s former employer or other third parties.
Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary
damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we
are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management
and other employees.
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance
fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the
USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents
and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside agency and rely on our outside
agency to pay these fees due to U.S. and non-U.S. patent agencies. The USPTO and various non-U.S. governmental patent agencies
require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application
process. We employ reputable professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of
a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can
result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the
relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material
adverse effect on our business.
We may not be able to protect our
intellectual property rights throughout the world.
Filing, prosecuting and defending patents
on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property
rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws
of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.
For example, 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. 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.
Consequently, we
may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling
or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies
in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products
to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may
compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them
from competing.
Many companies
have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets,
and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult
for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally.
Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs
and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or
interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against
us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially
meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a
significant commercial advantage from the intellectual property that we develop or license.
Changes in U.S. and foreign patent
law could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either
the patent laws or interpretation of the patent laws in the United States and abroad could increase the uncertainties and costs
surrounding the prosecution of patent applications and the enforcement or defense of issued patents. For example, assuming that
other requirements for patentability are met, prior to March 2013, in the United States, in general, the first to invent was entitled
to the patent. After March 2013, under the Leahy-Smith America Invents Act, enacted in September 2011, the United States transitioned
to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to
file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent
the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before us could therefore
be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This
will require us to be cognizant of the time from invention to filing of a patent application. Since patent applications in the
United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain
that we or our licensors were the first to either (i) file any patent application related to our product candidates or (ii) invent
any of the inventions claimed in our or our licensor’s patents or patent applications.
The America Invents
Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect
patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional
procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review,
inter
partes
review, and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary
standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence
in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate
the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to
invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district
court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding
the prosecution of our owned or in-licensed patent applications and the enforcement or defense of our owned or in-licensed issued
patents, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
In addition, the patent positions of companies
in the development and commercialization of pharmaceuticals are particularly uncertain. Recent U.S. Supreme Court rulings have
narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain
situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once
obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing
patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability
to protect and enforce our intellectual property in the future.
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 $1.01 per share to $2.65 per share during the 52-week trading
period ending June 30, 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 in the fourth quarter of 2018 and the 8-week signal finding study of AEVI-002 in patients with severe pediatric onset Crohn’s disease, for which initial data from a small number of patients 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 June 30, 2018, there
were outstanding options and warrants to purchase an aggregate of 10,749,651 and 3,953,904 shares, respectively. Of the 10,749,651
outstanding options, ranging in exercise price from $1.07 per share to $8.80 per share, 6,344,864 shares were exercisable as of
June 30, 2018. 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 June 30, 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.
If we fail to comply with the continued listing requirements
of the Nasdaq Global Market, our common stock may be delisted and the price of our common stock and our ability to access the capital
markets could be negatively impacted.
Our common stock is listed for trading on
the Nasdaq Global Market. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum
closing bid price requirement of $1.00 per share for our common stock.
If a company trades for 30 consecutive business
days below the $1.00 minimum closing bid price requirement, Nasdaq will send a deficiency notice to the company, advising that
it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements.
Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance period may
be available. If Nasdaq does not grant such a company a second 180-day compliance period or such company does not regain compliance
with the bid price requirement, such company may be delisted from the Nasdaq Global Market.
A delisting of our common stock from Nasdaq
could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our
common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable
to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.
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.