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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-37490
ProNAi Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 20-0138994 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| 2150 – 885 West Georgia Street Vancouver, British Columbia, Canada |
V6C 3E8 | |
| (Address of principal executive offices) | (Zip Code) | |
(604) 558-6536
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Exchange on Which Registered | |
| Common Stock, $0.001 par value per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act. YES ¨ NO x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||||
| Non-accelerated filer | x | (Do not check if a small reporting company) | Small reporting company | ¨ | ||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The registrant was not a public company as of the last business day of its most recently completed second fiscal quarter and, therefore, cannot calculate the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date. The registrant’s common stock began trading on The NASDAQ Global Market on July 16, 2015. The aggregate market value of common stock held by non-affiliates of the registrant computed by reference to the price of the registrant’s common stock as of July 16, 2015 (based on the last reported sale price on The NASDAQ Global Market as of such date) was $656.6 million.
The number of shares of Registrant’s Common Stock outstanding as of March 1, 2016 was 30,099,375.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement (“Proxy Statement”) relating to the 2016 Annual Meeting of Stockholders will be filed with the Commission within 120 days after the end of the Registrant’s 2015 fiscal year and is incorporated by reference into Part III of this Report.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (Annual Report) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and section 27A of the Securities Act of 1933, as amended (Securities Act). All statements contained in this Annual Report other than statements of historical fact, including statements regarding our future clinical development activities, expected results of clinical trials, future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue.” “anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A, “Risk Factors” and elsewhere in this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements to conform these statements to actual results or to changes in our expectations, except as required by law. You should read this Annual Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Unless the context indicates otherwise, as used in this Annual Report, the terms “ProNAi,” “we,” “us” and “our” refer to ProNAi Therapeutics, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted. ProNAi and DNAi are our registered trademarks. The “ProNAi” logo and all product names are our common law trademarks. This Annual Report contains additional trade names, trademarks and service marks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
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PART I
| Item 1. | Business. |
Overview
We are a clinical-stage oncology company led by a world-class senior management team of proven oncology drug developers. Our vision is to be a leader in developing and commercializing a broad and diverse portfolio of cancer therapies that deliver therapeutic outcomes that dramatically change patients’ lives. In addition to advancing our lead product candidate, PNT2258, we are seeking to expand the number of products we have under clinical development to leverage the full potential of our team.
Our lead product candidate, PNT2258, is based on our proprietary DNA interference (DNAi) technology platform. PNT2258 is designed to target BCL2, a widely overexpressed oncogene that is an important gatekeeper of the programmed cell death process known as apoptosis and has been linked to many forms of cancer. In a recent single-agent Phase 2 trial of 13 patients with relapsed or refractory non-Hodgkin’s lymphoma (NHL), PNT2258 demonstrated evidence of anti-tumor activity, with 11 patients achieving a complete response (CR), partial response (PR) or stable disease (SD). Furthermore, all four of the diffuse large B-cell lymphoma (DLBCL) patients treated in this trial experienced a clinical response, including three CRs and one PR, with reported durations on study in the range of nine to more than 28 months. Although not statistically powered for a formal efficacy analysis, we believe the preliminary evidence of efficacy observed in this trial, coupled with safety and tolerability data collected to date, suggest that PNT2258 has potential in the treatment of a variety of oncology indications.
Our lead product candidate, PNT2258, is a proprietary formulation of our single-stranded 24-base DNAi oligonucleotide, known as PNT100, encapsulated in the SMARTICLES Lipid Nanoparticle (LNP). PNT100 DNAi is designed to target a genetic regulatory region associated with BCL2, an important and validated oncogene known to be dysregulated in many types of cancer. This dysregulation, which is manifested in the excess production of BCL2 protein, is believed to provide certain cancer cells with the ability to resist naturally occurring apoptosis, which is a primary mechanism for the removal of aged, damaged or unnecessary cells. Since we estimate that BCL2 is expressed in more than 60% of all new cases across the top 10 most commonly diagnosed cancers in the United States, we believe there is the potential to develop PNT2258 across a variety of oncology indications.
We are pursuing a multi-faceted clinical development strategy that is designed to achieve regulatory approval and maximize the commercial opportunity of PNT2258. We have conducted two clinical trials with PNT2258 to date: a Phase 1 safety trial in patients with relapsed or refractory solid tumors and a Phase 2 trial in patients with relapsed or refractory NHL. Having observed preliminary evidence of efficacy and tolerability, we plan to pursue a broad registration-oriented clinical development program, initially in hematologic malignancies, that we anticipate will provide the foundation of a global registration strategy for PNT2258.
In December 2014, we initiated “Wolverine,” an open-label 60 patient Phase 2 trial evaluating PNT2258 for the treatment of third-line relapsed or refractory DLBCL. Initial interim data from this trial is expected to be reported in June 2016. DLBCL is the most prevalent form of NHL, comprising approximately 30% of the annual NHL diagnoses in the United States according to a 2013 report by the Leukemia & Lymphoma Society. In October 2015, we initiated “Brighton,” an open-label 50 patient Phase 2 trial evaluating PNT2258 for the treatment of Richter’s transformed chronic lymphocytic leukemia (Richter’s CLL). Initial interim data from this trial is expected to be reported in December 2016. Richter’s CLL is a rare and aggressive form of NHL with no currently approved therapies.
We are also designing a number of additional Phase 2 trials that could support the registration and commercialization strategies for PNT2258. We are carefully considering the timing of these additional trials with a view to maximizing PNT2258’s potential while deploying our capital prudently. Based on our current
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development strategy, we are planning to initiate two Phase 2 trials, “Cypress” and “Granite”, with PNT2258 for the treatment of second-line DLBCL in combination with other treatment regimens: in combination with R-ICE (Rituximab, Ifosfamide, Carboplatin, Etoposide) in the “transplant eligible” patient population; and in combination with BR (Bendamustine, Rituximab) in the “transplant ineligible” patient population. We may also evaluate PNT2258’s potential in DLBCL in combination with a targeted anti-cancer drug, and we may also evaluate PNT2258 in other hematological malignancies. If the efficacy data obtained in some or all of these trials are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies. As appropriate, we may apply for orphan drug, breakthrough therapy, fast track or other regulatory designations.
Our Strategy
Key elements of our business strategy are to:
| • | Expedite the Clinical Development and Regulatory Approval of PNT2258. We plan to advance our lead product candidate, PNT2258, for the treatment of several hematologic malignancies, initially focusing on indications where we believe PNT2258 has demonstrated anti-tumor activity and where there are significant unmet medical needs. The first two indications we plan to pursue are in DLBCL and Richter’s CLL. In December 2014, we initiated Wolverine, a Phase 2 trial for the treatment of third-line relapsed or refractory DLBCL, and in October 2015, we initiated Brighton, a Phase 2 trial for the treatment of Richter’s CLL. We are also designing a number of additional Phase 2 trials that could support the registration and commercialization strategies for PNT2258. If the data obtained in any of these trials are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies. |
| • | Pursue a Multi-Faceted Development Strategy for PNT2258 Across Many Oncology Indications. In addition to developing PNT2258 for DLBCL and Richter’s CLL, we intend to expand the commercial market opportunity for PNT2258 by developing it for the treatment of a wide variety of BCL2-driven tumors, such as leukemias or solid tumors, as monotherapy and in combination with other therapeutic agents or treatment regimens. BCL2 overexpression has also been implicated as a driver of a wide variety of solid tumors, including breast, prostate and lung, which could provide additional future development opportunities for PNT2258. |
| • | Maximize the Global Commercial Value of our Product Candidates. As we further develop our products, we plan to build a commercial infrastructure with the capability to directly market our product candidates to oncologists in North America, and possibly other major geographies that are core to our commercial strategy. We plan to enter into collaborations for the development, marketing and commercialization of our product candidates in additional geographies at an appropriate time. We also plan to invest in scaling our manufacturing capacity to support our global commercial strategy. |
| • | Continue to Invest in our Proprietary DNAi Technology Platform and Evaluate its Potential to Yield Additional Pipeline Products. We plan to continue to conduct research in the field of DNAi to further our understanding of the anti-cancer mechanism of action of this technology. We believe DNAi technology may be applicable to additional high value genetic targets beyond BCL2 that are also challenging to effectively drug by conventional means. We plan to evaluate the potential of our DNAi technology platform to yield additional pipeline product candidates by targeting the genetic regulatory regions of oncogenes known to be involved in cancer. |
| • | Broaden our Proprietary Pipeline by Acquiring Product Candidates. We are actively seeking to acquire additional oncology product candidates through in-licensing or other strategic opportunities in order to leverage the full potential of our team. We are primarily seeking to acquire oncology drug candidates that could be advanced into human clinical trials within the next 12 to18 months and that potentially could be complementary to our lead drug when administered in combination. |
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Background on DNA and its Role in Cancer
Cancer is a leading cause of death in the developed world and the second leading cause of death in the United States, with 596,000 deaths and 1.7 million new cases estimated to occur in the United States in 2016, according to the American Cancer Society (ACS). The International Agency for Research on Cancer projects that in 2030, 21.7 million people will be diagnosed with cancer and 13 million will die of cancer in that year worldwide.
Cancer typically develops when DNA in normal cells begins to fail and genes that regulate the cell become disrupted, leading to uncontrolled growth and survival. These cancer-causing oncogenes may be triggered by external factors, such as chemicals, radiation and viruses, or internal factors, such as hormones, immune conditions and inherited mutations.
The most common methods of treating patients with cancer are surgery, radiation and drug therapy. A cancer patient often receives treatment with a combination of these methods. Surgery and radiation therapy are particularly effective for patients in whom the disease is localized. Physicians generally use systemic drug therapies in situations where the cancer has spread beyond the primary site or cannot otherwise be treated through surgery or radiation. The goal of drug therapy is to kill cancer cells or to damage cellular components required for the rapid growth and survival of cancer cells. In many cases, drug therapy entails the administration of several different drugs in combination. Over the past several decades, drug therapy has evolved from non-specific drugs that kill both healthy and cancerous cells, to drugs that target specific molecular pathways to selectively kill only cancer cells. While heightened vigilance, new diagnostic tests, combination regimens and targeted therapies have resulted in improvements in overall survival for some cancer patients, we believe that there is still a necessity for continued innovation in the treatment of cancer.
Much of cancer drug discovery has focused on therapeutic intervention at the protein level through conventional approaches, including small molecules and antibodies. However, many proteins are not “druggable” by small molecules or antibodies. Small molecule drugs can target proteins inside the cell, but are often limited to proteins with accessible functional domains. Antibodies are limited to targeting circulating proteins or those expressed on the cell surface. More recently, there has been broad interest in potentially drugging mRNA as a way of impacting oncology targets that were otherwise intractable to small molecules or antibodies, but development has been challenged by issues of delivery, toxicity and potency. We believe that there is substantial opportunity for the next-generation of cancer treatments to target DNA itself, directly interfering with the oncogenes responsible for cancer. This difference may allow our DNAi to have a more profound impact on oncogenic targets that may be difficult to drug effectively with these other approaches, and, therefore, potentially result in enhanced efficacy, durability and safety outcomes. In addition, we believe that our unique mechanism could also potentially amplify and be complementary to other therapeutic modalities.
With the vast trove of data about human DNA generated by the Human Genome Project and other genomic research, scientists and clinicians have more powerful tools to study the role that genetic factors play in complex diseases such as cancer. By leveraging this robust dataset, we can deploy our DNAi technology platform to identify oncogenes suitable for interference. We identified the BCL2 oncogene as a compelling oncogenic target for developing our first DNAi-based therapeutic.
Our Initial Target Oncogene – BCL2, a Key Regulator of Apoptosis
Apoptosis, or naturally occurring programmed cell death, is a primary mechanism for the removal of aged, damaged and unnecessary cells. BCL2 was the first apoptotic regulator identified. The discovery that the BCL2 protein was found to inhibit cell death supported the notion that cancer is not only enabled by unlimited proliferation, but also by impaired apoptosis.
In cancer patients, higher levels of BCL2 expression are generally correlated with poor prognoses and resistance to chemotherapies. By promoting cancer cell survival, BCL2 overexpression contributes to tumor formation and
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growth, as well as the subsequent development of chemo-resistance as observed in a broad variety of tumors. Given its central role in cancer cell survival, BCL2 is an important and validated oncogenic target for therapeutic development.
Aberrant BCL2 control mechanisms are a defining characteristic of a variety of cancers. BCL2 overexpression is found not only in NHL, but also in other hematologic malignancies and solid tumors. We estimate that BCL2 is expressed in more than 60% of all new cases across the top 10 most commonly diagnosed cancers in the United States.
Our Approach – DNAi
Our DNAi technology platform is based on the breakthrough discovery at Wayne State University and Karmanos Cancer Institute that single-stranded DNA oligonucleotides can interact with genomic DNA in order to interfere with oncogenes. We acquired this technology and subsequently developed an algorithm for identifying DNAi product candidates using bioinformatics and our understanding of gene regulatory regions. In particular, understanding which specific sequences of DNA are involved in regulating genes, as well as identifying which regions reside in an accessible open DNA conformation, are important components of our know-how in designing DNAi oligonucleotides.
The ability to leverage DNAi as a broadly applicable therapeutic modality requires an effective delivery vehicle. Our approach uses pH-responsive LNPs designed to protect our DNAi oligonucleotides and deliver them to cancer cells, enabling broad systemic distribution after intravenous infusion. Specifically, our LNPs are composed of a proprietary liposomal formulation of four lipids selected to impart stability, enhance pharmacokinetics and facilitate systemic exposure of the drug payload. In particular, our LNPs have been engineered to avoid sequestration in the liver, and, unlike other technologies, our LNPs can dynamically change their surface electrical charge. They are negatively charged at physiological pH levels, and do not employ PEG stabilizers and therefore do not interact with the patient’s immune system and other biological factors that can result in toxicities. Within the acidic environment found in tumors, our LNPs become positively charged and therefore more amenable to cellular uptake and cytoplasmic release of their payloads.
In general, the effective systemic delivery of oligonucleotides has been a profound challenge to their deployment as therapeutics. We believe the favorable properties of our LNPs may offer advantages over certain other nanoparticle delivery systems, underscoring our decision to exclusively license the SMARTICLES LNP technology for the field of DNAi.
In order to maintain our competitive position in the field of DNAi, we plan to continue conducting research to further our understanding of this technology. We believe that DNAi technology may be applicable to additional high value genetic targets beyond BCL2 that are also challenging to drug by conventional means.
Our Lead Product Candidate – PNT2258
Overview
Our lead DNAi product candidate, PNT2258, is a proprietary formulation of our single-stranded 24-base DNAi oligonucleotide, known as PNT100, encapsulated in our LNP. After intravenous infusion, PNT2258 achieves broad systemic distribution and is taken up by cancer cells, where PNT100 DNAi oligonucleotides traffic to the nuclei of cells, and is designed to target a genetic regulatory region involved in the transcription of BCL2.
Design of PNT2258
The design of PNT2258 comprises two components, which are depicted below:
| • | PNT100 DNAi Oligonucleotide. The active ingredient of PNT2258 is our PNT100 DNAi, a single-stranded 24-base oligonucleotide. PNT100 DNAi oligonucleotides are designed to target a specific regulatory region of the BCL2 oncogene. |
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| • | LNP Delivery Technology. In PNT2258, protective amphoteric liposomes encapsulate PNT100 DNAi, providing enhanced serum stability and optimized pharmacokinetic properties to facilitate their broad systemic distribution after intravenous infusion. Within the acidic environment found in tumors, our LNPs become positively charged and therefore more amenable to cellular uptake and cytoplasmic release of their payloads. |
The Design of PNT2258 Comprises Two Components
Our Initial Focus in Lymphoma and Leukemia
Lymphoma is the most common blood cancer, with an estimated 81,000 new cases of lymphoma expected to be diagnosed in 2016, according to the ACS. Lymphoma occurs when cells of the immune system, or lymphocytes, grow and multiply uncontrollably. The two main types of lymphocytes that can develop into lymphomas are B-lymphocytes (B-cells) and T-lymphocytes (T-cells). Lymphoma is further classified as either Hodgkin’s or non-Hodgkin’s. NHL, a type of B-cell lymphoma, describes a diverse group of blood cancers that arise from the damaged DNA of a lymphocyte parent cell. NHL, which comprises more than 60 subtypes, is the most common form of lymphoma and is expected to account for approximately 73,000 new cases in the United States in 2016, according to the ACS. NHL carries a much poorer prognosis than Hodgkin’s lymphoma, and is expected to account for approximately 20,800 of 21,000 total annual deaths caused by lymphoma in the United States in 2016, according to the ACS. Additionally, while incidence rates for Hodgkin’s lymphoma have recently remained stable, the incidence of NHL has increased over time.
One NHL subtype where BCL2 overexpression is thought to be a key driver of disease is DLBCL. This aggressive form of cancer is the most prevalent form of NHL, comprising approximately 30% of the annual NHL diagnoses in the United States according to a 2013 report by the Leukemia & Lymphoma Society. DLBCL affects mostly middle aged and older adults and is aggressive but potentially curable. First-line treatment of intensive combination chemotherapy involving rituximab may cure approximately 67% of patients. If this fails, second-line treatment is typically platinum-based chemotherapy along with continued rituximab. In the event that a response is achieved with second-line treatment, patients may be given a hematopoietic stem cell transplant. If second-line treatment or the transplant fails, patients are left with few options and little hope of a curative therapy. The median survival for third-line DLBCL patients is approximately six months.
Leukemia is cancer of the body’s blood-forming tissues, including the bone marrow and the lymphatic system. According to the ACS, an estimated 60,000 new cases of leukemia are expected to be diagnosed in 2016. One of the main types of leukemia is chronic lymphocytic leukemia (CLL), a type of blood cancer that begins in the bone marrow. According to the ACS, approximately 19,000 individuals in the United States are expected to be diagnosed with CLL in 2016. High level BCL2 expression is seen in most patients with CLL. Though typically
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classified as a low-grade lymphoproliferative disorder, 3% to 11% of CLL patients will experience transformation to Richter’s CLL, a fast-growing variant of DLBCL, during the course of their disease. Richter’s CLL is a highly proliferative, rapidly progressing disease affecting mostly older adults with a median survival of approximately one year, and represents a significant unmet medical need with no currently approved therapies.
Status of Our Clinical Development Program
In February 2008, we submitted an investigational new drug (IND) application for PNT2258 as an anticancer agent. The IND is currently active and all completed and currently planned clinical trials for PNT2258 have been or are being conducted under this IND.
We have conducted two clinical trials with single-agent PNT2258 to date: a Phase 1 safety trial in 22 patients with relapsed or refractory solid tumors and a Phase 2 trial in 13 patients with relapsed or refractory NHL.
In December 2014, we initiated Wolverine, an open-label 60 patient Phase 2 trial evaluating single-agent PNT2258 for the treatment of third-line relapsed or refractory DLBCL. In October 2015, we initiated Brighton, an open-label 50 patient Phase 2 trial evaluating single-agent PNT2258 for the treatment of Richter’s CLL.
We are also designing a number of additional Phase 2 trials that could support the registration and commercialization strategies for PNT2258. This includes two Phase 2 trials with PNT2258 for the treatment of second-line DLBCL in combination with other treatment regimens, in the “transplant eligible” and “transplant ineligible” patient populations. We also may evaluate PNT2258’s potential in DLBCL in combination with a targeted anti-cancer drug and may evaluate PNT2258 in other hematological malignancies. We are carefully considering the timing of these additional trials with a view to maximizing PNT2258’s potential while deploying our capital prudently.
In order to obtain regulatory approval and potentially commercialize PNT2258, we will need to complete the Phase 2 clinical trials described above and possibly Phase 3 registration-oriented clinical trials in order to properly evaluate the safety and efficacy of PNT2258. If the efficacy data obtained in some or all of the Phase 2 trials are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies. In order to obtain marketing approval to commercialize PNT2258, a new drug application (NDA) must be filed with, and approved by, the FDA. Additionally during this time, we will need to complete manufacturing validation runs and commercial manufacturing facility readiness for prior approval inspections in preparation for the NDA and product launch.
The amount and timing of our expenditures on these trials will depend upon numerous factors, including the ongoing status and results. Although it is difficult to predict additional capital requirements, we believe that our existing cash and cash equivalents will be sufficient to allow us to achieve clinical data read-outs for the Wolverine and Brighton trials. We anticipate that we will need additional funding to complete these and our other planned clinical trials.
PNT2258-01: Phase 1 Trial in Advanced or Metastatic Solid Tumor Malignancies
Trial Overview
We initiated our Phase 1 dose escalation clinical trial with PNT2258 in 2010 to determine the safety and tolerability of PNT2258 administered by intravenous infusion. This Phase 1 trial involved 22 patients with relapsed or refractory solid tumor malignancies, including patients diagnosed with non-small cell lung cancer, squamous cell cancer of the head and neck, colorectal cancer, breast cancer, endometrial cancer, liver cancer, pancreatic cancer and prostate cancer. As this trial was safety oriented, patients were not chosen for participation on the basis of their BCL2 status and, thus, overt evidence of anti-tumor effect was not expected. Data from the trial were also used to determine an appropriate dose and schedule for subsequent trials and to evaluate any preliminary anti-cancer activity of PNT2258.
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Safety Results
PNT2258 was administered on days one through five of a 21-day schedule at doses ranging from 1 to 150 mg/m2 over a two to four hour intravenous infusion. At all dose levels, patients received a range of zero to eight cycles with a median of two cycles. Of the 310 planned doses of PNT2258, 299 were administered as scheduled. No subjects were dose-reduced for toxicity.
Across all dose levels, and regardless of attribution, a total of 82 treatment emergent adverse events (AEs), and six serious adverse events (SAEs) were reported. The most common AEs were fatigue (eight events in seven patients; 7/22 patients, 31.8%; grade range 1-2) and infusion reaction manifesting as back or flank pain (eight events in five patients; 5/22 patients, 22.7%; grade range 2-3.) An increase in aspartate aminotransferase at the 150 mg/m2 dose level was observed in a patient with metastatic disease to the liver and resolved spontaneously within 48 hours, and one patient developed a grade 4 thrombocytopenia within 30 days of study participation at the 150 mg/m2 dose level. The most common reasons for study discontinuation were progressive disease or symptomatic deterioration (13 patients, 62%) or lack of clinical benefit (5 patients, 24%). Two patients (9%) discontinued therapy due to an adverse event and one patient (4%) withdrew informed. One patient died as a result of disease progression within 30 days of trial participation.
PNT2258 was considered to be well tolerated at all doses by the investigators in this trial. In addition, there was no evidence of a systemic immune response to the LNP or PNT100; no significant changes in immune-stimulatory cytokines or clinical signs of anaphylaxis following dosing of PNT2258 were observed, which supports the lack of a non-specific immune response.
Efficacy Results
Patients were not enrolled in this trial on the basis of their BCL2 expression status; thus, overt evidence of anti-tumor effect was not expected. Of the 22 patients participating in the Phase 1 trial, six had SD at the time of the end-of-cycle two CT scan and none achieved a CR or PR. Four patients remained in the trial for greater than four cycles (range 5-8 cycles).
PNT2258-02: Phase 2 Trial in Relapsed or Refractory NHL
Trial Overview
In December 2012, we initiated a single arm, open-label Phase 2 trial in patients with relapsed or refractory NHL, defined as patients who are no longer or were never responsive to treatment with approved or experimental therapies. The primary objective was to determine PNT2258’s anti-tumor activity across several hematological malignancies and to collect safety data.
The trial enrolled 13 patients with a median age of 63 who had been previously treated with one to four prior regimens; six of these patients were refractory to prior treatment. Of these 13 patients, four patients were diagnosed with DLBCL, five with follicular non-Hodgkin’s lymphoma (FL), two with mantle cell lymphoma (MCL) and two with CLL/small lymphocytic lymphoma (SLL).
Phase 2 Trial Dosing Regimen in Relapsed or Refractory NHL
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As shown in the figure above, in the induction phase, patients received 120 mg/m2 of PNT2258 over a three to five hour intravenous infusion on days one through five of a 21-day cycle for six to eight cycles. In the continuation phase, patients who achieved stable disease or better received 100 mg/m2 over a two hour intravenous infusion on days one and two of a 28-day cycle, until disease progression.
Efficacy Results
In November 2014, we reported that 11 of the 13 (85%) patients achieved CR, PR or SD. In accordance with the International Working Group response criteria for each indication, potential responses include: CR, which for CLL means complete remission and for the other indications listed means complete response; PR, which for CLL means partial remission and for the other indications listed means partial response; SD which means stable disease for all indications listed; and PD, which means progressive disease for all indications listed.
Of the four DLBCL patients, three achieved CRs and one achieved a PR, with reported durations on study ranging from nine to more than 28 months. Of the five FL patients, one achieved a CR, one achieved a PR and three responded with SDs, with reported durations on study ranging from four months to more than 34 months. Of the two patients with CLL, one responded with SD and the other responded with PD. Of the two MCL patients, one responded with SD and other responded with PD. The table below summarizes the duration on study in the 13 patients as of each patient’s last reported scan:
Duration on Study with PNT2258 in Phase 2 Trial
A notable durable CR was achieved in a 79-year-old male with Richter’s CLL. The patient presented with aggressive disease at baseline and was refractory to two prior chemotherapy-containing regimens for Richter’s CLL. After six cycles of treatment with single-agent PNT2258, the patient experienced a complete metabolic response that was defined as a CR. The patient remained on study for 10 months before progressing.
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Safety Results
Patients were scheduled to receive PNT2258 at a dose of 120 mg/m2 IV over two to four hours, on days one through five of a 21-day cycle for six to eight cycles. All patients received PNT2258 per the aforementioned dose and schedule, with the exception of 4 patients who received reduced doses of PNT2258.
The most commonly reported drug-related AEs (in two or more patients) were nausea and chills, occurring in 12 and 8 patients respectively, as well as diarrhea, fatigue and vomiting (each in eight patients). The majority of drug-related AEs were assessed as grade 1 or 2 in severity. Most frequently reported grade 3 drug-related AEs were diarrhea (in three patients), as well as nausea, neutropenia, hyperphosphataemia and back and groin pain (each in two patients). Two related SAEs were reported; one grade 3 event of dehydration and one grade 2 event of altered mental status. There were no occurrences of grade 4 AEs and no drug-related discontinuations or deaths. No occurrences of tumor lysis syndrome, hyperkalemia, or hypocalcemia were noted.
For patients that experienced infusion-related events such as back or groin pain, chills and nausea, supportive care measures were usually sufficient to allow administration of the full dose of PNT2258 and adherence to the administration schedule.
These data demonstrate that PNT2258 administered to patients with recurrent or treatment refractory NHL was generally well tolerated and without evidence of significant metabolic abnormality or major organ toxicity.
Clinical Development Strategy
Having observed preliminary evidence of efficacy and tolerability in clinical trials to date, and given our belief that PNT2258 has the potential to be efficacious across a wide range of oncology indications, we plan to pursue a broad registration-oriented clinical development program, initially in hematologic malignancies, that may provide the foundation of a global registration strategy for PNT2258. In particular, in December 2014, we initiated Wolverine, a Phase 2 trial for the treatment of third-line relapsed or refractory DLBCL, and in October 2015, we initiated Brighton, a Phase 2 trial evaluating PNT2258 for the treatment of Richter’s CLL.
Given that BCL2 overexpression has been implicated as a fundamental driver in a wide variety of cancers, a primary goal of our clinical development strategy is to exploit the full commercial potential of PNT2258 by developing the product candidate in earlier lines of therapy in DLBCL and additional indications, either as monotherapy or in combination with other therapeutic agents or treatment regimens. Specifically, we believe that PNT2258 could also potentially amplify and be complementary to other therapeutic modalities.
We plan to initiate additional Phase 2 trials with PNT2258 in combination with other therapeutic agents or treatment regiments and we may also evaluate PNT2258’s potential in other hematological malignancies. If the efficacy data obtained in some or all of these trials are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies. As appropriate, we may apply for orphan drug, breakthrough therapy, fast track or other regulatory designations.
PNT2258-03 Wolverine Trial in Relapsed or Refractory DLBCL
In December 2014, the first patient was enrolled in our Phase 2 Wolverine trial in third-line relapsed or refractory DLBCL. Wolverine is a multi-center, open-label Phase 2 trial of single-agent PNT2258 that will characterize anti-tumor activity and collect safety data on approximately 60 patients with relapsed or refractory DLBCL. Initial interim data from this trial is expected to be reported in June 2016.
The primary endpoint is overall response rate (defined as the proportion of patients achieving CR or PR) and secondary endpoints include duration of response, disease control rate, progression-free survival, overall survival and exploratory predictors of outcome based on biomarker assessments as described below. We expect that the
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results of this trial may ultimately be used to design a subsequent registration trial. However, if the data obtained are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies.
The Wolverine trial employs a two-phase dosing regimen. In the induction phase, patients will receive 120 mg/m2 of PNT2258 intravenously on days one through five of a 21-day cycle. Treatment in the induction phase may continue for a total of eight cycles, unless there is disease progression or the occurrence of unacceptable toxicity. In the continuation phase, patients who achieve stable disease or better will receive 100 mg/m2 intravenously on days one through four of a 28-day cycle, until disease progression.
Biomarker Assessments
The Wolverine trial has been designed to identify and characterize patients who respond to PNT2258 on the basis of their genetics and disease characteristics. In particular, BCL2 protein levels can be measured from tumor biopsies, and we plan to correlate clinical responses with BCL2 overexpression in these patients.
Other exploratory predictors of outcome will be assessed by biomarker sample analysis. In particular, the “double hit” lymphoma population, representing approximately 30% of the total DLBCL population, has higher risk disease with a poorer prognosis than other DLBCL patients, and do not respond as well to standard treatment. These patients can be identified because they overexpress proteins from both the BCL2 and CMYC oncogenes. If PNT2258 shows efficacy in this population, it may represent an opportunity for future development in an area of high unmet medical need.
Wolverine has also been designed to identify patient responders according to the genetics of their DLBCL cancer cells, specifically the cell-of-origin sub-type (germinal center B-cell (GCB) vs. activated B-cell (ABC)), as these patients tend to differ in their prognoses and response to medical treatment. Since BCL2 is overexpressed in both sub-types, PNT2258 may be active in both types of disease, which could potentially differentiate our drug versus certain other therapeutics in common use or in development that only demonstrate activity in one sub-type.
PNT2258-04 Brighton Trial in Richter’s CLL
In October 2015, we initiated a Phase 2 trial for PNT2258 for the treatment of Richter’s CLL. Brighton is a multi-center, open-label, Phase 2 investigation of single-agent PNT2258 to characterize anti-tumor activity and collect safety data on approximately 50 patients with Richter’s CLL.
The primary endpoint is overall response rate (defined as the proportion of patients achieving CR or PR) and secondary endpoints include duration of response, disease control rate, progression-free survival, overall survival and exploratory predictors of outcome. If the data obtained in this trial are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies.
The Brighton trial employs a two-phase dosing regimen. In the induction phase, patients will receive 120 mg/m2 of PNT2258 intravenously on days one through five of a 21-day cycle. Treatment in the induction phase may continue for a total of eight cycles, unless disease progression or the occurrence of unacceptable toxicity. In the continuation phase, patients who achieve stable disease or better will receive 100 mg/m2 intravenously on days one through four of a 28-day cycle, until disease progression.
PNT2258-05 Cypress Combination Trial in Transplant Eligible Second line BCL
The BCL2 oncogene is upregulated as a cancer cell survival mechanism following chemotherapy, and is therefore an important contributor to the development of chemo-resistance. We believe that targeting BCL2 through DNA interference may potentially sensitize cancer cells to chemotherapy.
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This multi-center, open-label, Phase 2 trial will evaluate the safety and efficacy of PNT2258 combined with the standard of care chemotherapy regimen (R-ICE) in patients with second-line recurrent or refractory BCL who are likely to undergo stem cell transplant.
PNT2258-06 Granite Combination Trial in Transplant Ineligible Second line DLBCL
This multi-center, open-label, Phase 2 trial will evaluate the safety and efficacy of PNT2258 combined with a standard of care chemotherapy regimen (BR: Bendamustine, Rituximab) in patients with recurrent or refractory DLBCL who are unfit for stem cell transplant.
Additional PNT2258 Combination and Monotherapy Phase 2 Trials
Recent literature provides the scientific rationale for PNT2258 in combination with a number of targeted cancer therapeutics that modulate critical signaling pathways, such as CD20, BTK and PI3K, that invoke the apoptotic process and cause death of cancer cells. Since BCL2 resides at a key node of the apoptotic pathway, there is a scientific rationale to enhance the apoptotic signal with the addition of PNT2258 to these targeted therapies. We believe there is a strong scientific rationale to suggest that targeting BCL2 could be clinically beneficial in combination with a targeted therapy and may initiate a Phase 2 combination trial of PNT2258 in combination with a targeted therapy.
Since we estimate that BCL2 is expressed in more than 60% of all new cases across the top 10 most commonly diagnosed cancers in the United States, we are also interested in developing PNT2258 for indications beyond DLBCL. Specifically, BCL2 is highly overexpressed in various other hematologic malignancies. We may initiate a trial to test the potential efficacy of PNT2258 as a single agent in the treatment of one or more other hematological malignancies. If initial results are promising, this trial may provide a basis for subsequent clinical development, facilitating PNT2258’s entry into additional cancer indications to further broaden its commercial potential. BCL2 overexpression has also been implicated as a driver of a wide variety of solid tumors, including breast, prostate and lung, which could provide additional future development opportunities for PNT2258.
License and Payment Agreements
Marina License Agreement
In March 2007, we entered into an exclusive license agreement with Novosom AG (Novosom) to use certain patented LNP delivery technology (SMARTICLES) for any of our DNAi drug candidates that target a region of the BCL2 gene. In July 2010, the original Novosom license agreement was acquired by Marina, but Novosom retained the right to receive all payments due from us under the original Novosom license agreement.
In March 2012, we and Marina entered into another exclusive license agreement, which we refer to as the Marina license agreement, for the use of certain of Marina’s patented delivery technology, including LNP technology, for any of our current or future DNAi product candidates that target any gene. In exchange for this exclusive right, we paid Marina an upfront payment of $0.3 million in 2012. We will also be required to pay Marina milestone payments of up to an aggregate of $14.5 million for each DNAi product candidate other than PNT2258 upon successful completion of certain clinical and regulatory milestone events relating to each DNAi product candidate. In addition, for DNAi product candidates other than PNT2258, we are required to pay Marina a low single-digit royalty on net sales of all licensed products by us, our affiliates or sublicensees.
The Marina license agreement expires, on a licensed product-by-licensed product and country-by-country basis, on the earlier of (i) the end of the calendar quarter in which sales in such country of generic products for the licensed product exceed 25% of the sales of such licensed product in such country; or (ii) the later of (A) the date of expiration of the last to expire patent having a valid claim relating to such licensed product in a particular county or (B) 10 years after the first commercial sale of a licensed product in such country. Either party may
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terminate the Marina license agreement in the event of a material breach that remains uncured following the date that is up to 120 days, depending on the type of breach, from the date that the breaching party is provided with written notice by the non-breaching party, or upon certain insolvency events relating to the other party. We may terminate the Marina license agreement at our sole discretion at any time upon 90 days written notice to Marina.
Novosom Payment Agreement
In connection with an amendment to the Marina license agreement in April 2014, the rights from Marina under the Marina license agreement were amended to expressly include PNT2258, and we terminated the prior license agreements with Novosom and entered into a license payment agreement with Novosom to restructure the payments owing for PNT2258. Pursuant to the license payment agreement, by making a one-time payment to Novosom of $11.0 million in April 2014, we terminated the other payment obligations owing to Novosom for PNT2258 except for one remaining $3.0 million milestone equivalent payment due upon regulatory authority approval of PNT2258, and a low single-digit royalty payment to Novosom on net sales of PNT2258.
The license payment agreement expires on a country-by-country basis on the later of (i) the expiry, invalidation or abandonment of the last valid claim of a licensed patent right relating to the licensed product in such country; (ii) the licensed product becomes uncompetitive or unprofitable in such country or (iii) the expiration or termination of our remaining payment obligations to Novosom. In the license payment agreement, we and Marina further agreed not to terminate the Marina license agreement with respect to the use of the LNP delivery technology for PNT2258 or otherwise amend the agreement in a manner that would reduce or be likely to reduce the payments due to Novosom under the license payment agreement, without the prior consent of Novosom.
Research and Development
Since commencing operations, we have dedicated a significant portion of our resources to research and development activities, including the clinical development of our product candidate. We incurred research and development expenses of $26.4 million, $19.1 million and $2.8 million, during the years ended December 31, 2015, 2014 and 2013, respectively. We anticipate that a significant portion of our operating expenses will continue to be related to research and development as we continue to advance PNT2258.
Intellectual Property
Our commercial success depends in part on our ability to obtain and maintain proprietary or intellectual property protection for PNT2258 and future product candidates, our DNAi technology and other know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary or intellectual property rights. Our strategy is to seek to protect our proprietary position and intellectual property position by, among other methods, filing patent applications related to our proprietary technology and product candidates in the United States and in foreign jurisdictions. We also rely on trade secrets, know-how and continuing technological innovation to develop and maintain our proprietary and intellectual property position.
We have filed and will continue to file patent applications directed to the compositions of matter and methods of use related to various aspects of PNT2258 and our DNAi technology. As of December 31, 2015, we were the owner of seven U.S. patents, expiring between 2017 and 2028, absent any adjustments or extensions, comprising claims directed to the compositions of PNT2258, PNT100, oligonucleotides directed against the oncogenes CMYC and RAS, and methods of use of pharmaceutical compositions comprising PNT2258 and rituximab. As of December 31, 2015, we also owned five pending U.S. patent applications, related to PNT2258 for the treatment of cancer indications as a single agent, or in combination with chemotherapeutics and/or rituximab and DNA oligonucleotides directed against various oncogenes, including RAS. Any patents issuing from these U.S. utility applications are expected to expire between 2024 and 2034, absent any adjustments or extensions. As of December 31, 2015, we also owned 39 issued foreign patents and 26 pending foreign patent applications in 23 foreign jurisdictions, including Australia, Canada, China, Europe and Japan. These foreign patents, and any
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patents issuing from these pending foreign patent applications, are expected to expire between 2025 and 2034, absent any adjustments or extensions. These foreign patents and patent applications comprise claims that relate to the compositions of PNT2258, PNT100, oligonucleotides directed against the oncogenes CMYC, CHARAS, CKIRAS, HER2 and TGFBeta and methods of use of PNT2258 for cancer indications as a single agent or in combination with chemotherapeutics and/or rituximab.
The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In most countries, including the United States, the patent term is 20 years from the earliest filing date of a non-provisional patent application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier filed patent. The term of a patent that covers a drug may also be eligible for patent term extension when FDA approval is granted, provided statutory and regulatory requirements are met. In the future, if and when our product candidates receive approval by the FDA or foreign regulatory authorities, we expect to apply for patent term extensions on issued patents covering those drugs, depending upon the length of the clinical trials for each product candidate and other factors. There can be no assurance that any of our pending patent applications will issue or that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents.
As with other oncology companies, our ability to maintain and solidify our proprietary and intellectual property position for our product candidates and technologies will depend on our success in obtaining effective patent claims and enforcing those claims if granted. However, patent applications that we may file or license from third parties may not result in the issuance of patents. We also cannot predict the breadth of claims that may be allowed or enforced in our patents. Our issued patents and any issued patents that we may receive in the future may be challenged, invalidated or circumvented. For example, we cannot be certain of the priority of inventions covered by pending third-party patent applications. If third parties prepare and file patent applications that also claim technology or therapeutics to which we have rights, we may have to participate in interference proceedings to determine priority of invention, which could result in substantial costs to us, even if the eventual outcome is favorable to us. In addition, because of the extensive time required for clinical development and regulatory review of a product candidate we may develop, it is possible that, before PNT2258 or any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of any such patent.
In addition to patents, we rely upon unpatented trade secrets and know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part, using confidentiality agreements with our scientific advisors and consultants, and invention assignment agreements with our employees. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses requiring invention assignment, to grant us ownership of technologies that are developed through our relationship with a third party.
With respect to our DNAi technology platform, we consider trade secrets and know-how to be our primary intellectual property. Trade secrets and know-how can be difficult to protect. We anticipate that with respect to this DNAi technology platform, these trade secrets and know-how may over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology, and the movement of personnel skilled in the art from academic to industry scientific positions.
Competition
The oncology industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience, price, the level of generic competition and the availability of reimbursement from government and other third-party payors. While we believe that our technology, knowledge, experience and scientific resources provide us with competitive advantages, we face
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potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. To our knowledge, no other company has a DNAi-based product candidate in clinical development at the present time.
If PNT2258 is approved for DLBCL or Richter’s CLL, as the case may be, it will compete with existing therapies and currently marketed drugs, including the following:
| • | DLBCL. Therapy for DLBCL typically consists of multi-agent cytotoxic drugs in combination with the monoclonal antibody rituximab. In patients with DLBCL who are not elderly and who have good organ function, high dose chemotherapy with stem cell transplantation is often used. Newer targeted agents such as the BTK inhibitor ibrutinib and the immunomodulatory drug lenalidomide have shown activity in the ABC subtype of DLBCL. There are also a number of other widely used anti-cancer agents that have broad labels that include NHL, and some of these are being evaluated alone or in combination for the treatment of patients with DLBCL that have relapsed after several different types of chemotherapy. Certain monoclonal antibodies similar to rituximab are also being evaluated in relapsed DLBCL. Other oncology companies that have developed or are currently developing treatment for patients with DLBCL include Abbvie Inc., Bellicum Pharmaceuticals, Inc., Celgene Corporation, Epizyme, Inc., Juno Therapeutics, Inc., Karyopharm Therapeutics Inc., Kite Pharma, Inc., Novartis AG and Pharmacyclics, Inc. |
| • | Richter’s CLL. Although there are no specific therapies approved to treat Richter’s CLL, multi-agent cytotoxic drugs in combination with rituximab is typically used as a first-line treatment. To our knowledge, Karyopharm Therapeutics Inc. is the only other company with an active trial focused specifically on Richter’s CLL. |
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial and other resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the oncology industry may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any drugs that we may develop. Our competitors also may obtain FDA or other regulatory approval for their product candidates more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic drugs.
Manufacturing
We do not have any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of PNT2258 and other potential product candidates for preclinical and clinical testing, as well as for commercial manufacture if our product candidates receive marketing approval. We have engaged third-party manufacturers to manufacture PNT100 and to obtain lipids and other raw materials and consumables necessary for the manufacture of PNT2258. In addition, we continue to invest in process development and scale up activities relating to PNT100 and PNT2258 with a view to establishing robust, commercial scale manufacturing processes for both.
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We do not currently have arrangements in place for redundant supply. We believe that our manufacturers have sufficient capacity to meet our current demand and, in the event they fail to meet our demand, adequate alternative sources for such materials exist. However, there is a risk that if supplies are interrupted or result in poor yield or quality, it would materially harm our business. We will continue to evaluate product demand requirements and qualify alternate sources for PNT100 and PNT2258 on an as-needed basis.
Manufacturing is subject to extensive regulations that impose various procedural and documentation requirements, which govern record keeping, manufacturing processes and controls, personnel, quality control and quality assurance, among others. Our contract manufacturing organizations are required to comply with current good manufacturing practice (cGMP) regulations, which are regulatory requirements for the production of pharmaceuticals that will be used in humans.
Government Regulation
FDA Approval Process
In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act (FDC Act) and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution.
Pharmaceutical product development for a new product or certain changes to an approved product in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.
Preclinical tests include laboratory evaluation of product chemistry, formulation and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including good laboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.
Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted (i) in compliance with federal regulations; (ii) in compliance with good clinical practice (GCP), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors; and (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
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The FDA may order the temporary or permanent discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The trial protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board (IRB) for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into healthy patients, the drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the drug for a particular indication, dosage tolerance and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit FDA to evaluate the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug. In most cases FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the trial is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.
After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the United States. The NDA must include the results of all preclinical, clinical and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture and controls. The cost of preparing and submitting an NDA is substantial. The submission of most NDAs is additionally subject to a substantial application user fee, and the applicant under an approved NDA is also subject to annual product and establishment user fees. These fees are typically increased annually.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Most such applications for standard review drug products are reviewed within ten to twelve months; most applications for priority review drugs are reviewed in six to eight months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited only for drugs intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both standard and priority review may be extended by FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.
The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisory committee—typically a panel that includes clinicians and other experts—for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with cGMPs is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.
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After FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.
An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require Risk Evaluation and Mitigation Strategies (REMS) to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals and elements to assure safe use (ETASU). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. The requirement for REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Changes to some of the conditions established in an approved application, including changes in indications, labeling or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.
Pediatric Information
Under the Pediatric Research Equity Act (PREA), NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted. The Best Pharmaceuticals for Children Act (BPCA) provides NDA holders a six-month extension of any exclusivity—patent or non-patent—for a drug if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the requested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications, with all of the benefits that designation confers.
Orphan Drugs
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.
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Fast Track Designation and Accelerated Approval
FDA is required to facilitate the development, and expedite the review, of drugs that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a fast track drug concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.
Under the fast track program and FDA’s accelerated approval regulations, FDA may approve a drug for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments.
In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, will allow FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by FDA.
In addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with FDA, FDA may initiate review of sections of a fast track drug’s NDA before the application is complete. This rolling review is available if the applicant provides, and FDA approves, a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, FDA’s time period goal for reviewing an application does not begin until the last section of the NDA is submitted. Additionally, the fast track designation may be withdrawn by FDA if FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Breakthrough Therapy Designation
FDA is also required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.
Disclosure of Clinical Trial Information
Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved. Competitors may use this publicly-available information to gain knowledge regarding the progress of development programs.
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Post-Approval Requirements
Once an NDA is approved, a product will be subject to certain post-approval requirements. For instance, FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling.
AE reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketing testing, known as Phase 4 testing, REMS and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality-control, drug manufacture, packaging and labeling procedures must continue to conform to cGMPs after approval. Drug manufacturers and certain of their subcontractors are required to register their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.
The Hatch-Waxman Act
Orange Book Listing
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application (ANDA). An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.
The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify that (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired. A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant.
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The ANDA application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired.
Exclusivity
Upon NDA approval of a new chemical entity or NCE, which is a drug that contains no active moiety that has been approved by FDA in any other NDA, that drug receives five years of marketing exclusivity during which FDA cannot receive any ANDA seeking approval of a generic version of that drug. Certain changes to a drug, such as the addition of a new indication to the package insert, are associated with a three-year period of exclusivity during which FDA cannot approval an ANDA for a generic drug that includes the change. An ANDA may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed. If there is no listed patent in the Orange Book, there may not be a Paragraph IV certification, and, thus, no ANDA may be filed before the expiration of the exclusivity period.
Patent Term Extension
After NDA approval, owners of relevant drug patents may apply for up to a five year patent extension. The allowable patent term extension is calculated as half of the drug’s testing phase (the time between IND application and NDA submission) and all of the review phase (the time between NDA submission and approval up to a maximum of five years). The time can be shortened if FDA determines that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years. For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the United States Patent and Trademark Office must determine that approval of the drug covered by the patent for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been submitted.
Anti-Kickback, False Claims Laws
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain general business and marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes, false claims statutes and other statutes pertaining to healthcare fraud and abuse. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid, or other federally financed healthcare programs. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (PPACA) amended the intent element of the federal statute so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to commit a violation. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
Federal false claims laws, including the federal civil False Claims Act, prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. This includes claims made to programs where the federal government reimburses, such as Medicaid, as well as programs where the federal government is a direct purchaser, such as when it purchases off the Federal Supply Schedule. Recently, several
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pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. Additionally, PPACA amended the federal Anti-Kickback Statute such that a violation of that statute can serve as a basis for liability under the federal False Claims Act. The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offerer or payor knows or should know is likely to influence the beneficiary to order a receive a reimbursable item or service from a particular supplier, and the additional federal criminal statutes created by the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services.
Other Federal and State Regulatory Requirements
Pursuant to PPACA, the Centers for Medicare & Medicaid Services (CMS) has issued a final rule that requires manufacturers of prescription drugs to collect and report information on certain payments or transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members. The first reports were due in 2014 and must be submitted on an annual basis. The reported data were posted in searchable form on a public website on September 30, 2014, and will be posted on an annual basis. Failure to submit required information may result in civil monetary penalties.
In addition, several states now require prescription drug companies to report certain expenses relating to the marketing and promotion of drug products and to report gifts and payments to individual physicians in these states. Other states prohibit various other marketing-related activities. Still other states require the posting of information relating to clinical studies and their outcomes. In addition, California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes. Several additional states are considering similar proposals. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties.
We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology and Clinical Health Act (HITECH), and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, imposes specified requirements on certain types of people and entities relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect.
If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state
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healthcare programs and imprisonment, contractual damages, reputation harm, and diminished profits or future earnings, any of which could adversely affect our ability to operate our business and our financial results.
Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. Sales of pharmaceutical products depend significantly on the availability of third-party coverage and reimbursement. Third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. Although we currently believe that third-party payors will provide coverage and reimbursement for our product candidates, if approved, these third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct expensive clinical studies to demonstrate the comparative cost-effectiveness of our products. The product candidates that we develop may not be considered cost-effective. It is time consuming and expensive for us to seek coverage and reimbursement from third-party payors. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.
The marketability of any product candidates for which we or our collaborators receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we or our collaborators receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Healthcare Reform
The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.
By way of example, in March 2010, the PPACA was signed into law, which intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the PPACA of importance to our potential drug candidates are:
| • | an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs; |
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| • | an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively; |
| • | a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; |
| • | a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D; |
| • | extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; |
| • | expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability; |
| • | expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and |
| • | a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. |
There have been judicial and Congressional challenges and amendments to certain aspects of the PPACA, and we expect there will be additional challenges and amendments to the PPACA in the future. In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013, which will remain in effect through 2025 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for our product candidates, if approved, and, accordingly, our financial operations.
We expect that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drugs.
Foreign Regulation
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products to the extent we choose to develop or sell any products outside of the United States. The approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
In the European Union (EU), member states require both regulatory clearances by the national competent authority and a favorable ethics committee opinion prior to the commencement of a clinical trial. Under the EU regulatory systems, marketing authorization applications may be submitted under either a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that
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is valid for all EU member states. It is compulsory for medicines produced by certain biotechnological processes. Because our products are produced in that way, we would be subject to the centralized process. Under the centralized procedure, pharmaceutical companies submit a single marketing authorization application to the European Medicines Agency. Once granted by the European Commission, a centralized marketing authorization is valid in all EU member states, as well as the EEA countries Iceland, Liechtenstein and Norway. By law, a company can only start to market a medicine once it has received a marketing authorization.
Employees
As of December 31, 2015, we had 52 employees, of which 12 had M.D. or Ph.D. degrees and 33 were engaged in research and development activities. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Financial Information
We manage our operations and allocate resources as a single reporting segment. Financial information regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2015, 2014 and 2013 and our total assets as of December 31, 2015 and 2014, is included in our Consolidated Financial Statements in Item 8 of this Annual Report.
Corporate Information
We were incorporated in Delaware in May 2003 as Phenome Systems, Inc. and changed our name to ProNAi Therapeutics, Inc. in April 2004. Shortly thereafter, we merged with SenseGene Therapeutics Inc., a Michigan corporation, with ProNAi Therapeutics, Inc. being the surviving corporation. Our principal executive offices are located at 2150 – 885 West Georgia Street, Vancouver, British Columbia, Canada V6C 3E8, and our telephone number is (604) 558-6536. Our website address is www.pronai.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report, and you should not consider information on our website to be part of this Annual Report.
Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information with the Securities and Exchange Commission (SEC). Our filings with the SEC are available free of charge on the SEC’s website at www.sec.gov and on our website under the “Investors” tab as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also read and copy, at SEC prescribed rates, any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.
| Item 1A. | Risk Factors. |
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this report, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment.
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Risks Related to Our Business and Industry
We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses for the foreseeable future.
We are a clinical-stage oncology company with a limited operating history. Since inception, we have incurred significant operating losses. Our net losses were $53.3 million and $23.9 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had an accumulated deficit of $534.2 million. Investment in oncology product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue the development of our lead product candidate, PNT2258, further research and develop our DNAi technology platform, seek to identify additional product candidates, seek regulatory approval, prepare for potential commercialization and operate as a public company.
Even if we succeed in commercializing PNT2258 or any future product candidates we may develop, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital.
Our business is highly dependent on the success of our only clinical product candidate, PNT2258. If we are unable to successfully develop, obtain regulatory approval for and commercialize PNT2258, or experience significant delays in doing so, our business will be materially harmed.
Our business and future success depends on our ability to successfully develop, obtain regulatory approval for and commercialize our only clinical product candidate, PNT2258, which is at an early stage of development. We have invested significant effort and financial resources in the research and development of PNT2258, and PNT2258 will require significant additional clinical testing before we can seek regulatory approval and potentially launch commercial sales. Further development of PNT2258 will require additional clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales, if approved.
We cannot commercialize product candidates in the United States without first obtaining regulatory approval for the product candidates from the U.S. Food and Drug Administration (FDA). Similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from similar regulatory authorities outside of the United States, such as the European Medicines Agency in Europe. Even if PNT2258 or another product candidate were to be approved by the FDA and non-U.S. regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we are unable to obtain regulatory approval for PNT2258 in one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue the development, marketing or commercialization of PNT2258 or any other product candidate that we may discover, in-license, develop or acquire in the future. Furthermore, even if we obtain regulatory approval for PNT2258, we will still need to develop a commercial organization, or collaborate with a third party for the commercialization of PNT2258, establish commercially viable pricing and obtain approval for coverage and adequate reimbursement from third parties, including government payors. If we are unable to successfully commercialize PNT2258, we may not be able to generate sufficient revenues to continue our business.
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In addition, because we are developing other product candidates based on technology substantially similar to the technology on which PNT2258 is based, if PNT2258 encounters safety or efficacy problems, developmental delays or regulatory issues or other problems, our development plans and business may be significantly harmed.
We are very early in our development efforts and have only one product candidate in clinical development, which has only been tested in a limited number of patients. If we are unable to successfully develop and commercialize product candidates or experience significant delays in doing so, our business will be materially harmed.
We are very early in our development efforts and have only one product candidate, PNT2258, in clinical development. PNT2258 has only been tested in a limited number of patients, and the results of completed preclinical studies and early-stage clinical trials may not be indicative of the results from future clinical trials with a larger number of enrolled patients. The success of PNT2258 and any future product candidates that we may develop will depend on several factors, including the following:
| • | completion of preclinical studies with positive results; |
| • | successful enrollment in, and completion of, clinical trials with positive results; |
| • | receipt of marketing approvals from applicable regulatory authorities; |
| • | establishment of commercial manufacturing capabilities or making arrangements with third-party manufacturers; |
| • | effective patent and trade secret protection and regulatory exclusivity; |
| • | establishment of a commercial sales team, if and when approved, whether alone or in collaboration with others; |
| • | acceptance, if and when approved, by patients, the medical community and third-party payors; |
| • | coverage and adequate reimbursement by third-party payors, including government payors; |
| • | our ability to compete with other therapies; |
| • | continued acceptable safety profile following approval; |
| • | enforcement of intellectual property rights and claims; |
| • | achievement of desirable medicinal properties for the intended indications; and |
| • | effective growth of an organization of scientists and business people who can develop and commercialize the products, if approved, and technology. |
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize PNT2258 or other product candidates that we may develop, which would materially harm our business.
If clinical trials of PNT2258 or future product candidates that we may develop fail to demonstrate safety and efficacy or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of PNT2258 or future product candidates.
In December 2014, we initiated Wolverine, an open-label 60 patient Phase 2 trial evaluating single-agent PNT2258 for the treatment of third-line relapsed or refractory diffuse large B-cell lymphoma (DLBCL). In October 2015, we initiated Brighton, an open-label 50 patient Phase 2 trial evaluating PNT2258 for the treatment of Richter’s transformed chronic lymphocytic leukemia (Richter’s CLL). We may initiate two additional Phase 2 trials, Cypress and Granite, with PNT2258 for the treatment of second-line DLBCL in combination with other treatment regimens, in the “transplant eligible” and “transplant ineligible” patient populations, respectively. We may also evaluate PNT2258’s potential in DLBCL in combination with a targeted anti-cancer drug in other
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hematological malignancies. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. Most product candidates that begin clinical trials are never approved by regulatory authorities for commercialization. We cannot, therefore, guarantee that we will be successful in obtaining the required efficacy and safety profile from the performance of any of our clinical programs. A failure of one or more clinical trials can occur at any stage of testing.
Before obtaining marketing approval from regulatory authorities, including the FDA, for the sale of our product candidates, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans and an acceptable risk/benefit profile. The risk/benefit profile for product approval may include not only the ability to show tumor shrinkage, but also adequate duration of response, a delay in the progression of the disease or an improvement in survival. For example, response rates from the use of our product candidates will likely not be sufficient to obtain regulatory approval unless we can also show an adequate duration of response.
The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. To date, we have only obtained results from Phase 1 and Phase 2 clinical trials that are uncontrolled, involve small sample sizes and are of shorter duration than would be required for regulatory approval. Data from these clinical trials and our preclinical studies should not be relied upon as evidence that later or larger-scale, controlled clinical trials will succeed. For example, although the results from our Phase 2 trial of PNT2258 in patients with relapsed or refractory NHL characterized stable disease (SD) as providing evidence of anti-tumor activity, the FDA generally does not consider SD to provide a direct measure of anti-tumor activity. Accordingly, SD will likely not be a component of the primary efficacy endpoint of overall response rate of any pivotal trials necessary to obtain regulatory approval. There may be other reasons why our early clinical trials are not predictive of later clinical trials. For example, we have not discussed the design, including sample size, trial arms, duration and endpoints, or any results, of our completed, ongoing or planned clinical trials with the FDA, and thus we may not have the benefit of the FDA’s current thinking on trial designs. In addition, the results of clinical trials in one set of patients or line of treatment may not be predictive of those obtained in other clinical trials, and protocols may need to be revised based on unexpected early results.
Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and even if the trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit our product candidates for approval. Many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. To the extent that the results of our trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval of our product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
| • | regulators or institutional review boards (IRBs) may not authorize us or our investigators to initiate a clinical trial or conduct a clinical trial at a prospective trial site; |
| • | government or regulatory delays and changes in regulatory requirements, policy and guidelines; |
| • | delays in reaching or failure to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites and contract research organizations (CROs), or failure by such CROs or trials sites to carry out the clinical trial in accordance with the terms of our agreements with them; |
| • | negative or inconclusive results of clinical trials; |
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| • | decision by us to conduct additional clinical trials or abandon product development programs; |
| • | a higher number of patients required for clinical trials, slower than expected enrollment, greater than expected competition for patients or higher than expected drop out rates; |
| • | clinical sites electing to terminate their participation in one of our clinical trials, which would likely have a detrimental effect on subject enrollment; |
| • | failure of third-party contractors to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; |
| • | inability or unwillingness of patients or medical investigators to follow our clinical trial protocols; |
| • | suspension or termination of clinical trials for various reasons, including unacceptable health risks; |
| • | imposition of a clinical hold for safety reasons or following an inspection of our clinical trial operations or site by the FDA or other regulatory authorities; |
| • | greater than expected cost of clinical trials; |
| • | insufficient supply or quality of product candidates or other materials necessary to conduct clinical trials; |
| • | undesirable side effects or other unexpected characteristics of our product candidates, causing us or our investigators, regulators or IRBs to suspend or terminate the trials; and |
| • | revision of legal or regulatory requirements for approving our product candidates. |
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
| • | be delayed in obtaining marketing approval for our product candidates; |
| • | not obtain marketing approval at all; |
| • | obtain marketing approval in some countries and not in others; |
| • | obtain approval for indications or patient populations that are not as broad as intended or desired; |
| • | obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings; |
| • | be subject to additional post-marketing testing requirements; or |
| • | have the product removed from the market after obtaining marketing approval. |
If the efficacy data obtained in some or all of our PNT2258 clinical trials are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies. If we pursue, and ultimately obtain, accelerated approval from FDA for PNT2258 based on a surrogate endpoint, the FDA would require us to conduct a confirmatory trial to verify the predicted clinical benefit and additional safety studies. The results from the confirmatory trial may not support the clinical benefit, which would result in the approval being withdrawn. Moreover, the FDA may withdraw approval of a product approved under the accelerated approval pathway if, for example:
| • | the clinical trial or trials required to verify the predicted clinical benefit of the product candidate fail to verify such benefit or do not demonstrate sufficient clinical benefit to justify the risks associated with the drug; |
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| • | other evidence demonstrates that the product candidate is not shown to be safe or effective under the conditions of use; |
| • | we fail to conduct any required post-approval trials with due-diligence; or |
| • | we disseminate false or misleading promotional materials relating to the relevant product or product candidate. |
Product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinical trials will continue as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could allow our competitors to bring products to market before we do and could impair our ability to successfully commercialize our product candidates, any of which may harm our business and results of operations.
If we fail to obtain additional capital, we may be unable to complete the development and commercialization of PNT2258 or any future product candidates.
We have used substantial funds to develop our DNAi technology platform and PNT2258. We expect to continue to spend substantial amounts to further advance PNT2258 in clinical development, scale up manufacturing related to PNT2258, acquire or in-license other drugs and technologies, identify and develop additional product candidates, develop our DNAi technology platform, , seek regulatory approvals for our product candidates, establish a commercial sales force and manufacture and market products, if any, that are approved for commercial sale. We also incur significant additional compliance and administrative costs as a result of operating as a public company. While we believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our current operating plans through at least the next 18 months, which we expect will allow us to achieve clinical data read-outs for our Wolverine and Brighton Phase 2 trials, we anticipate that we will need additional funding for the completion of these and our other planned clinical trials.
Our future capital requirements will depend on many factors, including:
| • | the progress and results of our current and planned clinical trials of PNT2258; |
| • | the scope, progress, results and costs of product candidate discovery, preclinical development, laboratory testing and clinical trials for our other product candidates; |
| • | the costs, timing and outcome of regulatory review of PNT2258 and any future product candidates; |
| • | the costs of future commercialization activities, including drug sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval, to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of any collaborator; |
| • | the extent to which we acquire or in-license other drugs and technologies; |
| • | our ability to establish and maintain collaborations on favorable terms, if at all; |
| • | the success of any collaborations that we may enter into with third parties; |
| • | the timing and amount of milestone and royalty payments; |
| • | the amount of revenue, if any, received from commercial sales of our product candidates, should any of our drug candidates receive marketing approval; and |
| • | the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims. |
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve drug sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived
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from sales of PNT2258, if approved, which we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives.
We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of PNT2258 or other research and development initiatives. We could be required to seek collaborators for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to our product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves.
Our approach to the discovery and development of therapeutic treatments based on our DNAi technology platform is unproven and may not result in marketable products.
Our approach to the development of therapeutic treatments focuses on using our proprietary DNAi technology platform. This approach is unproven and may not result in marketable products. We plan to leverage our DNAi technology platform to generate a pipeline of product candidates that interfere with oncogenes known to be involved in cancer and potentially genes implicated in other diseases. While we believe that product candidates developed with our DNAi technology platform may offer potential improvements compared to other therapeutic approaches, the scientific research that forms the basis of our efforts to develop product candidates based on our DNAi technology platform is preliminary and limited.
We believe we are the first to develop DNAi as a therapeutic modality to be tested in humans. We may discover that our DNAi oligonucleotides do not possess the ability to hybridize to complementary regions of genomic DNA of an oncogenic target or our LNP delivery technology does not possess certain properties required for effective delivery, such as the ability to remain stable in the human body for the period of time required for the drug to reach the cell nucleus. We may spend substantial funds attempting to develop and refine these properties and may never succeed in doing so. In addition, product candidates based on our DNAi technology may demonstrate different chemical and pharmacological properties in patients than they do in laboratory studies. Even if product candidates that target a disease-related gene have successful results in preclinical studies in animals, they may not demonstrate the same chemical and pharmacological properties in humans and may interact with human biological systems in unforeseen, ineffective or harmful ways. As a result, we may never succeed in developing a marketable product, we may not become profitable and the value of our common stock may decline.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. The enrollment of patients depends on many factors, including:
| • | the number of clinical trials for other product candidates in the same therapeutic area that are currently in clinical development, and our ability to compete with such trials for patients and clinical trial sites; |
| • | the patient eligibility criteria defined in the protocol; |
| • | the size of the patient population, particularly in Richter’s CLL, which has a very small patient population; |
| • | the risk that disease progression will result in death before the patient can enroll in clinical trials or before the completion of any clinical trials in which the patient is enrolled; |
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| • | the proximity and availability of clinical trial sites for prospective patients; |
| • | the design of the trial; |
| • | our ability to recruit clinical trial investigators with the appropriate competencies and experience; |
| • | our ability to obtain and maintain patient consents; and |
| • | the risk that patients enrolled in clinical trials will drop out of the trials before completion. |
Our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates. This competition will reduce the number and types of patients and qualified clinical investigators available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors or clinical trial sites may not allow us to conduct our clinical trial at such site if competing trials are already being conducted there. Since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial site. We may also encounter difficulties finding a clinical trial site at which to conduct our trials. Moreover, because our product candidates represent a departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy, radiation and monoclonal antibodies, rather than enroll patients in any one of our clinical trials.
Delays in patient enrollment may result in increased costs or may affect the timing or outcome of our planned clinical trials, which could prevent completion of these clinical trials and adversely affect our ability to advance the development of PNT2258 or any future product candidates we may develop.
We intend to form or seek strategic alliances or enter into acquisitions or additional licensing arrangements in the future. We may be unable to form or enter into such alliances, acquisitions or licensing arrangements on our anticipated timeline, and we may not realize the expected benefits of any such transaction.
We intend to form or seek strategic alliances, create joint ventures or collaborations or enter into acquisitions or additional licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. Any of these transactions and relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. These transactions and relationships also may result in a delay in the development of our product candidates if we become dependent upon the other party and such other party does not prioritize the development of our product candidates relative to its other development activities. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates on our anticipated timeline, or all, because our product candidates may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or acquire businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction.
The manufacture of our DNAi product candidates is complex and we may encounter difficulties in production, particularly with respect to process development or scaling up of our manufacturing capabilities. If our third-party manufacturers encounter such difficulties, our ability to provide supply of our product candidates for clinical trials or our products for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.
Our DNAi product candidates comprise formulations of DNAi oligonucleotides encapsulated in LNPs, and the process of manufacturing our products is complex, highly-regulated and subject to many risks. As a result of
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these complexities, the cost to manufacture oligonucleotides and LNPs, and our DNAi product candidates in particular, is generally higher than traditional small molecule chemical compounds. As product candidates are developed through preclinical to late stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials.
Currently, our PNT2258 product candidate is manufactured using an unoptimized process by third-party manufacturers. Although we are working to develop a commercially viable manufacturing process, doing so is a difficult and uncertain task, and there are risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale up, process reproducibility, stability issues, lot consistency and timely availability of reagents or raw materials.
We may ultimately be unable to reduce the cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product candidates are commercialized. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidate, impair commercialization efforts, increase our cost of goods and have an adverse effect on our business, financial condition, results of operations and growth prospects.
Our reliance on third-party manufacturing partners may cause our supply of research and development, preclinical and clinical development materials to become limited or interrupted or fail to be of satisfactory quantity or quality.
We do not have any manufacturing facilities or personnel. We currently rely, and expect to continue to rely, on third parties for the manufacture of PNT2258 and any future potential product candidates that we may develop for preclinical and clinical testing, as well as for commercial manufacture if our product candidates receive marketing approval. We have engaged third-party manufacturers to obtain lipids, PNT100 and other raw materials and consumables necessary for the manufacture of PNT2258.
We may be unable to establish further agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
| • | reliance on the third party for sufficient quantity and quality; |
| • | the possible breach of the manufacturing agreement by the third party; |
| • | failure to manufacture our product according to our specifications; |
| • | failure to manufacture our product according to our schedule or at all; |
| • | misappropriation of our proprietary information, including our trade secrets and know-how; |
| • | the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us; and |
| • | reliance on the third party for regulatory compliance, quality assurance and safety reporting. |
Third-party manufacturers may not be able to comply with current good manufacturing practices (cGMPs) regulations or similar regulatory requirements outside the United States, which are FDA requirements for ensuring product quality control. Our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, although we are not involved in the day-to-day operations of our contract manufacturers, we are ultimately responsible for ensuring that our products and
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product candidates are manufactured in accordance with cGMPs. Therefore, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, quality control and quality assurance. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or approved products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our medicines and harm our business and results of operations.
Any performance failure on the part of our existing or future manufacturers, or any interruption or poor yield or quality of manufactured materials, could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply. If any one of our current contract manufacturers cannot perform as agreed, we may be required to replace that manufacturer. Although we believe that there are several potential alternative manufacturers who could manufacture our product candidates, we may incur added costs and delays in identifying and qualifying any such replacement.
If our third-party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages. Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials, by our third-party manufacturers. Our manufacturers are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage, handling and disposal of medical and hazardous materials. Although we believe that our manufacturers’ procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting from medical or hazardous materials. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical or hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, prospects, financial condition or results of operations.
Thus, our current and anticipated future dependence upon others for the manufacture of our product candidates or medicines may adversely affect our clinical development timeline, our future profit margins or our ability to commercialize any product candidates that receive marketing approval on a timely and competitive basis.
Our product candidates may cause undesirable side effects or have other properties that could halt their clinical development, prevent their regulatory approval, limit their commercial potential or result in significant negative consequences.
We have conducted two clinical trials with PNT2258 to date: a Phase 1 safety trial in patients with relapsed or refractory solid tumors and a pilot Phase 2 trial in patients with relapsed or refractory non-Hodgkin’s lymphoma (NHL). PNT2258 was considered to be well tolerated by the investigators in these trials, with most adverse events (AEs) of mild to moderate designation. However, we have not discussed with the FDA, and the FDA may not agree with, our current or any future assessment of the side-effect or safety profile of PNT2258 in these or other indications. In addition, because PNT2258 has been tested as monotherapy in relatively small patient populations and for limited durations to date, additional side effects may be observed as its development progresses, including in any combination trials that we may conduct in the future. Furthermore, given that some of the patients in our clinical trials may continue therapy until disease progression, we may observe additional side effects with extended dosing, and it may be difficult to distinguish such AEs from symptoms of disease progression. Given the similar chemistries underlying PNT2258 and our other potential DNAi product candidates, it is possible their observed safety profiles may be similar.
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Undesirable side effects caused by any of our product candidates could cause us, IRBs, our CROs, the FDA or other regulatory authorities to interrupt, delay or discontinue clinical trials and could result in the denial of regulatory approval by the FDA or other non-U.S. regulatory authorities for any or all targeted indications. This, in turn, could prevent us from commercializing our product candidates and generating revenues from their sale. In addition, if any of our products cause serious or unexpected side effects or are associated with other safety risks after receiving marketing approval, a number of potential significant negative consequences could result, including:
| • | regulatory authorities may withdraw their approval of this product; |
| • | we may be required to recall the product, change the way it is administered, conduct additional clinical trials or change the labeling of the product; |
| • | the product may be rendered less competitive and sales may decrease; |
| • | our reputation may suffer generally both among clinicians and patients; |
| • | regulatory authorities may require certain labeling statements, such as warnings or contraindications or limitations on the indications for use, or impose restrictions on distribution in the form of a Risk Evaluation and Mitigation Strategy (REMS) in connection with approval, if any; or |
| • | we may be required to change the way the product is administered or conduct additional clinical trials. |
We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants or if preliminary data demonstrate that our product candidates are unlikely to receive regulatory approval or unlikely to be successfully commercialized.
Any one or a combination of these events could prevent us from obtaining approval and achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from the sale of the product.
The market may not be receptive to PNT2258 or any future product candidates that we may develop, which are based on a novel therapeutic modality, and we may not generate any future revenue from the sale or licensing of product candidates.
Even if approval is obtained for a product candidate, we may not generate or sustain revenue from sales of the product due to factors such as whether the product can be sold at a competitive cost and otherwise accepted in the market. PNT2258 is based on new technologies and unproven therapeutic approaches. Market participants with significant influence over acceptance of new treatments, such as physicians and third-party payors, may not adopt a treatment based on DNAi technology, and we may not be able to convince the medical community and third-party payors to accept and use, or to provide favorable reimbursement for, PNT2258 or any future product candidates developed by us. Market acceptance of our product candidates, if approved, will depend on, among other factors:
| • | the timing of our receipt of any marketing and commercialization approvals; |
| • | the terms of any approvals and the countries in which approvals are obtained; |
| • | the safety and efficacy of our product candidates; |
| • | the prevalence and severity of any adverse side effects associated with our product candidates; |
| • | limitations or warnings contained in any labeling approved by the FDA or other regulatory authority; |
| • | relative convenience and ease of administration of our product candidates; |
| • | the success of our physician education programs; |
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| • | the availability of adequate government and third-party payor coverage and reimbursement; |
| • | the pricing of our products, particularly as compared to alternative treatments; and |
| • | availability of alternative effective treatments for the disease indications our product candidates are intended to treat and the relative risks, benefits and costs of those treatments. |
With our focus on emerging DNAi technology, these risks may increase to the extent the space becomes more competitive or less favored in the commercial marketplace.
Additional risks apply in relation to any disease indications we pursue that are classified as rare diseases and that may allow for orphan drug designation by regulatory agencies in major commercial markets. For example, we are developing PNT2258 for the treatment of DLBCL, an aggressive form of NHL, for which we may seek orphan drug designation from the FDA. Because of the small patient population for a rare disease, if pricing is not approved or accepted in the market at an appropriate level for an approved product with orphan drug designation, such drug may not generate enough revenue to offset costs of development, manufacturing, marketing and commercialization despite any benefits received from the orphan drug designation, such as market exclusivity, assistance in clinical trial design or a reduction in user fees or tax credits related to development expense.
Because our product candidates are based on new technology, we expect that they will require extensive research and development and have substantial manufacturing and processing costs. In addition, costs to treat patients with DLBCL and Richter’s CLL can be significant. Accordingly, our clinical trial costs are likely to be significantly higher than for more conventional therapeutic technologies or products. In addition, our proposed product candidates involve several complex and costly manufacturing and processing steps, the costs of which will be borne by us.
Market size is also a variable in disease indications not classified as rare. Our estimates regarding potential market size for any indication may be materially different from what we discover to exist at the time we commence commercialization, if any, for a product, which could result in significant changes in our business plan and have a material adverse effect on our business, financial condition, results of operations and prospects.
We rely and will rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
We depend and will depend upon independent investigators and collaborators, such as universities, medical institutions, CROs and strategic partners to conduct our preclinical and clinical trials under agreements with us. We expect to have to negotiate budgets and contracts with CROs and trial sites, which may result in delays to our development timelines and increased costs. We will rely heavily on these third parties over the course of our clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with current good clinical practices (cGCPs), which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials must be conducted with drug product produced under cGMPs. Our failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which
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would delay the regulatory approval process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.
Any third parties conducting our clinical trials will not be our employees and, except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval of or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.
We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.
Regulatory agencies, IRBs or data safety monitoring boards may at any time recommend the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. Clinical trials must be conducted in accordance with cGCPs, or other applicable foreign government guidelines. Clinical trials are subject to oversight by the FDA, other foreign governmental agencies and IRBs at the study sites where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced in accordance with applicable cGMPs. Clinical trials may be suspended by the FDA, other foreign governmental agencies, or us for various reasons, including:
| • | deficiencies in the conduct of the clinical trials, including failure to conduct the clinical trial in accordance with regulatory requirements or clinical protocols; |
| • | deficiencies in the clinical trial operations or trial sites; |
| • | the product candidate may have unforeseen adverse side effects; |
| • | deficiencies in the trial design necessary to demonstrate efficacy; |
| • | fatalities or other AEs arising during a clinical trial due to medical problems that may not be related to clinical trial treatments; |
| • | the product candidate may not appear to be more effective than current therapies; or |
| • | the quality or stability of the product candidate may fall below acceptable standards. |
Although we have never been asked by a regulatory agency, IRB or data safety monitoring board to temporarily or permanently discontinue a clinical trial, if we elect or are forced to suspend or terminate a clinical trial of any other of our product candidates, the commercial prospects for that product will be harmed and our ability to generate product revenue from that product may be delayed or eliminated. Furthermore, any of these events could prevent us or our partners from achieving or maintaining market acceptance of the affected product and could substantially increase the costs of commercializing our product candidates and impair our ability to generate revenue from the commercialization of these products either by us or by our collaboration partners.
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We face significant competition from other oncology companies, and our operating results will suffer if we fail to compete effectively.
The oncology industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.
If PNT2258 is approved for DLBCL or Richter’s CLL, as the case may be, it will compete with existing therapies and currently marketed drugs, including the following:
| • | DLBCL. Therapy for DLBCL typically consists of multi-agent cytotoxic drugs in combination with the monoclonal antibody rituximab. In patients with DLBCL who are not elderly and who have good organ function, high dose chemotherapy with stem cell transplantation is often used. Newer targeted agents such as the BTK inhibitor ibrutinib and the immunomodulatory drug lenalidomide have shown activity in the ABC subtype of DLBCL. There are also a number of other widely used anti-cancer agents that have broad labels that include NHL, and some of these are being evaluated alone or in combination for the treatment of patients with DLBCL that have relapsed after several different types of chemotherapy. Certain monoclonal antibodies similar to rituximab are also being evaluated in relapsed DLBCL. Other oncology companies that have developed or are currently developing treatment for patients with DLBCL include Abbvie Inc., Bellicum Pharmaceuticals, Inc., Celgene Corporation, Epizyme, Inc., Juno Therapeutics, Inc., Karyopharm Therapeutics Inc., Kite Pharma, Inc., Novartis AG and Pharmacyclics, Inc. |
| • | Richter’s CLL. Although there are no specific therapies approved to treat Richter’s CLL, multi-agent cytotoxic drugs in combination with rituximab is typically used as a first-line treatment. To our knowledge, Karyopharm Therapeutics Inc. is the only other company with an active trial focused specifically on Richter’s CLL. |
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial and other resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the oncology industry may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any drugs that we may develop. Our competitors also may obtain FDA or other regulatory approval for their product candidates more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic drugs. If we fail to complete effectively, our business and operating results would be harmed.
We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.
We currently have no sales, marketing or distribution capabilities and have no experience in marketing products. If one of our product candidates is approved for sale, we intend to develop an in-house marketing organization
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and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other oncology companies to recruit, hire, train and retain marketing and sales personnel.
If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.
We cannot assure you that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States or overseas.
We have requested orphan drug designation for the use of PNT2258 to treat DLBCL, Richter’s CLL and other rare indications. We may be unable to obtain such designations or to maintain the benefits associated with orphan drug status, including market exclusivity, which may cause our revenue, if any, to be reduced.
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, defined as a disease or condition with a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States when there is no reasonable expectation that the cost of developing and making available the drug in the United States will be recovered from sales in the United States for that drug. Orphan drug designation must be requested before submitting a new drug application (NDA) and entitles the sponsor to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
If a product candidate that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including an NDA, to market the same drug for the same indication for seven years, except in limited circumstances such as a showing of clinical superiority to the product with orphan drug exclusivity or if FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. As a result, even if one of our drug candidates receives orphan exclusivity, the FDA can still approve other drugs that have a different active ingredient for use in treating the same indication or disease. Furthermore, the FDA can waive orphan exclusivity if we are unable to manufacture sufficient supply of our product.
We have requested orphan drug designation for the use of PNT2258 to treat DLBCL, Richter’s CLL or other rare indications. We have obtained EU orphan drug designation and have submitted a U.S. orphan drug designation request however, despite such request, we may not obtain orphan drug designation for any indications in the United States. Even if we obtain orphan drug designation, we will not obtain exclusive marketing rights in the United States if we are not the first sponsor to obtain approval for the candidate for the orphan designated indication. In addition, exclusive marketing rights in the United States may be limited or lost if we seek approval for an indication broader than the orphan designated indication, if the FDA later determines that the request for designation was materially defective, if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition, or if a second product containing the same active moiety for the same orphan condition is demonstrated to be clinically superior to our product.
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A fast track designation by the FDA may not lead to faster development, regulatory review or approval process.
We may seek fast track designation for some applications of PNT2258. If a product candidate is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the product candidate sponsor may apply for FDA fast track designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive fast track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures, and receipt of fast track designation does not assure ultimate marketing approval from the FDA. The FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.
A breakthrough therapy designation by the FDA for any application of PNT2258 may not lead to faster development, regulatory review or approval process, and it does not increase the likelihood that PNT2258 will receive marketing approval.
We may seek a breakthrough therapy designation for some applications of PNT2258. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor may help identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective or less effective control regimens. Product candidates designated as breakthrough therapies by the FDA are also eligible for accelerated approval if the relevant criteria are met.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe an application of PNT2258 meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to product candidates considered for approval under conventional FDA procedures, and does not assure ultimate approval by the FDA. In addition, even if PNT2258 qualifies as a breakthrough therapy, the FDA may later decide that it no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
We may be unable to identify the regulatory regions of other cancer and disease-related genes and may not develop additional product candidates.
One of our strategies is to leverage our DNAi technology platform to generate a pipeline of product candidates that interefere with oncogenes known to be involved in cancer and potentially genes implicated in other diseases. We may be unable to identify the regulatory regions of other cancer and disease genes, and if we do, we may be unsuccessful in developing a product candidate that inhibits transcription or effectively provides therapeutic treatment. Even if our research programs initially show promise in targeting other genes and identifying potential product candidates, they may ultimately fail to yield product candidates for clinical development. Developing, obtaining regulatory approval and commercializing additional product candidates will require substantial additional funding and is prone to the risks of failure inherent in the development of therapeutic treatments. We cannot provide you any assurance that we will be able to successfully advance any potential future product candidates through the development process.
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We are dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive oncology industry depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are dependent on our management, scientific and medical personnel, including Nick Glover, Ph.D., our President and Chief Executive Officer, Angie You, Ph.D., our Chief Business and Strategy Officer and Head of Commercial, Barbara Klencke, M.D., our Chief Development Officer, and Sukhi Jagpal, our Chief Financial Officer. The loss of the services of any of our executive officers, other key employees and other scientific and medical advisors, and our inability to find suitable replacements, could result in delays in product development and harm our business.
We conduct a portion of our operations in Vancouver, British Columbia. Many other oncology companies and many academic and research institutions have located their headquarters in this region. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees.
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2015, we had 52 employees. As our development and commercialization plans and strategies develop, and as we continue to develop our public company infrastructure, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:
| • | identifying, recruiting, integrating, maintaining and motivating additional employees; |
| • | managing our internal development efforts effectively, including the clinical, FDA and international regulatory review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and |
| • | improving our operational, financial and management controls, reporting systems and procedures. |
Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services, including substantially all aspects of regulatory approval, clinical management and manufacturing. There can be no assurance that the services of independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
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If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms unfavorable to us.
Our internal computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on other third parties for the manufacture of our product candidates and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, and those of our CROs and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce and process our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters are in Vancouver, British Columbia near major earthquake faults. Our operations and financial condition could suffer in the event of a major earthquake or other natural disaster.
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Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk of fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by such individuals could include intentional failures to comply with FDA or international regulations, provide accurate information to the FDA or other international regulatory bodies, comply with manufacturing standards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data timely, completely and accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct by third parties could also involve the improper use of information obtained in the course of clinical trials.
We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
A variety of risks associated with marketing PNT2258 internationally could materially adversely affect our business.
We plan to seek regulatory approval of PNT2258 outside of the United States and, accordingly, we expect that we will be subject to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:
| • | differing regulatory requirements in foreign countries; |
| • | unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements; |
| • | economic weakness, including inflation, or political instability in particular foreign economies and markets; |
| • | compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; |
| • | foreign taxes, including withholding of payroll taxes; |
| • | foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country; |
| • | difficulties staffing and managing foreign operations; |
| • | workforce uncertainty in countries where labor unrest is more common than in the United States; |
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| • | differing payor reimbursement regimes, governmental payors or patient self-pay systems and price controls; |
| • | potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations; |
| • | challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States; |
| • | production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and |
| • | business interruptions resulting from geo-political actions, including war and terrorism. |
These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if our product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
| • | decreased demand for our product candidates; |
| • | injury to our reputation; |
| • | withdrawal of clinical trial participants; |
| • | initiation of investigations by regulators; |
| • | costs to defend the related litigation; |
| • | a diversion of management’s time and our resources; |
| • | substantial monetary awards to trial participants or patients; |
| • | product recalls, withdrawals or labeling, marketing or promotional restrictions; |
| • | loss of revenue; |
| • | exhaustion of any available insurance and our capital resources; |
| • | the inability to commercialize any product candidate; and |
| • | a decline in our stock price. |
We currently hold clinical trial liability insurance coverage, but that coverage may not be adequate to cover any and all liabilities that we may incur. We would need to increase our insurance coverage when we begin the commercialization of our product candidates, if ever. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
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Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2015, we had U.S. federal operating loss carryforwards of $57.0 million and state operating loss carryforwards of $54.5 million, expiring in years ranging from 2021 to 2035. We also had net tax credit carryforwards of $1.9 million available to reduce future tax liabilities, if any, for U.S. federal purposes. The net tax credit carryforwards begin to expire in 2031. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” generally occurs if there is a cumulative change in our ownership by “5% stockholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in our stock, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and state taxable income and taxes may be subject to limitations.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
Global credit and financial markets have experienced extreme volatility and disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. We cannot assure you that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy and stock price may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.
Our quarterly operating results may fluctuate significantly, which may cause our stock price to fluctuate or decline.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
| • | variations in the level of expense related to PNT2258 or future development programs; |
| • | results of preclinical and clinical trials, or the addition or termination of clinical trials or funding support; |
| • | the timing of the release of results from any clinical trials; |
| • | the timing and amount of milestone and royalty payments to our licensor; |
| • | our execution of any new collaboration, licensing or similar arrangement, and the timing of payments we may make or receive under such existing or future arrangements or the termination or modification of any such existing or future arrangements; |
| • | any intellectual property infringement lawsuit or opposition, interference or cancellation proceeding in which we may become involved; |
| • | additions and departures of key personnel; |
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| • | strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy; |
| • | if any of our product candidates receives regulatory approval, market acceptance and demand for such product candidates; |
| • | regulatory developments affecting our product candidates or those of our competitors; and |
| • | changes in general market and economic conditions. |
If our quarterly operating results or expected results from clinical trials fall outside the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
Risks Related to Government Regulation
We may be unable to obtain U.S. or foreign regulatory approval of PNT2258, and, as a result, we may be unable to commercialize our product candidates.
Our lead product candidate, PNT2258, is, and any future product candidates that we may develop will be, subject to extensive governmental regulations relating to, among other things, research, testing, development, manufacturing, safety, efficacy, approval, recordkeeping, import, export, reporting, labeling, storage, packaging, advertising and promotion, pricing, marketing, distribution, import and export of drugs. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required to be successfully completed before a new drug can be marketed in the United States and in many foreign jurisdictions. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the product candidates we may develop will obtain the regulatory approvals necessary for us or our collaborators to begin selling them.
We have very limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA and, as a company, we have no experience in obtaining approval of any product candidates. The time required to obtain FDA and other approvals is unpredictable but typically takes many years following the initiation of clinical trials, depending upon the type, complexity and novelty of the product candidate. We may encounter delays or rejections during any stage of the regulatory review and approval process based upon the failure of clinical or laboratory data to demonstrate compliance with, or upon the failure of the product candidates to meet, the FDA’s requirements for safety, efficacy and quality.
The standards that the FDA and its foreign counterparts use when regulating us are not always applied predictably or uniformly and can change. Because the drugs we are developing may represent a new class of drug, the FDA and its foreign counterparts have not yet established any definitive policies, practices or guidelines in relation to these drugs. The lack of policies, practices or guidelines may hinder or slow review by the FDA of any regulatory filings that we may submit. Moreover, the FDA may respond to these submissions by defining requirements we may not have anticipated. Such responses could lead to significant delays in the clinical development of our product candidates.
Any analysis we perform of data from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unexpected delays or increased costs due to new government regulations, for example, from future legislation or administrative action, or from changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. It is impossible to predict whether legislative changes will be enacted, or whether FDA or foreign regulations, guidance or interpretations will be changed, or what the impact of such changes, if any, may be.
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In addition, the FDA may delay, limit, or deny approval of a product candidate for many reasons, including:
| • | disagreement with the design or implementation of our clinical trials; |
| • | we may be unable to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for any indication; |
| • | we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks; |
| • | the FDA may disagree with our interpretation of data from preclinical studies or clinical trials; |
| • | the results of our clinical trials may not demonstrate the safety or efficacy required by the FDA for approval; |
| • | the FDA may find deficiencies in our manufacturing processes or facilities; and |
| • | the FDA’s approval policies or regulations may significantly change in a manner rendering our clinical data insufficient for approval. |
We plan to pursue a broad registration-oriented clinical development program, initially in hematologic malignancies, that we anticipate will provide the foundation of a global registration strategy for PNT2258. We have not, however, discussed the design of the Wolverine or Brighton clinical trials with the FDA and, thus, cannot assure you that the FDA will consider their design or results adequate for these purposes.
After submission of a NDA, the FDA may refuse to file the application, deny approval of the application, require additional testing or data or, if the NDA is filed and later approved, require post-marketing testing and surveillance to monitor the safety or efficacy of a product. Under the Prescription Drug User Fee Act (PDUFA), the FDA has agreed to certain performance goals in the review of NDAs. The FDA’s timelines are flexible and subject to change based on workload and other potential review issues and may delay the FDA’s review of an NDA. Further, the terms of approval of any NDA, including the product labeling, may be more restrictive than we desire and could affect the marketability of our products.
Even if we comply with all of the FDA regulatory requirements, we may not obtain regulatory approval for any of our product candidates in development. If we fail to obtain regulatory approval for any of our product candidates in development, we will have fewer commercialized products than we anticipate and correspondingly lower revenue.
In addition, because there may be approved treatments for some of the diseases for which we may seek approval, in order to receive regulatory approval, we may need to demonstrate through clinical trials that the product candidates we develop to treat these diseases, if any, are not only safe and effective, but safer or more effective than existing products. Furthermore, in recent years, there has been increased public and political pressure on the FDA with respect to the approval process for new drugs, and the FDA’s standards, especially regarding drug safety, appear to have become more stringent.
Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular product candidate for which we are seeking approval. Furthermore, any regulatory approval to market a product may be subject to limitations on the approved uses for which we may market the product or the labeling or other restrictions. In addition, the FDA has the authority to require a REMS plan as part of or after approval, which may impose further requirements or restrictions on the distribution or use of an approved product, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. These limitations and restrictions may limit the size of the market for the product and affect reimbursement by third-party payors.
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We are also subject to numerous foreign regulatory requirements governing, among other things, the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process varies among countries and may include all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities outside the United States and vice versa.
If we or any collaborators, manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect our ability to develop, market and sell our products successfully and could harm our reputation and lead to reduced acceptance of our products by the market. These enforcement actions include, among others:
| • | adverse regulatory inspection findings; |
| • | warning letters; |
| • | voluntary or mandatory product recalls or public notification or medical product safety alerts to healthcare professionals; |
| • | restrictions on, or prohibitions against, marketing our products; |
| • | restrictions on, or prohibitions against, importation or exportation of our products; |
| • | suspension of review or refusal to approve pending applications or supplements to approved applications; |
| • | exclusion from participation in government-funded healthcare programs; |
| • | exclusion from eligibility for the award of government contracts for our products; |
| • | suspension or withdrawal of product approvals; |
| • | product seizures; |
| • | injunctions; and |
| • | civil and criminal penalties and fines. |
Even if we receive regulatory approval of PNT2258, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.
Any regulatory approvals that we receive for PNT2258 will require surveillance to monitor the safety and efficacy of the product candidate, and may require us to conduct post-approval clinical studies. The FDA may also require a REMS in order to approve our product candidates, which could entail requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves our product candidates, the manufacturing processes, labeling, packaging, distribution, AE reporting, storage, advertising, promotion, import, export and recordkeeping for our product candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and cGCPs for any clinical trials that we conduct post-approval.
Moreover, if we obtain regulatory approval for PNT2258 or any other product candidate, we will only be permitted to market our products for the indication approved by FDA, and such approval may involve limitations on the indicated uses or promotional claims we may make for our products, or otherwise not permit labeling that
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sufficiently differentiates our product candidates from competitive products with comparable therapeutic profiles. For example, we will not be able to claim that our products have fewer side effects, or improve compliance or efficacy unless we can demonstrate those attributes to FDA in comparative clinical trials.
Later discovery of previously unknown problems with our product candidates, including AEs of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
| • | restrictions on the marketing or manufacturing of our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls; |
| • | fines, warning letters, or untitled letters; |
| • | holds on clinical trials; |
| • | refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals; |
| • | product seizure or detention, or refusal to permit the import or export of our product candidates; and |
| • | injunctions, the imposition of civil penalties or criminal prosecution. |
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.
In addition, if we pursue, and ultimately obtain, accelerated approval of PNT2258 based on a surrogate endpoint, the FDA would require us to conduct a confirmatory trial to verify the predicted clinical benefit and additional safety studies. The results from the confirmatory trial may not support the clinical benefit, which would result in the approval being withdrawn.
If we or any of our independent contractors, consultants, collaborators, manufacturers, vendors or service providers fail to comply with healthcare laws and regulations, we or they could be subject to enforcement actions, which could result in penalties and affect our ability to develop, market and sell our product candidates and may harm our reputation.
We are or may in the future be subject to federal, state, and foreign healthcare laws and regulations pertaining to, among other things, fraud and abuse and patients’ rights. These laws and regulations include:
| • | the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid; |
| • | the U.S. federal false claims and civil monetary penalties laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting or causing to be presented, claims for payment by government funded programs such as Medicare or Medicaid that are false or fraudulent, and which may apply to us by virtue of statements and representations made to customers or third parties; |
| • | the U.S. federal Health Insurance Portability and Accountability Act (HIPAA), which created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud healthcare programs; |
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| • | HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), which imposes requirements on certain types of people and entities relating to the privacy, security, and transmission of individually identifiable health information, and requires notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information; |
| • | the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, to report annually to the Centers for Medicare & Medicaid Services (CMS) information related to payments and other transfers of value to physicians, other healthcare providers and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members, which is published in a searchable form on an annual basis; and |
| • | state laws comparable to each of the above federal laws, such as, for example, anti-kickback and false claims laws that may be broader in scope and also apply to commercial insurers and other non-federal payors, requirements for mandatory corporate regulatory compliance programs, and laws relating to patient data privacy and security. Other state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. |
If our operations are found to be in violation of any such health care laws and regulations, we may be subject to penalties, including administrative, civil and criminal penalties, monetary damages, disgorgement, imprisonment, the curtailment or restructuring of our operations, loss of eligibility to obtain approvals from the FDA, or exclusion from participation in government contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, any of which could adversely our financial results. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these risks cannot be entirely eliminated. Any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divert our management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining compliance with applicable laws and regulations may be costly to us in terms of money, time and resources.
Any products we develop may become subject to unfavorable pricing regulations, third-party coverage and reimbursement practices or healthcare reform initiatives, thereby harming our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. Although we intend to monitor these regulations, our programs are currently in the early stages of development and we will not be able to assess the impact of price regulations for a number of years. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product and negatively impact the revenues we are able to generate from the sale of the product in that country.
Our ability to commercialize any products successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. Even if we succeed in bringing one or more products to the market, these products may not be considered cost-effective, and the amount
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reimbursed for any products may be insufficient to allow us to sell our products on a competitive basis. Because our programs are in the early stages of development, we are unable at this time to determine their cost effectiveness or the likely level or method of reimbursement. Increasingly, the third-party payors, such as government and private insurance plans, who reimburse patients or healthcare providers, are requiring that drug companies provide them with predetermined discounts from list prices, and are seeking to reduce the prices charged or the amounts reimbursed for pharmaceutical products. If the coverage provided for any products we develop is inadequate in light of our development and other costs, our return on investment could be adversely affected.
Certain products we develop may need to be administered under the supervision of a physician on an outpatient basis. Under applicable U.S. law, certain drugs that are not usually self-administered (including certain injectable drugs) may be eligible for coverage under the Medicare Part B program if:
| • | they are incident to a physician’s services; |
| • | they are reasonable and necessary for the diagnosis or treatment of the illness or injury for which they are administered according to accepted standards of medical practice; and |
| • | they have been approved by the FDA and meet other requirements of the statute. |
There may be significant delays in obtaining coverage for newly-approved products, and coverage may be more limited than the purposes for which the drug is approved by the FDA. Moreover, eligibility for coverage does not imply that any drug will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent.
Reimbursement may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other services and may reflect budgetary constraints or imperfections in Medicare data. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates. However, no uniform policy requirement for coverage and reimbursement for products exists among third-party payors in the United States. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for new drugs that we develop and for which we obtain regulatory approval could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our financial condition.
We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals to broaden the availability of healthcare will continue to affect the business and financial condition of oncology companies. A number of legislative and regulatory changes in the healthcare system in the United States and other major healthcare markets have been proposed in recent years, and such efforts have expanded substantially in recent years. These developments have included prescription drug benefit legislation that was enacted and took effect in January 2006, healthcare reform legislation enacted by certain states, and major healthcare reform legislation that was passed by Congress and enacted into law in the United States in 2010. These developments could, directly or indirectly, affect our ability to sell our products, if approved, at a favorable price.
For example, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act (PPACA), contains provisions that affect companies in the pharmaceutical industry
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and other healthcare related industries by imposing additional costs and changes to business practices. Provisions affecting pharmaceutical companies include the following.
| • | mandatory rebates for drugs sold into the Medicaid program were increased, and the rebate requirement was extended to drugs used in risk-based Medicaid managed care plans; |
| • | the 340B Drug Pricing Program under the Public Health Services Act was extended to require mandatory discounts for drug products sold to certain critical access hospitals, cancer hospitals and other covered entities; |
| • | expansion of eligibility criteria for Medicaid programs; |
| • | expansion of entities eligible for discounts under the Public Health Service pharmaceutical pricing program; |
| • | a new Patient Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; |
| • | pharmaceutical companies are required to offer discounts on brand-name drugs to patients who fall within the Medicare Part D coverage gap, commonly referred to as the “donut hole”; and |
| • | pharmaceutical companies are required to pay an annual non-tax deductible fee to the federal government based on each company’s market share of prior year total sales of branded products to certain federal healthcare programs, such as Medicare, Medicaid, Department of Veterans Affairs and Department of Defense. Since we expect our branded pharmaceutical sales, if any of our products are approved, to constitute a small portion of the total federal health program pharmaceutical market, we do not expect this annual assessment to have a material impact on our financial condition. |
There have been judicial and Congressional challenges, and amendments to certain aspects of the PPACA, and we expect there will be additional challenges and amendments to the PPACA in the future. The full effect of the U.S. healthcare reform legislation on our business activities is unknown. The financial impact of the U.S. healthcare reform legislation will depend on a number of factors, including but not limited to, the policies reflected in implementing regulations and guidance and changes in sales volumes for products affected by the new system of rebates, discounts and fees. The legislation may also have a positive impact on our future net sales, if any, by increasing the aggregate number of persons with healthcare coverage in the United States. Further, new litigation is currently pending before the U.S. Supreme Court to invalidate certain provisions of the PPACA.
Moreover, we cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state legislative and regulatory developments are likely, and we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop product candidates.
Our ability to obtain services, reimbursement or funding from the federal government may be impacted by possible reductions in federal spending.
U.S. federal government agencies currently face potentially significant spending reductions. Under the Budget Control Act of 2011, the failure of Congress to enact deficit reduction measures of at least $1.2 trillion for the years 2013 through 2021 triggered automatic cuts to most federal programs. These cuts would include aggregate reductions to Medicare payments to providers of up to two percent per fiscal year, which went into effect beginning on April 1, 2013 and will stay in effect through 2025 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, which was enacted on January 1, 2013, among other things, reduced Medicare payments to several providers, including hospitals and imaging centers. The full impact on our business of these automatic cuts is uncertain. If federal spending is reduced, anticipated budgetary shortfalls may
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also impact the ability of relevant agencies, such as the FDA or the National Institutes of Health to continue to function at current levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability of relevant agencies to timely review and approve drug research and development, manufacturing, and marketing activities, which may delay our ability to develop, market and sell any products we may develop.
Obtaining and maintaining regulatory approval for our product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of any of our product candidates in other jurisdictions.
Obtaining and maintaining regulatory approval for PNT2258 in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval for PNT2258, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
We may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the United States have requirements for approval of product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.
If we or our third-party manufacturers fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials, by ourselves and our third-party manufacturers. Our manufacturers are subject to federal, state and local laws and regulations in the United States and abroad governing laboratory procedures and the use, manufacture, storage, handling and disposal of medical and hazardous materials. Although we believe that our manufacturers’ procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting from medical or hazardous materials. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical or hazardous materials. Compliance with applicable environmental, health and safety laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, prospects, financial condition or results of operations.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.
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In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Risks Related to Our Intellectual Property
We depend on intellectual property licensed from Marina, and the termination of this license could result in the loss of significant rights, which would harm our business.
Pursuant to a license agreement with Marina, we hold an exclusive license from Marina to use certain patented delivery technology, including a particular form of liposomal delivery system, for unlimited use with our current or future DNAi products candidates directed against any gene target. Either party may terminate this license agreement in the event of a material breach that remains uncured following the date that is up to 120 days, depending on the type of breach, from the date that the breaching party is provided with written notice by the non-breaching party, or immediately upon certain insolvency events relating to the other party. See “Item 1, Business—License and Payment Agreements” for additional information regarding this license agreement.
Disputes may arise between us and Marina regarding intellectual property subject to this license agreement, including with respect to:
| • | the scope of rights granted under the license agreement and other interpretation-related issues; |
| • | whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; |
| • | the amount and timing of milestone and royalty payments; |
| • | the rights of Marina under the license agreement; |
| • | our right to sublicense patent and other rights to third parties under collaborative development relationships; |
| • | our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and |
| • | the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Marina and us and our partners. |
Any disputes with Marina over intellectual property that we have licensed from it may prevent or impair our ability to maintain our current licensing arrangement. We depend on these licensed technologies and products to develop PNT2258 and other product candidates developed from our DNAi technology platform. Termination of our license agreement could result in the loss of significant rights and could materially harm our ability to further develop and commercialize PNT2258 and any other product candidates. Additionally, our license extends to a particular form of liposomal delivery system for a product candidate that incorporates one of our DNAi oligonucleotides, and it does not prevent Marina from licensing a different form of liposomal delivery system to a different company, which it has done in the past and may continue to do in the future. If Marina licensed a form of liposomal delivery system to an oncology company developing DNAi technology, we would face increased competition.
Additionally, our success will depend in part on the ability of Marina to obtain, maintain and enforce patent protection for our licensed intellectual property, in particular, those patents to which we have secured exclusive rights. Marina may not successfully prosecute the patent applications licensed to us. Even if patents issue or are granted, Marina may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue litigation less aggressively than we would.
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If we are not able to obtain and enforce patent protection for our technologies or product candidates, development and commercialization of our product candidates may be adversely affected.
Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property rights, including in-licenses of intellectual property rights of others, for our product candidates, methods used to manufacture our product candidates and methods for treating patients using our product candidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate without infringing upon the proprietary rights of others. We have filed and will continue to file patent applications directed to the compositions of matter and methods of use related to various aspects of PNT2258 and our DNAi technology. As of December 31, 2015, we were the owner of seven U.S. patents, expiring between 2017 and 2028, absent any adjustments or extensions, comprising claims directed to the compositions of PNT2258, PNT100, oligonucleotides directed against the oncogenes CMYC and RAS, and methods of use of pharmaceutical compositions comprising PNT2258 and rituximab. As of December 31, 2015, we also owned five pending U.S. patent applications, related to PNT2258 for the treatment of cancer indications as a single agent, or in combination with chemotherapeutics and/or rituximab and DNA oligonucleotides directed against various oncogenes, including RAS. Any patents issuing from these U.S. utility applications are expected to expire between 2024 and 2034, absent any adjustments or extensions. As of December 31, 2015, we also owned 39 issued foreign patents and 26 pending foreign patent applications in 23 foreign jurisdictions, including Australia, Canada, China, Europe and Japan. These foreign patents, and any patents issuing from these pending foreign patent applications, are expected to expire between 2025 and 2034, absent any adjustments or extensions. These foreign patents and patent applications comprise claims that relate to the compositions of PNT2258, PNT100, oligonucleotides directed against the oncogenes CMYC, CHARAS, CKIRAS, HER2 and TGFBeta and methods of use of PNT2258 for cancer indications as a single agent or in combination with chemotherapeutics and/or rituximab.
We and our current or future licensors and licenses may not be able to apply for or prosecute patents on certain aspects of our product candidates or delivery technologies at a reasonable cost in a timely fashion or at all. It is also possible that we or our current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, claim scope or patent term adjustments. If our current licensors, or any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties from making, using, and selling competing products. If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid and unenforceable. Moreover, our competitors may independently develop equivalent knowledge, methods, and know-how. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition and operating results.
There is no guarantee that any of our pending patent applications will result in issued or granted patents, that any of our issued or granted patents will not later be found to be invalid or unenforceable or that any issued or granted patents will include claims that are sufficiently broad to cover our product candidates or delivery technologies or to provide meaningful protection from our competitors. Moreover, the patent position of oncology companies can be highly uncertain because it involves complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our current and future proprietary technology and product candidates are covered by valid and enforceable patents or are effectively maintained as trade secrets. If third parties disclose or misappropriate our proprietary rights, it may materially and adversely impact our position in the market.
The U.S. Patent and Trademark Office (USPTO) and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent
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process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. The standards applied by the USPTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in oncology patents. Moreover, changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. As such, we do not know the degree of future protection that we will have on our proprietary products and technology. While we will endeavor to try to protect our product candidates with intellectual property rights such as patents, as appropriate, the process of obtaining patents is time-consuming, expensive and sometimes unpredictable.
Further, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed (or 20 years after the filing date of the first non-provisional US patent application to which it claims priority). Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for our product candidates, we may be open to competition from generic versions of our product candidates. Further, the extensive period of time between patent filing and regulatory approval for a product candidate limits the time during which we can market a product candidate under patent protection, which may particularly affect the profitability of our early-stage product candidates.
If we are unable to protect the confidentiality of our trade secrets, in particular with respect to our DNAi technology platform, our business and competitive position would be harmed.
In addition to seeking patent protection for certain aspects of our product candidates and delivery technologies, we also consider trade secrets, including confidential and unpatented know-how important to the maintenance of our competitive position. With respect to our DNAi technology platform, we consider trade secrets and know-how to be our primary intellectual property. We protect trade secrets and confidential and unpatented know-how, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to maintain confidentiality and assign their inventions to us.
Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Additionally, we anticipate that with respect to our DNAi technology platform, these trade secrets and know-how may over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel skilled in the art from academic to industry scientific positions. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts in the United States and certain foreign jurisdictions are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
Numerous recent changes to the patent laws and proposed changes to the rules of the USPTO may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, the Leahy-Smith America Invents Act (AIA) enacted in 2011 involves significant changes in patent legislation. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more
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patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date 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 the third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application.
Further, the Supreme Court has ruled on several patent cases in recent years, some of which cases either narrow the scope of patent protection available in certain circumstances or weaken the rights of patent owners in certain situations. These changes have led to increasing uncertainty with regard to the scope and value of our issued patents and to our ability to obtain patents in the future.
Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court 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.
Depending on decisions by the U.S. Congress, the U.S. federal courts, the USPTO or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that may weaken our and our licensors’ ability to obtain new patents or to enforce existing patents we and our licensors or partners may obtain in the future.
Recent court cases such as Association for Molecular Pathology v. Myriad Genetics, Inc. (Myriad); BRCA1- & BRCA2-Based Hereditary Cancer Test Patent Litig.; and Promega Corp. v. Life Technologies Corp. have added to the uncertainty surrounding patent claims directed to nucleic acid products and pharmaceutical compositions comprising such products. For example, the recent decision by the Supreme Court in Myriad precludes a claim to a nucleic acid having a stated nucleotide sequence which is identical to a sequence found in nature and unmodified. We are currently uncertain as to what, if any, immediate impact this decision may have on our patents or patent applications because the extent to which the Myriad decision impacts the validity of claims directed to pharmaceutical formulations that include unmodified nucleic acid molecules having sequences identical to those found in genomic DNA has yet to be clearly interpreted by courts and by the USPTO. We cannot assure you that the interpretations of this decision or subsequent rulings will not adversely impact our patents or patent applications. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Once granted, patents may remain open to opposition, interference, re-examination, post-grant review, inter partes review, nullification derivation and opposition proceedings in court or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise objections against such initial grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the allowed or granted claims thus attacked, or may lose the allowed or granted claims altogether.
We, our licensors or any future strategic partners may become subject to third-party claims or litigation alleging infringement of patents or other proprietary rights or seeking to invalidate patents or other proprietary rights.
We, our licensors or any future strategic partners may be subject to third-party claims for infringement or misappropriation of patent or other proprietary rights. If we, our licensors or any future strategic partners are
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found to infringe a third-party patent or other intellectual property rights, we could be required to pay substantial damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed. In addition, we, our licensors or any future strategic partners may choose to seek, or be required to seek, a license from a third party, which may not be available on acceptable terms, if at all. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. If we fail to obtain a required license, we may be unable to effectively market product candidates based on our technology, which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. Alternatively, we may need to redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. In addition, we may find it necessary to pursue claims or initiate lawsuits to protect or enforce our patent or other intellectual property rights. The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. If we were to initiate legal proceedings against a third party to enforce a patent covering one of our products or our technology, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, 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. The outcome following legal assertions of invalidity and unenforceability during patent litigation 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 or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of our platform technology. Such a loss of patent protection could have a material adverse impact on our business. Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without legally infringing our patents or other intellectual property rights.
In addition, in an infringement proceeding, a court may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. 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.
Interference proceedings provoked by third parties or brought by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could result in a loss of our current patent rights and 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. Litigation or interference proceedings may result in a decision adverse to our interests and, even if we are successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with
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our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.
Furthermore, because 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. In addition, there could 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 substantial adverse effect on the price of our common stock.
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.
Other companies or organizations may challenge our or our licensors’ patent rights or may assert patent rights that prevent us from developing and commercializing our products.
DNAi technology is a new scientific field. We have obtained grants and issuances of DNAi patents. The issued patents and pending patent applications in the United States and in key markets around the world that we own or license claim many different methods, compositions and processes relating to the discovery, development, manufacture and commercialization of DNAi technology.
As the field of DNAi technology matures, patent applications are being processed by national patent offices around the world. There is uncertainty about which patents will issue, and, if they do, as to when, to whom, and with what claims. It is likely that there will be significant litigation in the courts and other proceedings, such as interference, reexamination, post-grant review, inter partes review, derivation and opposition proceedings, in various patent offices relating to patent rights in the DNAi technology field. In many cases, the possibility of appeal or opposition exists for either us or our opponents, and it may be years before final, unappealable rulings are made with respect to these patents in certain jurisdictions. The timing and outcome of these and other proceedings is uncertain and may adversely affect our business if we are not successful in defending the patentability and scope of our pending and issued patent claims or if third parties are successful in obtaining claims that cover our DNAi technology platform or any of our product candidates. In addition, third parties may attempt to invalidate our intellectual property rights. Even if our rights are not directly challenged, disputes could lead to the weakening of our intellectual property rights. Our defense against any attempt by third parties to circumvent or invalidate our intellectual property rights could be costly to us, could require significant time and attention of our management and could have a material adverse effect on our business and our ability to successfully compete in the field of DNAi technology.
We have limited foreign intellectual property rights and may not be able to protect our intellectual property rights throughout the world.
We have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents on 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. 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 further, may export otherwise 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.
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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 oncology 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 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.
If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary for developing and protecting our product candidates and delivery technologies or we could lose certain rights to grant sublicenses.
Our current license imposes, and any future licenses we enter into are likely to impose, various development, commercialization, funding, milestone, royalty, diligence, sublicensing, insurance, patent prosecution and enforcement, and other obligations on us. For example, we are required to pay Novosom a $3.0 million milestone payment upon regulatory approval of PNT2258 and low single-digit royalties on net sales of PNT2258, and we are required to pay Marina milestone payments of up to $14.5 million and low single-digit royalties on net sales of any DNAi product candidates other than PNT2258. If we breach any of these obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology. Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, we may be required to pay significant milestone and royalty payments, depending on the technology and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.
If our trademarks are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
We have trademarked ProNAi and DNAi. Our trademarks may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. If we are unable to establish name recognition based on our trademarks, we may not be able to compete effectively and our business may be adversely affected.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other oncology companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.
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Risks Related to Ownership of Our Common Stock
The market price of our common stock has been and may continue to be volatile, and you may be unable to sell your shares at or above the price at which you purchased them.
The market price of our common stock may be subject to wide fluctuations. Factors affecting the market price of our common stock include:
| • | the commencement, enrollment or results of the planned clinical trials of our product candidates or any future clinical trials we may conduct, or changes in the development status of our product candidates; |
| • | any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings; |
| • | disputes with Marina regarding our licensed technology and products; |
| • | adverse results or delays in clinical trials; |
| • | changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial requirements for approvals; |
| • | adverse developments concerning our manufacturers; |
| • | our inability to obtain adequate product supply for any approved product or inability to do so at acceptable prices; |
| • | our inability to establish collaborations if needed; |
| • | our failure to commercialize our product candidates; |
| • | additions or departures of key scientific or management personnel; |
| • | unanticipated serious safety concerns related to the use of our product candidates; |
| • | announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; |
| • | our ability to effectively manage our growth; |
| • | the size and growth of our initial cancer target markets; |
| • | our ability to successfully treat additional types of cancers or at different stages; |
| • | actual or anticipated variations in quarterly operating results; |
| • | our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public; |
| • | publication of research reports about us or our industry, or immunotherapy in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts; |
| • | changes in the market valuations of similar companies; |
| • | overall performance of the equity markets; |
| • | sales of our common stock by us or our stockholders in the future; |
| • | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
| • | significant lawsuits, including patent or stockholder litigation; |
| • | general political and economic conditions; and |
| • | other events or factors, many of which are beyond our control. |
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In addition, the stock market in general, and oncology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.
We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.
We have broad discretion in the application of the net proceeds from our initial public offering, including for any of the purposes described in the prospectus related to our initial public offering. Because of the number and variability of factors that will determine our use of the remaining net proceeds, their ultimate use may vary substantially from the use described in the prospectus related to our initial public offering. The failure by our management to apply these funds effectively could harm our business.
We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (JOBS Act) enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 (Section 404) of the Sarbanes-Oxley Act of 2002, as amended (Sarbanes-Oxley Act), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory stockholder votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (ii) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.
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We incur significantly increased costs and devote substantial management time as a result of operating as a public company.
As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the stock exchange upon which our common stock is listed and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. However, these rules and regulations are often 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. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We are not currently required to comply with the rules of the Securities and Exchange Commission (SEC) that implement Section 404, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose until our annual report for the year ended December 31, 2016. Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404.
Additionally, we have in the past and may in the future identify material weaknesses or significant deficiencies in internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board, a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. We cannot assure you that there will not be additional material weaknesses or significant deficiencies that our independent registered public accounting firm or we will identify. If we identify such issues or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with the Nasdaq Stock Market listing requirements.
Provisions in our restated certificate of incorporation and restated bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our restated certificate of incorporation and restated bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions, among other things:
| • | establish a classified board of directors so that not all members of our board are elected at one time; |
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| • | permit only the board of directors to establish the number of directors and fill vacancies on the board; |
| • | provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders; |
| • | require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws; |
| • | authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan (also known as a “poison pill”); |
| • | eliminate the ability of our stockholders to call special meetings of stockholders; |
| • | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
| • | prohibit cumulative voting; and |
| • | establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the securities or industry analysts who publish research about us downgrade our stock or publish inaccurate or unfavorable evaluations of our company or our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause our stock price to decline.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Our corporate headquarters is located in Vancouver, British Columbia, where we occupy approximately 8,300 square feet of office space under a lease that expires in February 2018. We also occupy approximately 4,300 square feet of office and laboratory space in Plymouth, Michigan that expires in March 2016 with respect to the laboratory space. We are currently negotiating with the landlord of the Plymouth, Michigan office space to extend the term of our lease. We also expect to occupy approximately 4,700 square feet of office space in Brisbane, California under a lease that is expected to commence in March 2016 and expire in April 2019. We believe that these facilities will be sufficient to meet our current needs.
| Item 3. | Legal Proceedings. |
From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Price Range of Common Stock
Our common stock has been listed on the NASDAQ Global market under the symbol “DNAI” since July 16, 2015. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported on the NASDAQ Global Market:
| High | Low | |||||||
| Fiscal Year 2015 |
||||||||
| Third Quarter (from July 16, 2015) |
$ | 33.75 | $ | 19.04 | ||||
| Fourth Quarter |
$ | 20.85 | $ | 13.18 | ||||
On March 1, 2016, the last reported sale price of our common stock on the NASDAQ Global Market was $6.00 per share. As of March 1, 2016, there were 143 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Stock Price Performance Graph
The graph below shows a comparison from July 16, 2015, the date on which our common stock first began trading on the NASDAQ Global market, of the cumulative total return on an assumed investment of $100.00 in cash in our common stock as compared to the same investment in the NASDAQ Composite Index and the NASDAQ Biotechnology Index, all through to December 31, 2015. Such returns are based on historical results and are not intended to suggest future performance.
| * | $100 invested on July 16, 2015 in stock or index. Fiscal year ending December 31. |
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Cumulative Total Return Comparison
| 7/16/15 | 12/31/15 | |||||||
| ProNAi Therapeutics, Inc. |
$ | 100.00 | $ | 48.83 | ||||
| NASDAQ Composite |
$ | 100.00 | $ | 96.98 | ||||
| NASDAQ Biotechnology |
$ | 100.00 | $ | 86.42 | ||||
This performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference to such filing.
Dividend Policy
We have never declared or paid cash or stock dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends on common stock will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
Recent Sale of Unregistered Securities
From January 1, 2015 through December 31, 2015, we sold and issued the following unregistered securities, which share numbers have been adjusted, as appropriate, to reflect the 7.45-to-1 reverse stock split which became effective on July 2, 2015:
| (1) | Prior to filing our registration statement on Form S-8 in 2015, we granted options to our directors, officers, employees and consultants to purchase 1,184,566 shares of common stock under our 2008 Stock Plan with per share exercise prices ranging from $3.055 to $6.705, and issued 54,929 shares of common stock upon exercise of such options. |
| (2) | Prior to filing our registration statement on Form S-8 in 2015, in July 2015, we issued 358,258 shares of the Series B-1 redeemable convertible preferred stock upon the exercise of warrants for aggregate cash proceeds of approximately $1.1 million and issued 32,138 shares of Series C redeemable convertible preferred stock upon the exercise of warrants for aggregate cash proceeds of approximately $0.2 million. In July 2015, upon the closing of our IPO, we issued 390,680 shares of common stock in connection with the net exercise of 493,648 preferred stock warrants at the IPO price of $17.00. |
The offers, sales and issuances of the securities described in paragraph (1) above were deemed to be exempt from registration under the Securities Act under Rule 701 promulgated under the Securities Act as offers and sale of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701.
The offers, sales, and issuances of the securities described in paragraph (2) above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.
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Use of Proceeds from Registered Securities
On July 15, 2015, our Registration Statement on Form S-1 (File No. 333-204921) relating to the IPO of our common stock was declared effective by the SEC. Pursuant to such Registration Statement, we sold an aggregate of 9,315,000 shares of our common stock at a price of $17.00 per share for aggregate cash proceeds of approximately $143.6 million, net of underwriting discounts and commissions and offering costs.
There has been no material change in the expected use of the net proceeds from our IPO, as described in our final prospectus filed with the SEC on July 16, 2015 pursuant to Rule 424(b) under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this item is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders. See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management.”
| Item 6. | Selected Consolidated Financial Data. |
We have derived the following selected consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements included elsewhere in this report. The selected consolidated balance sheet data as of December 31, 2013 is derived from our audited consolidated financial statements which are not included in this report.
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Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the selected consolidated financial data below in conjunction with “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in this Annual Report on Form 10-K.
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands except share and per share data) | ||||||||||||
| Consolidated Statements of Operations Data: |
||||||||||||
| Operating expenses(1): |
||||||||||||
| Research and development |
$ | 26,356 | $ | 19,078 | $ | 2,843 | ||||||
| General and administrative |
9,472 | 3,500 | 1,162 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
35,828 | 22,578 | 4,005 | |||||||||
|
|
|
|
|
|
|
|||||||
| Loss from operations |
(35,828 | ) | (22,578 | ) | (4,005 | ) | ||||||
| Other income (expense), net: |
||||||||||||
| Change in fair value of preferred stock warrants |
(17,443 | ) | (1,380 | ) | (202 | ) | ||||||
| Interest expense |
— | — | (2,719 | ) | ||||||||
| Other income |
66 | 87 | 94 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total other income (expense), net |
(17,377 | ) | (1,293 | ) | (2,827 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Loss before provision for income taxes |
(53,205 | ) | (23,871 | ) | (6,832 | ) | ||||||
| Provision for income taxes |
55 | 2 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net loss |
(53,260 | ) | (23,873 | ) | (6,832 | ) | ||||||
| Adjustment to redemption value on redeemable convertible preferred stock |
(374,015 | ) | (49,849 | ) | (5,713 | ) | ||||||
| Series B and B-1 redeemable convertible preferred stock dividend |
(5,543 | ) | — | — | ||||||||
| Series C and D redeemable convertible preferred stock dividend |
(20,366 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net loss attributable to common stockholders |
$ | (453,184 | ) | $ | (73,722 | ) | $ | (12,545 | ) | |||
|
|
|
|
|
|
|
|||||||
| Net loss per share attributable to common stockholders, basic and diluted(2) |
$ | (31.47 | ) | $ | (69.08 | ) | $ | (19.18 | ) | |||
|
|
|
|
|
|
|
|||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted(2) |
14,399,506 | 1,067,259 | 653,914 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | Includes the following stock-based compensation: |
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Stock-based compensation: |
||||||||||||
| Research and development |
$ | 1,846 | $ | 65 | $ | 5 | ||||||
| General and administrative |
1,340 | 237 | 17 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total stock-based compensation |
$ | 3,186 | $ | 302 | $ | 22 | ||||||
|
|
|
|
|
|
|
|||||||
| (2) | Basic and diluted net loss per share attributable to common stockholders is computed based on the weighted-average number of shares of common stock outstanding during each period. On June 29, 2015, our board of directors approved a 7.45-to-1 reverse stock split of our common stock, convertible preferred stock and redeemable convertible preferred stock, which became effective on July 2, 2015. All share and per share data in this table has been adjusted to reflect the reverse stock split. For additional information, see Notes 1 and 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. |
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| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Consolidated Balance Sheets Data: |
||||||||||||
| Cash and cash equivalents |
$ | 150,180 | $ | 29,154 | $ | 2,429 | ||||||
| Short-term investments |
— | 10,010 | — | |||||||||
| Working capital |
144,456 | 37,630 | 1,561 | |||||||||
| Total assets |
152,768 | 40,565 | 2,460 | |||||||||
| Long-term note payable and accrued interest |
— | — | 433 | |||||||||
| Preferred stock warrant liabilities |
— | 1,810 | 430 | |||||||||
| Total liabilities |
7,397 | 4,005 | 1,761 | |||||||||
| Convertible preferred stock |
— | 2,543 | 2,543 | |||||||||
| Redeemable convertible preferred stock |
— | 141,832 | 34,005 | |||||||||
| Accumulated deficit |
(534,187 | ) | (107,807 | ) | (34,691 | ) | ||||||
| Total stockholders’ equity (deficit) |
145,371 | (107,815 | ) | (34,690 | ) | |||||||
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the historical consolidated financial statements and the notes thereto included in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors.”
Overview
We are a clinical-stage oncology company led by a world-class senior management team of proven oncology drug developers. Our vision is to be a leader in developing and commercializing a broad and diverse portfolio of cancer therapies that deliver therapeutic outcomes that dramatically change patients’ lives. Our lead DNAi product candidate, PNT2258, is designed to target BCL2, a widely overexpressed oncogene that is an important gatekeeper of the programmed cell death process known as apoptosis and has been linked to many forms of cancer. We are pursuing a multi-faceted clinical development strategy that is designed to efficiently achieve regulatory approval and maximize the commercial opportunity of PNT2258. In addition to advancing PNT2258, we are seeking to expand the number of products we have under clinical development to leverage the full potential of our team.
We have conducted two clinical trials with PNT2258 to date: a Phase 1 safety trial in patients with relapsed or refractory solid tumors and a Phase 2 trial in patients with relapsed or refractory non-Hodgkin’s lymphoma (NHL). Having observed preliminary evidence of efficacy and tolerability, we plan to pursue a broad registration-oriented clinical development program, initially in hematologic malignancies, that we anticipate will provide the foundation of a global registration strategy for PNT2258. In December 2014, we initiated “Wolverine,” an open-label 60 patient Phase 2 trial evaluating PNT2258 for the treatment of third-line relapsed or refractory diffuse large B-cell lymphoma (DLBCL). In October 2015, we initiated “Brighton,” an open-label 50 patient Phase 2 trial evaluating PNT2258 for the treatment of Richter’s transformed chronic lymphocytic leukemia (Richter’s CLL). Richter’s CLL is a rare and aggressive form of NHL with no currently approved therapies. Based on our current development plan, we are planning to initiate additional Phase 2 trials with PNT2258 in combination with other therapeutic agents or treatment regiments. We may also evaluate PNT2258’s potential in other hematological malignancies. If the efficacy data obtained in some or all of these trials are highly compelling, we plan to discuss accelerated registration paths and other regulatory designations with regulatory agencies.
Our DNAi platform technology is based on the breakthrough discovery at Wayne State University and Karmanos Cancer Institute that single-stranded DNA oligonucleotides can interact with genomic DNA in order to interfere with oncogenes. We acquired this technology and subsequently developed an algorithm that we employ for rationally designing our DNAi product candidates using bioinformatics and our understanding of gene regulatory domains. In March 2007, we entered into an exclusive license agreement with Novosom AG (Novosom) to use certain patented lipid nanoparticle (LNP) delivery technology used in PNT2258. In July 2010, the original Novosom license agreement was acquired by Marina Biotech, Inc. (Marina), but Novosom retained the right to receive all future payments related to PNT2258. In March 2012, we and Marina entered into another exclusive license agreement for the use of certain of Marina’s patented delivery technology, including LNP technology, for any of our current or future DNAi product candidates other than PNT2258. In exchange for this exclusive right, we paid Marina an upfront payment of $0.3 million and will also be required to pay Marina milestone payments of up to an aggregate of $14.5 million for each DNAi product candidate other than PNT2258 as well as low single-digit royalties on net sales for DNAi product candidates other than PNT2258. In April 2014, we entered into a license payment agreement with Novosom, pursuant to which we made a one-time payment to Novosom of $11.0 million in April 2014 and terminated the other payment obligations owed to Novosom for PNT2258 except for one remaining $3.0 million payment due upon regulatory approval of PNT2258 and a low single-digit royalty on net sales of PNT2258.
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Since inception, we have devoted substantially all of our resources to research and development activities, including the clinical development of our lead product candidate, PNT2258, and providing general and administrative support for these operations. We have never generated revenue and have incurred significant net losses since inception. Our net losses were $53.3 million and $23.9 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had an accumulated deficit of $534.2 million. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
| • | invest significantly to further develop, and seek regulatory approval for, our lead product candidate, PNT2258; |
| • | acquire or in-license other drugs and technologies; |
| • | invest in scaling our manufacturing capacity to support development and our global commercialization strategy; |
| • | continue to develop our DNAi technology platform; |
| • | identify and develop additional product candidates; |
| • | hire additional clinical, scientific and management personnel; |
| • | seek regulatory and marketing approvals for any product candidates that we may develop; |
| • | ultimately establish a sales, marketing and distribution infrastructure to commercialize any drugs for which we may obtain marketing approval; |
| • | maintain, expand and protect our intellectual property portfolio; and |
| • | add operational, financial and management information systems and personnel, including personnel to support our drug development, any future commercialization efforts and operating as a public company. |
On July 21, 2015, we completed the initial public offering (IPO) of our common stock pursuant to a registration statement on Form S-1. In the IPO, we sold an aggregate of 9,315,000 shares of our common stock, which included 1,215,000 shares of common stock purchased by the underwriters upon the full exercise of their options to purchase additional common stock, at a price of $17.00 per share. We received aggregate cash proceeds of approximately $143.6 million from the IPO, net of underwriting discounts and commissions and offering expenses.
We have funded our operations to date primarily from the issuance and sale of our common stock in our IPO and our convertible and redeemable convertible preferred stock in private financings and, to a lesser extent, through debt financings and exercises of our preferred stock warrants. As of December 31, 2015, we had cash and cash equivalents of $150.2 million.
Components of Statements of Operations
Operating Expenses
Research and Development
Research and development expenses consist primarily of the following:
| • | fees or milestone payments incurred in connection with license agreements; |
| • | personnel-related costs, which include salaries, benefits, stock-based compensation, recruitment fees and travel costs; |
| • | costs associated with preclinical studies and clinical trials, regulatory activities and manufacturing activities to support clinical activities; |
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| • | fees paid to external service providers that conduct certain research and development, clinical and manufacturing activities on our behalf; and |
| • | facility-related costs, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization expense and other supplies. |
The largest recurring component of our total operating expenses has historically been our investment in research and development activities, including the clinical development of our product candidate. We expect our research and development expenses will increase over the next few years as we advance our development programs, pursue regulatory approval of our product candidate in the United States and other jurisdictions and prepare for potential commercialization, which will require a significant investment in costs related to contract manufacturing and inventory buildup.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for PNT2258 or any future product candidates. The probability of success of our product candidate may be affected by numerous factors, including clinical data, regulatory developments, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization of PNT2258 or any future product candidates.
General and Administrative
General and administrative expenses consist of personnel-related costs, facility-related costs, allocated expenses and professional fees for services, including legal, human resources, audit and accounting services. Personnel-related costs consist of salaries, benefits, stock-based compensation, recruitment fees and travel costs.
We expect to incur additional expenses associated with supporting our growing research and development activities, operating as a public company and other administration and professional services.
Other Income (Expense), net
Interest Expense
Interest expense consists of interest expense on our historical debt obligations as well as amortization of financing costs. We may incur additional interest expense in the future if we enter into debt arrangements.
Change in Fair Value of Preferred Stock Warrants
Our preferred stock warrants were classified as a liability on our consolidated balance sheets and, as such, were re-measured to fair value at each balance sheet date, with the corresponding gain or loss from the adjustment recorded in the consolidated statement of operations. Upon the completion of the IPO, the liability on the outstanding preferred stock warrants was reclassified to additional paid-in capital in stockholders’ equity (deficit). For additional information, see “Critical Accounting Policies and Estimates—Preferred Stock Warrant Liabilities.”
Other Income
Other income primarily consists of interest earned on our cash and cash equivalents and short-term investments, as well as foreign currency exchange gains and losses. Foreign currency exchange gains and losses relate to transactions and monetary asset and liability balances denominated in currencies other than the U.S. dollar. Foreign currency gains and losses may continue to fluctuate in the future due to changes in foreign currency exchange rates.
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Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the United States and income taxes in Canada and Australia, as well as deferred income taxes and changes in related valuation allowance reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
As of December 31, 2015, we had not generated any taxable income for U.S. federal income tax purposes. Our tax expense to date relates to income taxes in Canada and Australia. As of December 31, 2015, we had U.S. federal operating loss carryforwards of $57.0 million and state operating loss carryforwards of $54.5 million, expiring in years ranging from 2021 to 2035. We also had net tax credit carryforwards of $1.9 million available to reduce future tax liabilities, if any, for U.S. federal purposes. The net tax carryforwards begin to expire in 2031. Based upon our historical operating performance and the recorded cumulative net losses in prior fiscal periods, we have recorded a full valuation allowance against the net U.S. deferred tax assets as of December 31, 2015.
Results of Operations
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
| Year Ended December 31, |
Change | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Operating expenses: |
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| Research and development |
$ | 26,356 | $ | 19,078 | $ | 7,278 | 38% | |||||||||
| General and administrative |
9,472 | 3,500 | 5,972 | 171% | ||||||||||||
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| Total operating expenses |
35,828 | 22,578 | 13,250 | 59% | ||||||||||||
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| Loss from operations |
(35,828 | ) | (22,578 | ) | (13,250 | ) | (59% | ) | ||||||||
| Other income (expense), net: |
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| Change in fair value of preferred stock warrants |
(17,443 | ) | (1,380 | ) | (16,063 | ) | (1164% | ) | ||||||||
| Other income |
66 | 87 | (21 | ) | (24% | ) | ||||||||||
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| Total other income (expense), net |
(17,377 | ) | (1,293 | ) | (16,084 | ) | (1244% | ) | ||||||||
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| Loss before provision for income taxes |
(53,205 | ) | (23,871 | ) | (29,334 | ) | (123% | ) | ||||||||
| Provision for income taxes |
55 | 2 | 53 | 2650% | ||||||||||||
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| Net loss |
$ | (53,260 | ) | $ | (23,873 | ) | $ | (29,387 | ) | (123% | ) | |||||
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Research and Development
Research and development expenses increased $7.3 million, from $19.1 million in 2014 to $26.4 million in 2015. The increase was primarily due to a $7.4 million increase in costs related to the continuation of our PNT2258 clinical trials, a $5.7 million increase in personnel-related costs, of which $1.8 million was attributable to an increase in stock-based compensation, a $4.8 million increase due to the third-party manufacturing costs for the manufacture of PNT2258 and a $0.4 million increase in overhead. These increased costs were partially offset by a one-time $11.0 million milestone payment that was made to Novosom during the year ended December 31, 2014.
General and Administrative
General and administrative expenses increased $6.0 million, from $3.5 million in 2014 to $9.5 million in 2015. The increase was primarily due to a $2.8 million increase in personnel-related costs, of which $1.1 million was attributable to an increase in stock-based compensation. The remaining increase was attributable to a $1.7 million
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increase in accounting, consulting, legal and other professional fees primarily incurred in connection with activities related to being a public company and a $1.5 million increase in overhead expenses primarily related to increased headcount in support of corporate growth.
Change in Fair Value of Preferred Stock Warrants
The change in the fair value of our preferred stock warrants increased $16.0 million, from $1.4 million in 2014 to $17.4 million in 2015. The increase in the fair value of our preferred stock warrants was directly attributable to the increase in the fair value of the underlying stock as a result of our progress towards our IPO, which closed on July 21, 2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
| Year Ended December 31, |
Change | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Operating expenses: |
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| Research and development |
$ | 19,078 | $ | 2,843 | $ | 16,235 | 571% | |||||||||
| General and administrative |
3,500 | 1,162 | 2,338 | 201% | ||||||||||||
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| Total operating expenses |
22,578 | 4,005 | 18,573 | 464% | ||||||||||||
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| Loss from operations |
(22,578 | ) | (4,005 | ) | (18,573 | ) | (464% | ) | ||||||||
| Other income (expense), net: |
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| Interest expense |
— | (2,719 | ) | 2,719 | 100% | |||||||||||
| Change in fair value of preferred stock warrants |
(1,380 | ) | (202 | ) | (1,178 | ) | (583% | ) | ||||||||
| Other income |
87 | 94 | (7 | ) | (7% | ) | ||||||||||
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| Total other income (expense), net |
(1,293 | ) | (2,827 | ) | 1,534 | 54% | ||||||||||
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| Loss before provision for income taxes |
(23,871 | ) | (6,832 | ) | (17,039 | ) | (249% | ) | ||||||||
| Provision for income taxes |
2 | — | 2 | 100% | ||||||||||||
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| Net loss |
$ | (23,873 | ) | $ | (6,832 | ) | $ | (17,041 | ) | (249% | ) | |||||
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Research and Development
Research and development expenses increased $16.2 million, from $2.8 million in 2013 to $19.1 million in 2014. The increase was primarily due to an $11.0 million milestone payment made to Novosom in 2014 and a $3.1 million increase in third-party manufacturing costs for the manufacture of PNT2258. The remaining change was primarily attributable to a $1.3 million increase in personnel-related costs associated mainly with increased headcount, of which $0.1 million was attributable to an increase in stock-based compensation and a $0.7 million increase in clinical trial costs relating to the continuation of our PNT2258 clinical trials.
General and Administrative
General and administrative expenses increased $2.3 million, from $1.2 million in 2013 to $3.5 million in 2014. The change was primarily due to a $1.5 million increase in personnel-related costs associated mainly with increased headcount, of which $0.2 million was attributable to an increase in stock-based compensation. The remaining change was primarily the result of a $0.7 million increase in professional service costs, consisting of accounting, consulting, legal and other professional fees incurred in connection with our preparation to become a public company.
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Interest Expense
We had $2.7 million of interest expense in 2013 related to outstanding convertible promissory notes, all of which converted to redeemable convertible preferred stock in December 2013 and January 2014. We had immaterial interest expense in 2014.
Change in Fair Value of Preferred Stock Warrants
The change in the fair value of our preferred stock warrants increased $1.2 million, from $0.2 million in 2013 to $1.4 million in 2014. The increase in the fair value of our preferred stock warrants was directly attributable to the change in fair value of the underlying stock.
Liquidity and Capital Resources
We have never generated revenue and have incurred significant net losses since inception. Our net losses were $53.3 million and $23.9 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had an accumulated deficit of $534.2 million. Our principal sources of liquidity as of December 31, 2015 were cash and cash equivalents of $150.2 million.
In July 2015, we closed our IPO and sold an aggregate of 9,315,000 shares of our common stock, (inclusive of 1,215,000 shares of common stock issued pursuant to the full exercise of the underwriters’ option to purchase additional shares) at a price of $17.00 per share. We received aggregate cash proceeds of approximately $143.6 million from the IPO, net of underwriting discounts and commissions and offering expenses. As of December 31, 2015, we did not have any outstanding borrowings or any debt arrangements.
We have funded our operations to date primarily from the issuance and sale of our common stock in our IPO and our convertible and redeemable convertible preferred stock in private financings and to a lesser extent, through debt financings and exercises of our preferred stock warrants. In 2014, we received net proceeds of $57.5 million from the issuance of our redeemable convertible preferred stock.
We expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
| • | invest significantly to further develop, and seek regulatory approval for, our lead product candidate, PNT2258; |
| • | acquire or in-license other drugs and technologies; |
| • | invest in scaling our manufacturing capacity to support development and our global commercialization strategy; |
| • | continue to develop our DNAi technology platform; |
| • | identify and develop additional product candidates; |
| • | hire additional clinical, scientific and management personnel; |
| • | seek regulatory and marketing approvals for any product candidates that we may develop; |
| • | ultimately establish a sales, marketing and distribution infrastructure to commercialize any drugs for which we may obtain marketing approval; |
| • | maintain, expand and protect our intellectual property portfolio; and |
| • | add operational, financial and management information systems and personnel, including personnel to support our drug development, any future commercialization efforts and operating as a public company. |
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To fund our current operating plans, we will need to raise additional capital. Our existing cash and cash equivalents will not be sufficient for us to complete development of our lead product candidate and, if applicable, to prepare for commercializing any product candidate that may receive approval. Accordingly, we will continue to require substantial additional capital to continue our clinical development and potential commercialization activities; however, we believe that our existing cash and cash equivalents will be sufficient to fund our current operating plans through at least the next 18 months. We cannot assure that we will ever be profitable or generate positive cash flow from operating activities. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts.
We plan to continue to fund our current operating plans’ needs through equity financings or other arrangements. To the extent that we raise additional capital through future equity financings, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. There can be no assurance that such additional financing, if available, can be obtained on terms acceptable to us. If we are unable to obtain such additional financing, we would need to reevaluate our future operating plans.
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, |
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| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Cash used in operating activities |
$ | (28,265 | ) | $ | (21,786 | ) | $ | (3,572 | ) | |||
| Cash provided by (used in) investing activities |
9,446 | (10,282 | ) | (2 | ) | |||||||
| Cash provided by financing activities |
139,876 | 58,793 | 4,689 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents |
(31 | ) | — | — | ||||||||
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| Net increase in cash |
$ | 121,026 | $ | 26,725 | $ | 1,115 | ||||||
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Cash Flows from Operating Activities
In 2015, cash used in operating activities of $28.3 million was attributable to a net loss of $53.3 million, partially offset by $20.8 million in non-cash charges and a net change of $4.2 million in our net operating assets and liabilities. The non-cash charges consisted primarily of $17.4 million for the change in fair value of our preferred stock warrants and $3.2 million in stock-based compensation. The change in operating assets and liabilities was primarily attributable to an increase in accrued liabilities of $5.3 million due to an increase in accrued research and development activities and headcount, partially offset by an increase in prepaid expenses of $1.1 million, driven by an increase in prepaid insurance and third-party manufacturing costs.
In 2014, cash used in operating activities of $21.8 million was attributable to a net loss of $23.9 million, of which $11.0 million pertained to a milestone payment to Novosom, partially offset by $1.7 million in non-cash charges and a net change of $0.4 million in our net operating assets and liabilities. The non-cash charges consisted primarily of $1.4 million for the change in fair value of our preferred stock warrants and $0.3 million in stock-based compensation. The change in operating assets and liabilities was primarily attributable to a $0.5 million increase in prepaid expenses and other current assets related to our prepayment of manufacturing costs for clinical supply, offset by a $0.9 million increase in accounts payable and accrued liabilities due to an increase in headcount and accrued research and development costs driven by growth in our research and development activities.
In 2013, cash used in operating activities of $3.6 million was attributable to a net loss of $6.8 million partially offset by $3.0 million in non-cash charges and a net change of $0.2 million in our net operating assets and
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liabilities. Non-cash charges consisted primarily of $2.8 million in non-cash interest expense on our outstanding debt obligations attributable primarily to a beneficial conversion charge on our convertible promissory notes related to the premium conversion feature and a $0.2 million change in the fair value of our preferred stock warrants. The change in operating assets and liabilities was primarily attributable to a $0.3 million increase in our accounts payable and accrued liabilities due primarily to an increase in accrued employee related costs.
Cash Flows from Investing Activities
In 2015, cash provided by investing activities was $9.4 million consisting of $10.0 million in proceeds from the sale of short-term investments, partially offset by $0.4 million in capital expenditures related to purchases of property and equipment and $0.2 million of cash transferred to a restricted cash account.
In 2014, cash used in investing activities was $10.3 million consisting of $10.0 million in cash paid to purchase short-term investments, $0.2 million in capital expenditures related to purchases of property and equipment and $0.1 million of cash transferred to a restricted cash account.
In 2013, we had no significant investing activities.
Cash Flows from Financing Activities
In 2015, cash provided by financing activities was $139.9 million consisting primarily of $143.9 million in net proceeds (including the payment of $3.4 million of deferred offering costs) received from the issuance of common stock upon our IPO and $1.5 million in proceeds received from the cash exercise of redeemable convertible preferred stock warrants. This change is partially offset by the payment of $5.5 million to the holders of the Series B and Series B-1 redeemable convertible preferred stock in settlement of the cumulative dividend provisions on IPO.
In 2014, cash provided by financing activities was $58.8 million consisting of $57.5 million in net proceeds received from the issuance of our Series C and Series D redeemable convertible preferred stock, $1.2 million on the repayment of the stock subscription receivable relating to our December 2013 closing of our Series C redeemable convertible preferred stock and $0.4 million in proceeds received from the exercise of stock options, partially offset by the payment of $0.3 million in deferred offering costs.
In 2013, cash provided by financing activities was $4.7 million consisting of $2.5 million in net proceeds received from the issuance of convertible promissory notes and $2.2 million in net proceeds received from the issuance of our Series C redeemable convertible preferred stock. The outstanding convertible promissory notes issued in 2013 were subsequently converted into shares of our Series C redeemable convertible preferred stock in December 2013.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations as of December 31, 2015, which represent material expected or contractually committed future obligations.
| Payments Due By Period | ||||||||||||||||||||
| Total | Less Than 1 Year |
1 to 3 Years | 3 to 5 Years | More Than 5 Years |
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| (in thousands) | ||||||||||||||||||||
| Clinical obligations(1) |
$ | 16,243 | $ | 6,794 | $ | 9,057 | $ | 392 | $ | — | ||||||||||
| Operating lease obligations(2) |
628 | 290 | 338 | — | — | |||||||||||||||
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| Total contractual obligations |
$ | 16,871 | $ | 7,084 | $ | 9,395 | $ | 392 | $ | — | ||||||||||
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| (1) | Reflects payments we are required to make pursuant to clinical agreements relating to the clinical trials for PNT2258. |
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| (2) | Reflects payments we are required to make under an operating lease agreement (utilizing an exchange rate for the conversion of Canadian dollars into U.S. dollars of $0.7225, based on the noon rate on December 31, 2015, as quoted by The Bank of Canada). |
In the event we receive regulatory authority approval of PNT2258, we are required to pay Novosom a $3.0 million milestone payment. This milestone payment has been excluded from the table above as we are unable to reliably estimate the timing of the future payment.
Critical Accounting Polices and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Research and Development Expenses
As part of the process of preparing financial statements, we are required to estimate and accrue expenses, a significant portion of which are research and development expenses. Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites. This process involves the following:
| • | reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost; |
| • | estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and |
| • | periodically confirming the accuracy of our estimates with selected service providers and making adjustments, if necessary. |
Estimated research and development expenses that we accrue include clinical trial costs under arrangements with third parties, such as contract research organizations (CROs), manufacturing costs under agreements with contract manufacturing organizations (CMOs), external research and development expenses incurred under arrangement with third parties and consultants and license fees for technology that has not reached technological feasibility and does not have an alternative future use.
We base our expense accruals related to clinical trials on patient enrollment and our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions that conduct and manage clinical trials on our behalf. The financial terms of these agreements vary for each contract and may result in uneven payment flows. Payments under some of these contracts depend on several factors, such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. For service contracts entered into that include a nonrefundable prepayment for service, the upfront payment is deferred and recognized in the statement of operations as the services are rendered.
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To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.
Stock-Based Compensation
Stock-based compensation costs related to stock options granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The fair value of any options issued to non-employees is recorded as expense over the vesting period. Proceeds from options exercised by employees prior to vesting pursuant to an early exercise provision, the related shares of which we have the option to repurchase prior to the vesting date should employment of the early exercised option holder be terminated, are recognized as a liability until the shares vest.
We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation will likely increase. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the estimated fair value of stock-based awards. These assumptions include:
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. As our historical share option exercise is limited due to a lack of sufficient data points, and did not provide a reasonable basis upon which to estimate an expected term, we estimated the expected term by using the midpoint between the vesting commencement date and the contractual expiration period of the stock-based award. The expected term for options issued to non-employees is the contractual term.
Expected Volatility—Since we have limited information on the volatility of common stock due to its short trading history, the expected volatility was derived from the historical stock volatilities of comparable peer public companies within its industry that are considered to be comparable to our business over a period equivalent to the expected term of the stock-based awards.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.
Expected Dividend Rate—The expected dividend is zero as we have not paid nor anticipate paying any dividends on our common stock in the foreseeable future.
Forfeiture Rate—The forfeiture rate is estimated based on an analysis of actual forfeitures. We will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from management’s estimates, we might be required to record adjustments to stock-based compensation in future periods.
We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis and will revise in subsequent periods if actual forfeitures differ from those estimates.
Preferred Stock Warrant Liabilities
Warrants for the purchase of shares of our preferred stock were classified as derivative liabilities on our consolidated balance sheets at their fair value on the date of issuance. At the end of each reporting period, changes in estimated fair value during the period were recognized as a component of other income (expense), net in our statements of operations. We continued to adjust the carrying value of the preferred stock warrants until the completion of our IPO, at which time the liabilities were reclassified to additional paid-in-capital.
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We estimated the fair value of these liabilities using assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date. We used a combination of the OPM and/or PWERM models, or the fair value of the underlying stock to determine the fair value of these liabilities. The valuation models were based on inputs as of the valuation dates, including our estimated equity value at the valuation measurement dates, the estimated volatility of our stock, the remaining contractual term of the warrants, and the risk-free interest rates. Cumulative dividends associated with the redeemable convertible preferred stock were calculated as of the accrual start date of each security to the OPM maturity date.
Off-Balance Sheet Arrangements
As of December 31, 2015, we did not have any off-balance sheet financing arrangements or any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. We early adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. Prior periods were not retrospectively adjusted. The adoption of the ASU did not have a material impact on our financial statements.
JOBS Act Accounting Election
The Jumpstart Our Business Startups Act of 2012 permits emerging growth companies such as us to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities and foreign currency risk.
Interest Rate Sensitivity
We had cash and cash equivalents of $150.2 million as of December 31, 2015, which consisted primarily of bank deposits and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our consolidated financial condition or results of operations. We do not believe that our cash or cash equivalents have significant risk of default or illiquidity.
Foreign Currency Risk
Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. A substantial majority of our expenses are denominated in U.S. Dollars, with the remainder in Canadian Dollars. Our consolidated results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments. The effect of a hypothetical 10% change in foreign currency exchanges rates applicable to our business would not have a material impact on our operating loss.
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| Item 8. | Consolidated Financial Statements and Supplementary Data. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| PRONAI THERAPEUTICS, INC. |
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| 82 | ||||
| 83 | ||||
| 84 | ||||
| 85 | ||||
| 86 | ||||
| 88 | ||||
| 90 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ProNAi Therapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of ProNAi Therapeutics, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, convertible and redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ProNAi Therapeutics, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Detroit, Michigan
March 3, 2016
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PRONAI THERAPEUTICS, INC.
(in thousands, except share and per share data)
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS |
||||||||
| CURRENT ASSETS: |
||||||||
| Cash and cash equivalents (Note 5) |
$ | 150,180 | $ | 29,154 | ||||
| Short-term investments (Note 4) |
— | 10,010 | ||||||
| Prepaid expenses and other current assets (Note 5) |
1,673 | 561 | ||||||
|
|
|
|
|
|||||
| Total current assets |
151,853 | 39,725 | ||||||
| Property and equipment, net (Note 5) |
566 | 214 | ||||||
| Other assets |
349 | 626 | ||||||
|
|
|
|
|
|||||
| TOTAL ASSETS |
$ | 152,768 | $ | 40,565 | ||||
|
|
|
|
|
|||||
| LIABILITIES, CONVERTIBLE AND REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
| CURRENT LIABILITIES: |
||||||||
| Accrued liabilities (Note 5) |
$ | 7,016 | $ | 1,473 | ||||
| Accounts payable |
358 | 622 | ||||||
| Other current liabilities |
23 | — | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
7,397 | 2,095 | ||||||
| Preferred stock warrant liabilities (Note 10) |
— | 1,810 | ||||||
| Other liabilities |
— | 100 | ||||||
|
|
|
|
|
|||||
| TOTAL LIABILITIES |
7,397 | 4,005 | ||||||
|
|
|
|
|
|||||
| Commitments and Contingencies (Note 7) |
||||||||
| Convertible preferred stock (Note 9) at liquidation preference, $0.001 par value; nil and 1,843,894 shares authorized as of December 31, 2015 and 2014; nil and 224,564 shares issued and outstanding as of December 31, 2015 and 2014; aggregate liquidation preference of nil and $2.5 million at December 31, 2015 and 2014 |
— | 2,543 | ||||||
| Redeemable convertible preferred stock (Note 9) at redemption value, $0.001 par value; nil and 134,069,847 shares authorized as of December 31, 2015 and 2014; nil and 17,042,064 shares issued and outstanding as of December 31, 2015 and 2014; aggregate liquidation preference of nil and $103.5 million at December 31, 2015 and 2014 |
— | 141,832 | ||||||
| STOCKHOLDERS’ EQUITY (DEFICIT): |
||||||||
| Preferred stock (Note 9), $0.001 par value; 10,000,000 and nil shares authorized as of December 31, 2015 and December 31, 2014; nil shares issued and outstanding as of December 31, 2015 and December 31, 2014 |
— | — | ||||||
| Common stock, $0.001 par value; 500,000,000 and 180,000,000 shares authorized as of December 31, 2015 and 2014; 30,058,105 and 1,588,701 shares issued and outstanding as of December 31, 2015 and 2014 |
30 | 2 | ||||||
| Additional paid-in capital |
679,528 | — | ||||||
| Accumulated other comprehensive loss |
— | (10 | ) | |||||
| Accumulated deficit |
(534,187 | ) | (107,807 | ) | ||||
|
|
|
|
|
|||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) |
145,371 | (107,815 | ) | |||||
|
|
|
|
|
|||||
| TOTAL LIABILITIES, CONVERTIBLE AND REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
$ | 152,768 | $ | 40,565 | ||||
|
|
|
|
|
|||||
The accompanying notes are an integral part of these consolidated financial statements
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PRONAI THERAPEUTICS, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Operating expenses: |
||||||||||||
| Research and development |
$ | 26,356 | $ | 19,078 | $ | 2,843 | ||||||
| General and administrative |
9,472 | 3,500 | 1,162 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
35,828 | 22,578 | 4,005 | |||||||||
|
|
|
|
|
|
|
|||||||
| Loss from operations |
(35,828 | ) | (22,578 | ) | (4,005 | ) | ||||||
| Other income (expense), net: |
||||||||||||
| Change in fair value of preferred stock warrants |
(17,443 | ) | (1,380 | ) | (202 | ) | ||||||
| Interest expense |
— | — | (2,719 | ) | ||||||||
| Other income |
66 | 87 | 94 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total other income (expense), net |
(17,377 | ) | (1,293 | ) | (2,827 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Loss before provision for income taxes |
(53,205 | ) | (23,871 | ) | (6,832 | ) | ||||||
| Provision for income taxes |
55 | 2 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net loss |
(53,260 | ) | (23,873 | ) | (6,832 | ) | ||||||
| Adjustment to redemption value on redeemable convertible preferred stock |
(374,015 | ) | (49,849 | ) | (5,713 | ) | ||||||
| Series B and B-1 redeemable convertible preferred stock dividend |
(5,543 | ) | — | — | ||||||||
| Series C and D redeemable convertible preferred stock dividend |
(20,366 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Net loss attributable to common stockholders |
$ | (453,184 | ) | $ | (73,722 | ) | $ | (12,545 | ) | |||
|
|
|
|
|
|
|
|||||||
| Net loss per share attributable to common stockholders, basic and diluted (Note 3) |
$ | (31.47 | ) | $ | (69.08 | ) | $ | (19.18 | ) | |||
|
|
|
|
|
|
|
|||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (Note 3) |
14,399,506 | 1,067,259 | 653,914 | |||||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PRONAI THERAPEUTICS, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Net loss |
$ | (53,260 | ) | $ | (23,873 | ) | $ | (6,832 | ) | |||
| Other comprehensive loss: |
||||||||||||
| Unrealized loss on investments |
— | (10 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive loss |
$ | (53,260 | ) | $ | (23,883 | ) | $ | (6,832 | ) | |||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Convertible and Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
| Convertible Preferred Stock |
Redeemable Convertible Preferred Stock |
Subscription Receivable |
Common Stock | Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balance—December 31, 2012 |
224,564 | $ | 2,543 | 3,144,934 | $ | 17,172 | $ | — | 426,309 | $ | — | $ | 465 | $ | — | $ | (22,715 | ) | $ | (22,250 | ) | |||||||||||||||||||||||
| Issuance of common stock for exercise of stock options |
— | — | — | — | — | 91,272 | — | 26 | — | — | 26 | |||||||||||||||||||||||||||||||||
| Issuance of common stock for milestone payment |
— | — | — | — | — | 283,069 | 1 | 56 | — | — | 57 | |||||||||||||||||||||||||||||||||
| Issuance of non-vested common stock |
— | — | — | — | — | 35,353 | — | 11 | — | — | 11 | |||||||||||||||||||||||||||||||||
| Issuance of Series C redeemable convertible preferred stock in redemption of short-term convertible promissory notes |
— | — | 1,495,276 | 7,798 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series C redeemable convertible preferred stock and warrants |
— | — | 647,830 | 3,322 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Stock subscription receivable |
— | — | — | — | (1,159 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | — | 11 | — | — | 11 | |||||||||||||||||||||||||||||||||
| Adjustment to redemption value on redeemable convertible preferred stock |
— | — | — | 5,713 | — | — | — | (569 | ) | — | (5,144 | ) | (5,713 | ) | ||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | (6,832 | ) | (6,832 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Balance—December 31, 2013 |
224,564 | 2,543 | 5,288,040 | 34,005 | (1,159 | ) | 836,003 | 1 | — | — | (34,691 | ) | (34,690 | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock for exercise of stock options |
— | — | — | — | — | 752,698 | 1 | 304 | — | — | 305 | |||||||||||||||||||||||||||||||||
| Repayment of stock subscription receivable |
— | — | — | — | 1,159 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series C redeemable convertible preferred stock on redemption of long-term note payable |
— | — | 82,927 | 433 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series C redeemable convertible preferred stock |
— | — | 261,737 | 1,365 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $3.3 million |
— | — | 11,409,360 | 56,180 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | — | 302 | — | — | 302 | |||||||||||||||||||||||||||||||||
| Adjustment to redemption value on redeemable convertible preferred stock |
— | — | — | 49,849 | — | — | — | (606 | ) | — | (49,243 | ) | (49,849 | ) | ||||||||||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | — | — | (10 | ) | — | (10 | ) | ||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | (23,873 | ) | (23,873 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
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| Convertible Preferred Stock |
Redeemable Convertible Preferred Stock |
Subscription Receivable |
Common Stock | Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balance—December 31, 2014 |
224,564 | 2,543 | 17,042,064 | 141,832 | — | 1,588,701 | 2 | — | (10 | ) | (107,807 | ) | (107,815 | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock for exercise of stock options |
— | — | — | — | — | 41,505 | — | 18 | — | — | 18 | |||||||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | — | 3,186 | — | — | 3,186 | |||||||||||||||||||||||||||||||||
| Vesting of early exercised stock options |
— | — | — | — | — |
|
— — |
|
90 | — | — | 90 | ||||||||||||||||||||||||||||||||
| Issuance of redeemable convertible preferred stock upon exercise of redeemable convertible preferred stock warrants |
— | — | 481,671 | 8,976 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of redeemable convertible preferred stock upon net exercise of redeemable convertible preferred stock warrants upon initial public offering |
— | — | 390,032 | 11,785 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Adjustment to redemption value on redeemable convertible preferred stock |
— | — | — | 374,015 | — | — | — | (895 | ) | — | (373,120 | ) | (374,015 | ) | ||||||||||||||||||||||||||||||
| Conversion of convertible preferred stock to common stock upon initial public offering |
(224,564 | ) | (2,543 | ) | — | — | — | 252,817 | — | 2,543 | — | — | 2,543 | |||||||||||||||||||||||||||||||
| Conversion of redeemable convertible preferred stock to common stock upon initial public offering |
— | — | (17,913,767 | ) | (536,608 | ) | — | 18,109,136 | 18 | 536,590 | — | — | 536,608 | |||||||||||||||||||||||||||||||
| Issuance of common stock in connection with initial public offering, net of issuance costs of $14.8 million |
— | — | — | — | — | 9,315,000 | 9 | 143,540 | — | — | 143,549 | |||||||||||||||||||||||||||||||||
| Series B and B-1 redeemable convertible preferred stock dividend |
— | — | — | — | — | — | — | (5,543 | ) | — | — | (5,543 | ) | |||||||||||||||||||||||||||||||
| Series C and D redeemable convertible preferred stock dividend |
— | — | — | — | — | 750,946 | 1 | (1 | ) | — | — | — | ||||||||||||||||||||||||||||||||
| Reclassification of other-than-temporary losses on short-term investments to net loss |
— | — | — | — | — | — | — | — | 10 | — | 10 | |||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | (53,260 | ) | (53,260 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Balance—December 31, 2015 |
— | $ | — | — | $ | — | $ | — | 30,058,105 | $ | 30 | $ | 679,528 | $ | — | $ | (534,187 | ) | $ | 145,371 | ||||||||||||||||||||||||
|
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Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
| Net loss |
$ | (53,260 | ) | $ | (23,873 | ) | $ | (6,832 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
| Change in fair value of preferred stock warrant liabilities |
17,443 | 1,380 | 202 | |||||||||
| Stock-based compensation |
3,186 | 302 | 22 | |||||||||
| Depreciation and amortization |
111 | 12 | 1 | |||||||||
| Unrealized foreign exchange loss |
27 | — | — | |||||||||
| Noncash interest expense on short-term promissory notes and long-term note payable |
— | — | 2,760 | |||||||||
| Common stock issuance for milestone payment |
— | — | 57 | |||||||||
| Other |
7 | (2 | ) | — | ||||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Prepaid expenses and other current assets |
(1,087 | ) | (531 | ) | (10 | ) | ||||||
| Accrued liabilities |
5,302 | 740 | 356 | |||||||||
| Accounts payable |
6 | 186 | (89 | ) | ||||||||
| Accrued interest |
— | — | (39 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in operating activities |
(28,265 | ) | (21,786 | ) | (3,572 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
| Proceeds from sale of short-term investments |
10,031 | — | — | |||||||||
| Purchase of short-term investments |
(21 | ) | (10,020 | ) | — | |||||||
| Change in restricted cash |
(150 | ) | (75 | ) | — | |||||||
| Purchase of property and equipment |
(414 | ) | (187 | ) | (2 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) investing activities |
9,446 | (10,282 | ) | (2 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
| Proceeds from issuance of common stock upon initial public offering, net of issuance costs |
147,270 | — | — | |||||||||
| Payment of deferred offering costs |
(3,389 | ) | (316 | ) | — | |||||||
| Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs |
— | 57,545 | 2,219 | |||||||||
| Payment of Series B and B-1 redeemable convertible preferred stock cumulative dividend |
(5,543 | ) | — | — | ||||||||
| Repayment of stock subscription receivable |
— | 1,159 | — | |||||||||
| Proceeds from exercise of redeemable convertible preferred stock warrants |
1,507 | — | — | |||||||||
| Proceeds from short-term convertible promissory notes |
— | — | 2,445 | |||||||||
| Proceeds from exercise of common stock options |
18 | 305 | 25 | |||||||||
| Proceeds from early exercise of stock options |
13 | 100 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by financing activities |
139,876 | 58,793 | 4,689 | |||||||||
|
|
|
|
|
|
|
|||||||
| Effect of exchange rate changes on cash and cash equivalents |
(31 | ) | — | — | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS |
121,026 | 26,725 | 1,115 | |||||||||
| CASH AND CASH EQUIVALENTS—Beginning of period |
29,154 | 2,429 | 1,314 | |||||||||
|
|
|
|
|
|
|
|||||||
| CASH AND CASH EQUIVALENTS—End of period |
$ | 150,180 | $ | 29,154 | $ | 2,429 | ||||||
|
|
|
|
|
|
|
|||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
| Cash paid for income taxes |
$ | 8 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Cash paid for interest |
$ | — | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: |
||||||||||||
| Change in redemption value of redeemable convertible preferred stock |
$ | (374,015 | ) | $ | (49,849 | ) | $ | (5,713 | ) | |||
|
|
|
|
|
|
|
|||||||
| Fair value of common stock issued in settlement of Series C and Series D redeemable convertible preferred stock cumulative dividends |
$ | 20,366 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Conversion of preferred stock to common stock |
$ | 539,151 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Issuance of redeemable convertible preferred stock on exercise of warrants |
$ | 19,253 | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Conversion of long-term note payable and accrued interest into Series C redeemable convertible preferred stock |
$ | — | $ | 433 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Deferred offering/financing costs included in accounts payable and accrued liabilities |
$ | 154 | $ | 233 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
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| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Property and equipment purchases included in accounts payable and accrued liabilities |
$ | 90 | $ | 39 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
| Conversion of short-term convertible promissory notes and accrued interest into Series C redeemable convertible preferred stock |
$ | — | $ | — | $ | 5,383 | ||||||
|
|
|
|
|
|
|
|||||||
| Subscription receivable from investors on issuance of Series C redeemable convertible preferred stock |
$ | — | $ | — | $ | 1,159 | ||||||
|
|
|
|
|
|
|
|||||||
| Issuance of preferred stock warrants with redeemable convertible preferred stock |
$ | — | $ | — | $ | 57 | ||||||
|
|
|
|
|
|
|
|||||||
| Settlement of premium conversion derivative in redeemable convertible preferred stock |
$ | — | $ | — | $ | 2,415 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Notes to Consolidated Financial Statements
| 1. | The Company and Basis of Presentation |
Organization and Description of Business
ProNAi Therapeutics, Inc. (together with its subsidiaries, collectively referred to as the “Company”), a Delaware corporation, is a clinical-stage oncology company led by a world-class senior management team of proven oncology drug developers. The Company’s vision is to be a leader in developing and commercializing a broad and diverse portfolio of cancer therapies that deliver therapeutic outcomes that dramatically change patients’ lives. The Company’s lead DNAi product candidate, PNT2258, is designed to target BCL2, a widely overexpressed oncogene that is an important gatekeeper of the programmed cell death process known as apoptosis and has been linked to many forms of cancer. In addition to advancing PNT2258, the Company is seeking to expand the number of products it has under clinical development to leverage the full potential of its team.
The Company’s primary activities since inception have been conducting research and development activities, conducting preclinical and clinical testing, recruiting personnel, performing business and financial planning, and raising capital to support development activities.
The Company has not generated any product revenue related to its primary business purpose to date, nor has it generated any income, and is subject to a number of risks and uncertainties, which include dependence on key individuals, the need for development of commercially viable products, the need to obtain regulatory approval for its products and commercialize them and the need to obtain adequate additional financing to fund the development of its product candidates.
Initial Public Offering
On July 15, 2015, the Company’s Registration Statement on Form S-1 (File No. 333-204921) relating to the initial public offering (IPO) of its common stock was declared effective by the Securities and Exchange Commission (SEC). Pursuant to such Registration Statement, the Company sold an aggregate of 9,315,000 shares of its common stock at a price of $17.00 per share for aggregate cash proceeds of approximately $143.6 million, net of underwriting discounts and commissions and offering costs.
On July 21, 2015, immediately prior to the closing of the IPO, all outstanding shares of convertible and redeemable convertible preferred stock converted into 18,361,953 shares of common stock, including an aggregate of 390,680 shares of common stock that were issued on the net exercise of 493,648 preferred stock warrants at the IPO price of $17.00 per share and an aggregate of 481,671 shares of common stock that were issued on the cash exercise of 481,671 preferred stock warrants. The IPO closed on July 21, 2015.
As discussed further in Note 9, on the closing of the IPO, the Company paid the holders of its Series B and B-1 redeemable convertible preferred stock $5.5 million in settlement of the cumulative dividends. In addition, the Company issued 750,946 shares of common stock to the holders of its Series C and D redeemable convertible preferred stock in settlement of the cumulative dividends.
Following the filing of the Restated Certificate of Incorporation of the Company on July 21, 2015, the number of shares of capital stock the Company is authorized to issue is 510,000,000 shares, of which 500,000,000 shares may be common stock and 10,000,000 shares may be preferred stock. Both the common stock and the preferred stock have a par value of $0.001 per share.
Reverse Stock Split
On June 29, 2015, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of the Company’s common stock,
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
convertible preferred stock and redeemable convertible preferred stock at a 7.45-to-1 ratio (Reverse Stock Split). The Reverse Stock Split became effective on July 2, 2015, upon the filing of the amendment to the Company’s amended and restated certificate of incorporation. The authorized shares and par value of the common, convertible preferred and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock, convertible preferred stock, redeemable convertible preferred stock, warrants for preferred stock, options for common stock and per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). The accompanying consolidated financial statements include the accounts of ProNAi Therapeutics, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of expense during the reporting period. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to the fair value of common stock, the fair value of preferred stock, the fair value of preferred stock warrant liabilities, the fair value of stock options, recoverability of the Company’s net deferred tax assets, and related valuation allowance and certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. Dollar. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are recorded at historical exchange rates. Gains and losses related to remeasurement are recorded in other income (expense) in the consolidated statements of operations. The net foreign exchange transaction gains (losses) included in other income (expense) in the accompanying consolidated statements of operations was insignificant for the years ended December 31, 2015, 2014 and 2013.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist primarily of funds invested in readily available checking and savings accounts and highly liquid investments in money market funds.
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Restricted Cash
Restricted cash represents collateral for a corporate credit card facility and a security deposit required for a facility lease. Restricted cash consists of funds invested in a money market fund. As of December 31, 2015, the current portion of restricted cash of $25,000 was included in prepaid expenses and other current assets and the long-term portion of restricted cash of $0.2 million was included in other assets in the accompanying consolidated balance sheets.
Investments
The Company determines the appropriate designation of its investments as “trading,” “available-for-sale” or “held-to-maturity” based on management’s intent at the time of purchase and reevaluates such designation at each reporting date. During the years ended December 31, 2015 and 2014, all of the Company’s short-term investments were designated as available-for-sale. Unrealized gains and losses, if any, are reported as a separate component of stockholders’ equity (deficit), except for unrealized losses determined to be other-than-temporary which are recorded in other income (expense) in the accompanying consolidated statements of operations. The Company determines any realized gains or losses on the sale of any investments on a specific identification method and records such gains and losses as a component of other income (expense) in the accompanying consolidated statements of operations.
The Company evaluates its short-term investments periodically for possible other-than-temporary impairment. A decline in fair value below the amortized cost of the investment is considered other-than-temporary impairment if the Company has the intent to sell the investment or it is more likely than not that the Company will be required to sell the investment before recovery of the entire amortized cost basis. In those instances, an impairment charge equal to the difference between the fair value and the amortized cost basis is recognized in other income (expense). Regardless of the Company’s intent or requirement to sell an investment, impairment is considered other-than-temporary if the Company does not expect to recover the entire amortized cost basis.
Investments with original maturities beyond three months at the date of purchase and which mature at, or less than twelve months from, the balance sheet date are classified as current. Investments with a maturity beyond twelve months from the consolidated balance sheet date are classified as long-term.
Concentrations of Credit Risk
Financial instruments that subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, restricted cash and short-term investments. All of the Company’s cash, cash equivalents, restricted cash and short-term investments are held at financial institutions in the United States and Canada that management believes to be of high credit quality. Deposits held in the United States with these financial institutions exceed federally insured limits. The Company’s cash, cash equivalents, restricted cash and short-term investments exceeded federally insured limits by $149.9 million and $39.0 million at December 31, 2015 and 2014, respectively.
The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer and establishing a minimum allowable credit rating.
Fair Value of Financial Instruments
The Company’s cash and cash equivalents, restricted cash, short-term investments, other current assets, accounts payable, and accrued liabilities approximate their fair value at December 31, 2015 and 2014, due to
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Notes to Consolidated Financial Statements
their short duration. The short-term investment maintains observable inputs, thus the carrying value of this instrument is carried at fair value and unrealized gains and losses, if any, are reported as a separate component of stockholders’ equity (deficit). The Company’s preferred stock warrant liabilities contain unobservable inputs that reflect the Company’s own assumptions in which there is little, if any, market activity at the measurement date, thus the Company’s warrant liabilities were measured at fair value on a recurring basis using unobservable inputs until they were exercised in 2015.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Property and Equipment, Net
Property and equipment, net are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization on property and equipment, excluding leasehold improvements, is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Depreciation and amortization begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term.
Other Assets
Other assets consist primarily of restricted cash pledged as collateral for a corporate credit card facility and a security deposit required for a facility lease. As of December 31, 2014, other assets also included $0.5 million of offering costs, consisting of legal, accounting and filing fees relating to the IPO that were deferred until the completion of the IPO in July 2015, at which time they were reclassified to additional paid-in capital as a reduction of the gross proceeds.
Preferred Stock Warrant Liabilities
The Company accounts for its warrants issued in connection with its various financing transactions based upon the characteristics and provisions of the instrument. Warrants classified as derivative liabilities are recorded on the Company’s consolidated balance sheets at their fair value on the date of issuance and remeasured to fair value on each subsequent reporting period, with the changes in fair value recognized as a
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
component of other income (expense), net in the accompanying consolidated statements of operations. On the closing of the IPO on July 21, 2015 (discussed in Note 1), all outstanding warrants were exercised and the liability on the preferred stock warrants was reclassified to additional paid-in capital in stockholders’ equity (deficit) and was no longer subject to remeasurement.
Research and Development Costs
Research and development costs are expensed as incurred. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the goods have been received or when the service has been performed rather than when the payment is made. Depending on the timing of payments to service providers of research and development costs, the Company recognizes prepaid expenses or accrued expenses related to these costs. These prepaid or accrued expenses are based on management’s estimates of the work performed under service agreements and milestones achieved. Research and development costs include fees incurred in connection with license agreements, compensation and other related costs for employees engaged in research and development, costs associated with preclinical studies and trials, regulatory activities, manufacturing activities to support clinical activities, license fees, fees paid to external service providers that conduct certain research and development, clinical, and manufacturing activities on behalf of the Company and an allocation of overhead expenses.
Stock-Based Compensation
The Company accounts for share-based payments at fair value, which is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for employee stock-based compensation awards is the date of grant and the expense is recognized on a straight line basis, over the vesting period.
For share-based awards that vest subject to the satisfaction of a service requirement and a performance component, the fair value measurement date is the date of grant and is recognized over the requisite service period as achievement of the performance objective becomes probable.
Stock-based compensation arrangements with nonemployees are recognized at the grant date and remeasured to fair value at each reporting period. The expense is recognized over the vesting period which is generally the service period.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management makes an assessment of the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net U.S. deferred tax assets have been offset by a full valuation allowance.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement
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Notes to Consolidated Financial Statements
are reflected in the period in which judgment occurs. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of provision for income taxes.
Segment Information
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The Company’s Chief Executive Officer views the Company’s operations and manages its business in one operating segment, which is the business of researching, developing, and commercializing therapies for the treatment of patients with cancer. Accordingly, the Company has a single reporting segment.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company early adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. Prior periods were not retrospectively adjusted. The adoption of the ASU did not have a material impact on the financial statements.
| 3. | Net Loss Per Share |
Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, less common stock issued that is subject to repurchase, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, preferred stock and warrants for preferred stock, stock options and common stock subject to repurchase are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
| As of December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Options to purchase common stock |
3,522,813 | 2,138,096 | 582,152 | |||||||||
| Common stock subject to repurchase |
23,554 | 103,252 | — | |||||||||
| Convertible preferred stock |
— | 252,817 | 252,818 | |||||||||
| Redeemable convertible preferred stock |
— | 17,236,784 | 5,482,761 | |||||||||
| Warrants for preferred stock |
— | 976,492 | 1,002,291 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total potential dilutive shares |
3,546,367 | 20,707,441 | 7,320,022 | |||||||||
|
|
|
|
|
|
|
|||||||
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Notes to Consolidated Financial Statements
| 4. | Fair Value Measurements |
The Company measures and reports its cash equivalents, restricted cash, short-term investments and preferred stock warrant liabilities at fair value. The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy:
| December 31, 2015 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Financial Assets |
||||||||||||||||
| Money market funds |
$ | 148,604 | $ | — | $ | — | $ | 148,604 | ||||||||
| Restricted money market funds |
225 | — | — | 225 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total financial assets |
$ | 148,829 | $ | — | $ | — | $ | 148,829 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2014 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Financial Assets |
||||||||||||||||
| Money market funds |
$ | 27,847 | $ | — | $ | — | $ | 27,847 | ||||||||
| Restricted money market funds |
75 | — | — | 75 | ||||||||||||
| Short-term investments |
— | 10,010 | — | 10,010 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total financial assets |
$ | 27,922 | $ | 10,010 | $ | — | $ | 37,932 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financial Liabilities |
||||||||||||||||
| Preferred stock warrant liabilities |
$ | — | $ | — | $ | 1,810 | $ | 1,810 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Money market funds and restricted money market funds are measured at fair value on a recurring basis using quoted prices and are classified as a Level 1 input.
The short-term investments contain observable inputs. Accordingly, the carrying value of this instrument approximates its fair value and is classified as Level 2 inputs.
The Company’s preferred stock warrant liabilities contained unobservable inputs that reflected the Company’s own assumptions in which there was little, if any, market activity for at the measurement date. Accordingly, the Company’s warrant liabilities were measured at fair value on a recurring basis using unobservable inputs until the warrants were exercised in 2015. The warrant liabilities were classified as Level 3 inputs.
At December 31, 2014 and 2013, the Company remeasured the preferred stock warrants to fair value using the OPM and/or the PWERM models with the following assumptions used in the OPM:
| Year Ended December 31, | ||||
| 2014 | 2013 | |||
| Expected term (in years) |
1.2 – 2.5 | 2.5 – 3.1 | ||
| Expected volatility |
69 – 86% | 66 – 70% | ||
| Risk-free interest rate |
0.3 – 0.6% | 0.4 – 0.7% | ||
| Expected dividend rate |
— % | — % | ||
| Discount for lack of marketability |
19.5 – 24.3% | 23.7% – 25.8% | ||
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Notes to Consolidated Financial Statements
The Company estimated the volatility of its stock based on comparable peer public companies historical volatility. The risk-free interest rate was based on the U.S. Treasury zero-coupon bond. The expected term applied in the OPM considered both the probabilities of failure and success of the Company. Cumulative dividends associated with preferred stock were calculated as of the accrual start date of each security to the OPM maturity date. The assumptions used in calculating the estimated fair market value at each reporting period represent the Company’s best estimate, however inherent uncertainties are involved. As a result, if factors or assumptions change the warrant liability, the estimated fair value could be materially different.
During the year ended December 31, 2015, the Company remeasured the preferred stock warrants using the OPM and/or PWERM models, or based on the fair value of the underlying stock. On the closing of the IPO, the outstanding preferred stock warrants were exercised and the liability on the preferred stock warrants were reclassified to additional paid-in capital in stockholders’ equity (deficit), and was no longer subject to remeasurement.
There were no transfers between Levels 1, 2 or 3 during the year ended December 31, 2014. During the year ended December 31, 2015, $10.0 million of short-term investments transferred from being a Level 2 financial asset to a Level 1 financial asset when the short-term investments were sold in July 2015. The proceeds from the sale of the short-term investments were invested in money market funds, which is a Level 1 financial asset. The Company realized a $10,000 other-than-temporary impairment loss on its short-term investments through other income (expense) in the accompanying consolidated statements of operations. During the year ended December 31, 2014, the Company did not realize any gains and losses related to its financial assets.
The following table provides a summary of the changes in the estimated fair value of the Company’s preferred stock warrant liabilities, which were measured at fair value on a recurring basis using unobservable inputs (Level 3) until their exercise (in thousands):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Fair value, beginning balance |
$ | 1,810 | $ | 430 | $ | 171 | ||||||
| Fair value of preferred stock warrants exercised |
(19,253 | ) | — | 57 | ||||||||
| Change in fair value of preferred stock warrants |
17,443 | 1,380 | 202 | |||||||||
|
|
|
|
|
|
|
|||||||
| Fair value, ending balance |
$ | — | $ | 1,810 | $ | 430 | ||||||
|
|
|
|
|
|
|
|||||||
The change in fair value of the preferred stock warrant liabilities is attributable to the increase of the fair value of the underlying stock. The change in the fair value of preferred stock warrants for each presented period is recognized as a component of other income (expense), net in the consolidated statements of operations.
| 5. | Balance Sheet Components |
Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Cash |
$ | 1,576 | $ | 1,307 | ||||
| Cash equivalents: |
||||||||
| Money market accounts |
148,604 | 27,847 | ||||||
|
|
|
|
|
|||||
| Total cash and cash equivalents |
$ | 150,180 | $ | 29,154 | ||||
|
|
|
|
|
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Prepaid research and development project costs |
$ | 878 | $ | 515 | ||||
| Prepaid insurance |
480 | 23 | ||||||
| Other |
315 | 23 | ||||||
|
|
|
|
|
|||||
| Total prepaid expenses and other current assets |
$ | 1,673 | $ | 561 | ||||
|
|
|
|
|
|||||
Property and Equipment, net
Property and equipment, net consists of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Computer equipment |
$ | 242 | $ | 56 | ||||
| Software |
126 | 9 | ||||||
| Lab equipment |
236 | 163 | ||||||
| Leasehold improvements |
84 | — | ||||||
|
|
|
|
|
|||||
| Property and equipment, gross |
688 | 228 | ||||||
| Less: accumulated depreciation |
(122 | ) | (14 | ) | ||||
|
|
|
|
|
|||||
| Total property and equipment, net |
$ | 566 | $ | 214 | ||||
|
|
|
|
|
|||||
Depreciation and amortization related to the Company’s property and equipment for the years ended December 31, 2015, 2014 and 2013 was $111,000, $12,000 and $1,000, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Accrued research and development costs |
$ | 4,318 | $ | 526 | ||||
| Accrued employee related costs |
1,529 | 759 | ||||||
| Accrued professional fees |
933 | 140 | ||||||
| Other |
236 | 48 | ||||||
|
|
|
|
|
|||||
| Total accrued liabilities |
$ | 7,016 | $ | 1,473 | ||||
|
|
|
|
|
|||||
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Notes to Consolidated Financial Statements
| 6. | Debt |
Michigan Strategic Fund (MSF) Loan
On December 31, 2007, the Company entered into a promissory note agreement with MSF whereby the Company could borrow up to $0.4 million. Interest on the note accrued at 1% per year on borrowings outstanding under the agreement. Per the terms of the promissory note, no payments were required until December 31, 2012, at which time accrued and unpaid interest would be added to the then outstanding principal. Interest would then accrue on the restated principal amount and was payable over 59 months starting January 1, 2013. The note was secured by all tangible personal property owned by the Company. If the Company ceased to have substantially all of its employees or operations located in Michigan or failed to comply with other terms as defined in the promissory note agreement, MSF could have declared the entire indebtedness, plus a 7% premium of the then-outstanding balance of the note, due and payable immediately.
On December 18, 2012, the Company and the MSF entered into an amendment to the promissory note agreement in which the MSF was granted the right to convert the outstanding indebtedness into equity of the Company upon the occurrence of certain events, including a qualified financing. Also, under the terms of the amended promissory note, all accrued but unpaid interest as of January 1, 2013 was added to the then outstanding principal, with the restated principal accruing interest at 5%. Under the terms of the amended promissory note, the Company would be obligated to make payments on the restated principal on January 1, 2015 in monthly equal installments over 48 months if a qualified financing did not occur. The Company accounted for the amendment in 2012 as an extinguishment.
The outstanding principal on the promissory note payable was $0.4 million and accrued interest totaled $21,000 as of December 31, 2013.
On January 10, 2014, the outstanding principal and accrued interest of $0.4 million on the promissory note was extinguished on the Company’s closing of a Series C redeemable convertible preferred stock financing. On closing, the outstanding principal and accrued interest on the promissory note was converted into 82,927 shares of the Company’s Series C redeemable convertible preferred stock at a price per share of $5.215.
Convertible Promissory Note Financing
On March 1, 2012, the Company entered into a convertible promissory note financing pursuant to which certain investors agreed to loan the Company up to $1.0 million. The convertible promissory notes accrued interest at 8% and would automatically convert into shares of the Company’s next issued series of convertible preferred stock upon the closing of a preferred stock financing of a specified size. Investors also had the option to convert notes outstanding to convertible preferred stock if a change of control or IPO occurred. On October 1, 2012, the Company and the holders of the convertible promissory notes agreed to increase the total loan amount to up to $3.0 million and extend the maturity date of the notes to June 30, 2013. On November 13, 2012, the Company and the holders of the notes agreed to increase the total loan amount to up to $5.0 million, extend the maturity date of the notes to December 31, 2013, and offer to the note holders who matched their total investment through November 1, 2012, and all note holders subsequent to November 1, 2012, a conversion premium of 50%.
The Company issued convertible promissory notes for an aggregate principal amount of $5.0 million on various dates in 2012 and 2013. The investors that held notes dated prior to November 1, 2012, also received warrants to purchase additional shares of redeemable convertible preferred stock which met the requirements for liability classification. The estimated fair value of the warrants at issuance was recorded as a discount on the notes and amortized into interest expense over the expected life of the promissory notes. The holders of certain promissory notes dated prior to November 1, 2012, and all holders of promissory
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Notes to Consolidated Financial Statements
notes dated after November 1, 2012, received the benefit of a premium on conversion into Series C preferred stock at the time of their issuance. The Company determined that the embedded conversion feature met the definition of an embedded derivative at inception. This derivative expired prior to December 31, 2013. The fair value of this derivative at December 31, 2012 was $0.8 million and resulted in a discount on the short-term promissory notes. This discount was amortized to interest expense during the year ended 2013, the estimated term of the notes. During the year ended December 31, 2013, the Company recorded $0.8 million of interest expense related to the discount created by the embedded derivative. The Company recognized an additional $1.6 million of interest expense for the premium conversion feature on newly issued convertible promissory notes during the year ended December 31, 2013.
On December 20, 2013, the convertible promissory notes were extinguished in their entirety on the Company’s closing of a Series C redeemable convertible preferred stock financing. On closing, the Company issued an aggregate 1,495,276 shares of Series C redeemable convertible preferred stock at a per share price of $5.125 on conversion of the convertible promissory notes into shares of Series C redeemable convertible preferred stock. The Company issued Series C redeemable convertible preferred stock worth $7.8 million in settlement of all convertible promissory note obligations of which $5.0 million related to the outstanding principal obligations, $0.4 million in accrued interest and $2.4 million for settlement of the beneficial conversion feature.
As of December 31, 2013, there were no outstanding borrowings on the convertible promissory notes.
| 7. | Commitments and Contingencies |
License Agreements
In March 2007, the Company entered into an exclusive license agreement with Novosom AG (Novosom) to use certain patented LNP delivery technology for any of its DNAi drug candidates that target a region of the BCL2 gene (the Novosom License Agreement). In July 2010, the Novosom License Agreement was acquired by Marina Biotech, Inc. (Marina), but Novosom retained the right to receive all payments due from the Company under the Novosom License Agreement.
In March 2012, the Company and Marina entered into another exclusive license agreement (the Marina License Agreement) for the use of certain of Marina’s patented delivery technology, including LNP technology, for any of the Company’s current or future DNAi product candidates that target any gene. In exchange for this exclusive right, the Company paid Marina an upfront payment of $0.3 million in 2012 to be applied to the first DNAi product candidate under this agreement. The Company will be required to pay Marina milestone payments of up to an aggregate of $14.5 million for each DNAi product candidate, other than PNT2258, upon successful completion of certain clinical and regulatory milestone events relating to each DNAi product candidate identified in the Marina License Agreement. In addition, for DNAi product candidates other than PNT2258, the Company is required to pay Marina a low single-digit royalty on net sales.
In May 2013, the Company issued Novosom 283,069 shares of common stock with a fair market value of $0.1 million in settlement of the first milestone payment. Pursuant to the terms of the Novosom License Agreement, additional shares may have been issued if certain dilution events occurred through December 31, 2014. The Company evaluated the need to accrue an expense related to the future potential issuance of shares at December 31, 2013 and 2014, but determined that each of the terms requiring additional issuances was not likely to occur and thus the expense was not recorded. The dilution provisions expired on December 31, 2014.
In April 2014, the Company entered into a Second License Amendment and Consent to Termination Agreement with Marina pursuant to which the Novosom License Agreement (which had been transferred to
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Marina by Novosom in July 2010) was terminated and the obligations previously set forth in the Novosom License Agreement were restated in the Marina License Agreement. In connection therewith, in April 2014, the Company also entered into a License Payment Agreement with Novosom under which the Company agreed to pay Novosom $11.0 million in cash upon the closing of a minimum $35.0 million financing. Also, the Company agreed to pay Novosom a $3.0 million milestone payment within 30 days of regulatory authority approval of PNT2258. Upon Novosom’s receipt of the cash payment of $11.0 million, all financial obligations of the Company to Novosom were terminated, other than the aforementioned milestone payment, historic manufacturing costs and a low-single digit royalty payment on net sales of PNT2258.
The Company made the $11.0 million payment to Novosom in April 2014, upon the closing of the Series D redeemable convertible preferred stock financing and a payment of $0.1 million in July 2014 settling the obligation for the historic manufacturing costs. The April 2014 Second License Amendment and Consent to Termination Agreement serves as the second amendment to the Marina License Agreement.
As of December 31, 2015 and 2014, the Company has not accrued the $3.0 million milestone payment to Novosom as regulatory approval was not considered probable of occurring.
As of December 31, 2015 and 2014, the Company has not identified any product candidates that would pertain to the Marina License Agreement. Therefore, there is currently no potential expense or payment due under the Marina License Agreement.
Lease Agreements
The Company leases its Michigan facility under a short-term operating lease with a term of less than a year that provides for a fixed monthly rent for the term of the lease and also provides for certain rent adjustments covering the expenses and taxes of the facility.
In February 2015, the Company entered into an operating lease agreement to sublease office space in Vancouver, Canada. The operating lease agreement expires on February 27, 2018. Under the terms of the agreement, the Company issued a Canadian Dollar $50,000 letter of credit to the sublessor on closing, which is collateralized by a restricted deposit of $50,000.
As of December 31, 2015, the aggregate future non-cancelable minimum lease payments associated with this office space operating lease are as follows:
| Years Ending December 31: |
Operating Leases |
|||
| (in thousands) | ||||
| 2016 |
$ | 290 | ||
| 2017 |
290 | |||
| 2018 |
48 | |||
|
|
|
|||
| Total |
$ | 628 | ||
|
|
|
|||
The total rent expense for all operating leases for the years ended December 31, 2015, 2014 and 2013 was $0.3 million, $0.1 million and $34,000.
Legal
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal
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Notes to Consolidated Financial Statements
proceedings, nor is it aware of any pending or threatened litigation that, in the Company’s opinion, would have a material adverse effect on the business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
| 8. | Common Stock Reserved for Issuance |
The Company is required to reserve and keep available out of its authorized but unissued shares of common stock a number of shares sufficient to effect the conversion of all outstanding shares of preferred stock (and preferred stock warrants), plus options granted and available for grant under the incentive plans and shares reserved for issuance under the employee stock purchase plan.
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Conversion of outstanding Series A convertible preferred stock |
— | 252,817 | ||||||
| Conversion of outstanding Series B redeemable convertible preferred stock |
— | 1,947,354 | ||||||
| Conversion of outstanding Series B-1 redeemable convertible preferred stock |
— | 1,392,300 | ||||||
| Conversion of outstanding Series C redeemable convertible preferred stock |
— | 2,487,770 | ||||||
| Conversion of outstanding Series D redeemable convertible preferred stock |
— | 11,409,360 | ||||||
| Outstanding preferred stock warrants |
— | 976,492 | ||||||
| Outstanding stock options |
3,522,813 | 2,138,096 | ||||||
| Shares reserved for future option grants |
3,523,879 | 1,550,101 | ||||||
| Shares reserved under the 2015 employee stock purchase plan |
700,000 | — | ||||||
|
|
|
|
|
|||||
| Total common stock reserved for issuance |
7,746,692 | 22,154,290 | ||||||
|
|
|
|
|
|||||
| 9. | Preferred Stock |
Preferred Stock
As of December 31, 2015, the Company had 10,000,000 shares of preferred stock authorized with a par value of $0.001. No shares of preferred stock were outstanding as of December 31, 2015.
Convertible and Redeemable Convertible Preferred Stock
On January 10, 2014, the Company issued 344,664 shares of Series C redeemable convertible preferred stock at a price per share $5.215. Of the total shares, 261,737 were issued for cash proceeds of $1.4 million and 82,927 were issued on the conversion of a note payable to MSF (see Note 6) with principal and accrued interest totaling $0.4 million.
On April 17, 2014, the Company issued 11,409,360 shares of Series D redeemable convertible preferred stock at a price of $5.215 per share for net cash proceeds of $56.2 million, net of issuance costs of $3.3 million.
During the year ended December 31, 2015, the Company issued an aggregate of 481,671 shares of redeemable convertible preferred stock upon the cash exercise of the Company’s Series B-1 and Series C redeemable convertible preferred stock warrants, consisting of 444,286 shares of Series B-1 redeemable convertible preferred stock and 37,385 shares of Series C redeemable convertible preferred stock.
In addition, during the year ended December 31, 2015, the Company issued an aggregate of 390,032 shares of redeemable convertible preferred stock upon the net exercise of the Company’s Series B, Series B-1 and
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Notes to Consolidated Financial Statements
Series C redeemable convertible preferred stock warrants, consisting of 5,850 shares of Series B redeemable convertible preferred stock, 291,165 shares of Series B-1 redeemable convertible preferred stock and 93,017 shares of Series C redeemable convertible preferred stock.
On July 21, 2015 (closing date of the IPO), all outstanding shares of Series A convertible preferred stock converted into 252,817 shares of common stock and all outstanding shares of Series B, Series B-1, Series C and Series D redeemable convertible preferred stock converted into 18,109,136 shares of common stock. The convertible and redeemable convertible preferred stock as of December 31, 2014 consisted of the following:
| December 31, 2014 | ||||||||||||||||||||||||
| Shares Authorized |
Shares Issued and Outstanding |
Net Carrying Value |
Liquidation Price Per Share |
Aggregate Liquidation Preference |
Redemption Value |
|||||||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||||||||||||
| Convertible Preferred Stock: |
||||||||||||||||||||||||
| Series A |
1,843,894 | 224,564 | $ | 2,543 | $ | 11.324 | $ | 2,543 | $ | — | ||||||||||||||
| Redeemable Convertible Preferred Stock: |
||||||||||||||||||||||||
| Series B |
13,134,880 | 1,752,634 | $ | 19,504 | $ | 12.268 | $ | 21,502 | $ | 19,504 | ||||||||||||||
| Series B-1 |
16,122,618 | 1,392,300 | 6,979 | 3.656 | 5,091 | 6,979 | ||||||||||||||||||
| Series C |
19,812,349 | 2,487,770 | 21,052 | 5.642 | 14,035 | 21,052 | ||||||||||||||||||
| Series D |
85,000,000 | 11,409,360 | 94,297 | 5.510 | 62,865 | 94,297 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total redeemable convertible preferred stock |
134,069,847 | 17,042,064 | $ | 141,832 | $ | 103,493 | $ | 141,832 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total preferred stock |
135,913,741 | 17,266,628 | $ | 144,375 | $ | 106,036 | $ | 141,832 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
On issuance, the Company’s convertible and redeemable convertible preferred stock was recorded at fair value or the amount of allocated proceeds, net of issuance costs.
The Company’s Series A convertible preferred stock (convertible preferred stock) was classified outside of stockholders’ equity (deficit) from issuance through the closing of the IPO, because, in the event of certain “liquidation events” that are not solely within the Company’s control (including merger, acquisition, or sale of all or substantially all of the Company’s assets), the shares would have become redeemable at the option of the holders. The carrying value of the convertible preferred stock was the liquidation value.
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
The Company’s Series B, B-1, C and D redeemable convertible preferred stock (collectively, redeemable convertible preferred stock) was classified outside of stockholders’ equity (deficit) from issuance through the closing of the IPO, because the stocks contain redemption features that commence at any time on or after December 31, 2018 at the election of the Series B, B-1, C and D redeemable convertible preferred stockholders. The Company adjusted the carrying amount of the redeemable convertible preferred stock to equal the redemption value at the end of each reporting period. Due to the absence of retained earnings, adjustments to redemption value were recorded against additional paid-in capital, if any, and then to accumulated deficit. The following table sets forth the total adjustment to redemption value of each series of redeemable convertible preferred stock recognized during the following periods:
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Redeemable Convertible Preferred Stock |
||||||||||||
| Series B |
$ | 46,976 | $ | 6,447 | $ | — | ||||||
| Series B-1 |
36,961 | 2,836 | 28 | |||||||||
| Series C |
52,832 | 2,449 | 5,685 | |||||||||
| Series D |
237,246 | 38,117 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total adjustment to redemption value on redeemable convertible preferred stock |
$ | 374,015 | $ | 49,849 | $ | 5,713 | ||||||
|
|
|
|
|
|
|
|||||||
As the redemption value for the redeemable convertible preferred stock was at times based on fair market value, the Company determined the fair value of the redeemable convertible preferred stock using a combination of the OPM and/or the PWERM models, or the fair value of the Company’s common stock. At July 21, 2015 (closing date of the IPO), the fair value of redeemable convertible preferred stock was estimated based on the underlying value of the Company’s common stock. Prior to the Company’s IPO, the holders of the convertible and redeemable convertible preferred stock (collectively, Preferred Stock) had various rights, preferences, and privileges as follows:
Optional Conversion Rights
Each share of Preferred Stock was convertible at the option of the holder at any time into the number of shares of common stock based on the conversion price then in effect. The conversion rate was obtained by dividing the Series A, B, B-1, C and D original issuance prices of $11.324, $7.45, $2.6075, $5.215 and $5.215 per share by the preferred conversion price for each series in effect. The conversion prices for each series were adjusted on a broad-based weighted-average basis in connection with certain dilutive issuances. However, the articles of incorporation provide that in no event shall the conversion price for the Series A be less than $10.0575 per share or the conversion price for the Series B be less than $6.705 per share. The conversion price per share for the Preferred Stock was adjusted for certain recapitalizations, splits, combinations, common stock dividends or similar events, as discussed below.
Automatic Conversion Rights
Each share of Preferred Stock was automatically converted into shares of common stock based on the then-effective conversion price upon either the affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Preferred Stock or upon the closing of a Qualified IPO. A Qualified IPO was defined as the closing of a firm underwritten initial public offering pursuant to an effective registrant statement under the Securities Act of 1933, in which the aggregate cash proceeds to the Company (before
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
underwriting discounts, commissions and fees) are at least $50.0 million and if it covers the offer and sale of the Company’s common stock at a price per share of (i) at least 1.6 times the Series D original issue price ($8.344 per share) if such closing occurred on or before April 17, 2015; and (ii) at least 2.0 times the Series D original issue price ($10.43 per share) if such closing occurred after April 17, 2015. Upon such automatic conversion, any unpaid accruing dividends and any other accrued and unpaid dividends on the Preferred Stock was also paid.
Voting Rights
Each share of Preferred Stock had a number of votes equal to the number of shares of common stock into which it was convertible. The holders of the Series B and C redeemable convertible preferred stock each had the right to elect one director to the Board. The holders of the Series D redeemable convertible preferred stock had the right to elect two directors to Board. The holders of the common stock and Preferred Stock, voting together on an as-converted basis, elect the three remaining directors.
A separate vote of a majority of the Series A, B, B-1, C and D preferred stockholders, determined on the basis of the number of shares of common stock into which it was convertible, was required to authorize, effect or validate any action which altered or changed the rights, preferences or privileges or increased the number of authorized shares of each respective series of Preferred Stock.
Dividend Rights
The holders of the outstanding shares of Series B, B-1, C and D redeemable convertible preferred stock were entitled to receive cumulative accruing dividends at a rate of 8.0% per annum of the original issuance price per share, compounded annually (accruing dividends). The accruing dividends accrued from day to day, whether or not declared, and were cumulative. The accruing dividends were deemed declared annually and payable upon the earliest to occur of (i) the date determined by the Board, (ii) the liquidation of the Company (including a Deemed Liquidation Event) and (iii) the conversion or redemption of at least a majority of the outstanding shares of the Series B, B-1, C and D redeemable convertible preferred stock. At December 31, 2014, cumulative unpaid accruing dividends in arrears totaled $14.4 million and consisted of $8.4 million for the Series B, $1.5 million for the Series B-1, $1.1 million for the Series C and $3.4 million for the Series D redeemable convertible preferred stock.
In the event of a qualified IPO, the holders were entitled to 50% of the then accrued but unpaid accruing dividends in cash and the remaining 50% were forfeited. If a Qualified IPO had occurred as of December 31, 2014, the Company would have paid accruing dividends in the aggregate amount of $7.2 million to the Series B, B-1, C and D redeemable convertible preferred stockholders.
The holders of the Series A convertible preferred stock, in preference to the holders of the common stock, were entitled to first receive, or simultaneously receive, when and as declared by the board, but only out of funds that were legally available therefore, a dividend in an amount of at least equal to $0.79268 per share of the Series A convertible preferred stock. Such dividends were not cumulative.
After payment of these dividends, any dividends declared by the board out of funds legally available were shared equally among all outstanding shares on an as-converted basis.
Amendment to Dividend Rights
On June 11, 2015, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation to modify the terms of the cumulative accruing dividends on the outstanding shares of the
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Company’s Series C and Series D redeemable convertible preferred stock. Under the terms of the amended certificate of incorporation, upon conversion of the Company’s redeemable convertible preferred stock into common stock in connection with an IPO, the Company was required to pay 50% of the then accrued but unpaid accruing dividends on shares of the Series C and Series D redeemable convertible preferred stock in shares of the Company’s common stock instead of payment in cash and the remaining 50% of the then accrued but unpaid accruing dividends was to be forfeited. The settlement of the accrued but unpaid accruing dividends in shares of common stock was required to be at the original issue price of the Series C and Series D redeemable convertible preferred stock of $5.215 per share. The terms of the dividends payable on the Series B and Series B-1 preferred stock were not modified.
Settlement of Cumulative Dividends
On July 21, 2015 (closing date of the IPO), the Company had total cumulative unpaid dividends in arrears of $18.9 million, which consisted of $9.4 million for the Series B, $1.7 million for the Series B-1, $1.7 million for the Series C and $6.1 million for the Series D redeemable convertible preferred stock. During the year ended December 31, 2015, the Company paid in cash accruing dividends in the aggregate amount of $5.5 million to the Series B and B-1 redeemable convertible preferred stockholders, consisting of $4.7 million for the Series B and $0.8 million for the Series B-1 redeemable convertible preferred stockholders. In addition, during the year ended December 31, 2015, the Company issued an aggregate of 750,946 shares of common stock to the Series C and D redeemable convertible preferred stockholders with an aggregate fair value of $20.4 million in settlement of the Series C and Series D redeemable convertible preferred stock cumulative dividends in accordance with the June 11, 2015 amendment discussed above, consisting of 161,536 shares of common stock with a fair value of $4.4 million to the Series C redeemable convertible preferred stockholders and 589,410 shares of common stock with a fair value of $16.0 million to the Series D redeemable convertible preferred stockholders.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the corporation, the holders of the Series A, Series B, Series B-1, Series C and Series D preferred stock were entitled to liquidation preferences in the amount of $11.324 per share for the Series A, $12.268 per share for the Series B, $3.656 per share for the Series B-1, $5.642 per share for the Series C and $5.510 per share for the Series D at December 31, 2014 (adjusted to reflect stock splits, stock dividends, and recapitalizations), plus all unpaid accruing dividends, whether or not declared, together with any other dividends declared but unpaid. Following distribution of the liquidation preferences to the preferred stockholders, the remaining assets of the Company available for distribution to shareholders were distributed among the holders of the Series B, B-1, C and D redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock held by each on an as-converted basis.
A Deemed Liquidation Event is defined as any acquisition of the corporation by means of merger or other form of corporate reorganization in which the outstanding shares of the corporation are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (other than a reincorporation transaction) or a sale of all or substantially all of the assets of the Company shall be treated as a liquidation, dissolution, or winding-up of the corporation and shall entitle the holders of preferred stock and common stock to receive at the closing the amounts specified above in cash, securities or other property.
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Notes to Consolidated Financial Statements
Redemption Rights
The Series A convertible preferred stock did not contain any fixed or determinable redemption features. At any time on or after December 31, 2018, upon the election of the holders of the then-outstanding Series B, B-1, C and D redeemable convertible preferred stock, voting as a separate class, the Company might be required to redeem in cash the then-outstanding shares of Series B, B-1, C and D redeemable convertible preferred stock. The Company shall effect any such redemption in three annual installments with the first to occur on the date sixty days after the date on which the Company receives notice of the redemption election. The redemption price for the Series B and B-1 redeemable convertible preferred stock was equal to the greater of (a) 150% of the liquidation preference for such series; provided, however, that any sum in excess of the purchase price shall be paid out of the retained earnings of the Company; or, (b) the fair market value per share as determined by an appraisal plus all declared or accrued but unpaid accruing dividends.
At December 31, 2013, due to the absence of retained earnings, the redemption value of the Series B redeemable convertible preferred stock was determined under criterion (a) and was the original issuance price of $7.45 per share. At December 31, 2014 and on the closing of the IPO, the redemption value of the Series B redeemable convertible preferred stock was determined under criterion (b) and was the fair value market value per share plus all unpaid accruing dividends. At December 31, 2013 and 2014 and on the closing of the IPO, the redemption price of the Series B-1 redeemable convertible preferred stock was determined under criterion (b) and was the fair market value per share plus all unpaid accruing dividends. The redemption price for the Series C and D redeemable convertible preferred stock was equal to the greater of (a) 150% of the liquidation preference of such series; or, (b) the fair market value per share as determined by an appraisal, plus all declared or accrued but unpaid accruing dividends. At December 31, 2013 and 2014 and on the closing of the IPO, the redemption value for Series C and D redeemable convertible preferred stock was determined under criterion (a) and is 150% of the liquidation preference for the Series C and D redeemable convertible preferred stock.
MSF and MEDC Redemption Rights
Prior to the closing of the IPO, the Company was required to redeem certain shares of its Series B, B-1, and C redeemable convertible preferred stock held by MSF and the Michigan Economic Development Corporation (MEDC) upon the occurrence of a deemed triggering event. If a triggering event occurred, MSF and MEDC both had the option to elect for the Company to redeem their shares in cash for a period of 60 days after the occurrence of the triggering event for the shares of Series B redeemable convertible preferred stock and a period of 120 days after the triggering event occurs for the shares of Series B-1 and C redeemable convertible preferred stock. The option expired if not exercised within the given timeframe. If a triggering event had occurred and the option to redeem the respective shares of Series B, B-1 and C redeemable convertible preferred stock had been exercised by both MSF and MEDC at December 31, 2014, the cash redemption amount of the respective shares would have amounted to $5.4 million. On April 1, 2015, the Company notified MSF and MEDC that a triggering event had occurred.
On June 11, 2015, the Company and the Michigan Strategic Fund (MSF) and the Michigan Economic Development Corporation (MEDC) entered into an amendment to equity conversion agreements previously entered into by the parties. The amendment modified the terms of the equity conversion agreements that permit the MSF and MEDC to require the Company to repurchase shares of their preferred stock in certain circumstances, referred to as “put options.” The modification to the put options (i) suspended the exercisability of the put options during the period prior to and through the completion of the IPO and (ii) further provided that the put options would expire upon the completion of the IPO. However, in the event the IPO had not been completed by December 31, 2015 or was abandoned by the Company prior to
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Notes to Consolidated Financial Statements
that date, the MSF and MEDC would have the right to exercise the put options for a period of 120 days following the earlier to occur of such dates.
| 10. | Preferred Stock Warrants |
The Company classified its preferred stock warrants as liabilities on the accompanying consolidated balance sheets. During the year ended December 31, 2015, $19.3 million of the fair value of the warrant liability was reclassified to redeemable convertible preferred stock and then into additional paid-in capital in stockholders’ equity (deficit) on conversion of redeemable convertible preferred stock into common stock on the closing of the IPO. The warrants were no longer outstanding at December 31, 2015. The fair value of the warrants was estimated to be $1.8 million as of December 31, 2014. Refer to Note 4 for the valuation technique and assumptions used in estimating the fair value of the warrants.
The key terms of the convertible preferred stock are summarized in the following table:
| Warrants Outstanding | ||||||||||||||
| Warrants Outstanding December 31, 2014 |
Warrants Outstanding December 31, 2013 |
Exercise Price |
Expiration | |||||||||||
| Series A preferred stock warrants |
— | 22,914 | $ | 11.324 | Various dates in 2014 | |||||||||
| Series B preferred stock warrants |
10,414 | 10,414 | 7.45 | July 31, 2018 | ||||||||||
| Series B-1 preferred stock warrants |
47,060 | 47,060 | 7.45 | June 30, 2018 | ||||||||||
| Series B-1 preferred stock warrants |
746,295 | 746,295 | 2.6075 | Various dates in 2016 – 2021 | ||||||||||
| Series C preferred stock warrants |
171,566 | 171,566 | 5.125 | Various dates in 2022 – 2023 | ||||||||||
|
|
|
|
|
|||||||||||
| Total preferred stock warrants |
975,335 | 998,249 | ||||||||||||
|
|
|
|
|
|||||||||||
The warrants were immediately exercisable in whole or in part over the term of the warrants. During the year ended December 31, 2015, 31,778 of the Series B-1 warrants were cash exercised at an exercise price of $7.45 per share, 412,508 of the Series B-1 warrants were cash exercised at an exercise price of $2.6075 per share and 37,385 of the Series C warrants were cash exercised at an exercise price of $5.215 per share, resulting in total aggregate cash proceeds to the Company of $1.5 million.
On the closing of the Company’s IPO, all of the remaining outstanding preferred stock warrants were net exercised at the IPO price of $17.00 per share, which resulted in 6,499 shares of common stock being issued upon the net exercise of outstanding warrants to purchase 10,414 shares of Series B preferred stock, 291,164 shares of common stock being issued upon the net exercise of outstanding warrants to purchase 349,054 shares of Series B-1 preferred stock and 93,017 shares of common stock being issued upon the net exercise of outstanding warrants to purchase 134,180 shares of Series C preferred stock.
During the years ended December 31, 2014 and 2013, no warrants were exercised.
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
| 11. | Stock-Based Compensation |
In the accompanying consolidated statement of operations, the Company recognized stock-based compensation expense for its employees and non-employees as follows:
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Research and development |
$ | 1,846 | $ | 65 | $ | 5 | ||||||
| General and administrative |
1,340 | 237 | 17 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total stock-based compensation |
$ | 3,186 | $ | 302 | $ | 22 | ||||||
|
|
|
|
|
|
|
|||||||
Determination of Fair Value
The estimated grant-date fair value of all the Company’s stock-based awards was calculated using the Black-Scholes option pricing model, based on the following assumptions:
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Expected term (in years) |
5.2 – 10.0 | 5.0 – 6.0 | 5.0 – 6.0 | |||||||||
| Expected volatility |
75 – 84 | % | 81 – 83 | % | 79 – 82 | % | ||||||
| Risk-free interest rate |
1.5 – 2.4 | % | 1.5 – 1.8 | % | 0.7 – 1.6 | % | ||||||
| Expected dividend rate |
— | % | — | % | — | % | ||||||
The fair value of each stock option grant was determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management.
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The Company’s historical share option exercise is limited due to a lack of sufficient data points, and did not provide a reasonable basis upon which to estimate an expected term, the expected term was derived by using the midpoint between the vesting commencement date and the contractual expiration period of the stock-based award. The expected term for options issued to nonemployees is the contractual term.
Expected Volatility—Since the Company has limited information on the volatility of common stock due to its short trading history, the expected volatility was derived from the historical stock volatilities of comparable peer public companies within its industry that are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock-based awards.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.
Expected Dividend Rate—The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.
Forfeiture Rate—The forfeiture rate is estimated based on an analysis of actual forfeitures. Management will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from management’s estimates, the Company might be required to record adjustments to stock-based compensation in future periods.
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Fair Value of Common Stock—Prior to the closing of the Company’s IPO, the fair value of the Company’s common stock was determined by the Company’s board of directors because there was no public market for the Company’s common stock as the Company was a private company. The Company’s board of directors determined the fair value of the common stock by considering a number of objective and subjective factors, including having contemporaneous and retrospective valuations of its common stock performed by an unrelated valuation specialist, valuations of comparable peer public companies, sales of the Company’s redeemable convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of the Company’s capital stock, and general and industry-specific economic outlook. After the closing of the Company’s IPO, the fair value of the Company’s common stock is used to estimate the fair value of the stock-based awards at grant date.
Equity Incentive Plans
2015 Plan
The 2015 Equity Incentive Plan (2015 Plan) became effective on July 14, 2015. Under the 2015 Plan, 3,400,000 shares of common stock were initially reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, restricted stock awards, stock appreciation rights, restricted stock units, performance awards, cash awards and stock bonuses. In addition, 365,535 shares that had been available for future awards under the 2008 Plan as of July 14, 2015, were added to the initial reserve available under the 2015 Plan, bringing the total number of shares reserved for issuance under the 2015 Plan upon its effective date to 3,765,535 shares. The number of shares initially reserved for issuance under the 2015 Plan will increase automatically on January 1 of each calendar year 2016 through 2025 by the number of shares equal to 4% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31. The Company’s Board of Directors or Compensation Committee may reduce the amount of the increase in any particular year. The exercise price of each stock-based award issued under the 2015 Plan is required to be no less than the fair value of the Company’s capital stock. The vesting and exercise provisions of options or restricted awards granted are determined individually with each grant. Stock options have a 10-year life and expire if not exercised within that period or if not exercised within three months of cessation of employment with the Company or such longer period of time as specified in the option agreement.
2008 Plan
The Company granted options under the 2008 Stock Plan (2008 Plan) until July 2015 when it was terminated as to future awards, although it continues to govern the terms of options that remain outstanding under the 2008 Plan. The 2008 Plan provided for the granting of Incentive Stock Options (ISO), nonqualified stock options and stock purchase rights. In connection with the Board of Directors approval of the 2015 Plan, all remaining shares available for future award under the 2008 Plan were transferred to the 2015 Plan, and the 2008 Plan was terminated.
2005 Stock Plan
As of December 31, 2015, there were 940 awards issued and outstanding under the Company’s 2005 Plan (the “2005 Plan”). The terms of the 2005 Plan are similar to those of the 2008 Plan. On August 20, 2008, the board of directors canceled all shares available under the 2005 Plan with the intention to not issue any more shares under the plan.
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
A summary of activity under the 2005 Plan, 2008 Plan and 2015 Plan and related information is as follows:
| Options Outstanding | Non-Vested Stock | |||||||||||||||||||||||||||
| Shares Available for Grant |
Number of Shares Outstanding |
Weighted- Average Exercise Price Per Share |
Weighted- Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value of Outstanding Options (in thousands) |
Number of Shares Outstanding |
Weighted- Average Grant Date Fair Value Per Share |
||||||||||||||||||||||
| Outstanding—December 31, 2012 |
555,135 | 271,276 | $ | 0.32 | 7.66 | $ | — | 404 | $ | 0.30 | ||||||||||||||||||
| Awards authorized |
520,134 | |||||||||||||||||||||||||||
| Options granted |
(403,759 | ) | 403,759 | 0.37 | ||||||||||||||||||||||||
| Non-vested stock granted |
(35,353 | ) | — | 35,353 | 0.29 | |||||||||||||||||||||||
| Options exercised |
— | (91,272 | ) | 0.27 | ||||||||||||||||||||||||
| Non-vested stock vested |
— | — | (35,757 | ) | 0.29 | |||||||||||||||||||||||
| Options cancelled |
1,611 | (1,611 | ) | 0.26 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Outstanding—December 31, 2013 |
637,768 | 582,152 | 0.37 | 8.63 | 48 | — | — | |||||||||||||||||||||
| Awards authorized |
3,221,477 | |||||||||||||||||||||||||||
| Options granted |
(2,309,681 | ) | 2,309,681 | 0.93 | ||||||||||||||||||||||||
| Options exercised |
— | (752,698 | ) | 0.54 | ||||||||||||||||||||||||
| Options cancelled |
537 | (1,039 | ) | 2.08 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Outstanding—December 31, 2014 |
1,550,101 | 2,138,096 | 0.91 | 9.29 | 3,153 | — | — | |||||||||||||||||||||
| Awards authorized |
3,400,000 | |||||||||||||||||||||||||||
| Options granted |
(1,471,664 | ) | 1,471,664 | 8.06 | ||||||||||||||||||||||||
| Options exercised |
— | (41,505 | ) | 0.76 | ||||||||||||||||||||||||
| Options cancelled |
45,442 | (45,442 | ) | 7.76 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Outstanding—December 31, 2015 |
3,523,879 | 3,522,813 | $ | 3.81 | 8.78 | $ | 40,425 | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Exercisable—December 31, 2015 |
2,152,742 | $ | 1.04 | 8.35 | $ | 30,140 | ||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Vested and expected to vest—December 31, 2015 |
3,417,287 | $ | 3.74 | 8.77 | $ | 39,437 | ||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
The weighted-average grant date fair values of options granted during the years ended December 31, 2015, 2014 and 2013 was $10.51, $0.67 and $0.15 per share. The aggregate intrinsic value of options exercised was $0.2 million, $1.4 million and $0 for the years ended December 31, 2015, 2014 and 2013. The total grant date fair value of options vested for the years ended December 31, 2015, 2014 and 2013 was $1.4 million, $0.2 million and $18,000.
The aggregate intrinsic value totaled $0 for options outstanding at December 31, 2012 because the exercise price of the options was greater than the fair market value of the options for this date.
As of December 31, 2015, total unrecognized stock-based compensation related to unvested stock options was $13.0 million, net of estimated forfeitures, which the Company expects to recognize over a remaining weighted-average period of 3.3 years. Certain stock options are subject to occurrence of a performance condition.
Performance-Based Stock Option Grant
During the year ended December 31, 2014, the Company granted options to purchase 217,305 shares of common stock to an executive officer which contains both performance-based and service-based vesting criteria. Stock-based compensation associated with these performance-based stock options is recognized if the performance condition is achieved. Management concluded that the performance-based milestone was not probable of achievement as of December 31, 2014. As such, no stock-based compensation was recorded during the year ended December 31, 2014 related to these options. If the performance condition had been achieved at December 31, 2014, the Company would have recorded $17,000 in additional stock-based compensation related to these stock options.
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
On January 24, 2015, the Company amended the terms of the performance-based stock options to extend the date of the performance-based milestone. Upon the completion of the IPO in July 2015, the performance-based criteria of the stock options was achieved and the Company recorded additional stock-based compensation of $0.2 million during the year ended December 31, 2015.
Liability for Early Exercise of Stock Options
The 2008 Plan allows for the granting of options that may be exercised before the options have vested. In December 2014, an executive officer early exercised 103,252 stock options. In February 2015, an executive officer early exercised 13,422 stock options. On early exercise, the awards became subject to a restricted stock agreement. The shares of restricted stock granted upon early exercise of the options are subject to the same vesting provisions as the original stock option awards. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment or services, at the price paid by the purchaser, and are not deemed to be issued for accounting purposes until those related shares vest. The liability is reclassified into common stock and additional paid-in capital as the shares vest and the repurchase right lapses. Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $23,000 as a current liability as of December 31, 2015 and $0.1 million as a long term liability as of December 31, 2014 from the early exercise in the accompanying consolidated balance sheet. As of December 31, 2015 and 2014, 23,554 and 103,252 shares held by the employees remain unvested and subject to repurchase.
2015 Employee Stock Purchase Plan
The Company adopted the 2015 Employee Stock Purchase Plan (ESPP) and initially reserved 700,000 shares of common stock as of its effective date of July 15, 2015. The number of shares initially reserved for issuance under the ESPP will increase automatically on January 1 for nine years from the first offering date by the number of shares equal to 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31. The aggregate number of shares issued over the term of the 2015 Employee Stock Purchase Plan will not exceed 3,400,000 shares of common stock.
Under the ESPP, participants are offered the options to purchase shares of Company’s common stock at a 15% discount during a series of discrete offering periods, subject to any plan limitations. The ESPP will not become effective until such time as the Compensation Committee determines in the future, and as of December 31, 2015, the initial offering periods had not commenced. As of December 31, 2015, no shares of common stock have been issued to employees participating in the ESPP and 700,000 shares were available for issuance under the ESPP.
| 12. | Income Taxes |
The geographical breakdown of loss before provision for income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| United States |
$ | (53,376 | ) | $ | (23,872 | ) | $ | (6,832 | ) | |||
| International |
171 | 1 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Loss before provision for income taxes |
$ | (53,205 | ) | $ | (23,871 | ) | $ | (6,832 | ) | |||
|
|
|
|
|
|
|
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
The components of the provision for income taxes are as follows:
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Current tax provision: |
||||||||||||
| Federal |
$ | — | $ | — | $ | — | ||||||
| State |
— | — | — | |||||||||
| Foreign |
59 | 4 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total current tax provision |
59 | 4 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Deferred tax provision (benefit): |
||||||||||||
| Foreign |
(4 | ) | (2 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Total deferred tax provision (benefit) |
$ | (4 | ) | $ | (2 | ) | $ | — | ||||
|
|
|
|
|
|
|
|||||||
| Total provision for income taxes |
$ | 55 | $ | 2 | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
The reconciliation between income taxes computed at the federal statutory income tax rate and the provision for income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Federal statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
| Effect of: |
||||||||||||
| Change in valuation allowance |
(27.8 | ) | (37.3 | ) | (23.1 | ) | ||||||
| Federal tax credit |
2.6 | 1.8 | 1.8 | |||||||||
| State income tax benefit, net of federal benefit |
2.9 | 4.0 | 2.2 | |||||||||
| Conversion costs |
— | — | (13.5 | ) | ||||||||
| Change in fair value of preferred stock warrants |
(11.1 | ) | (2.0 | ) | (1.1 | ) | ||||||
| Other permanent items |
(0.7 | ) | (0.5 | ) | (0.3 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total provision for income taxes |
(0.1 | )% | — | % | — | % | ||||||
|
|
|
|
|
|
|
|||||||
The components of the deferred tax assets are as follows:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets: |
||||||||
| Net operating loss carryforwards |
$ | 21,482 | $ | 8,941 | ||||
| Research and development credits |
1,923 | 649 | ||||||
| License fee |
3,413 | 3,880 | ||||||
| Other |
1,649 | 177 | ||||||
|
|
|
|
|
|||||
| Gross deferred tax assets |
28,467 | 13,647 | ||||||
| Valuation allowance |
(28,448 | ) | (13,645 | ) | ||||
|
|
|
|
|
|||||
| Total deferred tax assets |
19 | 2 | ||||||
|
|
|
|
|
|||||
| Deferred tax liabilities: |
||||||||
| Other |
10 | — | ||||||
|
|
|
|
|
|||||
| Total deferred tax liabilities |
10 | — | ||||||
|
|
|
|
|
|||||
| Total net deferred tax assets |
$ | 9 | $ | 2 | ||||
|
|
|
|
|
|||||
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes historical operating performance and the recorded cumulative net losses in prior fiscal periods, the Company recorded a full valuation allowance of $28.4 million and $13.6 million against the net U.S. deferred tax assets as of December 31, 2015 and 2014. The net valuation allowance increased by $14.8 million for the year ended December 31, 2015 and increased by $8.9 million for the year ended December 31, 2014.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Based on the weight of all evidence, including a history of operating losses and the Company’s ability to generate future taxable income to realize the assets, management has determined that it is more likely than not that the deferred tax assets will not be realized.
As a result of certain realization requirements of Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation, the table of deferred tax assets and liabilities above does not include certain deferred tax assets as of December 31, 2015, that arose directly from tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by $0.1 million if and when such deferred tax assets are ultimately realized.
As of December 31, 2015, the Company has federal operating loss carryforwards of $57.0 million and state operating loss carryforwards of $54.5 million, expiring in years ranging from 2021 to 2035. The Company also had net tax credit carryforwards of $1.9 million available to reduce future tax liabilities, if any, for federal tax purposes. The net tax credit carryforwards begin to expire in 2031.
Future utilization of the Company’s net operating loss and research and development credits carryforwards to offset future taxable income are subject to an annual limitation, pursuant to Internal Revenue Code (IRC) Sections 382 and 383, as a result of ownership changes that have occurred.
Uncertain Tax Positions
The activity related to the gross amount of unrecognized tax benefits is as follows:
| Year Ended December 31 |
||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Beginning balance |
$ | 162 | $ | 58 | ||||
| Increases based on tax positions related to prior years |
— | — | ||||||
| Decreases based on tax positions related to prior years |
(77 | ) | — | |||||
| Increases based on tax positions in current year |
147 | 104 | ||||||
| Settlement |
— | — | ||||||
| Lapse of statute of limitations |
— | — | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | 232 | $ | 162 | ||||
|
|
|
|
|
|||||
If recognized, gross unrecognized tax benefits would not have an impact on the Company’s effective tax rate due to the Company’s full valuation allowance position. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of gross unrecognized tax benefits will change significantly in the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying consolidated statement of operations. Accrued interest and penalties, if
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PRONAI THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
applicable, are included in accrued liabilities in the consolidated balance sheet. For the years ended December 31, 2015 and 2014, the Company did not recognize any accrued interest and penalties.
The Company is subject to taxation in the United States, various states, Canada and Australia. Tax years 2012 through 2014 remain open to examination by the United States and various state jurisdictions. The 2014 tax year remains open to examination in Canada. The Company is not currently under examination by the Internal Revenue Service or any other jurisdiction for any year.
| 13. | Selected Quarterly Financial Data (Unaudited) |
The following tables present certain selected unaudited consolidated quarterly financial information for each of the eight quarters ended December 31, 2015. This consolidated quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments necessary to state fairly the information for the periods presented. The Selected consolidated quarterly financial results from operations for the years ended December 31, 2015 and 2014 are set forth therein. Net loss per share for all periods presented has been retroactively adjusted to reflect the 7.45-for-1 reverse stock split effected on June 29, 2015.
| Fiscal 2015 Quarter Ended | ||||||||||||||||
| March 31, 2015 |
June 30, 2015 |
September 30, 2015 |
December 31, 2015 |
|||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
| Operating expenses |
$ | 6,737 | $ | 6,612 | $ | 11,033 | $ | 11,446 | ||||||||
| Net loss |
$ | (8,048 | ) | $ | (15,249 | ) | $ | (18,505 | ) | $ | (11,458 | ) | ||||
| Net loss attributable to common stockholders |
$ | (19,053 | ) | $ | (156,129 | ) | $ | (266,544 | ) | $ | (11,458 | ) | ||||
| Basic and diluted net loss per share |
$ | (12.83 | ) | $ | (104.10 | ) | $ | (11.03 | ) | $ | (0.38 | ) | ||||
| Fiscal 2014 Quarter Ended | ||||||||||||||||
| March 31, 2014 |
June 30, 2014 |
September 30, 2014 |
December 31, 2014 |
|||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
| Operating expenses |
$ | 2,320 | $ | 13,508 | $ | 3,480 | $ | 3,270 | ||||||||
| Net loss |
$ | (2,467 | ) | $ | (13,824 | ) | $ | (3,961 | ) | $ | (3,621 | ) | ||||
| Net loss attributable to common stockholders |
$ | (4,909 | ) | $ | (50,657 | ) | $ | (9,552 | ) | $ | (8,604 | ) | ||||
| Basic and diluted net loss per share |
$ | (5.77 | ) | $ | (55.04 | ) | $ | (9.37 | ) | $ | (5.85 | ) | ||||
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| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2015, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2015, the design and operation of our disclosure controls and procedures were effective at a reasonable assurance level.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
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PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
| Item 11. | Executive Compensation. |
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
| Item 14. | Principal Accounting Fees and Services. |
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
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PART IV
| Item 15. | Exhibits, Consolidated Financial Statement Schedules. |
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
See Index to Consolidated Financial Statements at Item 8 herein.
2. Consolidated Financial Statement Schedules
No consolidated financial statement schedules are provided because the information called for is not required or is shown either in the consolidated financial statements or notes thereto.
3. Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 3, 2016
| PRONAI THERAPEUTICS, INC. | ||
| By: |
/s/ Nick Glover | |
| Nick Glover | ||
| President and Chief Executive Officer | ||
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Nick Glover and Sukhi Jagpal, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ Nick Glover Nick Glover |
President, Chief Executive Officer and Director (Principal Executive Officer) | March 3, 2016 | ||
| /s/ Sukhi Jagpal Sukhi Jagpal |
Chief Financial Officer (Principal Accounting and Financial Officer) | March 3, 2016 | ||
| /s/ Donald Parfet Donald Parfet |
Chairman of the Board | March 3, 2016 | ||
| /s/ Albert Cha Albert Cha |
Director | March 3, 2016 | ||
| /s/ Nicole Onetto Nicole Onetto |
Director | March 3, 2016 | ||
| /s/ Robert Pelzer Robert Pelzer |
Director | March 3, 2016 | ||
| /s/ James Topper James Topper |
Director | March 3, 2016 | ||
| /s/ Alvin Vitangcol Alvin Vitangcol |
Director | March 3, 2016 | ||
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EXHIBIT INDEX
| Incorporated by reference | ||||||||||||||||||||
| Exhibit Number |
Description of Document |
Form | File No. | Exhibit | Filing Date | Filed Herewith |
||||||||||||||
| 3.1 | Restated Certificate of Incorporation. | S-1 | 333-204921 | 3.2 | June 12, 2015 | |||||||||||||||
| 3.2 | Restated Bylaws. | S-1 | 333-204921 | 3.4 | June 12, 2015 | |||||||||||||||
| 4.1 | Form of Common Stock Certificate. | S-1 | 333-204921 | 4.1 | July 6, 2015 | |||||||||||||||
| 4.2 | Third Amended and Restated Investor Rights Agreement, dated April 17, 2014, by and among the Registrant and certain of its stockholders, as amended. | S-1 | 333-204921 | 4.2 | June 12, 2015 | |||||||||||||||
| 10.1* | Form of Indemnification Agreement. | S-1 | 333-204921 | 10.1 | June 12, 2015 | |||||||||||||||
| 10.2* | 2008 Stock Plan, as amended, and forms of award agreements thereunder. | S-1 | 333-204921 | 10.2 | June 12, 2015 | |||||||||||||||
| 10.3* | 2015 Equity Incentive Plan and forms of award agreements thereunder. | S-1 | 333-204921 | 10.3 | July 6, 2015 | |||||||||||||||
| 10.4* | 2015 Employee Stock Purchase Plan. | S-1 | 333-204921 | 10.4 | July 6, 2015 | |||||||||||||||
| 10.5* | Form of Executive Officer Employment Agreement. | S-1 | 333-204921 | 10.5 | July 6, 2015 | |||||||||||||||
| 10.6* | Form of Employment Agreement between the Registrant and Nick Glover. | S-1 | 333-204921 | 10.7 | July 6, 2015 | |||||||||||||||
| 10.7 | Lease, dated March 9, 2012, by and between the Registrant and Michigan Life Science and Innovation Center, LLC, as amended. | S-1 | 333-204921 | 10.9 | June 12, 2015 | |||||||||||||||
| 10.8 | Lease, dated February 4, 2015, by and between the Registrant and Thompson Creek Metals Company Inc. | S-1 | 333-204921 | 10.10 | June 12, 2015 | |||||||||||||||
| 10.9 | Standard Office Lease, dated January 8, 2016, by and between the Registrant and Fund VIII 1000 Marina, LLC. | X | ||||||||||||||||||
| 10.10+ | Exclusive License Amendment, dated March 13, 2012, by and between the Registrant and Marina Biotech, Inc. | S-1 | 333-204921 | 10.11 | June 12, 2015 | |||||||||||||||
| 10.11+ | Second License Amendment and Consent to Termination, dated April 14, 2014, by and between the Registrant and Marina Biotech, Inc. | S-1 | 333-204921 | 10.12 | June 12, 2015 | |||||||||||||||
| 10.12+ | License Payment Agreement, dated April 14, 2014, by and between the Registrant and Novosom Verwaltungs GmbH. | S-1 | 333-204921 | 10.13 | June 12, 2015 | |||||||||||||||
| 21.1 | Subsidiaries of the Registrant. | S-1 | 333-204921 | 21.1 | June 12, 2015 | |||||||||||||||
Table of Contents
| Incorporated by reference | ||||||||||||||
| Exhibit Number |
Description of Document |
Form | File No. | Exhibit | Filing Date | Filed Herewith |
||||||||
| 23.1 | Consent of independent registered public accounting firm. | X | ||||||||||||
| 24.1 | Power of Attorney. Reference is made to the signature page hereto. | X | ||||||||||||
| 31.1 | Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
| 31.2 | Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
| 32.1** | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
| 32.2** | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
| 101.INS | XBRL Instance Document. | X | ||||||||||||
| 101.SCH | XBRL Schema Linkbase Document. | X | ||||||||||||
| 101.CAL | XBRL Calculation Linkbase Document. | X | ||||||||||||
| 101.DEF | XBRL Definition Linkbase Document. | X | ||||||||||||
| 101.EXT | XBRL Extension label Linkbase Document. | X | ||||||||||||
| 101.PRE | XBRL Presentation Linkbase Document. | X | ||||||||||||
| * | Executive compensation plan or agreement. |
| ** | This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
| + | Confidential treatment has been granted for portions of this exhibit under Rule 406 promulgated under the Securities Act. The Registrant has omitted and filed separately with the SEC the confidential portions of this exhibit. |
