atnx-10k_20191231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to          

Commission file number 001-38112

 

ATHENEX, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

43-1985966

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

1001 Main Street, Suite 600

Buffalo, NY

 

 

United States

 

14203

(Address of principal executive offices)

 

(Zip Code)

 

(716) 427-2950

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol

Name of Exchange on Which Registered

Common Stock, par value $0.001 per share

ATNX

The Nasdaq Global Select Market

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

 

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

The aggregate market value of common equity held by non-affiliates of the registrant calculated based on the closing price of $19.80 of the registrant’s common stock as reported on The Nasdaq Global Market on June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $867 million.

As of February 28, 2020, 81,627,093 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2020 annual meeting of stockholders currently scheduled to be held June 5, 2020 are incorporated by reference into Part III hereof.

 

 


 

 

 

 

 

 

Page

PART I.

 

 

 

2

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

52

Item 1B.

 

Unresolved Staff Comments

 

102

Item 2.

 

Properties

 

102

Item 3.

 

Legal Proceedings

 

103

Item 4.

 

Mine Safety Disclosures

 

103

 

 

 

 

 

PART II.

 

 

 

104

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

104

Item 6.

 

Selected Financial Data

 

105

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

107

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

124

Item 8.

 

Financial Statements and Supplementary Data

 

124

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

136

Item 9A.

 

Controls and Procedures

 

136

Item 9B.

 

Other Information

 

138

 

 

 

 

 

PART III.

 

 

 

139

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

139

Item 11.

 

Executive Compensation

 

139

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

139

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

139

Item 14.

 

Principal Accounting Fees and Services

 

139

 

 

 

 

 

PART IV.

 

 

 

140

Item 15.

 

Exhibits and Financial Statement Schedules

 

140

Item 16.

 

Form 10-K Summary

 

141

 

 

Signatures

 

147

 

 

 

 

 


 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Annual Report. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, clinical development activities, the timing and results of clinical trials and potential regulatory approval and commercialization of product candidates. In some cases, forward-looking statements may be identified by terminology such as “believe,” “may,” “will,” “should,” “predict,” “goal,” “strategy,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “indicate,” “could,” “would,” “project,” “plan,” “expect,” “seek,” “strategy,” “mission” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section 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, 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 for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

Unless the context indicates otherwise, as used in this Annual Report, the terms “Athenex,” “the Company,” “we,” “us,” and “our” refer to Athenex, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.  

 

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PART I

Item 1.

Business.

Overview

Athenex, Inc., together with its subsidiaries (“Athenex,” the “Company,” “we,” “us” or “our”), is a global biopharmaceutical company dedicated to becoming a leader in the discovery, development and commercialization of next generation drugs for the treatment of cancer. Our mission is to improve the lives of cancer patients by creating more effective, safer and tolerable treatments. We are organized around three platforms, an Oncology Innovation Platform, a Commercial Platform and a Global Supply Chain Platform. Our current clinical pipeline in the Oncology Innovation Platform is derived from four different proprietary technologies: (1) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor, (2) Src Kinase inhibition, (3) T-cell Receptor-engineered T-cells (“TCR-T”), and (4) arginine deprivation therapy. We have assembled a strong and experienced leadership team and have established global operations across the pharmaceutical value chain to execute our goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes.

Significant Developments in the Oncology Innovation Platform

Orascovery Platform

Our Orascovery technology is based on the novel P-gp pump inhibitor molecule, encequidar, formerly known as HM30181A. Oral administration of encequidar in combination with established chemotherapy agents such as paclitaxel, irinotecan, docetaxel, topotecan and eribulin has been shown in our clinical studies to date to improve the absorption of these agents by blocking the P-gp pump in the intestinal wall. Oral paclitaxel and encequidar, formerly known as Oraxol (“Oral Paclitaxel”) is our lead asset in our Orascovery platform. We are also advancing the following clinical candidates for the treatment of solid tumors on this platform: oral irinotecan and encequidar, formerly known as Oratecan (“Oral Irinotecan”); oral docetaxel and encequidar, formerly known as Oradoxel (“Oral Docetaxel”); oral topotecan and encequidar, formerly known as Oratopo (“Oral Topotecan”); and oral eribulin and encequidar, formerly known as Eribulin ORA (“Oral Eribulin”).

Significant developments in our Orascovery platform in 2019 include the following:

We announced topline results in August 2019 for our Phase 3 study of Oral Paclitaxel for the treatment of metastatic breast cancer and presented further data of the Phase 3 study in an oral presentation at the San Antonio Breast Cancer Symposium (“2019 SABCS”) in December 2019. Results demonstrated that the study met its primary endpoint showing statistically significant improvement in overall response rate for Oral Paclitaxel compared to intravenous (“IV”) paclitaxel and neuropathy was less frequent with Oral Paclitaxel compared to IV paclitaxel. In addition, ongoing analysis of secondary endpoints of survival showed a strong trend favoring Oral Paclitaxel, in particular, Oral Paclitaxel showed a statistically significant improvement in overall survival compared to IV paclitaxel in the prespecified modified intention-to-treat population. We intend to establish Oral Paclitaxel as the treatment of choice for patients receiving chemotherapy for metastatic breast cancer and intend to file a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) in 2020 to secure regulatory approval of Oral Paclitaxel for metastatic breast cancer, although we can provide no assurance that we will be successful in obtaining the FDA’s approval to commercialize Oral Paclitaxel.

We are also evaluating Oral Paclitaxel in the treatment of angiosarcoma and in combination with other therapies, including anti-VEGF and anti-PD-1 therapies. In May 2019, we announced early and complete response data from a clinical study of Oral Paclitaxel in cutaneous angiosarcoma, and the study is continuing to enroll. Oral Paclitaxel also received Orphan Designations from the European Commission for the treatment of soft tissue sarcoma, in October 2019. We are also studying Oral Paclitaxel with ramucirumab in a Phase 1b study in patients with advanced gastric cancer who failed previous chemotherapy. We presented results from the study at the European Society for Medical Oncology (“ESMO”) Congress 2019 on the first three patient cohorts and are continuing to advance in the expansion phase of the study. Our Phase 1/2 study of Oral Paclitaxel in combination with pembrolizumab, or Keytruda, in patients with advanced solid malignancies is ongoing.

In addition to the progress made with respect to our lead product candidate, we continued to advance our other Orascovery product candidates in 2019. We presented preliminary results with respect to our Phase 1 study of Oral Irinotecan at the American Society of Clinical Oncology annual meeting in May 2019 (“2019 ASCO Annual Meeting”). We are planning Phase 2 studies for both Oral Irinotecan and Oral Docetaxel. A Phase 1 study of Oral Eribulin in patients with solid tumors is ongoing.

Src Kinase Inhibition Platform

Our Src Kinase inhibition platform technology is based on novel small molecule compounds that have multiple mechanisms of action, including the inhibition of the activity of Src Kinase and the inhibition of tubulin polymerization, which may limit the growth or proliferation of cancerous cells. We believe the combination of these mechanisms of action provides a broader range of anti-cancer activity compared to either mechanism of action alone. Our lead product candidate on our Src Kinase inhibition platform is

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tirbanibulin (formerly known as KX2-391 and KX-01) ointment, which we are advancing for the treatment of actinic keratosis (“AK”) as well as psoriasis and skin cancer. Our other clinical candidates and their indications in this platform include tirbanibulin oral for solid and liquid tumors and KX2-361, formerly known as KX-02, for brain cancers, such as glioblastoma multiforme (“GBM”).

Significant developments in our Src Kinase inhibition platform in 2019 include the following:

We completed two Phase 3 studies for tirbanibulin ointment in the treatment of AK and presented topline results from the two Phase 3 studies in a late breaker session at the 2019 annual meeting of the American Academy of Dermatology (“2019 AAD Annual Meeting”). The results showed that both studies achieved their primary endpoint with 44% and 54% of patients in studies KX01-AK-003 and KX01-AK-004, respectively, achieving 100% AK lesion clearance at Day 57 within the face or scalp treatment areas. There was a statistically significant greater clearance rate in favor of tirbanibulin ointment 1% versus vehicle in each study and in each of the predefined patient subgroups. Safety results showed that tirbanibulin ointment was well tolerated. In October 2019, we announced a progress update for tirbanibulin ointment in the treatment of AK from our partner Almirall, S.A. (“Almirall”), with whom we are collaborating for the development and commercialization of tirbanibulin in the U.S. and Europe. We also announced the completion of pre-NDA consultation with the FDA.

We submitted an NDA to the FDA for tirbanibulin ointment as a topical treatment for AK. We are seeking approval of tirbanibulin ointment pursuant to Section 505(b)(1) of the Federal Food, Drug and Cosmetic Act (“FDCA”). We can provide no assurances the FDA will accept the NDA submission for filing, or if accepted, that our NDA will ultimately receive approval.

A study of tirbanibulin ointment 1% in psoriasis once daily for five days in a Phase 1 clinical trial sponsored by our partner, PharmaEssentia Corp. (“PharmaEssentia”), is ongoing.

With respect to KX2-361, our other Src Kinase inhibition platform product candidate, we announced in September 2019 that our partner, Guangzhou Xiangxue Pharmaceutical Co., Ltd. (“Xiangxue”), initiated a Phase 1 study in China of KX2-361 oral treating advanced malignant solid tumors on the strength of encouraging results in preclinical studies.

Other Platforms

The other technologies in our Oncology Innovation Platform are our TCR-T immunotherapy technology under which we are advancing TCR affinity-enhancing specific T-cell (TAEST) therapy with our first drug candidate, TAEST16001, and our arginine deprivation therapy technology under which we are advancing PT01, also known as Pegtomarginase. With respect to these technologies, we announced several developments in 2019.

In March 2019, we announced that our partner, Xiangxue Life Sciences Limited (“XLifeSc”), a wholly-owned subsidiary of Xiangxue, received notice of allowance from the China National Medical Product Administration (“NMPA”) of its Investigational New Drug (“IND”) application to initiate registration related clinical studies in China of TAEST therapy in patients with solid tumors that are HLA-A*02:01 positive and NY-ESO-1 positive. The cancer immunotherapy product, named TAEST 16001, is an autologous cell-based therapy utilizing the TAEST technology to enhance affinity against the HLA-A*02:01 restricted antigen NY-ESO-1. We are currently preparing the US IND for TAEST 16001.

In June 2019, the FDA allowed our IND application for the clinical investigation of PT01 for the treatment of patients with advanced malignancies. The compound targets cancer growth and survival by removing the supply of arginine to cancers that have a disrupted urea cycle. Also in June 2019 we presented preclinical study results of PT01 in a poster session at the 2019 ASCO Annual Meeting. The biologic agent demonstrated high enzymatic activity, predictable pharmacokinetic-pharmacodynamic profiles, and cytotoxicity in vitro. Mouse xenograft models showed good tumor growth inhibition activity at tolerable doses with only transient weight loss during therapy. We are currently planning a Phase 1 clinical study for PT01.

Other Business Developments

Other significant business developments for the Company in 2019 include:

 

In December 2019, we entered into an exclusive license agreement with Xiangxue (the “2019 Xiangxue License”), pursuant to which we granted Xiangxue exclusive rights to develop and commercialize Oral Paclitaxel and Oral Irinotecan, tirbanibulin ointment in China, Hong Kong and Macau, for certain indications, including oncological and AK indications, as well as other indications that we and Xiangxue mutually agree to pursue under the 2019 Xiangxue License. The 2019 Xiangxue License contains an option, exercisable by Xiangxue, for two additional product candidates which may be included under the 2019 Xiangxue License. For additional information, please see “Business—License and Collaboration Agreements—Xiangxue License Agreements.”

 

Also in December 2019, we closed a private placement equity offering in which M. Kingdon Offshore Master Fund, LP as lead investor together with a number of institutional investors purchased 3,945,750 million shares of common stock at a price of $15.30 per share. The aggregate gross proceeds received by us were $60.4 million and net proceeds were approximately $59.4 million.

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In September 2019, we announced that we had completed construction of the new active pharmaceutical ingredient (“API”) facility in Chongqing, China. The 440,000-square-foot facility is preparing to commence operations in the second half of 2020. The construction of the facility is part of our strategy for vertical integration in order to capture value across the supply chain. Once operational, the facility is expected to expand our API production capabilities to further support our global clinical development needs and ensure the supply of API for commercial launches. The new API facility was constructed in accordance with an agreement with Chongqing Maliu Riverside Development & Investment Co., Ltd. (CQ). For additional information, please see “Business—Strategic Public-Private Partnerships—China Partnership.”

 

In June 2019, we announced the strategic expansion of our presence in Europe and Latin America to grow our global clinical research and development capacity by establishing offices in Manchester to support our ongoing clinical studies in the U.K. and to continue expanding our research and development capabilities in the region. We also entered into a definitive agreement to acquire certain assets of CIDAL Limited (“CIDAL”). The transactions contemplated by the asset purchase agreement closed in October 2019. CIDAL is a contract research organization (CRO) with headquarters in Guatemala and operations in various countries in Latin America. CIDAL has provided CRO services and support for our Phase 3 study of Oral Paclitaxel for metastatic breast cancer.  

 

In May 2019, we suspended operations at our existing API plant in Chongqing, based on the concerns raised by the Department of Emergency Management of Chongqing (the “DEMC”) related to the location of our plant. As a result of suspending these operations, we are currently unable to produce commercial batches of API, which has impacted our revenue. We can provide no assurances of when, if at all, commercial production of API will resume at the plant. Although we currently are producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials.

 

Also in May 2019, we closed a private placement equity offering in which three institutional investors, Perceptive Advisors LLC (“Perceptive”), Avoro Capital Advisors (formerly known as venBio Select Advisor) and OrbiMed Partners Master Fund Limited and The Biotech Growth Trust PLC (combined known as OrbiMed) purchased 10,000,000 shares of common stock at a price of $10.00 per share. The aggregate gross proceeds received by us were $100 million and net proceeds were approximately $99.8 million.

Overview of Our Business Organization Commercial Platform U.S. Sales & Marketing Chicago, IL Global Partnering Chicago, IL Oncology Innovation Platform Research Labs Buffalo, NY Clinical  Development Buffalo, NY Hong Kong, HK Cranford, NJ Chongqing, China Taipei, Taiwan Buffalo, NY Cranford, NJ Chongqing, China Taipei, Taiwan Regulatory Global Supply Chain Platform cGMP High  Potency API  Facilities Chongqing, China Under Development cGMP  Manufacturing Clarence, NY Formulation Labs Buffalo

Mission and Strategy

We have a comprehensive and experienced leadership team who have come together under one organization to achieve our mission of improving the lives of cancer patients by creating more effective, safer and tolerable treatments. We have the goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes. To achieve our goal, we have established the following strategic priorities:

Obtain regulatory approval and prepare to commercialize Oral Paclitaxel and tirbanibulin ointment - We intend to file an NDA with the FDA in 2020 to secure regulatory approval of Oral Paclitaxel for metastatic breast cancer, and if approved, to establish it as the chemotherapy of choice for patients with metastatic breast cancer. If approved by the FDA, we plan to commercialize Oral Paclitaxel in the U.S. by leveraging our commercialization capabilities in the U.S., and also plan to evaluate marketing options outside of the U.S., including using our internal resources, partnering with others, or out-licensing the product. We submitted an NDA to the FDA for tirbanibulin ointment for the treatment of AK and we can provide no assurances the FDA will accept the NDA submission for filing, or if accepted, that our NDA will ultimately receive approval. Our strategic partner Almirall will employ its expertise to support the development of tirbanibulin ointment, if approved, in Europe and also to commercialize the product in the U.S. and European countries, including Russia.

Rapidly and concurrently advance our other clinical programs and product candidates - We intend to pursue the fastest feasible pathways to approval of our existing clinical product pipeline. For example, in our Orascovery platform, we plan to continue to advance our studies evaluating Oral Paclitaxel in other indications as well as those of our other Orascovery product candidates. In addition, we continue to make progress with the development of the clinical program for tirbanibulin. We will also evaluate options to enter into partnerships and collaborations where appropriate.

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Enhance and expand our other new technology platforms -  In 2018, Axis Therapeutics Limited, our majority owned subsidiary, commenced the development of TCR-T through an in-license from XLifeSc. We are currently preparing the U.S. IND application for TAEST16001. In 2018, we commenced development of arginine deprivation therapy, based on our pegylated genetically modified human arginase technology which is in-licensed from Avalon Polytom (HK) Limited (“Polytom”). In June 2019, the FDA allowed the IND application for the clinical investigation of PT01 for the treatment of patients with advanced malignancies and we are currently planning a Phase 1 clinical study. In addition to our existing portfolio of clinical candidates, our research and development teams are evaluating additional applications of our novel technology platforms. For example, our novel Cytochrome P450 (“CYP”) and P-gp dual inhibitor technology could expand the breadth of application for our oral enabling platform.

Leverage our global research and development operations to continue development of an oncology-focused product pipeline - We have research and development operations in the U.S., U.K., China, Taiwan and Latin America that are focused on advancing our existing product pipeline and on developing additional novel clinical drug product candidates in order to replenish our development pipeline as other candidates mature. We have developed a core competency in oral absorption technology and apply that skill to develop new methods of drug discovery and to identify new pipeline candidates, such as our Oral Eribulin IND program. In addition, we may leverage our research and development capabilities to partner with others for the development of new pipeline candidates. We believe that we can create substantial long-term value by pursuing a robust, ongoing research and development program.

Continue to build an integrated business model that leverages our proprietary commercial platform, supply chain and cGMP manufacturing capabilities - We built our U.S. commercial operation in preparation for future FDA approvals of our proprietary product candidates. We believe that our experienced product commercialization team can build an infrastructure that leverages both our global facilities and collaborative relationships to achieve global distribution of any products approved by the FDA and regulatory authorities in other jurisdictions, as applicable, in a timely and cost-effective manner. Our strategic partner Almirall will employ its expertise to support the development in Europe and also to commercialize tirbanibulin in the U.S. and European countries, including Russia. In addition, we intend to utilize current Good Manufacturing Practices (“cGMP”) manufacturing facilities from our public/private partnerships in both the China and U.S. markets as a mechanism to build-out our supply chain around the world.

Selectively pursue strategic M&A, licensing or partnership opportunities to complement our existing operations - We continue to pursue strategic acquisitions, licensing and partnership opportunities. We will continue to target opportunities that will complement our existing portfolio and operations to create value for stockholders and support our business strategy and mission.

Operating Segments

We have organized our business model into three platforms: (1) our Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) our Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) our Global Supply Chain Platform, dedicated to providing a stable and efficient supply of APIs for our clinical and commercial efforts. Our global operations across the three segments as of December 31, 2019 are shown below:

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* Includes Guatemala City, Guatemala and Buenos Aires, Argentina

Our Oncology Innovation Platform

Within our Oncology Innovation Platform, we have four different technologies: (1) Orascovery, based on a P-glycoprotein (P-gp) pump inhibitor, (2) Src Kinase inhibition, (3) TCR-T immunotherapy, and (4) arginine deprivation therapy. The following table summarizes the clinical development status of our current pipeline of product candidates in our Oncology Innovation Platform as of December 31, 2019:

 

May 2019  Program Drug Candidate Indication Pre-clinical Phase 1 Phase 2 Phase 3 Orascovery  (P-gp inhibitor [ encequidar ] +  chemoRx agents )  Oral paclitaxel + encequidar Metastatic breast cancer Angiosarcoma Oral paclitaxel + encequidar w/  pembrolizumab Solid tumors Oral paclitaxel + encequidar w/  ramucirumab Gastric cancer Oral irinotecan + encequidar Solid tumors Oral docetaxel + encequidar Solid tumors  Oral topotecan + encequidar Solid tumors Oral  eribulin + encequidar Solid tumors  Dual Inhibition ATNX - 04 (CYP / P - gp) Multiple tumors Src Kinase Inhibition Tirbanibulin ointment Actinic keratosis Psoriasis Skin Cancers Tirbanibulin  oral Liquid tumors Ovarian cancer KX2 - 361 Glioblastoma TCR - T Immunotherapy TAEST16001 Multiple tumors Arginine Deprivation Therapy PT01 ( Pegtomarginase) Multiple tumors

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In addition to our existing portfolio of clinical candidates, our research and development teams are evaluating additional applications of our novel technology platforms. For example, our novel CYP and P-gp dual inhibitor technology could expand the breadth of application for our oral enabling platform.

We collaborate with a number of biotechnology pharmaceutical companies, including Hanmi Pharmaceutical Co., Ltd. (“Hanmi”), Eli Lilly and Company (“Lilly”), Almirall, Xiangxue, ZenRx Limited (“ZenRx”) and PharmaEssentia, to support the development of our clinical pipeline globally and explore additional indications. For additional information, please see “Business—License and Collaboration Agreements”.

Our Orascovery Platform

Our Orascovery platform technology is based on the novel oral P-gp pump inhibitor molecule, encequidar. The P-gp pump is a plasma membrane efflux protein on the cells which forms a localized drug transport system. In the intestine it limits the oral absorption of a large number of drugs, including widely used P-gp substrate cancer chemotherapeutic drugs such as paclitaxel, irinotecan, docetaxel and eribulin, thus restricting their current dosing to IV administration. We are developing a series of orally administered chemotherapeutic agents using our proprietary P-gp pump inhibitor delivery system. For our lead Orascovery product candidate, Oral Paclitaxel, sequential co-administration of encequidar and oral paclitaxel is designed to facilitate oral absorption of paclitaxel and achieve therapeutic blood levels. Studies conducted to date have indicated that oral administration of paclitaxel in combination with encequidar has lower peak concentrations of paclitaxel in the blood which we believe will result in lower rates of peripheral neuropathy. In addition, oral administration eliminates infusion-related reactions related to IV administration of paclitaxel, which could improve patient tolerability and allow for longer dosing durations to improve efficacy. The technology is designed to enable the oral administration of many cancer agents, which currently are only given by IV due to poor oral absorption. Oral administration of certain cytotoxic chemotherapies can potentially overcome several key challenges in IV administration of those drugs. In addition to Oral Paclitaxel, we are advancing Oral Irinotecan, Oral Docetaxel, Oral Topotecan and Oral Eribulin as other clinical candidates on this platform.

Chemotherapeutic agents such as paclitaxel, irinotecan, docetaxel and eribulin are clinically proven and widely used. However, these agents have historically been limited to IV administration, which can result in adverse events which are due, in part, to high peak blood concentration levels of the chemotherapeutic drugs. In addition, for some agents, there are infusion-related reactions caused, in part, by solubilizing dilution agents used to facilitate IV administration. A cancer patient’s inability to tolerate IV chemotherapies may limit the long-term efficacy of IV anti-cancer therapies. We believe our pipeline products, which leverages our proprietary delivery system will expand the use of these chemotherapeutic agents. We believe that our Orascovery platform overcomes the current challenges of chemotherapeutic agents by allowing more frequent dosing over longer periods of time, which we believe will lead to better tolerability and allow for higher total dosage and longer time exposure to the chemotherapeutic agent.

We have historically observed that a novel technology applied to a traditional chemotherapy agent may achieve pricing premiums if data demonstrates superior efficacy and tolerability as compared to current standards of care. We believe our pipeline products will be able to capture a large untapped market and achieve significantly larger market potential than the revenue generated by existing formulations, due to (1) increasing adoption of oral therapy due to patient preference, (2) the potential for improved response rates through greater exposure (based on our predictive model), (3) the potential for improved tolerability (based on our predictive model) and (4) the possibility to expand the market through combination therapies with immuno-oncology therapy and oral targeted treatments.

Encequidar—Our Novel P-gp Pump Inhibitor

The novel P-gp inhibition molecule, encequidar (formerly known as HM30181A), belongs to a new class of P-gp inhibitor that has high potency, specificity and local action at the intestine cells, and forms the cornerstone of our Orascovery platform. Encequidar is designed to enable the administration of oral dosing formats of paclitaxel, irinotecan, docetaxel, topotecan and eribulin, each of which is currently under clinical development. The feature that distinguishes encequidar from other small molecule P-gp inhibitors is that this novel compound is specific to P-gp, does not interfere significantly with the activity of other related transporters and does not significantly inhibit cytochrome 3A4, an enzyme that is important in the metabolism of commonly used drugs. Encequidar is minimally absorbed following oral administration. This localizes P-gp inhibitory activity in the gastrointestinal tract, limiting the potential for interaction at additional systemic sites where P-gp is expressed. Based on the results of our encequidar clinical development programs to date, inhibition of gastrointestinal P-gp has been shown to improve the absorption of chemotherapy agents to achieve systemic exposure profiles which enhance the efficacy and may reduce toxicity of these established chemotherapeutic agents. Based on its pharmacological profile and low systemic absorption, encequidar is not expected to cause drug-to-drug interactions other than enhancement of oral absorption of medications which are P-gp substrates.

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Mechanism of Action - P-gp Inhibition

Encequidar is a P-gp pump inhibitor and an oral absorption enhancer that prevents the P-gp pump-mediated efflux of chemotherapy agents back into the gastrointestinal tract. P-gp plays an important physiologic role as a transporter protein at multiple barrier sites, including the gastrointestinal tract and the blood brain barrier (“BBB”). The demonstrated role of P-gp in limiting intestinal absorption of multiple cancer chemotherapies highlighted the potential utility of a small molecule P-gp inhibitor for enabling oral administration of P-gp substrate drugs otherwise restricted to IV dosing. Encequidar was originally identified by Hanmi as a highly selective and potent P-gp inhibitor, capable of elevating the oral bioavailability of paclitaxel from less than 5% (in the absence of encequidar) to 41% in rats. As shown in the below chart, encequidar is distinct from previously developed small molecule P-gp inhibitors because it is designed to not be systemically absorbed in the gastrointestinal tract following oral administration with only small amounts detectable in the plasma even after relatively high doses. This unique property makes encequidar a good candidate for co-administration with P-gp substrate drugs, such as paclitaxel, which normally exhibit poor oral bioavailability and are therefore limited to IV routes of dosing.

 

 

 

 

 

Preclinical Development

In preclinical studies, encequidar demonstrated poor absorption from the gastrointestinal tract following oral administration in rats and dogs. The safety and tolerability of encequidar has been characterized in a panel of safety and toxicology studies. Single dose oral toxicology, repeat dose oral toxicology in multiple species for several durations, a standard battery of genotoxicity assays, and a full developmental and reproductive toxicity assessment have been performed.

Multiple preclinical studies have evaluated the in vivo pharmacologic effect of encequidar, generally in the context of a co-administered P-gp substrate such as paclitaxel. In each case, co-administration of encequidar significantly enhanced systemic exposure of the co-administered substrate. In murine models of human cancer, oral co-administration of encequidar with paclitaxel or docetaxel conferred anti-tumor activity comparable to the IV dosing route.

Clinical Development

In three separate pharmacokinetics (“PK”) studies of encequidar conducted in healthy subjects, a total of 81 individuals received single oral doses of encequidar tablets in single doses of up to 900 mg, and 30 individuals were enrolled in multiple dose cohorts with treatment groups receiving encequidar tablets ranging from 60 to 360 mg per day for five days. Encequidar was well-tolerated, with mostly mild gastrointestinal adverse effects. No serious adverse events (“SAEs”) were reported. At the current clinical dose of 15 mg given once daily for up to five days, the Cmax in systemic circulation is low.

Our Orascovery Product Candidates

Oral Paclitaxel and Encequidar

Overview

IV paclitaxel is used widely for the treatment of breast, ovarian and lung cancer. Due to its poor solubility, paclitaxel is usually dissolved in ethanol and polyethoxylated castor oil, which is a major cause of IV hypersensitivity reactions. As a result, premedication

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with high dose steroids and antihistamines is required to minimize these adverse reactions. Additional common toxicities associated with IV administration of paclitaxel include neuropathy, neutropenia and alopecia. These side effects limit dose intensification and often require reduction in dosing.

As a single agent or in combination, IV paclitaxel is administered at a variety of doses and regimens that are approved for therapeutic use for various paclitaxel indications, including 175 and 135 mg/m2 administered as both three and twenty-four hour infusions, respectively, once every three weeks. Over the past number of years, there has been great interest in dose dense therapy with paclitaxel, switching from the conventional every three-week regimen to administering the drug once weekly. Dose dense treatment with paclitaxel has various advantages that can lead to an increase in the overall exposure, as measured by area under the concentration-time curve (AUC), over a treatment cycle, while balancing the adverse event profile normally observed, such as neutropenia. This concept is consistent with the hypothesis of maintaining sufficient drug concentrations above a threshold target value for an extended duration.

Oral Paclitaxel is our lead drug candidate in our Orascovery Platform and is initially being developed for the treatment of patients with metastatic breast cancer. We are preparing for NDA submission in 2020, having conducted a pivotal, randomized Phase 3 study of Oral Paclitaxel monotherapy versus IV paclitaxel monotherapy which met its primary endpoint of confirmed response rate in patients receiving Oral Paclitaxel. We are also evaluating Oral Paclitaxel (1) as a monotherapy treatment for patients with cutaneous angiosarcoma, (2) in combination with ramucirumab for patients with advanced gastric cancers, and (3) in combination with pembrolizumab for advanced solid malignancies including urothelial, gastric or gastroesophageal or non-small cell lung cancer. We are working to develop Oral Paclitaxel for additional indications and are exploring potential combinations with immuno-oncology agents.

Overview of Clinical Findings

As of December 31, 2019, five Phase 1, 2 and 3 clinical studies of Oral Paclitaxel have been completed. Oral Paclitaxel (15 mg of encequidar plus 205 mg/m2 of oral paclitaxel) administration has shown to result in overall exposure in the blood approximately equivalent to that achieved with 80 mg/m2 of IV paclitaxel. We believe oral dosing of paclitaxel can provide a longer drug exposure over a target drug concentration than IV paclitaxel, which may translate to better clinical response. We also observed in a Phase 3 clinical study of 402 metastatic breast cancer patients that Oral Paclitaxel had statistically significantly higher confirmed tumor response rate with lower incidence and severity of neuropathy compared to IV paclitaxel. See “—Clinical Development by Indication—Metastatic Breast Cancer—Phase 3 Study” for a further discussion of the results of the Phase 3 study. We are continuing to collect data on the secondary endpoints of progression free and overall survival.

We have completed a randomized two-way crossover study comparing the exposure of paclitaxel after administration of IV paclitaxel 80 mg/m2 and Oral Paclitaxel 205mg/m2 daily over three consecutive days. Intensive PK sampling was conducted over each treatment period. Statistical analysis demonstrated that the exposure to paclitaxel, based on the AUC was similar between the two treatments. For Oral Paclitaxel, the AUC was 5033 ng.hr/mL and Cmax was 397 ng/mL. For IV paclitaxel, the AUC was 5595 ng.hr/mL with a Cmax of 2732 ng/mL. The geometric ratio and 90% confidence intervals for AUC was 89.5% (83.9-95.5) falling within the guidelines for equivalence.  

Clinical Development by Indication

Metastatic Breast Cancer

Phase 2 Study

We conducted a Phase 2 study of Oral Paclitaxel in patients with metastatic breast cancer who failed previous chemotherapies in Taiwan. The study was a multicenter, single-arm, open-label, PK study of Oral Paclitaxel administered orally for 3 consecutive days weekly for up to 16 weeks. We presented encouraging data on the efficacy of Oral Paclitaxel in the treatment of metastatic breast cancer patients obtained from this Phase 2 study at the 2019 ASCO Annual Meeting. Results from 28 patients were reported and 26 of these patients had failed multiple previous chemotherapies.  Study results on tumor response showed that there were 11 (42.3%) partial response, 12 (46.2%) stable disease and 3 (11.5%) progressive disease in 26 evaluable patients. Three patients had treatment-related SAEs (grade ≥3 neutropenia) and all patients recovered completely. PK results showed that the AUC of Oral Paclitaxel at week-1 was reproducible at week-4 (3050 to 3594 ng-hr/mL). The results indicated that weekly Oral Paclitaxel can achieve paclitaxel exposure similar to that of weekly IV paclitaxel (80mg/m2) reported previously and that Oral Paclitaxel appears effective in the treatment of advanced breast cancer patients.

Phase 3 Study

Our Phase 3 study of Oral Paclitaxel in patients with metastatic breast cancer was a randomized, active-controlled clinical trial comparing Oral Paclitaxel monotherapy against IV paclitaxel monotherapy. The trial randomized subjects in a 2:1 ratio to Oral Paclitaxel, and was designed to compare the safety and efficacy of Oral Paclitaxel with IV paclitaxel. The primary endpoint was overall response rate (“ORR”) (confirmed by scans at two consecutive timepoints) as assessed by RECIST v1.1 criteria, a generally

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accepted method for assessing tumor response. Blinded assessments of tumor response were made by independent radiologists. In December 2019, we presented the data from our Phase 3 study of Oral Paclitaxel in patients with metastatic breast cancer at the 2019 SABCS.

A total of 402 metastatic breast cancer patients were enrolled (Oral Paclitaxel =265 vs. IV paclitaxel=137), which represented the intent-to-treat (“ITT”) population. Patient demographics were balanced. The prespecified modified ITT (“mITT”) population comprised 360 patients (Oral Paclitaxel =235 vs. IV paclitaxel=125), which includes patients who received at least 7 doses of Oral Paclitaxel (the majority of one cycle of treatment) or one dose of IV paclitaxel and excludes patients that did not have tumors that could be evaluated by the central radiologist at baseline.  The study was designed with 360 evaluable patients (prespecified mITT population) and was statistically powered to detect a difference of 15% in confirmed ORR at p=0.045 with 80% power at the final analysis.  

In the final analysis of the primary endpoint of the study, Oral Paclitaxel (205 mg/m2 per day 3 days/week) showed a statistically significant improvement in ORR at 40.4% compared to IV paclitaxel (175 mg/m2 once every 3 weeks) at 25.6%, a difference of 14.8% (p=0.005) favoring Oral Paclitaxel, based on prespecified mITT analysis. Based on ITT analysis, Oral Paclitaxel showed a statistically significant improvement in ORR over IV paclitaxel, with 35.8% ORR, compared to 23.4% for IV paclitaxel, a difference of 12.4% (p=0.011).

The study results showed that approximately one-third of confirmed responders who received Oral Paclitaxel experienced a confirmed tumor response for more than 200 days. Ongoing analysis as of July 25, 2019 showed the median durations of response were 39.0 weeks for the patients who received Oral Paclitaxel, compared to 30.1 weeks for those who received IV paclitaxel.

Secondary endpoints in the study include progression free survival (“PFS”) and overall survival (“OS”). Ongoing analysis as of July 25, 2019 showed a strong trend favoring Oral Paclitaxel. The study results showed a median PFS of 9.3 months for Oral Paclitaxel compared to 8.3 months for IV paclitaxel (p=0.077, hazard ratio=0.760) in the prespecified mITT and ITT populations.  Ongoing analysis as of July 25, 2019 of OS in the prespecified mITT population favored Oral Paclitaxel over IV paclitaxel, by an additional 11 months, with a median survival of 27.9 months compared to 16.9 months, respectively (p=0.035, hazard ratio=0.684). In the ITT population, the median OS was 27.7 months for the Oral Paclitaxel group compared to 16.9 months for the IV paclitaxel group (p=0.114).

In the study, the Oral Paclitaxel group had lower incidence and severity of neuropathy compared to IV paclitaxel: 57% of IV paclitaxel patients experienced neuropathy (all grades) versus 17% of Oral Paclitaxel patients, with grade 2 or above neuropathy observed in 31.1% of IV paclitaxel patients versus 7.6% of Oral Paclitaxel patients.  Grade 3 neuropathy was observed in 8% of IV paclitaxel patients versus 1% of Oral Paclitaxel patients. The results also showed lower incidence of alopecia compared to IV paclitaxel, with 28.8% of the Oral Paclitaxel group experiencing alopecia versus 48.2% of the IV paclitaxel group in treatment-emergent adverse events of interest. For other treatment-emergent adverse events of interest, there was a higher incidence of neutropenia with CTCAE grade ≥ 3 (29.9% vs. 28.1%; with Grade 4 14.8% vs 8.9%) and gastro-intestinal side effects, such as diarrhea with CTCAE grade ≥ 3 (5.3% vs. 1.5%) and vomiting or nausea with CTCAE grade ≥ 3 (6.8% vs. 0.7%), in the Oral Paclitaxel group as compared to the IV paclitaxel group.

Based on the Phase 3 study data, we are preparing an NDA submission to the FDA. In the event we receive regulatory approval from the FDA, we plan to pursue additional oncology indications where we believe taxanes will remain a foundational treatment and to continue exploring combination therapies.

Angiosarcoma

          We are also developing Oral Paclitaxel for the treatment of angiosarcoma. Angiosarcomas are rare, aggressive and heterogeneous tumors accounting for approximately 2% of all soft tissue sarcomas. Only limited treatment options for advanced disease exist with poor outcomes and low 5-year survival rates. In April 2018, FDA granted an Orphan Drug Designation for Oral Paclitaxel for the treatment of angiosarcoma. In addition, in October 2019, we announced the receipt of Orphan Designations from the European Commission for Oral Paclitaxel for the treatment of soft tissue sarcoma.

           In the angiosarcoma xenograft model in preclinical studies, oral dosing of Oral Paclitaxel resulted in dose-dependent tumor growth inhibition and subsequent increased survival. Tumor histology revealed that Oral Paclitaxel greatly reduced the formation of cavernous blood-filled neoplastic vessels characteristic of angiosarcoma.

           We commenced a study of Oral Paclitaxel monotherapy in the treatment of angiosarcoma in December 2018. Preliminary data announced in May 2019 showed promising early clinical responses in the first 7 patients who received at least six weeks treatment, the timepoint for the first response assessment. All 7 patients showed significant and visible reduction of the cutaneous angiosarcoma within one or two weeks of treatment. Three patients had complete responses based on RECIST v1.1 criteria, with two complete responses occurring by six weeks of treatment. The study is ongoing.

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Gastric Cancer

Monotherapy Study

Hanmi conducted a Phase 1/2 gastric cancer study in South Korea. The study was an open-label Phase 2, single-arm clinical trial of Oral Paclitaxel for second line treatment of advanced gastric cancer patients. This trial included dosing Oral Paclitaxel at 150 mg/m2 per day, for two consecutive days per week, for 3 weeks out of a 4-week cycle. A total of forty-six subjects enrolled in this study. Oral Paclitaxel was well-tolerated by gastric cancer patients. The results of the Phase 2 portion of this clinical trial showed treatment with Oral Paclitaxel resulted in a median overall survival of 10.7 months, which compared favorably to historical data for ramucirumab, the only FDA approved drug for second line treatment of gastric cancer, which reported 5.2 months of overall survival in a randomized, placebo controlled Phase 3 clinical study.

Study in Combination with Ramucirumab

We are conducting an MTD (maximum tolerated dose) study of Oral Paclitaxel in combination with ramucirumab in patients with advanced gastric cancer in the U.S. and Asia through a clinical trial collaboration with Lilly. We commenced a study of up to 32 patients in a dose escalation part of the trial with a dose expansion of Oral Paclitaxel in combination with a fixed dose of ramucirumab in July 2017.

         The objective of our ongoing Phase 1 study is to define the MTD of daily Oral Paclitaxel dosing, starting at 200 mg/m2 for three days in a week, in combination with ramucirumab, which will be dosed every other week. In the first part of the study, 17 subjects were enrolled at doses ranging from 200-300 mg/m2. Dose limiting toxicities (“DLTs”) included febrile neutropenia, grade 4 neutropenia and grade 3 gastric hemorrhage. The most frequently reported adverse events were vomiting (70%), neutropenia (59%). Decreased appetite (53%), nausea (24%) and mucositis (24%).

Other Indications

We have an ongoing Phase 1/2 clinical study to assess the safety, tolerability and activity of Oral Paclitaxel in combination with an anti-programmed cell death protein 1 (anti-PD1) antibody (pembrolizumab) in patients with advanced solid malignancies. Pembrolizumab is a checkpoint inhibitor approved by the FDA. The study is being conducted in patients with urothelial, gastric or gastroesophageal or non-small cell lung cancer that have previously failed treatment with a checkpoint inhibitor. Dose escalation of paclitaxel administered as a flat dose of 270 mg per day for 3 to 5 days per week for 2 of 3 weeks is ongoing.

Overview of Safety Observations in Oral Paclitaxel Studies

Studies to date have indicated that Oral Paclitaxel has a manageable adverse event profile in cancer patients when given without premedication for hypersensitivity type reactions, in contrast to the premedication requirement for IV paclitaxel, namely steroids and antihistamines. No new toxicity, apart from those typically observed with paclitaxel, was observed. Infusion related reactions, including hypersensitivity type reactions, have not been observed in patients administered Oral Paclitaxel. Additionally, severe toxicities associated with IV administration of paclitaxel, including neuropathy and alopecia, are at a lower incidence and severity for Oral Paclitaxel.

As of December 31, 2019, approximately 13% of patients treated in clinical studies with Oral Paclitaxel experienced SAEs that were considered to be related to the study treatment. The most common were neutropenia in approximately 4% of patients and febrile neutropenia in approximately 3% of patients; pneumonia in approximately 2% of patients; and sepsis, septic shock, dehydration and vomiting in approximately 1% of patients; gastroenteritis, anemia, diarrhea, mucositis, gastrointestinal bleeding and nausea each in less than one percent of patients. Serious treatment-related infections other than sepsis, septic shock or pneumonia were reported in approximately 1% of patients. Approximately 1% of patients with serious infections had other concurrent treatment-related SAEs.

Oral Irinotecan and Encequidar

Overview

Irinotecan is a potent anticancer drug that is marketed under the trade name Camptosar. Irinotecan is mainly administered to patients with metastatic colorectal cancer (mCRC), but also in glioblastoma, lung, ovarian, cervical, upper gastrointestinal cancer and pancreatic cancer. The active metabolite of Irinotecan, SN38, is a type 1 DNA topoisomerase inhibitor with potent antitumor activity and wide antitumor spectrum. We believe that oral administration of irinotecan will more efficiently generate SN38, resulting in the potential for better clinical response with reduced toxicity. Oral Irinotecan is intended for oral administration for the treatment of irinotecan-responsive cancers.

Key Preclinical and Early Clinical Studies

Hanmi conducted three Oral Irinotecan Phase 1 studies, two as monotherapy, and one in combination with capecitabine, in a total of fifty-four Korean patients with advanced solid tumors. The tumor types in these clinical trials were mostly gastric and

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colorectal cancers. MTD for Oral Irinotecan as monotherapy was defined as 100 mg/m2 per 3-week cycle, either given as once daily for five consecutive days for one week (20 mg/day), or two weeks (10 mg/day), of a 3-week cycle. Anti-cancer activity was observed in these studies.

Completed Clinical Studies

In a Phase 1 MTD study (HM-OTE-101), Oral Irinotecan was administered to twenty patients with advanced solid tumors on Days 1 to 5 during a 21-day cycle. Irinotecan daily doses ranged from 5 to 30 mg/m2, and encequidar doses were 60 mg. MTD was identified at 20 mg/m2 per day for five days of a 3-week cycle. Adverse events were typical of events seen with IV irinotecan. Common adverse events included nausea (90%), diarrhea (65%), and vomiting (55%). Four subjects had dose-limiting toxicity (“DLT”) events (diarrhea, neutropenia, nausea/vomiting and AST elevation). At the MTD, the SN-38 Cmax on Days 1 and 5 were 9 and 12 ng/mL. Estimated SN-38 cycle exposure (AUC) was 373 ng*hr/mL. In this study Oral Irinotecan monotherapy in patients with advanced solid tumors resulted in a disease control rate of 44%.

In a Phase 1 MTD study (HM-OTE-102), Oral Irinotecan was given once daily for five consecutive days each week for two weeks during a 21-day cycle to thirteen patients with advanced solid tumors. Irinotecan doses ranged from 5 to 20 mg/m2. MTD was identified at 10 mg/m2 per day. Adverse events were similar to those observed following IV irinotecan and included diarrhea, nausea, and anorexia. Five subjects had a DLT in Cycle 1. The disease control rate was 50% or above at each of the dose levels tested.

In a Phase 1 MTD study (HM-OTE-103) Oral Irinotecan in combination with capecitabine. Oral Irinotecan was administered to twenty-one patients on Days 1 to 5 during a 21-day cycle. Irinotecan doses ranged from 10 to 20 mg/m2 per day, with encequidar (15 mg) in combination with capecitabine at 800-1000 mg/m2 for fourteen days. The MTD of Oral Irinotecan, in combination with capecitabine at the 1000 mg/m2 dose was identified at 15 mg/m2 per day of Oral Irinotecan. In this study of combination of Oral Irinotecan with capecitabine in patients with a variety of solid tumors (mostly GI cancers), 10 out of 18 (56%) patients had either stable disease or a partial response.

Current and Planned Clinical Development

A Phase 1 MTD study is being conducted and is currently ongoing. This study is to determine the MTD of Oral Irinotecan, when given once every three weeks, in subjects with advanced malignancies. We have identified a dosing regimen suitable for Phase 2, and Phase 2 studies are being planned.

Overview of Safety Observations in Oral Irinotecan Studies

In our Oral Irinotecan clinical studies to date, the SAEs observed that were deemed to be possibly, likely or definitely related to Oral Irinotecan include diarrhea, rash, gastrointestinal hemorrhage, anorexia, vomiting, nausea, enteritis, asthenia, neutropenia, increased alanine aminotransferase and increased aspartate aminotransferase. As the clinical development program is still in its early stages, we do not yet have meaningful safety, including adverse event, statistics to report.

Oral Docetaxel and Encequidar

Overview

Docetaxel is a potent anticancer drug within the class of antimicrotubule agents that is marketed under the trade name Taxotere. Docetaxel is mainly administered to patients with breast, lung, prostate, gastric and head and neck cancers. Docetaxel has potent activity with a wide antitumor spectrum. As a single-agent therapy, docetaxel is administered by IV infusion over one hour at a dose of 60-100 mg/m2 for breast cancer and 75 mg/m2 for non-small cell lung cancer given once every three weeks. Docetaxel is also used in combination with doxorubicin and cyclophosphamide (adjuvant treatment of breast cancer), cisplatin (lung), topical fluorouracil (head and neck and gastric) and prednisone (prostate). Docetaxel causes dose-limiting toxicities that are more common at higher doses. One significant dose-limiting toxicity is fluid retention that we believe is associated (at least in part) with the IV formulation that contains polysorbate 80, a nonionic and emulsifier frequently used in food and cosmetics. Hypersensitivity reactions may also be attributable to IV administration of polysorbate 80. We believe that Oral Docetaxel will provide therapeutic exposures of the drug and result in the potential for better clinical response with reduced toxicity.

Preclinical Activity and Evaluation

The potential effectiveness of encequidar to inhibit the P-gp pump’s ability to transport docetaxel out of cells was first observed in vitro by an increase in the potency of docetaxel by 1,788-fold in a uterine sarcoma cell line. In rat oral PK studies, the plasma concentrations of docetaxel versus time showed a significant increase upon co-administration of encequidar with docetaxel. In this experiment, docetaxel was formulated in the currently proposed clinical formulation. Oral Docetaxel was also tested in preclinical human prostate cancer murine model and overall, Oral Docetaxel was more active than docetaxel given orally without a P-gp inhibitor and was similar to the efficacy of IV docetaxel administration. At a dose of 25 mg/kg docetaxel with encequidar a percent of tumor control of 4.8% was achieved which is comparable to the standard 10 mg/kg IV dosing regimen of docetaxel (2.9%). Without P-gp pump inhibition by encequidar, oral administration of docetaxel demonstrated less inhibition of tumor growth, with a percent of control of 50.5%, consistent with reduced absorption of oral docetaxel when dosed without encequidar.

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Current and Planned Clinical Studies

A Phase 1 dose escalation U.S. trial for Oral Docetaxel in patients with various solid tumors with a starting dose of 35 mg/m2 given once every three weeks is ongoing. Another Phase 1 study to identify the absolute bioavailability of Oral Docetaxel in prostate cancer patients is ongoing in New Zealand. Based on Phase 1 results so far, we believe that we can achieve similar exposure to IV docetaxel with one or two days of dosing every three weeks. Phase 2 studies are being planned.

In line with our expectations for Oral Paclitaxel, we expect that the overall safety profile of Oral Docetaxel will be similar to that of IV docetaxel, with differences related to the route of administration. As with Oral Paclitaxel, premedication has not been required and hypersensitivity type reactions have not been observed. No treatment-related SAEs have been reported.

Oral Topotecan and Encequidar

Topotecan is a potent anticancer drug under the class of camptothecins that is marketed under the trade name Hycamtin. Topotecan is mainly administered to patients with lung, ovarian and cervical cancer. Clinical activity has been shown in combination with the taxanes, docetaxel and paclitaxel, for the treatment of a variety of tumors, including lung cancer. Topotecan causes dose-limiting toxicities. These side effects mainly include neutropenia, late onset diarrhea and nausea and vomiting.

In rat oral PK studies, the plasma concentrations of topotecan versus time demonstrated a significant increase upon co-administration with encequidar. This effect is evident when topotecan is formulated in saline or the marketed product, Hycamtin. In preclinical murine models with human tumor transplants, including ovarian cancer, oral topotecan in combination with encequidar was more active than oral topotecan alone following administration at a dose of topotecan 1 mg/kg once daily for five days per week.

A Phase 1 clinical trial in advanced malignancies for Oral Topotecan is ongoing.

In line with our expectations for Oral Paclitaxel, we expect that the overall safety profile of Oral Topotecan will be similar to that of IV topotecan, with differences related to the route of administration. As with Oral Paclitaxel, premedication has not been required and hypersensitivity type reactions have not been observed. No treatment-related SAEs have been reported.

Oral Eribulin and Encequidar

Eribulin is an anticancer intravenous drug marketed by Eisai Company under the trade name Halaven. It is used to treat certain patients with breast cancer and liposarcoma. Eribulin is a synthetic derivative of the natural product Halichondrin B. The potent anticancer effects of this agent come primarily from its unique means of targeting microtubule dynamics, a process critical to cell proliferation. 

The nonclinical demonstration of a favorable PK profile, with lowered peak plasma concentration and longer duration of the drug within the desired plasma concentration range, suggests the potential for an efficacy and safety profile for Oral Eribulin, similar to what we have observed with Oral Paclitaxel and other Orascovery products. In addition, we have developed a novel and efficient synthetic route for the synthesis of eribulin API which we believe will support our development of this candidate. In October 2018, the FDA allowed our IND application for Oral Eribulin. A Phase 1 study commenced in 2019 to assess the safety, MTD, DLT and absolute bioavailability of Oral Eribulin (encequidar and oral eribulin) in subjects with solid tumors. As the clinical development program is still in its early stages, we do not yet have meaningful safety, including adverse event, statistics to report.

Our Src Kinase Inhibition Platform

Our Src Kinase inhibition platform technology is based on novel small molecule compounds that have multiple mechanisms of action, including the inhibition of the activity of Src Kinase and the inhibition of tubulin polymerization, which may limit the growth or proliferation of cancerous cells. We believe the combination of these mechanisms of action provides a broader range of anti-cancer activity compared to either mechanism of action alone. Our lead product candidate on our Src Kinase inhibition platform is tirbanibulin ointment, which we are advancing for the treatment of AK as well as psoriasis and skin cancer. Our other clinical candidates and their indications in this platform include tirbanibulin oral for solid and liquid tumors; and KX2-361 for brain cancers, such as GBM.

Tirbanibulin

Mechanism of Action

Tirbanibulin, formerly known as KX2-391 or KX-01, is a novel small molecule that we discovered and developed, which demonstrates at least two mechanisms of action (“MOAs”) relevant to the potential control of cancer and hyper-proliferative disorders: (1) Src tyrosine kinase inhibition (non-ATP competitive) and (2) tubulin polymerization inhibition. Src Kinase, a tyrosine kinase protein involved in regulating cell growth, is strongly implicated in metastasis. Inhibiting Src Kinase may limit the growth or proliferation of cancerous cell types. Src plays a role in regulating multiple aspects of tumor development, growth and metastases, and

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its inhibition limits such tumor activity. Interfering with tubulin polymerization activity is a clinically validated mechanism for treating cancer. For both targets tirbanibulin binds at a novel binding site. Taken together, these two MOAs may provide for a potent means of treating cancer and other hyper-proliferative disorders.

 Tirbanibulin Ointment for Topical Indications

Tirbanibulin is a compound developed under our Src Kinase inhibition platform that, as a free base, has advantageous physical properties for topical ointment formulations.

We are evaluating topical tirbanibulin ointment in the clinic for AK in the U.S. The most common cause of AK is exposure to ultraviolet radiation from the sun or tanning beds. This exposure can lead to oncogenic changes, such as inactivation of p53, and consequential hyper-proliferation of mutated keratinocytes. If left untreated, 10-15% of AKs can progress to skin cancer. tirbanibulin inhibits the proliferation of keratinocytes and up-regulates p53 so its utility in clinically treating AK is of interest. We commenced two Phase 3 studies of tirbanibulin ointment for the treatment of AK in September 2017, which completed patient enrollment in February 2018. In July 2018, both Phase 3 studies achieved their primary endpoint of 100% clearance AK lesions at Day 57 within the face or scalp treatment areas.

An additional indication for psoriasis is being evaluated in a Phase 1 clinical trial led by our out-licensing partner PharmaEssentia Corp. Since AK can lead to skin cancers, we are now investigating the initiation of a study in that basal cell carcinoma. These applications provide additional potential therapeutic utilities for tirbanibulin ointment and could represent significant potential market expansions beyond AK.

Actinic Keratosis

Phase 1 and 2 Studies

A Phase 1 study of tirbanibulin ointment 1% for treatment of AK was conducted by us in the U.S. In the study, 50% (four of eight subjects) had complete response (100% clearance) with tirbanibulin ointment 1% being applied for five consecutive days on a 25 cm2 area of the forearm. The results indicated very good local and systemic tolerability, with a complete response achieved without severe adverse skin reactions in some patients.

We completed a Phase 2a clinical study in the U.S. of tirbanibulin ointment 1% for treatment of AK on the face and scalp. The primary objective was to evaluate the complete response rate, which was defined as 100% clearance of such patient’s AK at Day 57 after treatment. Additionally, we sought to further investigate the findings from the Phase 1 proof of concept study indicating that tirbanibulin ointment has a favorable side effect profile. Data from 168 patients in the Phase 2 study shows that the tirbanibulin dosing regimen used in this study is well-tolerated, with mostly mild and transient local skin reactions (LSRs). The five-day treatment cohort achieved a higher overall 100% clearance of AK lesions at Day 57 (i.e. eight weeks after the initiation of treatment) than the three-day treatment cohort (43% vs. 32%). In the five-day treatment cohort, 23 of 44 subjects (52%) with AK on face and thirteen of forty (33%) on scalp attained 100% clearance at Day 57. LSRs were mild and mostly erythema, flaking or scaling, crusting and swelling with the majority of the LSRs scores of < 2 and resolved rapidly. Only one subject scored 4 in erythema and flaking or scaling, which both resolved rapidly without concomitant medications. Erosions or ulcers and vesicles or pustules were observed in only 15% and 5% of subjects, respectively. No subjects scored ≥ 3 in erosions or ulcers or vesicles or pustules. Treatment related adverse effects were few and predominately mild transient application site pruritus, tenderness and pain. There were no treatment related SAEs or discontinuations. Plasma levels of tirbanibulin were low to undetectable.

Phase 3 Studies

We completed two Phase 3 studies of tirbanibulin ointment for treatment of AK on the face and scalp. These two double-blind, randomized, vehicle-controlled, parallel group, multi-center studies (KX01-AK-003 and KX01-AK-004) were designed to support the registration of tirbanibulin ointment as field therapy for AK of the face or scalp.  The studies enrolled a total of 702 patients across 62 sites in the U.S. Tirbanibulin ointment 1% or vehicle (randomized 1:1) was self-administered to 25 cm2 of the face or scalp encompassing 4-8 typical AK lesions, once daily for 5 consecutive days. In July 2018, both Phase 3 studies achieved their primary endpoint of 100% clearance of AK lesions at Day 57 within the face or scalp treatment areas, with each study achieving statistical significance (p<0.0001). In March 2019, we presented topline results from the two Phase 3 studies of tirbanibulin ointment in the treatment of AK in a late breaker session at the 2019 AAD Annual Meeting. Results showed that 44% and 54% of patients in studies KX01-AK-003 and KX01-AK-004, respectively, achieved 100% AK lesion clearance at Day 57 (see Table 1). Compliance rate in these two studies was greater than 99%. There was a statistically significantly higher 100% clearance rate in favor of the tirbanibulin ointment versus the vehicle for each study and in each of the predefined patient subgroups. Safety results showed that tirbanibulin ointment was well tolerated. Treatment-related adverse events occurred in 11-20% of patients receiving tirbanibulin ointment in the two Phase 3 studies. These events were generally transient mild to moderate application site symptoms, such as pruritus or pain. In the KX01-AK-003 study, the most common (occurring in >2% subjects in either group) adverse events in the vehicle and tirbanibulin ointment groups up to the Day 57 efficacy and tolerability endpoint were application site pruritus (5% and 7% subjects, respectively) and application site pain (3% and 6% subjects, respectively). In the KX01-AK-004 study, the most common

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(occurring in >2% subjects in either group) adverse events in the vehicle and tirbanibulin ointment groups were application site pruritus (8% and 11% subjects, respectively) and application site pain (3% and 13% subjects, respectively). There were no SAEs or early discontinuations that were considered related to the study drug. Local skin reactions were mostly mild to moderate and transient erythema, flaking/scaling and crusting. A 12-month recurrence follow-up period was subsequently completed. Only patients showing complete clearance at the primary evaluation endpoint on day 57 were followed quarterly in this period until recurrence was observed in the treatment area. Recurrence rates were defined as proportion of patients in whom at least one treated or new AK lesion was identified in the treated area throughout one year follow up. The recurrence rates at 12 months were 74% and 72% in the pivotal trials KX01-AK-003 and KX01-AK-004, respectively. As of July 22, 2019, there were no SAEs that were considered to be related to the study treatment.

Table 1: Study Results of Tirbanibulin Ointment 1% in the Field Treatment of AK, as presented at the 2019 AAD Annual Meeting in March 2019

 

Study

KX01-AK-003

KX01-AK-004

% of Subjects in the Intent-To-Treat Population

(Number of Subjects)

Tirbanibulin

N=175

Vehicle

N=176

p-value

Tirbanibulin

N=178

Vehicle

N=173

p-value

100% AK Clearance on Day 57

44% (N=77)

5% (N=8)

<0.0001a

54% (N=97)

13% (N=22)

<0.0001a

Face

Scalp

50%

30%

6%

2%

<0.0001

<0.0001

61%

41%

14%

11%

<0.0001

0.0003

≥75% AK Clearance on Day 57

68%

16%

<0.0001a

76%

20%

<0.0001a

Note:

a = p-value calculated based on Cochran-Mantel-Haenszel (CMH)

We believe that this product, if approved by regulatory authorities, could have a major impact in the medical treatment of AK. We submitted an NDA to the FDA for tirbanibulin ointment as a topical treatment for AK. We are seeking approval of tirbanibulin ointment pursuant to Section 505(b)(1) of the FDCA. The FDA may not accept the NDA submission for filing, or if accepted, our NDA may not receive approval. We cannot accurately predict when or if the NDA will be accepted for filing by the FDA. On March 2, 2020, our partner Almirall announced that the European Medicines Agency (EMA) accepted the filing of a European marketing authorization for tirbanibulin ointment for the treatment of AK.

Psoriasis

To date, tirbanibulin ointment has shown encouraging preclinical results in treating psoriasis, a chronic autoimmune skin disease that speeds up the growth cycle of skin cells. Psoriasis causes localized or generalized patches of red papules and plaques, covered with white or silver scales and itching. A Phase 1 clinical trial of tirbanibulin ointment 1% in psoriasis, performed by our partner PharmaEssentia, is ongoing.

We licensed the rights to tirbanibulin to PharmaEssentia for psoriasis and non-malignant skin conditions (excluding AK) in Mainland China, Taiwan, Hong Kong, Macau, Singapore and Malaysia, as well as the rights for AK in Taiwan. PharmaEssentia is sponsoring this Phase I clinical trial in psoriasis. For additional information, please see “Business—License and Collaboration Agreements—PharmaEssentia License Agreements.”

Tirbanibulin Oral

We are also developing tirbanibulin in an oral formulation. Tirbanibulin oral has been evaluated in several early dose finding studies against both solid and liquid tumors. Initial clinical results indicate activity against both solid and liquid tumors in patients in clinical studies. We are planning further probe studies to focus our evaluation in certain of those indications where activity was observed.

A Phase 1 clinical trial in solid tumor patients identified the MTD for continuous twice daily oral dosing at 40 mg/dose, with a favorable PK profile, and indications of activity. In this trial, 44 patients were enrolled in nine dose cohorts. The drug was well-tolerated and the DLTs were mainly elevated levels of AST and ALT, which were readily reversible. Eleven patients had stable disease for at least four months, including patients with ovarian, carcinoid, papillary thyroid, prostate, pancreas and head and neck

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cancer. An ovarian cancer patient, who failed 9 prior therapies, had stable disease for 16 months and a tirbanibulin oral induced a large decrease in the ovarian cancer CA-125 biomarker, which correlates well with clinical response.

A subsequent Phase 2a clinical study in men with bone-metastatic castration-resistant prostate cancer using the twice daily 40 mg/dose was conducted. Thirty-one patients were dosed with tirbanibulin oral at 40 mg/dose twice daily until disease progression or unacceptable toxicity. The primary endpoint was 24-week progression-free survival. The designated clinical endpoints were not met with tirbanibulin oral at this dose.

A Phase 1b clinical study in elderly acute myeloid leukemia (AML) patients was conducted using once daily dosing. The doses tested were 40, 80, 120, 140 and 160 mg of tirbanibulin. Twenty-four patients were recruited with a median age of 76 years (range 63 to 86 years). Most had been previously treated for their disease, generally with decitabine or azacitidine. The MTD is estimated to be 105 mg of tirbanibulin oral daily.

We are planning further studies to focus our upcoming evaluation efforts in targeted indications. Hanmi, who we partnered with on tirbanibulin oral up until August 2018, completed a Phase 1b clinical trial in South Korea, combining escalating continuous once daily doses of tirbanibulin with a standard IV paclitaxel treatment of 80 mg/m2. The study enrolled 23 subjects who received doses of tirbanibulin ranging from 20 through 80 mg/day. The five most frequently reported treatment-related adverse events were neutrophil count decreased (83%), myalgia (61%), decreased appetite (57%), anemia (53%) and peripheral sensory neuropathy (48%).  Six subjects experienced serious adverse events: febrile neutropenia (n=3), and pneumonia, sepsis, fever, and neutrophil count decreased (n=1 each).  There were no CR or PR in this heavily treated Phase 1 population, but 12 subjects had a best response of stable disease.  Dose expansion in part 2 of the study was not conducted.

In our tirbanibulin oral clinical studies to date, the SAEs observed that were deemed to be possibly, likely or definitely related to tirbanibulin oral include allergic reaction, bacteremia, rash, syncope, tremor, dermatitis, neutropenic fever, hyponatremia, hypersensitivity, failure to thrive, lower extremity edema, mucositis, neutropenia, pancytopenia, thrombocytopenia, seizure and motor vehicle accident, embolic stroke, pneumonitis, fever, acute kidney injury, increased bilirubin and albumin levels, decreased blood platelet count, abdominal pain, arm pain, pyrexia, rigors, tachypenea, oxygen desaturation, pneumonia, anemia, elevated ALT and AST, dehydration and leukopenia. As the clinical development program is still in its early stages, we do not yet have meaningful safety, including adverse event, statistics to report.

KX2-361

KX2-361, formerly known as KX-02, is the second compound we developed using our Src Kinase inhibition platform technology. KX2-361 is a closely related structural analog of tirbanibulin and has been observed to have a similar dual MOA of inhibition of Src activity and microtubule polymerization. Although KX2-361 is an analog of tirbanibulin, it has significantly different physical properties. These properties are designed to allow KX2-361 freely cross the BBB such that the concentration in the brain is equal to, or somewhat greater than, that in the plasma. This trait is uncommon for oncology drugs and highlights the potential for KX-361 as a novel therapy for unmet medical needs such as brain cancers, including GBM and brain metastases. KX2-361’s multiple MOAs along with its ability to cross the BBB, make it a novel molecule for the treatment of brain tumors. The FDA has granted Orphan Drug Designation to KX2-361 for the treatment of gliomas.

Studies of KX2-361 in preclinical syngeneic mouse GBM models resulted in the complete eradication, without recurrence, of the tumors in an average of approximately 30% of treated mice. KX2-361 produced long-term survival mice, as compared to temozolomide, which extended survival but did not result in any long-term survivors.

In vitro studies in mice have found that the KX2-361 levels in the mouse brain meet or exceed the levels in the plasma at the same time points after oral dosing, indicating that KX2-361 readily crosses the BBB. We believe that this ability to cross the BBB provides a rationale for investigating brain cancers and metastases in the brain as potential therapeutic applications, which are traditionally considered to be an unmet medical need.

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KX2-361 is currently in the early stages of clinical development. In our KX2-361 clinical studies to date, the SAEs observed were thromboembolic events, hyperuricemia and pulmonary embolism. As the clinical development program is still in its early stages, we do not yet have meaningful safety, including adverse event, statistics to report.

We out-licensed the development and marketing of KX2-361 in Greater China to our partner, Xiangxue. The NMPA allowed the start of a Phase 1 trial of KX2-361 in China, which commenced at the end of 2019 for the treatment of advanced malignant solid tumors. The Phase 1 clinical study in China is a single-center, open-label dose escalation trial that will enroll approximately 36-72 patients with advanced malignant solid tumors who have no standard treatment or standard treatment failed. We anticipate this partnered clinical program in China will accelerate the development timeline of this candidate.

Our Other Technology Platforms

TCR-T Immunotherapy

TCR-T immunotherapy technology harnesses and enhances the patient’s own immune cells to target and eliminate cancer. It is a cell-based therapy that takes advantage of unique attributes of TCR mediated target recognition and provides a potent and selective TCR-T directed response against cancer cells. Central to this platform is the ability to first identify endogenous TCRs with specificity for a defined tumor antigen and to then enhance the affinity of the TCR to optimize tumor recognition and killing. These high affinity TCRs can be incorporated into a patient’s own T cells, converting the cells into a potent anti-cancer therapy. Using this technology, we believe the platform has generated engineered T-cells with higher binding affinity, specificity for intended target cells, expression level of the TCR and persistence in patients’ circulation during therapy. Preliminary studies have shown positive clinical signals.

Arginine Deprivation Therapy

PT01, the arginine deprivation therapy product, is based on our pegylated genetically engineered human arginase. It targets cancer growth and survival by interrupting the supply of arginine to cancers with disrupted urea cycles such as melanoma, hepatocellular carcinoma and prostate cancer. Our proprietary arginase biologic product is well suited to deplete arginine from the tumors, while healthy cells, capable of producing their own arginine, are largely unaffected.

Other Research Programs

Proprietary Dual (CYP/P-gp) Inhibitor

We are developing a proprietary class of “dual” absorption enhancers that are intended to inhibit both the P-gp transporter and the CYP enzymes within the gastrointestinal tract. There are many barriers that limit the oral absorption of drugs in humans. The P-gp transporter is a major barrier to absorption of active chemotherapy drugs. However, certain other drugs with P-gp liabilities may also have liabilities for other barriers such as metabolizing enzymes, such as the cytochrome P450, or CYP, class of enzymes. This intestinal CYP mediated metabolism can be a contributing factor in limiting oral absorption of certain drugs. This class of dual absorption enhancers has shown potential to significantly improve the oral bioavailability of certain other drugs in laboratory tests and may expand the application of our oral absorption platform to drugs where the CYP barrier to oral absorption is also important. These dual absorption enhancers may lead to better performing next-generation oral medicines in our pipeline of clinical products.

The development of these dual absorption enhancers is at the preclinical stage. Proof of concept, providing increased oral bioavailability in preclinical species, has been obtained with several absorption enhancers and candidate drugs. Currently additional filters such as patentability/freedom to operate, physical-chemical characterization, pre-formulation studies, manufacturing analysis and preliminary toxicity testing are being applied to our first group of lead candidates to facilitate election of an IND candidate.

Research and Development

We have drug discovery, drug formulation, clinical and regulatory development and API/drug product manufacturing facilities and capabilities around the world. The U.S. drug discovery, clinical and regulatory development and formulation research facilities are largely concentrated in Buffalo, New York and Cranford, New Jersey. The range of capabilities at these facilities includes medicinal chemistry, biochemistry, cell biology, formulation, chemical manufacturing and control, quality control, pharmacokinetics/ pharmacodynamics (“PK/PD”) and data management, as well as pharmacovigilance, clinical development and regulatory expertise functions. Animal efficacy, PK/PD and toxicology studies are carried out at various contract research organizations, or CROs, around the world in order to facilitate the drug research and development process. We also have research, clinical development and regulatory capabilities in China, the U.K. and Latin America, as well as in Taiwan, where we also have built up data management facility. Our research and development center in Hong Kong concentrates on drug formulation development and evaluation. Our global research and development capabilities and facilities are well integrated with our research and development center in the U.S.

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To date, we and our partners have conducted, or are conducting, clinical trials across sites in the U.S., South Korea, New Zealand, Taiwan, China and various countries in Latin America, including Argentina, Guatemala, Honduras, Chile, Colombia, Ecuador, the Dominican Republic and Peru.

Commercialization

For Oral Paclitaxel, our strategy is to develop and, if we receive approval from the FDA, commercialize Oral Paclitaxel in the U.S. by leveraging our Commercial Platform and sales and marketing capabilities established in the U.S. In terms of commercialization planning efforts, we are further developing strategies around marketing, market access, sales, medical affairs, and policy and patient advocacy. We launched our “Athenex Oncology” brand at the 2019 ASCO Annual Meeting with the goal of raising our profile and showcasing the potential of our Orascovery technology and development pipeline.  We continued these initiatives at the 2019 SABCS in December 2019, in which our abstract for the Phase 3 study of Oral Paclitaxel was not only accepted for oral presentation but also selected for the press program.

In 2020, provided we have a regulatory path to approval, we plan to focus on:

 

quantitative and qualitative market research, including on health outcomes and qualitative pricing, to understand our customers, patients, and the market;

 

examining our competitive landscape;

 

developing brand strategy;

 

developing key opinion leader relationships;

 

attending priority medical conferences to increase awareness of the Company and Oral Paclitaxel;

 

creating a market access strategy;

 

developing and executing a scientific publication plan;

 

developing our patient and patient advocacy strategy;

 

completing account, physician and patient segmentation in order to prioritize and target commercial efforts effectively;

 

developing our distribution and patient support plans;

 

developing our patient adherence to therapy strategy;

 

completing our organizational design to determine the overall size of our go-to-market commercial team based on our market opportunity;

 

continuing to hire key commercial and medical affairs leadership roles;

 

completing a life cycle plan for Oral Paclitaxel; and

 

preliminary marketing and launching forecasts.

We also plan to evaluate marketing options outside of the U.S., including using our internal resources, partnering with others, or out-licensing the product.

For tirbanibulin ointment in the treatment of AK, in December 2017, we entered into a license agreement with Almirall, pursuant to which we granted to Almirall an exclusive, sublicensable license of certain of our intellectual property for the development and commercialization of topical products containing tirbanibulin for the treatment of AK in the U.S. and substantially all European countries. We believe this partnership validates the potential of this candidate and that this partnership is an important step in the development and commercialization of tirbanibulin. For additional information, please see “Business—License and Collaboration Agreements—Almirall License Agreement.” We may also partner with third parties or consider using our internal resources to reach other geographic markets.

 

Our Commercial Platform

We believe the value creation potential is higher for biopharmaceutical companies able to commercialize their proprietary products as compared to companies who have a partner to commercialize. The infrastructure investment and build-out of a commercial team prior to regulatory approval is typically costly and requires years of investment. In 2016, we launched a commercial platform in the U.S. to begin building out this infrastructure in advance of our launch of proprietary products.

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Our Commercial Platform includes our Specialty Pharmaceuticals business and our manufacture and marketing of products subject to Section 503B of the FDCA. Our Specialty Pharmaceuticals business markets specialty pharmaceuticals, including multi-source oncology and other pharmaceutical products which are therapeutically related to our proprietary portfolio. Our 503B product offerings, which include sterile to sterile products and products from sterilized bulk API, support our offerings in the U.S. oncology market.

Using our resources to commercialize products in oncology may create more value for investors than marketing product rights pre-commercialization. We believe commercialization risks can be offset by establishing oncology manufacturing operations (API, Manufacturing, etc.) and commercial operations (Multi-source Oncology, Pharmacy, Hospitals, etc.).

Specialty Pharmaceuticals

Our Specialty Pharmaceuticals business develops and sources products through licensing agreements with various partners, whom we collectively refer to as our Global Partner network. Our team has unique commercial expertise in multisource oncology and injectable products and has developed a number of Global Partners that develop and manufacture multisource products for the U.S. market. This Global Partner network supplies the products we market in the Specialty Pharmaceutical business. We primarily market the products to the acute hospital and oncology clinics in the U.S. oncology market. As of December 31, 2019, Athenex Pharmaceutical Division (“APD”) markets twenty-nine products with fifty-five SKUs. In addition, Athenex Pharma Solutions (“APS”) markets five products with thirteen SKUs as of December 31, 2019.

The U.S. Oncology market is highly complex with gatekeepers, influencers and prescribers influencing sales of oncology products. Gatekeepers include hospitals (including pharmacies and therapeutics committees), buying groups, oncology managed care organizations, specialty distributors and pharmacists. Influencers in the oncology market include key opinion leader (KOL) physicians, regional cancer centers (as defined by the National Cancer Institute) and the U.S. government. Prescribers include oncologists and dermatologists. Launching a commercial operation in preparation for a proprietary drug approval is risky, difficult and expensive. Any commercial oncology organization must be able to market to these gatekeepers, influencers and prescribers in the oncology market at launch. Through our Commercial Platform, which has established a comprehensive sales and marketing organization, we are able to target and build relationships with gatekeepers, influencers and prescribers in the U.S. Oncology market, enabling us to manage the risks and capture post commercial oncology economics.

Agreements with key Suppliers and Marketing Partners

Gland Term Sheets

From August 2016 to May 2017, we entered into four binding term sheets with Gland Pharma Ltd (“Gland”) to market twenty-seven of Gland’s products. Gland has obtained FDA approval for twenty-two of such products and has filed an abbreviated new drug application, or ANDA, in the U.S. for the remaining five products. For each of the licensed products, we will pay a license fee to Gland. Additionally, during the terms of the term sheets we have a profit-sharing arrangement pursuant to which we will pay to Gland between 0% and 60% of the net profits from sales of each of the licensed products, depending on the product. The initial term of each of the Gland term sheets is five years from the launch of each product licensed pursuant to the term sheet, subject to automatic renewal for additional two-year terms, unless terminated by either party upon provision to the other party at least 90 days’ notice in advance of a renewal date.

Amphastar Agreement

In February 2017, we entered into a definitive agreement with Amphastar Pharmaceuticals, Inc. (“Amphastar”) to acquire fourteen ANDAs and inventory for certain APIs. The agreement requires payments of up to $6.4 million, which has been paid in full as of December 31, 2018. In addition to the payments described above, we have agreed to pay Amphastar a royalty fee equal to 2% of our net sales relating to the fourteen ANDAs and API inventory transferred to us by Amphastar for a period of ten years from the execution of the agreement. We have competed the site transfer for two products, Prochlorperazine and Diltiazem, and are actively selling them.

MAIA Agreement

In December 2018, we entered into a distribution and supply agreement with MAIA Pharmaceuticals (“MAIA”) effective as of October 3, 2018 whereby we acquired the exclusive license to a generic version of an approved product, which we began selling in January 2019. In connection with the execution of this agreement, we agreed to pay an upfront milestone payment in addition to profit sharing of 50% of the net profits from the sales of the licensed product. We also agreed to pay an additional milestone payment to MAIA in the event the FDA approves the ANDA for the licensed product. The initial term of the agreement is for seven years from the launch of the product and is subject to an automatic two-year renewal term unless terminated by either party upon at least 180 days’ notice in advance of the renewal date.

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In December 2019, the agreement with MAIA was amended to grant us the license to a branded product which MAIA holds the approved NDA. In connection with this amendment, we agreed to an upfront milestone payment and 56% of the net profits from sales of the licensed product. Additionally, we agreed to increase MAIA’s share of the net profits to 70% for both products until certain financial metrics are achieved and shall revert to the initial rates after those metrics are satisfied.

Customers and Product Distribution

We distribute our products primarily through pharmaceutical wholesalers and, to a lesser extent, specialty distributors that focus on particular therapeutic product categories, for use by a wide variety of end-users, including hospitals, integrated delivery networks and alternative site facilities. For the year ended December 31, 2019, the products we sold through our three largest wholesalers, AmerisourceBergen Corp. (“Amerisource”), Cardinal Health Inc. (“Cardinal Health”) and McKesson Corp. (“McKesson”), accounted for approximately 16%, 14% and 15%, respectively, of our total revenue.

We utilize an outside third-party logistics contractor to distribute our U.S. products. Since the inception of the launch of our specialty products, the third-party logistics provider has been handling all aspects of our product logistics efforts and related services for us, including warehousing and shipment services, order-to-cash services, contract administration services and chargeback processing. Our products are warehoused and distributed through a third-party logistics provider located in Memphis, Tennessee. Under our agreement with the third-party logistics provider, we maintain ownership of our finished products until sale to our customers. The initial term of the agreement is three years following the initial delivery date and will automatically renew for successive 12-month periods, unless either we or the other party give notice of intent to terminate at least 90 days in advance of such automatic renewal. We may also have the opportunity to terminate the agreement within 30 days of receiving notice of certain price increases by the third-party logistics provider. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement.

Global Supply Chain Platform

We believe it is important to minimize potential disruptions associated with a high potency oncology pharmaceutical supply chain. Therefore, we have begun the process of internalizing key components of the supply chain that we believe are integral to minimizing these risks and retaining value for stockholders. For example, the World Health Organization (WHO) lists paclitaxel as an essential medicine. Paclitaxel is derived from the bark of the Pacific yew tree and harvestable trees for the starting biomass are globally limited in supply. While current supply of the starting biomass for paclitaxel may be sufficient to meet global paclitaxel API demand, we believe future shortages are possible if we are successful in the commercialization of one of our lead drug candidates, Oral Paclitaxel. We believe this increased demand could lead to shortages of paclitaxel API potentially leading to market and supply disruptions.

Our research group evaluated the purity and potency of some of the largest global suppliers of paclitaxel API. In 2015, we acquired one of these suppliers, Polymed Therapeutics Inc. (“Polymed”) and Chongqing Taihao Pharmaceutical Co. Ltd., or Taihao. Taihao is a cGMP manufacturer of high potency oncology API based in Chongqing, China and Polymed is the U.S. marketing entity for Taihao’s API in North America and Europe. Historical production and sales of API by this subsidiary were to third parties. We anticipate a greater share of Taihao’s manufacturing capacity will be used for our internal needs in the future, and, therefore, sales to third parties may decrease. Historically, Polymed sold certain of these API products internationally to mostly large multi-national pharmaceutical companies. However, we have experienced a suspension of commercial operations at our plant in Chongqing, China. We suspended production in May 2019 based on concerns raised by the DEMC related to the location of our plant. Although we currently are producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials.

In 2014, we sought to obtain better control over our manufacturing of high potency oncology drugs used in global clinical studies, and, in the third quarter of 2014 acquired APS (formely known as QuaDPharma, LLC), one of our suppliers based in Clarence, New York. The number of our clinical studies has grown since the close of the acquisition. We are standardizing and leveraging the acquired cGMP systems and operating procedures in anticipation of developing multi-cGMP large scale manufacturing plants in both the U.S. and China.

Strategic Public-Private Partnerships

New York State Partnership

In May 2015, we entered into an agreement with Fort Schuyler Management Corporation (FSMC) a not-for-profit corporation affiliated with the State of New York, for a medical technology research, development, innovation and commercialization alliance. Under the agreement, FSMC agreed to pay up to $25.0 million for the construction of our North American headquarters and formulation lab and equipment in Buffalo, New York. We moved into the North American Headquarters in October 2015 and are sub-leasing the space from FSMC for a 10-year term, with an option to extend the term for an additional 10 years. Under the agreement,

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we are obligated to spend $100.0 million in the Buffalo area over the initial 10-year term of the lease and an additional $100.0 million during the second 10-year term if we elect to extend the lease. We also committed to hiring 250 permanent employees in the Buffalo area within the first 5 years of completion of the project. As of December 31, 2019, we had hired 171 permanent employees in the Buffalo area. In the event we are unable to hire enough employees in the Buffalo area or meet our other obligations under this agreement, FSMC may terminate the agreement and we may have to renegotiate our lease or relocate our North American headquarters.

Under the same May 2015 agreement, FSMC also agreed to fund the costs of construction of a new manufacturing facility in Dunkirk, New York that we intend to use for injectable and 503B products and, eventually, our proprietary oncology products for commercial production at this facility. Under the current arrangement, we have selected a general contractor for the project, and we will oversee the development of the facility. Empire State Development (“ESD”), the parent entity of FSMC, is responsible for the costs of construction and all equipment for the facility, up to an aggregate of $200.0 million, plus any additional funds available from the previous $25.0 million grant, and FSMC, not us, will own the facility and equipment. We are entitled to lease the facility and all equipment at a rate of $1.00 per year for an initial 10-year term and for the same rate if we elect to extend the lease for an additional 10-year term. We are responsible for all operating costs and expenses for the facility. In exchange, we have committed to spending $1.52 billion on operational expenses in our first 10-year term in the facility, and an additional $1.5 billion on operational expenses if we elect to extend the lease for a second 10-year term. We also committed to hiring 450 employees at our Dunkirk facility within the first 5 years of operations, including hiring at least 300 new employees within 2.5 years of the Dunkirk facility becoming operational. In September 2017, we entered into a grant disbursement agreement with ESD, whereby the State of New York will grant up to $200.0 million, plus any additional funds available from the previous $25.0 million ESD grant, to us in order to fund the construction of the Dunkirk facility. The funds will be deposited in four installments of up to $50.0 million each into an ESD held account. The first $50.0 million installment was deposited in the third quarter of 2017 and the remaining $50.0 million installments were made in the first, third, and fourth quarter of 2019. Actual disbursement of such funds occurs as we submit appropriate documentation verifying that expenditures on the project have been incurred. In addition, in July 2017, we entered into a 20-year payment in-lieu of tax agreement for the construction of the Dunkirk facility with the County of Chautauqua Industrial Development Agency (“CCIDA”), under which we anticipate incurring sales tax exemption savings of approximately $9.1 million during the development of the facility and property tax savings of approximately $78.0 million over 20 years.

In November 2017, we entered into a project agreement with the CCIDA which sets forth the obligations of the parties in relation to the CCIDA’s grant to us of certain sales and use tax exemptions and real property tax exemptions in consideration for our agreement to complete the Dunkirk facility. The project agreement estimates the cost of the Dunkirk project at around $213.0 million, which exceeds the $200.0 million grant committed to by the State of New York, and we will be responsible for the difference. We are obligated to invest no less than $187.2 million in the facility prior to the completion of the project, which sum includes funds committed by the State of New York. The agreement includes commitments to comply with state and local laws in connection with the project.

In December 2017, we entered into an agreement with M+W, U.S., Inc. (now renamed Exyte U.S., Inc.). The agreement, as amended to date, provides that M+W will be responsible for the design and construction of the Dunkirk facility at a cost estimated between $205.0 million and $213.0 million, of which up to around $208.0 million will be paid by a grant from the State of New York (including approximately $8.0 million in additional funds available from the previous $25.0 million ESD grant), with the remaining amount being paid by us. Payments under the December 2017 agreement will be made to M+W over time based upon completion of certain milestones under the agreement, and ESD must approve any payment from the grant funds.

Under the same September 2017 agreement with ESD, we must complete the construction of the facility in Dunkirk, New York in accordance with the final plans and specifications approved in writing by ESD and must maintain our business operations at the facility for a minimum of ten years after its completion. In 2018, we began constructing the facility and began ordering equipment for the operation and maintenance of the facility. This manufacturing facility, which was originally planned to be 320,000 square feet, has been expanded to approximately 409,000 square feet to meet our needs and within the terms of the September 2017 agreement. The September 2017 agreement may be subject to termination if ESD and FSMC perform their obligations under the agreement, and we do not attain and or maintain certain levels of employment or spending for specified periods of time. In such event and in accordance with the May 2015 agreement, any potential liability of us would be capped at the amount of actual ESD spending on the facility in Dunkirk, New York times the percentage of required spending by us which we have not yet incurred.

China Partnership

In October 2015, we entered into an agreement with CQ, which is wholly owned by the Finance Bureau of Banan district of Chongqing, and is authorized to be responsible for investments, financing, infrastructure construction, operations and management in the Chongqing Maliu Riverside Development Zone. Our agreement with CQ provides for the construction of both a formulation plant and an API plant in China. After entering into the agreement, and pursuant to its terms, we established a China-based subsidiary that is responsible for the operations of both facilities in July 2016 and committed to a registration capital requirement of no less than $30.0 million. CQ is responsible for the construction of both facilities according to the U.S. cGMP standards. The land and buildings will be

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owned by CQ, and we will lease the facilities rent-free, for the first 10-year term, with an option to extend the lease for an additional 10-year term, during which, if we are profitable, we will pay a monthly rent of 5 Chinese Renminbi (“RMB”) per square meter of space occupied. We are responsible for the costs of all equipment and technology for the facilities. The lease term will commence upon our acceptance of the building. Within six months of our acceptance of the building, we are required to finish equipment installation and testing, and within twelve months, we are required to commence production. We have also committed to achieving certain operational, revenue and tax generation milestones within certain time periods once we commence operations. If we are unable to achieve these milestones, CQ will have the opportunity to terminate the agreement and dispose of the plants in its discretion.

In September 2019, we announced the completion of the new API facility construction in Chongqing, China. However, as a result of the Coronavirus outbreak, we expect to commence operations at the 440,000-square-foot facility in the second half of 2020. The construction of the facility is part of our strategy for vertical integration in order to capture value across the supply chain. Once operational, the facility is expected to expand our API production capabilities to further support our global clinical development needs and ensure the supply of API for commercial launches.

Our goal is to use our public-private partnerships as a capital efficient method for large scale cGMP manufacturing within our supply chain and to facilitate market access in China. We believe those facilities will be adequate and suitable for our operations for the foreseeable future.

To date, we have utilized a combination of acquisitions and public-private partnerships to internalize certain key components of our manufacturing and supply chain. We expect to continue to use a combination of collaborations and acquisitions to continue to build out elements of our supply chain where needed as a mechanism to minimize execution risk and retain value for our stockholders.

In May 2019, we suspended operations at our existing API plant in Chongqing, based on the concerns raised by the DEMC related to the location of our plant. As a result of the suspension, we are currently unable to produce commercial batches of API, which has impacted our revenue. We can provide no assurances of when, if at all, commercial production of API will resume at this plant. Although we are still producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials.

License and Collaboration Agreements

In-Licenses

Arginase License Agreement

In June 2018, we entered into a license agreement with Polytom, an entity affiliated with Avalon Global Holdings Limited and a related party of the Company, which we refer to as the Arginase License, pursuant to which Polytom granted us an exclusive, sublicensable right and license to develop and commercialize products containing pegylated and cobalt-replaced arginase for the treatment of cancer in humans, apart from ophthalmic uses and use as eye drops, worldwide. Dr. Johnson Lau, our chief executive officer and chairman, and Dr. Manson Fok, one of our directors, collectively have a controlling interest in, and serve on the board of directors of, Avalon.

We made an upfront payment of cash of $3.0 million and common stock of $2.0 million to Polytom upon effectiveness of the Arginase License in June 2018. In September 2019, we made a cash payment of $1.0 million to Polytom upon meeting the first regulatory milestone under the agreement. We may be required to make additional payments to Polytom worth up to $44.0 million of our common stock or of cash upon the occurrence of additional regulatory milestones. Pursuant to the agreement, we have also agreed to pay royalties based on certain percentage of net sales of any products utilizing the intellectual property that is the subject of the Arginase License. Such royalties will be reduced by 40% when competing generic products have 25% of the market share in the applicable country and will be eliminated entirely when competing generic products have 50% of the market share in the applicable country.

HepaPOC License and Supply Agreement

In June 2018, we entered into a license and supply agreement with Avalon HepaPOC Limited (“HepaPOC”), an entity affiliated with Avalon and a related party of the Company, which we refer to as the HepaPOC License, pursuant to which HepaPOC agreed to exclusively sell to us the meter and consumable strips that can be used to detect galactose concentrations in human blood and granted us an exclusive, sublicensable right and license to use and commercialize the meter and strips for conduct of liver function tests in humans taking our oncology drugs. Dr. Johnson Lau, our chief executive officer and chairman, and Dr. Manson Fok, one of our directors, has a controlling interest in, and serve on the board of directors of, Avalon.

We made an upfront payment of cash of $0.5 million to HepaPOC upon effectiveness of the HepaPOC License Agreement, and we may be required to make payments to HepaPOC worth up to $4.8 million in our common stock or in cash upon the occurrence of

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certain regulatory and sales milestones. Pursuant to the agreement, we have also agreed to pay royalties based on certain percentage of aggregate net sales of any products utilizing the intellectual property that is the subject of the HepaPOC License.

The terms of the HepaPOC License shall extend until the date on which the last of the patent rights licensed under the agreement expires or is invalidated. Notwithstanding the foregoing, the terms of the HepaPOC license shall automatically be extended for consecutive one year periods subject to the same terms and conditions set forth herein (unless agreed otherwise) unless either party gives written notice of its intention not to extend the agreement term: (1) at least ninety days prior to the expiration date of the patent rights licensed under the agreement or (2) as soon as practically possible in the case of an invalidation claim or (3) at least ninety days prior to the then current expiration date of the agreement thereafter. Notwithstanding the foregoing, after the occurrence of (1) or (2) above, the terms of the HepaPOC License shall automatically be extended for consecutive one year periods subject to the same terms and conditions set forth in the agreement unless either HepaPOC or we give written notice of its intention not to extend the agreement terms: (i) at least ninety days prior to the expiration of the patent rights licensed under the agreement or (ii) as soon as practically possible in the case of an invalidation claim and (iii) at least ninety days prior to the then current expiration date of the agreement. Prior to the expiration of the term of the agreement, both parties may terminate the agreement in whole or in part upon mutual written agreement. We may also terminate in whole or in part the agreement in our sole discretion upon not less than six months prior written notice of termination at any time. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

TCR-T License Agreement

In June 2018, we entered into a Share Subscription Agreement XLifeSc, a wholly-owned subsidiary of Xiangxue to establish, operate and manage a limited liability company named Axis Therapeutics Limited (Axis) to offer certain goods and services worldwide except in China. Axis is owned 45% by XLifeSc and 55% by us.

In June 2018, Axis entered into a license agreement with XLifeSc, which we refer to as the TCR-T License, pursuant to which XLifeSc granted Axis an exclusive, sublicensable right and license to use XLifeSc’s proprietary TCR-T to develop and commercialize therapeutic products for oncology indications worldwide except in China. Axis is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

In September 2018, we completed the closing process under the Share Subscription Agreement which included an exchange of a 45% ownership interest in Axis to XLifeSc for a license of in-process research and development. Upon effectiveness of the TCR-T License and satisfaction of certain conditions in the license agreement, Axis made an upfront payment of the Company’s common stock of $5.0 million to XLifeSc. In April 2019, Axis made a cash payment of $2.0 million to XLifeSc upon meeting the first regulatory milestone under the agreement. Axis may be required to make additional cash payments to XLifeSc worth up to $108.0 million in aggregate upon the occurrence of certain additional regulatory milestones to be achieved in the U.S., the EU, China and Japan. In addition, XLifeSc is required to pay Axis royalty payments based on certain percentage of aggregate net income generated by sales of any products using the licensed intellectual property in China.

The term of the TCR-T License will remain in effect until the expiration of the patent rights licensed under the agreement. The agreement will terminate automatically if the shareholders agreement between XLifeSc and us is terminated. The TCR-T License also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

Hanmi Licensing Agreements

In December 2011 and June 2013, we entered into two separate in-licensing agreements with Hanmi pursuant to which Hanmi granted us licenses to certain patents and know-how with respect to Hanmi’s Orascovery Program to research, discover and develop compounds that enhance or increase the oral absorption of active pharmaceutical ingredients.

The December 2011 agreement, which we refer to as the 2011 Hanmi Agreement, granted us an exclusive, sublicensable license for development and commercialization activities utilizing Hanmi’s patents and know-how related to the Orascovery Program in a certain territory including North America, South America, the EU, Australia, New Zealand, Russia, Eastern Europe, Taiwan and Hong Kong, and a non-exclusive license to utilize the same intellectual property in manufacturing worldwide for sales inside those territories. The June 2013 agreement, which we refer to as the 2013 Hanmi Agreement, granted us an exclusive, sublicensable license comparable to the 2011 Hanmi Agreement solely for China. The 2011 Hanmi Agreement was amended in November 2012 to add Macau and Singapore to the territory licensed under the agreement; in October 2013 to add Malaysia, Thailand, Vietnam, the Philippines and Indonesia; in March 2015 to add India; in March 2017 to add Japan; and again in September 2018 to all territories in the world apart from the Republic of Korea.

Upon effectiveness of the 2011 Hanmi Agreement we made an upfront payment of $0.25 million to Hanmi, and we will pay Hanmi tiered royalty payments in the teens based on aggregate net sales of any products using the licensed intellectual property in the territory. Such royalties will be reduced if competing generic products gain market share in the applicable country. Depending on when we receive regulatory approval of a product using the intellectual property licensed from Hanmi in the U.S. or Europe, we may

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be obligated to pay Hanmi a regulatory bonus of $24.0 million to be paid (1) upon the occurrence of a liquidity event, if the regulatory approval has already been received, or (2) upon receipt of the regulatory approval, if such approval is received after a liquidity event. We were also required to pay Hanmi an exit bonus, in shares of our common stock at a 20% discount to the initial public offering price, of $6.25 million upon the completion of our initial public offering in June 2017 based on a nominal value of $5.0 million. In connection with the March 2015 amendment to the 2011 Hanmi Agreement, we made an upfront payment of $50,000 to Hanmi. Additionally, in connection with the March 2017 amendment to the 2011 Hanmi Agreement, we issued a $7.0 million convertible bond to Hanmi in lieu of an upfront payment. Hanmi elected to convert the $7.0 million principal amount of the convertible bond into 795,455 shares of our common stock, based on the agreed 20% discount to our initial public offering price, in September 2017. In connection with the September 2018 amendment to the 2011 Hanmi Agreement, we made an upfront payment of $40,000 to Hanmi.

Upon effectiveness of the 2013 Hanmi Agreement we made an upfront payment of $0.1 million to Hanmi, and we will pay Hanmi tiered royalty payments in the teens based on net sales of any products using the licensed intellectual property in China. The royalties shall be reduced if competing generic products gain market share in China. We also granted to Hanmi a one-time right of first negotiation to purchase all of our rights in Oral Paclitaxel or Oral Irinotecan under the agreement during development and prior that, at Hanmi’s discretion, requires us to negotiate in good faith the sale of our rights under such agreement to Hanmi at a purchase price determined by an internationally-recognized investment banking firm with an office in Hong Kong at any time prior to the earlier of (1) our first commercial sale of products using such technology or (2) receipt by Hanmi of written notice from our company of the sublicense of the rights in an applicable product to a third party.

Under each agreement, we are responsible for all clinical studies and development and commercialization activities, and the related expenses, resulting from the agreements. Each of the 2011 Hanmi Agreement and the 2013 Hanmi Agreement expires on the earlier of (1) expiration of the last of Hanmi’s patent rights licensed under the agreement or (2) invalidation of Hanmi’s patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then-current annual expiration date of the agreement. The patent rights licensed to us under the 2011 and 2013 Hanmi Agreements have expiry dates ranging from in 2023 to 2033, unless the terms of such licensed patents are extended in accordance with applicable laws and regulations.

Hanmi may also terminate the 2011 Hanmi Agreement if (1) we fail to file an IND application with the FDA for Oral Paclitaxel within six months of the latest of (x) our receipt from Hanmi of all English translations necessary for the filing of an IND application with the FDA, (y) the date we and Hanmi agree that all studies necessary for the filing of an IND application with the FDA have been completed or (z) the date of the final study report for the last of any additional studies that are necessary for the filing of an IND application with the FDA or (2) we fail to commence clinical studies for Oral Paclitaxel within twelve months after the date of approval of an IND application by the FDA.

The 2013 Hanmi Agreement may be terminated by Hanmi if (1) we fail to file an IND application for Oral Paclitaxel with the NMPA within six months after the latest of (w) completion of all Chinese translations necessary for the filing of an IND application with the NMPA, (x) completion of all manufacturing and toxicology studies necessary for the filing of an IND application with the NMPA (y) the date we and Hanmi agree that all studies necessary for the filing of an IND application with the NMPA have been completed or (z) the date of the final study report for the last of any additional studies that are necessary for the filing of an IND application with the NMPA or (2) we fail to commence clinical studies for Oral Paclitaxel within twelve months after the date of approval of an IND application by the NMPA.

Such clinical development milestones in respect of the termination right in both the 2011 Hanmi Agreement, and the 2013 Hanmi Agreement may be extended for twelve months if we reasonably request.

Prior to the expiration of the term of each agreement, we may terminate the agreement in our sole discretion, by providing six months’ notice to Hanmi. Subject to certain conditions. The agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party or by mutual agreement.

Out-Licenses

ZenRx License Agreement

In April 2013, we entered into a license agreement with ZenRx, which we refer to as the ZenRx License, pursuant to which we granted to ZenRx an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize Oral Irinotecan and Oral Paclitaxel in Australia and New Zealand, and a non-exclusive license to manufacture a certain compound but only for use in Oral Irinotecan and Oral Paclitaxel. ZenRx is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

We received a $50,000 payment from ZenRx upon effectiveness of the agreement, and we may be entitled to receive up to an aggregate of $1.4 million in additional development, regulatory and sales milestone payments. We will also be eligible to receive

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tiered royalties in the teens on net sales of each product commercialized by ZenRx utilizing the intellectual property that is the subject of the ZenRx License. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

As an incentive to ZenRx to further development and commercialization of Oral Irinotecan and Oral Paclitaxel in the territory, if ZenRx obtains certain regulatory approvals in the territory prior to regulatory approval of those products in either the U.S. or South Korea, we may be required to make payments to ZenRx, at ZenRx’s option, either up to $0.6 million in cash or $0.35 million in cash plus $0.25 million worth of our common stock.

The term of the ZenRx License expires on the earlier of (1) expiration of the last of our patent rights licensed under the agreement or (2) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement. Prior to the expiration of the term of the agreement, ZenRx may terminate the agreement in its sole discretion, by providing three months’ notice to us. Subject to certain conditions, we may also terminate the agreement if ZenRx fails to comply with certain development timelines set forth in the ZenRx License. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

PharmaEssentia License Agreements

In December 2011 and December 2013, we entered into two separate out-licensing agreements with PharmaEssentia, pursuant to which we granted to PharmaEssentia certain licenses to our intellectual property for use in development and commercialization of certain products in specific territories.

The December 2011 agreement, which we refer to as the 2011 PharmaEssentia Agreement, granted an exclusive, sublicensable license to use any pharmaceutical preparation containing tirbanibulin or KX-361 for use in treating psoriasis or other non-malignant skin conditions in a territory that includes China, Taiwan, Macau, Hong Kong, Singapore and Malaysia. In December 2016, we agreed to amend the 2011 PharmaEssentia Agreement such that the field under the license agreement does not include AK for any country in the territory except Taiwan.

We received a $40,000 payment from PharmaEssentia upon effectiveness of the 2011 PharmaEssentia Agreement, and we may be entitled to an aggregate of up to $1.6 million in additional development and regulatory milestone payments, $0.25 million of which may be paid in the form of PharmaEssentia stock. PharmaEssentia has discretion to offer to make such payment in the form of its stock, and we have discretion as to whether to accept such payment in the form of its stock. We will also be eligible to receive tiered royalties ranging from the high single-digits to teens on net sales of each product commercialized by PharmaEssentia utilizing the intellectual property that is the subject of the 2011 PharmaEssentia Agreement. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

The December 2013 agreement, which we refer to as the 2013 PharmaEssentia Agreement, granted an exclusive, sublicensable license for development and commercialization of Oral Paclitaxel and Oral Irinotecan in Taiwan and Singapore. In December 2016, we agreed to amend the 2013 PharmaEssentia Agreement to also include Vietnam in the territories covered by the license, provided that, if PharmaEssentia has not completed a submission for regulatory approval in Vietnam by 2021, the rights under the license in Vietnam will be returned to us. In November 2018, we agreed to amend the 2013 PharmaEssentia Agreement to also include a license for development and commercialization of Oral Docetaxel in Singapore, Taiwan and Vietnam. We received $2.0 million from PharmaEssentia upon effectiveness of the amended agreement.

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We received a $50,000 payment from PharmaEssentia upon effectiveness of the 2013 PharmaEssentia Agreement and a $0.5 million payment upon the initiation of a 505b2 strategy registration study in the first quarter of 2017, and we may be entitled to an aggregate of up to $1.5 million in additional development, regulatory and sales milestone payments. We may be obligated to pay PharmaEssentia an aggregate of $1.0 million in incentives if PharmaEssentia achieves certain milestones within designated timeframes. We will also be eligible to receive tiered royalties in the mid-teens on net sales of each product commercialized by PharmaEssentia utilizing the intellectual property that is the subject of the 2013 PharmaEssentia Agreement. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country. Under the November 2018 amendment to the 2013 PharmaEssentia Agreement, we also received an upfront payment of $2.0 million, and we may be entitled to an aggregate of up to $9.1 million in additional development and regulatory milestone payments related to Oral Docetaxel.

Under each agreement, PharmaEssentia is responsible for all clinical studies and development and commercialization activities, and the related expenses, resulting from the agreements. Each of the 2011 PharmaEssentia Agreement and the 2013 PharmaEssentia Agreement expire on the earlier of (1) expiration of the last of our patent rights licensed under the agreement or (2) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement.

Prior to the expiration of the term of each agreement, PharmaEssentia may terminate the agreement in its sole discretion, by providing six months’ notice to us. Subject to certain conditions, we may also terminate the agreement if PharmaEssentia fails to comply with certain development timelines set out in each of the agreements. The agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

Xiangxue License Agreements

2012 License Agreement

In May 2012, we entered into a license agreement with Xiangxue, which we refer to as the Xiangxue 2012 License, pursuant to which we granted to Xiangxue an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize products containing KX-361 in all indications for brain tumors in China, Taiwan, Hong Kong and Singapore.  Xiangxue is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

We received a $0.75 million payment from Xiangxue upon effectiveness of the Xiangxue 2012 License and in 2013 received a further $0.75 million payment upon meeting the first regulatory milestone under the agreement. We may be entitled to receive an aggregate of up to $4.5 million in additional development and regulatory milestone payments. We will also be eligible to receive royalties in the teens on net sales of each product commercialized by Xiangxue utilizing the intellectual property that is the subject of the. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

The term of the Xiangxue 2012 License expires on the earlier of (1) expiration of the last of our patent rights licensed under the agreement or (2) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement. Prior to the expiration of the term of the Xiangxue 2012 License, Xiangxue may terminate the agreement in its sole discretion, by providing six months’ notice to us. Subject to certain conditions, we may also terminate the agreement if Xiangxue fails to comply with certain development timelines set forth in the Xiangxue 2012 License. The Xiangxue 2012 License also contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

2019 License Agreement

In December 2019, we entered into an exclusive license agreement with Xiangxue, which we refer to as the 2019 Xiangxue License, in which we granted Xiangxue exclusive rights to develop and commercialize certain licensed products for China, Hong Kong and Macau, including Oral Paclitaxel, Oral Irinotecan, and tirbanibulin ointment for certain indications, including oncological and AK indications, as well as other indications that we and Xiangxue mutually agree to pursue under the 2019 Xiangxue License. The 2019 Xiangxue License contains an option, exercisable by Xiangxue, to license two additional product candidates on terms and conditions to be negotiated separately from the 2019 Xiangxue License. Under the terms and conditions of the 2019 Xiangxue License, we and Xiangxue will be jointly responsible for licensed products in the territory covered by the 2019 Xiangxue License in their permitted fields of use and Xiangxue will be responsible for the commercialization of the licensed products in the territory in their permitted fields of use. Xiangxue has agreed to pay us an initial payment of $30.0 million, subject to the satisfaction of certain conditions, including the delivery of required regulatory data, which are expected to occur in the first quarter of 2020. We may be eligible to receive future additional payments up to $150.0 million in the event defined regulatory and sales milestones are achieved, a

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payment of $20.0 million in the event of a change of control or assignment of rights involving Xiangxue (as further defined and subject to the conditions set forth in the 2019 License Agreement), and to receive tiered royalties at rates ranging from the low teens to low twenties based on annual net sales of the licensed products in the territory covered by the 2019 Xiangxue License and a percentage of sublicensing revenue. The 2019 Xiangxue License will continue until Xiangxue has no payment obligations under the 2019 Xiangxue License, unless terminated earlier in accordance with the terms of the 2019 Xiangxue License. The 2019 Xiangxue License may be terminated in its entirety upon the mutual agreement of the parties, by Xiangxue for convenience upon requisite notice, or by either party for material breach as set forth in the 2019 Xiangxue License.  The 2019 Xiangxue License also will be terminated with respect to any licensed product for Xiangxue’s failure to meet agreed upon regulatory milestones with respect to such 2019 Licensed Product.

Almirall License Agreement

In December 2017, we entered into a license agreement with Almirall, which we refer to as Almirall License, pursuant to which we granted to Almirall an exclusive, sublicensable license of certain of our intellectual property for the development and commercialization of topical products containing tirbanibulin to treat and prevent skin disorders and diseases in humans (including AK), or the Field, in the licensed territory, which includes the U.S. and substantially all European countries (including Russia and Turkey). We also granted Almirall a right of first negotiation to license from us in the territory covered by the Almirall license any compound (other than tirbanibulin) that we may develop in the future with the same mechanism of action as tirbanibulin for topical treatment of skin disorders and diseases if we decide to collaborate with a third party regarding that newly developed compound. Under the Almirall License, Almirall also grants us an exclusive, sublicensable license to use certain of its intellectual property related to the products containing our licensed tirbanibulin for use in the Field in order to commercialize such products outside of the Licensed Territory and outside of the Field in the Licensed Territory and to commercialize other products containing tirbanibulin for indications outside the Field. If we decide to sublicense that license from Almirall for certain additional products or indications, we will negotiate with Almirall to allow them to reasonably participate in the commercial benefit of such sublicense.

In March 2018, we received an upfront payment of $30.0 million from Almirall under this agreement. In June 2019, we received milestone payment of $20.0 million, and we expect to receive other near-term payments of up to $5.0 million. We may also be entitled to receive an aggregate of $65.0 million in additional milestone payments, as well as sales milestone payments we estimate will likely total $155.0 million. Almirall will reward Athenex with additional sales milestones should the sales exceed the currently projected amounts. In addition, we are eligible to receive tiered royalty payments for a certain period starting at 15% based on annual net sales of the topical products commercialized by Almirall, utilizing the intellectual property subject to the license agreement, with incremental increases in royalty rates commensurate with increased sales. Additionally, under certain circumstances starting after one year following regulatory approval of certain licensed products in the U.S., we would have the option to co-promote such licensed products under pre-negotiated terms and conditions with Almirall.

The term of the Almirall License began in February 2018 when antitrust approval was obtained and continues for the entire life of the licensed topical products on a country-by-country basis. Prior to the expiration of the term of the Almirall License, Almirall may terminate the agreement in its entirety or with regard to a certain territory in its sole discretion by providing six months’ notice to us. We may also be required to reimburse Almirall in the event Almirall provides notice that certain clinical endpoints under the agreement are not met. In addition, Almirall may terminate the agreement effective immediately if the licensed topical products cannot be marketed in the territory due to significant safety concerns, if regulatory approval is finally and irrevocably denied in a territory or if an approved product label is less favorable than the product label submitted to the regulatory authorities in a way that would materially affect the commercial value of the product.

The agreement also contains customary termination rights for both parties, such as in the event of a breach of the agreement or if the other party defaults in performance of its obligations under the agreement.

In October 2019, we announced a progress update from our partner Almirall on tirbanibulin ointment for the treatment of AK.

CJ License Agreement

In December 2018, through our subsidiary Taihao Pharmaceutical, we entered into a series of agreements to license certain intellectual property to Chongqing Jingdong Junzhuo Pharmaceutical Co., Ltd. (“CJ”) to exclusively develop and commercialize tirbanibulin for the treatment of actinic keratosis and oncology indications in humans in mainland China (excluding Hong Kong, Macau and Taiwan). Via the series of agreements, CJ obtained the exclusive right to promote, market, sell and commercialize in mainland China those topical or oral products that contain our proprietary Src/tubulin inhibitor, tirbanibulin, also known as tirbanibulin. We have agreed to manufacture the products and to conduct all clinical trials, and CJ was required to use its reasonable best efforts to commercialize the licensed products in mainland China. Under the agreements, CJ has agreed to pay Taihao (1) an upfront payment of $14.5 million, (2) certain milestone payments totaling $15.0 million and (3) royalty payments based on the amount of sales of the product. These agreements have been terminated by mutual consent of both parties as of March 6, 2019, and we will retain the exclusive right to promote, market, sell and commercialize in mainland China those topical or oral products that contain tirbanibulin. We are not subject to any termination penalties related to the termination of the license and sublicense agreements.

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Collaboration Agreement

Eli Lilly and Company Agreement

In October 2016, we entered into a Clinical Trial Collaboration and Supply Agreement with Lilly, which we refer to as the Lilly Agreement, under which we and Lilly will conduct a Phase 1b trial of Oral Paclitaxel in combination with Lilly’s ramucirumab in patients with gastric, gastro-esophageal and esophageal cancers. Under the terms of the Lilly Agreement we will act as the sponsor of the study and will hold the IND/clinical trial application (“CTA”) relating to the study, while all clinical data generated under the study will be jointly owned by us and Lilly. Other than Lilly’s obligation to supply ramucirumab to us, we will be responsible for all other costs associated with the conduct of the study.

The Lilly Agreement will remain in effect until the study contemplated by the agreement has been completed. The agreement also contains customary termination rights for either party, such as in the event of a breach of the agreement by the other party, or in the event a regulatory authority takes any action against or raises any objection to the study.

Competition

The biopharmaceutical industry and the oncology subsector are characterized by rapid evolution of technologies, fierce competition and strong defense of intellectual property. Any product candidates that we successfully develop and commercialize will have to compete with existing therapies and new therapies that may become available in the future. While we believe that our product candidates, platforms and scientific expertise in the field of biotechnology and oncology provide us with competitive advantages, a wide variety of institutions, including large biopharmaceutical companies, specialty biotechnology companies, academic research departments and public and private research institutions, are actively developing potentially competitive products and technologies. We face substantial competition from biotechnology and biopharmaceutical companies developing oncology products. These competitors generally fall within the following categories:

Oral administration: Taxol, Abraxane, Cynviloq, Camptosar, Onivyde, Taxotere and Hycamtin;

Src Kinase inhibitors: Picato and Temodar.

Many of our competitors, either alone or with strategic partners, have substantially greater financial, technical and human resources than we do. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and achieving widespread market acceptance, rendering our treatments obsolete or non-competitive. Accelerated merger and acquisition activity in the biotechnology and biopharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These companies also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical study sites and patient registration for clinical studies, acquiring technologies complementary to, or necessary for, our programs and for sales in the API business. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our commercial opportunity could be substantially limited in the event that our competitors develop and commercialize products that are more effective, safer, less toxic, more convenient or less expensive than our comparable products. In geographies that are critical to our commercial success, competitors may also obtain regulatory approvals before us, resulting in our competitors building a strong market position in advance of our products’ entry. We believe the factors determining the success of our programs will be the efficacy, safety and convenience of our product candidates and our access to supply of API.

Intellectual Property

We strive to protect and enhance the proprietary technologies, inventions, products and product candidates, methods of manufacture, methods of using our products and product candidates, and improvements thereof that are commercially important to our business. We protect our proprietary intellectual property position by, among others, filing patent applications in the U.S. and in jurisdictions outside of the U.S. covering our proprietary technologies, inventions, products and product candidates, methods, and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how, continuing innovation, and licensing opportunities to develop, strengthen and maintain our proprietary intellectual property position. As of December 31, 2019, we owned more than 150 granted patents and approximately 65 pending patent applications worldwide. In addition, we have in-licensed patents and patent applications relating to our Orascovery platform technology from Hanmi. In our Orascovery platform, the lead compound is covered as composition-of-matter in granted patents in the U.S. and other territories, such as China and Europe. These patents will expire in October 2023 or 2024, excluding any potential patent term adjustments and/or patent term extensions that may be available. The lead compounds in our Src Kinase Inhibition platform are covered as composition-of-matter in granted patents in the US and other territories, including China and Europe. These patents will begin to expire in December 2025, excluding any potential patent term adjustments and/or patent term extensions that may be available.  As of December 31, 2019, we have in-licensed patents and technologies in relation to our TCR T-cell therapy.  Some of these patents will expire in 2034, excluding any potential patent term adjustments and/or patent term extensions that may be available.  We have in-

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licensed a patent relating to the site-directed PEGylation of arginases and their use as anti-cancer and anti-viral therapies granted in the U.S. and other territories, such as China and Europe. This patent will expire in March 2030, excluding any potential patent term adjustments and/or patent term extensions that may be available. A PCT application has entered national phases in the U.S. and other territories, such as China and Europe covering the compositions and methods for amino acid depletion therapy.

The term of individual patents depends upon the laws of the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing of a non-provisional patent application. In the U.S., the term of a patent may be lengthened by patent term adjustment to compensate the patentee for administrative delays by the United States Patent and Trade Office (USPTO) in examining and granting the patent or may be shortened if the patent is terminally disclaimed over an earlier-filed patent. In addition, a patent term may be extended to restore a portion of the term effectively lost as a result of FDA regulatory review. However, the restoration period cannot be longer than five years and cannot extend the remaining term of a patent beyond a total of fourteen years from the date of FDA approval, and only one patent applicable to an approved drug may be extended. Similar extensions as compensation for regulatory delays are available in Europe and other jurisdictions. We intend to seek patent term extensions where these are available. However, there is no guarantee that the applicable authorities, including the FDA in the U.S., will agree with our assessment of whether such extensions should be granted, and we cannot predict the length of the extensions even if they are granted. The actual protection afforded by a patent varies on a claim-by-claim basis, from country-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent. For a granted patent to remain in force most countries require the payment of annuities or maintenance fees, either yearly or at certain intervals during the term of a patent. If an annuity or maintenance fee is not paid, the patent may lapse irrevocably.

Granted patents and pending patent applications related to the SRC Kinase Inhibition platform cover such aspects as composition-of-matter claims to our lead product candidates and their analogs, claims to pharmaceutical compositions comprising such candidates and claims to methods of making and method of treatment using such candidates. Not accounting for any patent term adjustment, patent term extension or terminal disclaimer, and, assuming that all annuity and/or maintenance fees are paid, the patents and, if granted, patent applications, will expire from 2025 to 2040.

Government Regulation and Product Approval

Governmental authorities in the U.S., at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, approval, quality control, labeling, packaging, promotion, storage, advertising, distribution, post-approval monitoring, marketing and export and import of products such as those we are developing. In order to be lawfully marketed in the U.S., our therapeutic drug candidates and compounded products must comply with either Section 503B (compounding) or Section 505 (new drug approval) of the FDCA as applicable, and they will be subject to similar premarket requirements in other countries. The process of obtaining regulatory approvals and ensuring compliance with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources.

U.S. Government Regulation

In the U.S., the FDA regulates drugs under the FDCA and its implementing regulations. Failure to comply with the applicable U.S. requirements at any time during the product development or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:

 

refusal to approve pending applications;

 

withdrawal of an approval;

 

imposition of a clinical hold;

 

warning or untitled letters;

 

seizures or administrative detention of product;

 

total or partial suspension of production or distribution or

 

injunctions, fines, restitution, disgorgement, refusal of government contracts, or civil or criminal penalties.

NDA approval processes

The process required by the FDA before a therapeutic drug product may be marketed in the U.S. generally involves the following:

 

completion of extensive nonclinical laboratory tests, animal studies and formulation studies conducted in accordance with GLPs and other applicable regulations;

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submission to the FDA of an IND application, which must be authorized before human clinical trials may begin;

 

performance of adequate and well-controlled human clinical trials in accordance with Good Clinical Practices, or GCPs, to establish the safety and efficacy of the product candidate for its intended use;

 

submission to the FDA of an NDA;

 

satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product candidate is produced to assess readiness for commercial manufacturing and conformance to the manufacturing-related elements of the application, to conduct a data integrity audit, and to assess compliance with cGMP to assure that the facilities, methods and controls are adequate to assure the product candidate’s identity, strength, quality and purity;

 

potential FDA audit of the clinical trial sites that generated the data in support of the NDA; and

 

FDA review and approval of the NDA.

Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Such studies must generally be conducted in accordance with the FDA’s GLPs. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND application. Some nonclinical testing may continue even after the IND application is submitted. In addition to including the results of the nonclinical studies, the IND application will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND application automatically becomes effective thirty days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND and may affect one or more specific studies or all studies conducted under the IND application.

The manufacture of investigational drugs for the conduct of human clinical trials is subject to cGMP requirements. Investigational drugs and API imported into the U.S. are also subject to regulation by the FDA relating to their labeling and distribution. Further, the export of investigational drug products outside of the U.S. may be subject to regulatory requirements of the receiving country as well as U.S. export requirements under the FDCA.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP requirements, which include, among other things, the requirements that all research subjects provide their informed consent in writing for their participation in any clinical trial. Investigators must also provide certain information to the clinical trial sponsors to allow the sponsors to make certain financial disclosures to the FDA. Clinical trials must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness endpoints to be evaluated. Each protocol, and any subsequent material amendment to the protocol, must be submitted to the FDA as part of the IND application, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must report to the FDA serious and unexpected adverse reactions in a timely manner. Reporting requirements also apply to, among other things, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator’s brochure and any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product candidate. An institutional review board, or IRB, with jurisdiction at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each research subject or the subject’s legal representative, monitor the study until completed and otherwise comply with IRB regulations.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined.

 

Phase 1—The product candidate is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and elimination. In the case of some therapeutic candidates for severe or life-threatening diseases, such as cancer, especially when the product candidate may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

Phase 2—Clinical trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

 

Phase 3—Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product labeling.

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A pivotal study is a clinical study that adequately meets regulatory agency requirements for the evaluation of a product candidate’s efficacy and safety such that it can be used to justify the approval of the product. Generally, pivotal studies are also Phase 3 studies but may be Phase 2 studies, with the agreement of FDA, if the trial design provides a reliable assessment of clinical benefit, particularly in situations where there is an unmet medical need.

In the case of a 505(b)(2) NDA, which is a marketing application in which the sponsor may rely on investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted, some of the above-described studies and nonclinical studies may not be required or may be abbreviated. The applicant may rely upon the FDA’s prior findings of safety and efficacy for a previously approved product or on published scientific literature in support of its application. Bridging studies, including clinical studies, may be needed, however, to demonstrate that it is scientifically appropriate to rely on the findings of the studies that were previously conducted by other sponsors to the drug that is the subject of the marketing application.

In addition, the manufacturer of an investigational drug in a Phase 2 or Phase 3 clinical trial for a serious or life-threatening disease is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for expanded access to such investigational drug.

The outcome of human clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed or may not be completed at all. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.

During the development of a new product candidate, sponsors are given opportunities to meet with the FDA at certain points; specifically, prior to the submission of an IND, at the end of Phase 2 and before an NDA application is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trials that they believe will support the approval of the new therapeutic. A sponsor may be able to request a Special Protocol Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis that will form the primary basis of an efficacy claim. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the product candidate was identified after the testing began.

Post-approval trials, sometimes referred to as “Phase 4” clinical trials, may be required after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication.

Concurrent with clinical trials, sponsors usually complete additional animal safety studies, develop additional information about the chemistry and physical characteristics of the product candidate and finalize a process for manufacturing commercial quantities of the product candidate in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and the manufacturer must develop methods for testing the quality, purity and potency of the product candidate. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its proposed shelf-life.

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual program fee for each prescription drug. Fee waivers or reductions are available in certain circumstances, such as where a waiver is necessary to protect the public health, where the fee would present a significant barrier to innovation or where the applicant is a small business submitting its first human therapeutic application for review. Product candidates that are designated as orphan drugs are also not subject to user fees unless the application contains an indication other than an orphan indication.

Within sixty days following submission of an NDA, FDA reviews the application to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to accept any NDA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review of the NDA. The FDA has agreed to certain performance goals in the review of NDAs. FDA seeks to review NDAs for standard review products that are not new molecular entities, or NMEs, within ten months of the date the NDA is submitted, while FDA seeks to review NDAs for standard review NMEs within ten months of the date FDA files the NDA.  FDA seeks to review NDAs for priority review products that are not NMEs within six months of the date the NDA is submitted, while FDA seeks to review NDAs for priority review NMEs within six months of the date FDA files the NDA. The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.

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During the product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or REMS, plan is necessary to assure the safe use of the product. If the FDA concludes that a REMS plan is needed, the sponsor of the NDA must submit a proposed REMS plan prior to approval. The FDA has authority to require a REMS plan when necessary to ensure that the benefits of a drug outweigh the risks. In determining whether a REMS plan is necessary, the FDA must consider the size of the population likely to use the drug, the seriousness of the disease or condition to be treated, the expected benefit of the drug, the duration of treatment, the seriousness of known or potential adverse events, and whether the drug is a new molecular entity. A REMS plan may be required to include various elements, such as a medication guide or patient package insert, a communication plan to educate health care providers of the risks, limitations on who may prescribe or dispense the drug or other measures that the FDA deems necessary to assure the safe use of the drug. In addition, the REMS plan must include a timetable to assess the strategy at eighteen months, three years and seven years after the strategy’s approval.

The FDA may also require a REMS plan for a drug that is already on the market if it determines, based on new safety information, that a REMS plan is necessary to ensure that the product’s benefits outweigh its risks.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are compliant with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements. To assure cGMP and GCP compliance, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production and quality control.

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA does not satisfy its regulatory criteria for approval. Data obtained from clinical trials are not always conclusive, and the FDA may interpret data differently than the applicant. If the agency decides not to approve the NDA in its then present form, the FDA will issue a complete response letter that describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant must either resubmit the NDA, addressing all of the deficiencies identified in the letter, withdraw the application, or appeal the decision.

Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post marketing clinical trials, sometimes referred to as “Phase 4” clinical trials, designed to further assess a drug’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.

Expedited Review and Approval

The FDA has various programs, including Fast Track, priority review, accelerated approval and breakthrough therapy designation, which are intended to expedite or simplify the process for reviewing therapeutic candidates, or provide for the approval of a product candidate on the basis of a surrogate endpoint. Even if a product candidate qualifies for one or more of these programs, the FDA may later decide that the product candidate no longer meets the conditions for qualification or that the time period for FDA review or approval will be lengthened. Generally, therapeutic candidates that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of therapeutic candidates to treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give therapeutic candidates that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared to a standard review time of ten months.

Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated product candidate and expedite review of the application for a product candidate designated for priority review. Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an earlier approval for a new product candidate that is (1) intended to treat a serious or life-threatening disease or condition; (2) generally provides a meaningful advantage over available therapies and (3) demonstrates an effect on either a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, and is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA will require that a sponsor of a product candidate receiving accelerated approval perform post-

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marketing studies to verify and describe the predicted effect on IMM or other clinical endpoint. The product may be subject to accelerated withdrawal procedures under certain circumstances.

In addition to the Fast Track, accelerated approval and priority review programs discussed above, a sponsor may seek a breakthrough therapy designation. 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 conditions, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Drugs designated as breakthrough therapies are eligible for, among other things, the Fast Track designation, intensive guidance on an efficient drug development program and a commitment from FDA to involve senior managers and experienced review staff in a proactive collaborative, cross-disciplinary review.

Abbreviated New Drug Applications for Generic Drugs and 505(b)(2)NDAs

NDA applicants are required to list with the FDA each patent with claims covering the applicant’s product or method of using the 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 or 505(b)(2) applicants in support of approval of an ANDA, or a 505(b)(2) application. 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 to be bioequivalent 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 can often be substituted by pharmacists under prescriptions written for the original listed drug. A 505(b)(2) NDA is an application that contains full reports of investigations of safety and effectiveness but where some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. A 505(b)(2) applicant may be able to rely on published literature or on FDA’s previous findings of safety and effectiveness for an approved drug. A 505(b)(2) NDA may be submitted for changes to a previously approved drug, including, for example, in the dosage form, route of administration, or indication.  

The ANDA or 505(b)(2) applicant is required to make a certification to the FDA concerning any patents listed for the approved NDA product in the FDA’s Orange Book. Specifically, the ANDA or 505(b)(2) applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) 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 labeling 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 or 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired.

A certification that the ANDA or 505(b)(2) 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 or 505(b)(2) applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA or 505(b)(2) application has been received 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 forty-five days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of thirty months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.

The ANDA or 505(b)(2) application will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of fourteen years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND application and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, except that this review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, if available, we intend to apply for restorations of patent term for some of our currently owned patents beyond their current expiration

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dates, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA; however, there can be no assurance that any such extension will be granted to us.

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA, or a 505(b)(2) NDA, submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness. Five- and three-year exclusivity do not affect the submission of a full 505(b)(1) NDA.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant Orphan Drug Designation to therapeutic candidates intended to treat a rare disease or condition, which is generally a disease or condition that affects either (1) fewer than 200,000 individuals in the U.S., or (2) more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a product candidate for this type of disease or condition will be recovered from sales in the U.S. for that product candidate. Orphan Drug Designation must be requested before submitting an NDA. We have received Orphan Drug Designation for KX-361 and Oral Paclitaxel for the treatment of angiosarcomas. After the FDA grants Orphan Drug Designation, the identity of the therapeutic agent 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 the disease for which it has such designation, the product candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication, except under limited circumstances, for seven years. Orphan drug exclusivity, however, could also block the approval of one of our therapeutic candidates for seven years if a competitor obtains approval of the same drug for the same disease or condition as defined by the FDA or if our product candidate is determined to be contained within the competitor’s product candidate for the same indication or disease. Orphan drug exclusivity does not prevent FDA from approving the same drug for a different disease or a different drug for the same disease.

Pediatric Exclusivity and Pediatric Use

Under the Best Pharmaceuticals for Children Act (BPCA), certain therapeutic candidates may obtain an additional six months of exclusivity if the sponsor submits information requested in writing by the FDA, referred to as a Written Request, relating to the use of the active moiety of the product candidate in children. Although the FDA may issue a Written Request for studies on either approved or unapproved indications, it may only do so where it determines that information relating to that use of a product candidate in a pediatric population, or part of the pediatric population, may produce health benefits in that population.

In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric studies for most therapeutic candidates, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under PREA, original NDAs and supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must assess the safety and effectiveness of the product candidate for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product candidate is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the product candidate is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the pediatric studies begin. The law requires the FDA to send a PREA Non-Compliance letter to sponsors who have failed to submit their pediatric assessments required under PREA, have failed to seek or obtain a deferral or deferral extension or have failed to request approval for a required pediatric formulation. It further requires the FDA to post the PREA Non-Compliance letter and sponsor’s response.

Post-Approval Requirements

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product candidate reaches the market. Later discovery of previously unknown problems with a product candidate may result in restrictions on the product candidate or even complete withdrawal of the product candidate from the market.

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After approval, some types of changes to the approved product candidate, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may under some circumstances require testing and surveillance programs to monitor the effect of approved therapeutic candidates that have been commercialized, and the FDA under some circumstances has the power to prevent or limit further marketing of a product candidate based on the results of these post-marketing programs.

Any therapeutic candidates manufactured or distributed pursuant to FDA approvals for prescription drugs are subject to continuing regulation by the FDA, including, among other things:

 

reporting and record-keeping requirements;

 

reporting of adverse experiences;

 

providing the FDA with updated safety and efficacy information;

 

product sampling and distribution requirements;

 

notifying the FDA and gaining its approval of specified manufacturing or labeling changes and

 

complying with FDA promotion and advertising requirements, which include, among other things, standards for direct-to-consumer advertising, restrictions on promoting products for uses or in patient populations that are not described in or consistent with the product’s approved labeling, limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet.

Therapeutic manufacturers and other entities involved in the manufacture and distribution of approved therapeutic products are required to register their establishments with the FDA and obtain licenses in certain states and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes extensive procedural, substantive and record-keeping requirements. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require FDA approval before being implemented. FDA regulations would also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers used. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

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, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed under certain limited circumstances for up to two years after the date of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs. The government recently released a regulation and policy to expand and enhance the requirements related to registering and reporting the results of which may result in greater enforcement of these requirements in the future.

Regulation of Compounding Pharmacies

Pharmaceutical drug compounding is a practice in which a licensed pharmacist, a licensed physician, or in the case of an outsourcing facility, a person under the direct supervision of a licensed pharmacist, combines, mixes, or alters ingredients of a drug to create a medication. We are engaged in the compounding of sterile drugs as an outsourcing facility registered with FDA under FDCA Section 503B. Title I of the Drug Quality and Security Act, the Compounding Quality Act, or CQA, allows an entity that compounds sterile drugs to register with FDA as an outsourcing facility. Once registered (which includes payment of an annual fee), an outsourcing facility must meet certain conditions in order to be exempt from the FDCA’s new drug approval requirements, the requirement to label products with adequate directions for use, and certain product tracing and serialization requirements. Under the CQA, a drug must be compounded in compliance with FDA’s cGMP regulations by or under the direct supervision of a licensed pharmacist in a facility registered pursuant to Section 503B of the FDCA in order to be so exempt. The outsourcing facility must also report specific information about the products that it compounds, including a list of all of the products it compounded during the previous six months, and information about the compounded products, such as the source of the active ingredients used to compound pursuant to Section 503B(b)(2). The source of any bulk substance active ingredient used in compounding must be a Section 510 registered manufacturer, and the ingredients must include a certificate of analysis. If the outsourcing facility compounds using bulk drug substances, the bulk drug substances must either appear on FDA’s “interim” list of bulk substances that may be used in compounding under Section 503B, which are bulk drug substances for which FDA has determined there is a clinical need for use in compounding.  Drugs may also be compounded if the FDA-approved drug product appears on FDA’s published drug shortage list.  

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FDA has not yet finalized its list of bulk drug substances for which there is a clinical need, but FDA has announced an interim policy pursuant to which bulk drug substances for which there is sufficient supporting information for FDA to evaluate them may be nominated for inclusion on FDA’s “Category 1” list.  Provided certain conditions are met, FDA will exercise enforcement discretion concerning Category 1 substances pending evaluation of the substances for inclusion on FDA’s final list of bulk drug substances for which there is a clinical need.

In addition, an outsourcing facility must meet other conditions described in the CQA, including reporting adverse events pursuant to Section 503B(b)(5) of the FDCA, and labeling its compounded products with certain information pursuant to Section 503B(a)(10). Outsourcing facilities are prohibited from transferring selling compounded drugs through a wholesale distributor, or from compounding drugs that are essentially copies of commercially available, FDA-approved drugs. Outsourcing facilities are subject to FDA inspection, and FDA conducts inspections on a risk-based frequency under Section 503B(b)(4).

Pharmaceutical Coverage, Reimbursement and Pricing

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval or compound. In the U.S., sales of any products for which we may compound or receive regulatory approval for commercial sale will depend in part on the availability of coverage and reimbursement from third-party payors. Third-party payors include government authorities such as Medicare, Medicaid, TRICARE and the Veterans Administration, managed care providers, private health insurers and other organizations.

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, the Affordable Care Act (“ACA”) made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP, and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the population potentially eligible for Medicaid drug benefits. Centers for Medicare and Medicaid Services (“CMS”) will expand Medicaid rebate liability to the territories of the United States as well, beginning in 2020, if the territories elect to enroll in the Medicaid Drug Rebate Program. In addition, the ACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by CMS may also provide for the public availability of pharmacy acquisition cost data, which could influence our decisions related to setting product prices and offering related discounts.

In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. Effective in 2010, the ACA expanded the types of entities eligible to receive discounted 340B pricing; although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication.

The process for determining whether a payor will provide coverage for a product is typically separate from the process for setting the reimbursement rate that the payor will pay for the product. Third-party payors may limit coverage to specific products on an approved list or formulary which might not include all of the FDA-approved products for a particular indication. Also, third-party payors may refuse to include a particular branded drug on their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. However, under Medicare Part D—Medicare’s outpatient prescription drug benefit—there are protections in place to ensure coverage and reimbursement for oncology products and all Part D prescription drug plans are required to cover substantially all anti-cancer agents. However, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be available. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. In order to obtain coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of any products, in addition to the costs required to obtain regulatory approvals. Our drug candidates may not be considered medically necessary or cost-effective. If third-party payors do not consider a product to be cost-effective compared to other available therapies, they may not cover an approved product as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit.

The U.S. government and state legislatures have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and requirements for

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substitution of generic products for branded prescription drugs. Further, the ACA, contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs reimbursed by Medicaid programs and the extension of Medicaid rebates to Medicaid managed care plans. Several other provisions of the ACA focused on cost containment include:

 

The Patient-Centered Outcomes Research Institute, which was established to identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.

 

The Independent Payment Advisory Board which, since 2014, has had authority to recommend certain changes to the Medicare program to reduce expenditures by the program when spending exceeds a certain growth rate and such changes could result in reduced payments for prescription drugs. Under certain circumstances, these recommendations will become law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings. However, as of late 2016, the President has yet to nominate anyone to serve on the board.

 

The Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending. Funding has been allocated to support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019.

 

The ACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.

 

The ACA imposed a requirement on manufacturers of branded drugs to provide a discount, now 70%, off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., the “donut hole” or the period of consumer payment for prescription medicine costs which lies between the initial coverage limit and the catastrophic—coverage threshold).

The adoption of government controls and measures and tightening of restrictive policies in jurisdictions with existing controls and measures, could also limit payments for pharmaceuticals.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. 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 receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Generic Drugs

Given that we manufacture and market generic drug products, our business may be impacted by laws and policies governing the coverage, pricing and reimbursement of generic drugs. Generic drugs are the same API as initial innovator medicines and are typically more affordable in comparison to the innovator’s products. Sales of generic medicines have benefitted from policies encouraging generic substitution and a general increasing acceptance of generic drugs on the part of healthcare insurers, consumers, physicians and pharmacists. However, while the U.S. generics market is one of the largest in the world, the recent trend of rising generic drug prices has drawn scrutiny from the U.S. government. Specifically, generic drug pricing is the subject of Congressional inquiries and media attention, and many generic drug manufacturers are the targets of government investigations.

In addition, like branded drug manufacturers, generic drug manufacturers are now required to pay an inflation penalty if price increases on generic drugs exceed the rate of inflation.

Also, the ACA revised the methodology for setting Medicaid generic drug reimbursement in order to further limit the reimbursement of generic drugs under the Medicaid program. Specifically, the Federal Upper Limit (“FUL”), which establishes the government’s maximum payment amount for certain generic drugs, is no less than 175% of the weighted average of the most recently reported monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drug products that are available for purchase by retail community pharmacies on a nationwide basis. Similarly, reimbursement for generic drugs is also limited in Medicare Part B, as the Average Sales Price (the metric upon which reimbursement is based or ASP) for multiple-source drugs included within the same multiple-source drug billing and payment code is the volume-weighted average of the various manufacturers’ ASPs for those drug products.

Laboratory Testing Services Coverage and Reimbursement

Given that we market medical devices in the form of in vitro diagnostic devices, or IVDs, used in the performance of clinical laboratory tests, currently limited to drugs of abuse, pregnancy and alcohol testing in the U.S., and cardiac marker and infectious disease testing in Asia, our business may be impacted by laws and policies governing the coding, coverage, reimbursement and demand for clinical laboratory services. With regard to the clinical laboratory services performed on Medicare beneficiaries, health care providers utilizing such tests generally either are paid under prospective payment systems for most tests performed on hospital

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inpatients and outpatients or must bill the Medicare Part B program directly in compliance with applicable coding, coverage and reimbursement rules and accept the amount paid by the Medicare contractor under the Medicare Clinical Laboratory Fee Schedule (CLFS) as payment in full. Currently, Medicare does not require the beneficiary to pay a co-payment for clinical laboratory services paid under the CLFS. Pursuant to Section 216 of-the federal Protecting Access to Medicare Act of 2014 (PAMA), CMS is modernizing the CLFS by creating a market-based reimbursement system which will require clinical laboratories subject to the law to report certain private payor prices and test volumes, and CMS will set new payment rates for CLFS tests based on the weighted median of reported prices, effective January 1, 2018. It is unclear how this new law will affect testing services that use our products at this time, but, as a general matter, CMS has indicated that prices of many clinical laboratory tests will decrease under PAMA. In addition, state Medicaid programs are prohibited from paying more (and in many instances, pay significantly less) than Medicare, and payment is subject to state-specific coverage, reimbursement and laboratory law requirements. Certain state Medicaid programs also require Medicaid recipients to pay co-payment amounts for clinical laboratory services. Likewise, payment by private payors is subject to payor-determined coverage and reimbursement policies that vary considerably and are subject to change without notice. Finally, there is increasing legislative attention to opioid abuse in the United States, including passage of the Comprehensive Addiction and Recovery Act of 2016 which, among other things, strengthens state prescription drug monitoring programs and expands educational efforts for certain populations, which may increase the need for drugs of abuse testing. Changes like these related to clinical laboratory services and any other changes related to coverage or reimbursement may impact the demand for and pricing of some of our products which could adversely affect our ability to operate our business and our financial results.

Reimbursement for Compounded Drugs

Given that we intend to compound and sell compounded products, some of which may include APIs that we manufacture, our business may be impacted by the downstream coverage and reimbursement of compounded products. Generally, federal reimbursement is available for compounded drugs but is typically dependent upon whether the individual ingredients or bulk drug substances that make up the compounded product are FDA-approved. Certain of our API products have not yet received FDA approval.

There is a national payment policy for compounded drugs under Medicare Part B, but the policy is unclear because it does not stipulate whether payment is available for ingredients that are bulk drug substances, which are generally not FDA-approved. Under Medicare Part B, claims for compounded drugs are typically submitted using a billing code for “not otherwise classified drugs,” and CMS contractors who process Part B claims may conduct further reviews of outpatient claims to determine whether the drug billed under a nonspecific billing code is a compounded drug and to identify its ingredients in order to make payment decisions. However, CMS contractors who process Part B claims do not always collect information on the FDA-approval status of drug ingredients, and, therefore, payment may be made for ingredients that are not FDA-approved products. Therefore, there is uncertainty as to whether Medicare payments for compounded drugs are consistent with the Medicare Part B policy.

Under Medicare Part D, federal payments are not available for non-FDA-approved products—including bulk drug substances—and inactive ingredients used to make a compounded drug. Insurers that offer Medicare Part D benefits and Part D-only sponsors, generally, pay pharmacies for each ingredient in the compounded drug that is an FDA-approved product and is otherwise eligible for reimbursement under Part D. However, with respect to non-FDA approved bulk drug substances, insurers that offer Medicare Part D benefits and Part D-only sponsors may choose to pay for such bulk substances but may not submit these payments as part of the Part D transaction data CMS uses to determine federal payments to Part D plans.

Healthcare Fraud and Abuse Laws and Compliance Requirements

We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry. These laws may impact, among other things, our proposed sales and marketing programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration (a term interpreted broadly to include anything of value, including, for example, gifts, discounts, chargebacks, and credits), directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

 

federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment to Medicare, Medicaid or other third-party payors that are false or fraudulent, or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money owed to the federal government;

 

provisions of the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes, referred to as the “HIPAA All-Payor Fraud Prohibition,” that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

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the federal transparency laws, including the federal Physician Payment Sunshine Act, which was part of the ACA, that require manufacturers of certain drugs and biologics to track and report payments and other transfers of value they make to U.S. physicians and teaching hospitals as well as physician ownership and investment interests in the manufacturer, and that such information is subsequently made publicly available in a searchable format on a CMS website;

 

provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information and

 

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, state transparency reporting and compliance laws; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and which may not have the same effect, thus complicating compliance efforts.

The ACA broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The federal False Claims Act prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent. Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. For example, pharmaceutical companies have been prosecuted under the federal False Claims Act in connection with their alleged off-label promotion of drugs, purportedly concealing price concessions in the pricing information submitted to the government for government price reporting purposes, and allegedly providing free product to customers with the expectation that the customers would bill federal health care programs for the product. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes. In addition, private individuals have the ability to bring actions under the federal False Claims Act, and certain states have enacted laws modeled after the federal False Claims Act.

Medical Devices

Through our subsidiary Polymed, we marketed in vitro diagnostic, or IVD, rapid test kits used in the performance of clinical laboratory tests (limited to drugs of abuse and pregnancy testing in the U.S.). We discontinued this line of product sales during the beginning of 2019. These IVD test kits are regulated by the FDA as medical devices under the FDCA and related regulations, and are subject to premarket notification requirements pursuant to Section 510(k) of the FDCA.  FDA’s medical device regulations address, among other topics, the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution of medical devices, for the purpose of ensuring that medical devices manufactured or distributed in the U.S. are safe and effective for their intended uses and otherwise meet the requirements of the FDCA. These requirements apply to varying extents, depending on the level of risk posed by a device. Medical devices may also be subject to other federal and state authorities in the U.S., as well as comparable authorities in foreign jurisdictions.

In addition, the Clinical Laboratory Improvement Amendments of 1988, or CLIA, established quality standards for laboratory testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. Pursuant to CLIA, the FDA categorizes IVDs based on their level of complexity (e.g., knowledge and training necessary to perform the test).  Waived tests are those that are simple to use and pose little risk of providing incorrect information or causing harm if performed incorrectly.  Laboratories that perform only waived tests must obtain a Certificate of Waiver but otherwise are subject to minimal requirements under CLIA.  Tests categorized as moderate complexity are more complex than waived tests, and laboratories performing them are subject to CLIA requirements for quality control, quality assurance, proficiency testing and limited personnel requirements.  Finally, high complex tests are the most difficult to perform or pose the greatest risk if performed incorrectly.  In addition to the requirements applicable to moderate complexity tests, laboratories performing high complexity tests are subject to

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additional personnel requirements.   Labs performing tests other than waived tests must obtain either a Certificate of Accreditation or Certificate of Compliance. Foreign countries may require similar or more onerous approvals to manufacture or market our products or to allow the use of our products in certain settings. Most of our test strips are categorized as CLIA waived, but some of our test strips are categorized as moderate in complexity.

Risk Classification

Unless an exemption applies, each medical device commercially distributed in the U.S. requires either FDA clearance of a 510(k) premarket notification submission, granting of a de novo classification request, or approval of a premarket approval application, or PMA. The FDCA establishes three classes of devices - Class I (low risk), Class II (moderate risk) or Class III (high risk) - depending on the degree of risk associated with each medical device. Class I devices are those for which general controls are sufficient to provide reasonable assurance of safety and effectiveness. General controls include establishment registration and product listing, complaint handling, reporting of adverse events recordkeeping, and compliance with the applicable portions of the Quality System Regulation, or QSR. Class II devices are those for which general controls are insufficient by themselves to provide reasonable assurance of the safety and effectiveness of the device and for which special controls can be established to provide such assurance.  Special controls may include performance standards, post-market surveillance, patient registration, and the development and dissemination of guidelines. Class III devices are those for which reasonable assurance of safety and effectiveness cannot be provided through the imposition of general and special controls and that are either purported or represented for use in supporting or sustaining life or of substantial important in preventing impairment of human health or that present a potential unreasonable risk of illness or injury.

Premarket Authorization Pathways

In addition to general and special controls, medical devices may be subject to the requirement for premarket review and authorization by FDA in order to be commercially distributed.  The three premarket authorization pathways for medical devices are the 510(k) premarket notification, request for de novo classification, and an application for premarket approval, or PMA.  Most Class I devices are exempt from any premarket authorization requirement.  Many Class II devices are subject to 510(k) premarket notification.  Our currently marketed products are Class II devices subject to 510(k) clearance.  If no predicate exists, a device is automatically designated as Class III.  However, if the device does not pose high risk, a request for de novo classification may be submitted. Class III devices require FDA approval of a PMA application.

510(k) Marketing Clearance and De Novo Pathways

To obtain 510(k) clearance, a premarket notification submission must be submitted to the FDA demonstrating that the proposed device is “substantially equivalent” to a predicate device. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I or a device that was found substantially equivalent another device cleared through the 510(k) process. Pursuant to FDA’s user fee-based performance goals,  the agency has 90 days to review a 510(k) notification submission once it has been accepted, but the review process may take longer if the agency has questions or requires additional information, including clinical data, in order to make a determination regarding substantial equivalence.

If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant 510(k) clearance to market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device cannot be lawfully marketed. In the absence of a suitable predicate, the device is  automatically designated as Class III. The sponsor may be able to seek reclassification through the de novo process.  If a de novo request is granted, the device may be legally marketed and a new classification is established. If the device is classified as Class II, the device may serve as a predicate for future 510(k) submissions. If the de novo pathway is not available, the sponsor must fulfill more rigorous PMA requirements.

PMA Approval Pathway

Class III devices require PMA approval before they can be lawfully marketed in the U.S. The PMA process is more demanding than the 510(k) process. A PMA must include information from investigations sufficient to show there is a reasonable assurance of safety and effectiveness under the labeled conditions of use proposed by the sponsor.  A PMA submission generally includes data from preclinical studies and human clinical trials.  The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical trial that supported PMA approval or requirements to conduct additional clinical trials post-approval. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.

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Our products are not currently subject to PMA requirements. However, we may in the future develop devices that will require the submission of a PMA, or FDA may find that some of our proposed uses are not substantially equivalent to previously cleared and marketed devices, and thus a PMA is required.

Clinical Trials

Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations, which specify obligations on study sponsors and clinical investigators.  These regulations include restrictions on promotion and commercialization of the device, specified labeling, reporting, and monitoring obligations, and compliance with human protection requirements (e.g., IRB approval, informed consent of subjects). If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must be approved prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective thirty days after receipt by the FDA unless the FDA notifies us that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE that require a modification, the FDA may, depending on whether the issues need to be addressed prior to study enrollment, either disapprove the IDE or approve the IDE with conditions.

During a clinical trial, the sponsor is required to comply with applicable FDA requirements, and the clinical investigators are also subject to FDA’s regulations. Both must comply with GCPs, which among other things require that informed consent be obtained from each research subject prior to enrollment, that the investigational plan and study protocol be followed, that the disposition of the investigational device be controlled and that reporting and recordkeeping requirements are followed. Additionally, after a trial begins, the sponsor, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a clinical trial is completed, there can be no assurance that the data generated during a clinical trial will meet the prespecified safety and effectiveness endpoints or otherwise produce results that will lead the FDA to grant marketing clearance or approval.

Post-Market Regulation

After a device is cleared or approved for marketing, the manufacturer is subject to numerous post-market requirements. These include:

 

establishment registration and device listing with the FDA;

 

QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

 

labeling and promotion requirements, including the requirement that product labeling is truthful and nonmisleading and bears adequate directions for use;

 

procedures for evaluating device modifications and for determining whether they could significantly affect safety or effectiveness or would constitute a major change to intended use, in which case additional marketing authorization from FDA could be required;

 

complaint handling and investigation requirements, including, when necessary, undertaking corrective and preventive action to prevent recurrence of an identified issue;

 

medical device reporting requirements, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury if the malfunction were to recur;

 

correction and removal requirements, under which a manufacturer must repair or replace (depending on the circumstances) a customer’s device and which may include FDA reporting obligations;  

 

voluntary recall requirements, if FDA determines that a removal or correction was initiated by the manufacturer to correct a violation of the FDCA, which may require additional disclosure and remedial actions to be undertaken.  FDA may also request that the manufacturer initiate a recall if a product presents a risk of illness or injury or gross consumer deception and agency action is necessary to protect the public health and welfare.  FDA posts information about certain types of recalls on a publicly-available database;

 

mandatory recall, if FDA determines there is a reasonable probability that a device would cause serious, adverse health consequences or death and issues a cease distribution and notification order; and

 

post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.

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Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods used in, and the facilities and controls used for, the design, manufacture, labeling, packaging, installation and servicing of finished devices intended for human use. The QSR includes requirements to establish and maintain procedures relating to design controls (including design history file), document controls, purchasing controls, production and process controls, labeling and packaging controls, corrective and preventive action, quality audits, and records (including device master record, device history record, and complaint files). As a manufacturer, we and our third-party manufacturers are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our product. The discovery of previously unknown problems with our product, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.

New Legislation and Regulations

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the testing, approval, manufacturing, marketing, coverage and reimbursement of products regulated by the FDA or other government agencies. In addition to new legislation, FDA and healthcare fraud and abuse and coverage and reimbursement regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products. In particular, we expect that the current presidential administration and U.S. Congress will continue to seek to modify, repeal or otherwise invalidate all, or certain provisions of, the ACA. Most recently, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. There is still uncertainty with respect to the impact President Trump’s administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold. Such reforms could have an adverse effect on anticipated revenues from therapeutic 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 therapeutic candidates. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

Furthermore, in the U.S., the health care industry is subject to political, economic and regulatory influences. Initiatives to reduce the federal budget and debt and to reform health care coverage are increasing cost-containment efforts. We anticipate that federal agencies, Congress, state legislatures and the private sector will continue to review and assess alternative health care benefits, controls on health care spending, and other fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit coverage or the amounts that federal and state governments will pay for health care products and services, which could also result in reduced demand for our products or additional pricing pressures and limit or eliminate our spending on development projects and affect our ultimate profitability. We are not able to predict whether further legislative changes will be enacted or whether FDA or healthcare fraud and abuse or coverage and reimbursement regulations, guidance, policies or interpretations will be changed or what the effect of such changes, if any, may be.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977 (“FCPA”) prohibits any U.S. individual or business from corruptly offering, paying, promising or authorizing the provision of anything of value, directly or indirectly, to any foreign official, foreign political party or official thereof, or candidate for foreign political office to obtain or retain business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with accounting provisions requiring the issuer to maintain books and records that accurately and fairly reflect all transactions of the issuer and its controlled subsidiaries and to devise and maintain an adequate system of internal accounting controls.

Environment

We are subject to inspections by the FDA for compliance with cGMP and other U.S. regulatory requirements, including U.S. federal, state and local regulations regarding environmental protection and hazardous and controlled substance controls, among others. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We have incurred, and may continue to incur, significant expenditures to ensure that we are in compliance with these laws and regulations. We would be subject to significant penalties for failure to comply with these laws and regulations.

China Government Regulation

In the People’s Republic of China ( “PRC” or “China”), we operate in an increasingly complex legal and regulatory environment. We are subject to a variety of Chinese laws, rules and regulations affecting many aspects of our business. This section summarizes the principal Chinese laws, rules and regulations relevant to our business and operations.

Foreign Investment in Pharmaceutical Industry

Foreign investment in China was previously subject to the Catalogue for the Guidance of Foreign Investment Industries (2017 Revision) issued and effective beginning July 28, 2017, and the Special Administrative Measures for the Access of Foreign Investment (“Negative List”) issued and effective beginning July 28, 2018, which together comprised the encouraged foreign-invested

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industries catalogue and the special administrative measures for the access of foreign investments to the restricted or the prohibited foreign-invested industries. The latter set out restrictions such as percentage of shareholding and qualifications of senior management. The Catalogue of Industries in which Foreign Investment is Encouraged (2019 Revision), the 2019 Catalogue, and the Special Administrative Measures for the Access of Foreign Investment (Negative List) (2019 Revision), and the 2019 Negative List, which were issued on June 30, 2019 and came into effect on July 30, 2019, further reduced restrictions on the foreign investment. Manufacturing and producing of new anti-cancer drugs, new cardiovascular medicine and new nervous system drugs falls within the field of encouraged catalogue. After the 2019 Catalogue and the 2019 Negative List came into effect, they replaced the Catalogue for the Guidance of Foreign Investment Industries (2017 Revision) and the Special Administrative Measures for the Access of Foreign Investment (Negative List).

General Regulations on China Drug Administration

The pharmaceuticals industry in China is mainly regulated and administrated by the State Administration for Market Regulation, the National Health Commission (NHC) and the Bureau of National Health Care. Pursuant to the Decision of the First Session of the Thirteenth National People’s Congress on the State Council Institutional Reform Proposal promulgated by the Chinese National Congress on March 17, 2018, (1) the State Administration for Market Regulation was established; and the China Food and Drug Administration (CFDA) ceased to exist, while the NMPA was established as a department under the State Administration for Market Regulation; (2) the National Health and Family Planning Commission shall cease to exist, while the NHC shall be established as a department under the State Council, incorporating duties of supervision and management which had been assigned to relevant departments and (3) the Bureau of National Health Care shall be established as a bureau directly subordinate to the State Council.

The NMPA monitors and supervises the administration of pharmaceutical products, as well as medical devices and equipment. The NMPA’s primary responsibility includes evaluating, registering and approving new drugs, generic drugs and imported drugs; approving and issuing permits for the manufacture, export and import of pharmaceutical products and medical appliances; approving the establishment of enterprises for pharmaceutical manufacture and distribution; formulating administrative rules and policies concerning the supervision and administration of pharmaceuticals and handling significant accidents involving these products. The local provincial drug administrative authorities are responsible for supervision and administration of drugs within their respective administrative regions.

The People’s Republic of China Drug Administration Law promulgated by the Standing Committee of the National People’s Congress in 1984 and the Implementing Measures of the Chinese Drug Administration Law promulgated by the Ministry of Health, or the MOH, in 1989 set forth the legal framework for the administration of pharmaceutical products, including the research, development and manufacturing of drugs.

The Chinese Drug Administration Law was revised in February 2001, December 2013, April 2015, and again in August 2019. The purpose of the revisions was to strengthen the supervision and administration of pharmaceutical products and to ensure the quality and safety of those products for human use. The revised Chinese Drug Administration Law applies to entities and individuals engaged in the development, production, trade, application, supervision and administration of pharmaceutical products. It regulates and prescribes a framework for the administration of pharmaceutical preparations of medical institutions and for the development, research, manufacturing, distribution, packaging, pricing and advertisement of pharmaceutical products. Revised Implementing Measures of the Chinese Drug Administration Law promulgated by the State Council took effect in September 2002 and was revised in February 2016, and again in March 2019, providing detailed implementing regulations for the revised Chinese Drug Administration Law.

The Chinese Drug Administration Law was newly revised on August 26, 2019 and came into effect on December 1, 2019. As compared to the old law, the current revised Chinese Drug Administration Law mainly includes the following key highlights:

 

The supervision and administration of pharmaceutical products will be improved by emphasizing the responsibility of the enterprise, strengthening the management of drug production process and clarifying the traceability requirements of drug quality and safety;

 

The responsibility for drug supervision will be clarified, and the supervision measures will be improved;

 

The punishment of illegal behaviors will be aggravated by increasing the fine limit, strengthening the punishment for the relevant personnel of pharmaceutical production enterprises and supplementing the responsibility of the drug marketing authorization holder (MAH);

 

The MAH system will be implemented, which will cause the MAH holder to undertake the responsibility of the safety and effectiveness of drugs and to bear legal responsibility during the whole process of development, production, management and use of drugs; and

 

The drug approval system will be reformed, including the abolishment of the separation of GMP and GSP certification.

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Under these regulations, we need to follow related regulations for preclinical research, clinical trials and production of new drugs.

Good Laboratories Practice Certification for Preclinical Research

To improve the quality of preclinical research, the NMPA promulgated the Administrative Measures for Good Laboratories Practice of Preclinical Laboratory in 2003 and began to conduct the certification program of GLP. Under the Certifying Measures for Clinical Test Units, or NMPA Circular 44, promulgated in February 2004, the NMPA decides whether an institution is qualified for undertaking pharmaceutical preclinical research upon the evaluation of the institution’s organizational administration, its research personnel, its equipment and facilities and its operation and management of preclinical pharmaceutical projects. If all requirements are met, a GLP Certification will be issued by the NMPA, and the result will be published on the NMPA’s website. According to the newly revised Chinese Drug Administration Law, drug clinical trial institutions shall complete filing with NMPA (approval by NMPA is no longer required). Accordingly, NMPA promulgated the Filing Measures for Drug Clinical Trial Institutions on November 29, 2019, which provides details of the filing procedures and requirements.

Approval for Clinical Trials and Production of New Drugs

According to the Provisions for Drug Registration promulgated by the NMPA in 2007, the Chinese Drug Administration Law, the Provisions on the Administration of Special Examination and Approval of Registration of New Drugs, or the Special Examination and Approval Provisions issued by the NMPA in 2009 and the Circular on Information Publish Platform for Pharmaceutical Clinical Trials issued by the NMPA in 2013, we must comply with the following procedures and obtain several approvals for clinical trials and production of new drugs.

Clinical Trial Application

Upon completion of its preclinical research, a research institution must apply for approval of a CTA before conducting clinical trials. According to the Decision of the NMPA on Adjusting the Approval Procedures of the Administrative Approval Items for Certain Drugs promulgated by the NMPA on March 17, 2017, the decision on the approval of clinical trials of drugs enacted by the NMPA can be made by the Center for Drug Evaluation of the NMPA, or the CDE in the name of the NMPA from May 1, 2017. In July 2018, the NMPA promulgated the Announcement of the State Drug Administration on Adjusting Evaluation and Approval Procedures for Clinical Trials for Drugs, which further adjusted for those who apply for drug clinical trials in China, if an applicant does not receive any negative or questioning opinions from the CDE within sixty days after the date of accepting the application and the payment of the fee, drug clinical trials may be conducted in accordance with the plan being submitted.

Four Phases of Clinical Trials

A clinical development program consists of Phases 1, 2, 3 and 4. Phase 1 refers to the initial clinical pharmacology and safety evaluation studies in humans. Phase 2 refers to the preliminary evaluation of a drug candidate’s therapeutic effectiveness and safety for particular indication(s) in patients, provides evidence and support for the design of Phase 3 clinical trial and settles the administrative dose regimen. Phase 3 refers to clinical trials undertaken to confirm the therapeutic effectiveness of a drug. Phase 3 is used to further verify the drug’s therapeutic effectiveness and safety on patients with target indication(s), to evaluate overall benefit-risk relationships of the drug and ultimately to provide sufficient evidence for the review of drug registration application. Phase 4 refers to a new drug’s post-marketing study to assess therapeutic effectiveness and adverse reactions when the drug is widely used, to evaluate overall benefit-risk relationships of the drug when used among general population or specific groups and to adjust the administration dose, etc.

New Drug Application

When Phase 1, 2 and 3 of the clinical trials have been completed, the applicant must apply to the NMPA for approval of a new drug application. The NMPA then determines whether to approve the application according to the comprehensive evaluation opinion provided by the CDE of the NMPA. We must obtain approval of a new drug application before our drugs can be manufactured and sold in the Chinese market.

Good Manufacturing Practice

All facilities and techniques used in the manufacture of products for clinical use or for sale in China must be operated in conformity with cGMP guidelines as established by the NMPA. GMP certification was no longer required from December 2019 and regular and random onsite checking and supervision will be implemented by the relevant authority. Failure to comply with applicable requirements could result in the termination of manufacturing and significant fines.

Animal Test Permits

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According to Regulations for the Administration of Affairs Concerning Experimental Animals promulgated by the State Science and Technology Commission in November 1988, as revised in January 2011 and July 2013, and Administrative Measures on the Certificate for Animal Experimentation promulgated by the State Science and Technology Commission and other regulatory authorities in January 2001, performing experimentation on animals requires a Certificate for Use of Laboratory Animals. Applicants must satisfy the following conditions:

 

Laboratory animals must be qualified and sourced from institutions that have Certificates for Production of Laboratory Animals;

 

The environment and facilities for the animals’ living and propagating must meet state requirements;

 

The animals’ feed and water must meet state requirements;

 

The animals’ feeding and experimentation must be conducted by professionals, specialized and skilled workers or other trained personnel;

 

The management systems must be effective and efficient and

 

The applicable entity must follow other requirements as stipulated by the Chinese laws and regulations.

We obtained a Certificate for Use of Laboratory Animals in 2012 regarding the scope of rats and mice.

Domestic Category 1 New Drugs Are Eligible for Special Examination and Approval

According to the Provisions for Drug Registration, drug registration applications are divided into three different types, namely Domestic New Drug Application, Domestic Generic Drug Application and Imported Drug Application. Drugs fall into one of three categories, namely chemical medicine, biological product or traditional Chinese or natural medicine. The registrations of chemical medicines are divided into six categories, among which, a Category 1 drug is a new drug that has never been marketed in any country. All of our clinical-stage drug candidates qualify as domestic Category 1 new drugs.

In March 2016, the NMPA promulgated the Work Plan for Reforming the Chemical Medicines Registration Classification System, under which, the registrations of chemical medicines are divided into five categories as follows:

Category 1: Innovative drugs that are not marketed both domestically and abroad. These drugs contain new compounds with clear structures and pharmacological effects, and they have clinical value.

Category 2: Modified new drugs that are not marketed both domestically and abroad. With known active components, the drug’s structure, phase, prescription manufacturing process, administration route and indication are optimized, and it has obvious clinical advantage.

Category 3: The drugs that are imitated by domestic applicants to original drugs that have been marketed abroad but not domestically. These kinds of drugs are supposed to have the same quality and effects with original drugs. Original drugs are the foremost drugs that are approved to be marketed domestically and /or abroad with complete and full safety and validity data as marketing evidence.

Category 4: The drugs that are imitated by domestic applicants to original drugs that have been marketed domestically. These kinds of drugs are supposed to have the same quality and effects with original drugs.

Category 5: The drugs that have been marketed abroad are applied to be marketed domestically.

The registration of Category 1 or Category 2 drugs above will be subject to the requirements of Domestic New Drug Application under the Provisions for Drug Registration, Domestic Generic Drug Application will be applicable to Category 3 or Category 4 drugs registration, and Imported Drug Application will be applicable to Category 5 drugs registration. The applicants whose registration applications for chemical medicines have been accepted by the NMPA before the date of promulgation of the Work Plan for Reforming the Chemical Medicines Registration Classification System can choose to continue the applications process according to the Provisions for Drug Registration or to comply with the new categories under the Work Plan for Reforming the Chemical Medicines Registration Classification System

According to the Special Examination and Approval Provisions, the NMPA conducts special examination and approval for new drugs registration application when:

 

(1)

active ingredients and their preparations extracted from plants, animals and minerals, and newly discovered medical materials and their preparations have not been marketed in China;

 

(2)

the chemical raw material medicines as well as the preparations and biological products thereof have not been approved for marketing home and abroad

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(3)

the new drugs are for treating AIDS, malignant tumors and rare diseases, etc., and have obvious advantages in clinic treatment; or

 

(4)

the new drugs are for treating diseases with no effective methods of treatment.

The Special Examination and Approval Provisions provide that the applicant may file for special examination and approval at the stage of Clinical Trial Application if the drug candidate falls within items (1) or (2), and for drug candidates that fall within items (3) or (4), the application for special examination and approval must be made when filing for production.

The registration of Category 1 or Category 2 drugs above will be subject to the requirements of Domestic New Drug Application under the Provisions for Drug Registration, Domestic Generic Drug Application will be applicable to Category 3 or Category 4 drugs registration and Imported Drug Application will be applicable to Category 5 drugs registration. The applicants whose registration applications for chemical medicines have been accepted by the NMPA before the date of promulgation of the Reform Plan Regarding the Category of the Registration of Chemical Medicines can choose to continue the applications process according to the Provisions for Drug Registration or to comply with the new categories under the Reform Plan Regarding the Category of the Registration of Chemical Medicines.

We believe that certain of our products fall within items (2) and (3) above. Therefore, we may file an application for special examination and approval at the CTA stage, which may enable us to pursue a more expedited path to approval in China and bring therapies to patients more quickly.

The Advantages of Category 1 New Drugs over Category 5 Drugs

Under the Provisions for Drug Registration and the Work Plan for Reforming the Chemical Medicines Registration Classification System, Category 5 drugs are drugs which have already been marketed abroad by multinational companies but are not yet approved in China, and Category 5 drug registration will be subject to the requirements of the Imported Drug Application. Compared with the application for Category 5 drugs, the application for Category 1 domestic new drugs has a more straight-forward registration pathway. According to the Special Examination and Approval Provisions, where a special examination and approval treatment is granted, the application for clinical trial and manufacturing will be handled with priority and with enhanced communication with the CDE, which will establish a working mechanism for communicating with the applicants. If it becomes necessary to revise the clinical trial scheme or make other major alterations during the clinical trial, the applicant may file an application for communication. When an application for communication is approved, the CDE will arrange the communication with the applicant within one month.

In comparison, according to the Provisions for Drug Registration, the registration pathway for Category 5 drugs is complicated and evolving. Category 5 drug applications may be submitted after a company obtains an NDA approval and receive the CPP granted by a major regulatory authority, such as the FDA or the EMA. Multinational companies may need to apply for conducting multi-regional clinical trials, which means that companies do not have the flexibility to design the clinical trials to fit the Chinese patients and standard-of-care. Category 5 drug candidates may not qualify to benefit from fast track review with priority at the CTA stage. Moreover, a requirement to further conduct local clinical trials can potentially delay market access by several years from its international NDA approval.

Adjustment on the Administration of Imported Drug Registration

On October 10, 2017, the NMPA promulgated the Decision on Adjusting Relevant Matters Concerning the Administration of Imported Drug Registration, effective as of the date of its promulgation, which stipulates that, among others, (1) simultaneous research and application are allowed, meaning that, in the case of a clinical trial concerning a drug subject thereto to be conducted at an international multi-center clinical trial (“IMCCT”) in China, Phase 1 clinical trials of the drug are allowed simultaneously, and the requirement that the drug subject to the clinical trial need to have been previously registered overseas or to have entered a Phase 2 or Phase 3 clinical trial shall not apply, except for preventative biological products; (2) the drug registration procedure is to be optimized, meaning that, upon the completion of a clinical trial at an IMCCT in China, an applicant may directly file a drug registration application and (3) for a new chemical drug or an innovative therapeutic biological drug for which a clinical trial or market registration is made, in each case as an imported drug, the requirement that such drug has received an overseas license issued by the country or region where the drug’s overseas pharmaceutical manufacturer is located shall not apply.

Changes to the Review and Approval Process

In August 2015, the State Council issued a statement, Opinions on Reforming the Review and Approval Process for Pharmaceutical Products and Medical Devices, which contained several potential policy changes that could benefit the pharmaceutical industry:

 

A plan to accelerate innovative drug approval with a special review and approval process, with a focus on areas of high unmet medical needs, including drugs for HIV, cancer, serious infectious diseases, orphan diseases and drugs on national priority lists.

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A plan to adopt a policy which would allow companies to act as the marketing authorization holder and to hire contract manufacturing organizations to produce drug products.

 

A plan to improve the review and approval of clinical trials, and to allow companies to conduct clinical trials at the same time as they are in other countries and encourage local clinical trial organizations to participate in international multi-center clinical trials.

In November 2015, the NMPA released the Circular Concerning Several Policies on Drug Registration Review and Approval, which further clarified the following policies potentially simplifying and accelerating the approval process of clinical trials:

 

A one-time umbrella approval procedure allowing approval of all phases of a new drug’s clinical trials at once, rather than the current phase-by-phase approval procedure, will be adopted for new drugs’ CTAs.

 

A fast track drug registration or clinical trial approval pathway will be available for the following applications: (1) registration of innovative new drugs treating HIV, cancer, serious infectious diseases and orphan diseases; (2) registration of pediatric drugs; (3) registration of geriatric drugs and drugs treating China-prevalent diseases; (4) registration of drugs sponsored by national science and technology grants; (5) registration of innovative drugs using advanced technology, using innovative treatment methods, or having distinctive clinical benefits; (6) registration of foreign innovative drugs to be manufactured locally in China; (7) concurrent applications for new drug clinical trials which are already approved in the U.S. or EU, or concurrent drug registration applications for drugs which have applied for marketing authorization and passed onsite inspections in the U.S. or EU and are manufactured using the same production line in China and (8) clinical trial applications for drugs with urgent clinical need and patent expiry within three years, and marketing authorization applications for drugs with urgent clinical need and patent expiry within one year.

In March 2016, the NMPA issued the Interim Provisions on the Procedures for Drug Clinical Trial Data Verification that provides procedural rules for NMPA’s on-site verification of clinical data before drug approvals.

Also in February 2016, the NMPA published the Opinions on Implementing a Prioritized Review System to Avoid Drug Review Backlogs, which introduces a prioritized review and approval pathway to clinical trial applications and registration applications of certain drugs as part of NMPA’s ongoing reform of its current drug review and approval system.

The NMPA issued the Procedures for Priority Examination and Approval of Medical Devices (Procedures) on October 25, 2016, which shall come into effect on January 1, 2017. The Procedures, composed of seventeen articles, specify that the priority in examination and approval shall be given, in relation to the applications of registering Class-III domestic, or Class-II and Class-III imported medical devices, when those applications fall within such categories as diagnosis or treatment of rare disease or malignant tumor with significant clinical advantage. According to the Procedures, the medical device technical evaluation center of the NMPA will tentatively decide on the applicants applying for their project given priority examination and approval, names of their products and the reception numbers and disclose such information on its website for a period of no less than five working days. The Procedures provide that for projects given priority in examination and approval, the medical device technical evaluation center shall communicate with applicants in an active way, as required by applicable provisions, in the course of evaluating relevant technologies and may arrange for special talks when necessary; food and drug administrative departments at provincial levels shall take the review of the registered quality management system of medical devices as priority and the NMPA will prioritize their administrative examination and approval.

In December 2017, the NMPA innovations promulgated the Opinions on Encouraging the Prioritized Evaluation and Approval for Drug, the NMPA would prioritize the examination and approval on applications of new drugs in particular cases, including (1) applications of new drugs with significant clinical value satisfying particular conditions; (2) applications of new drugs with significant clinical advantages preventing or treating particular diseases and (3) other particular conditions.

According to the Announcement on Optimizing the Evaluation and Approval of Drug Registration promulgated by the NMPA and the NHC in May 2018, the Chinese government seeks to further simplify and accelerated the clinical trial approval process.

Chinese Enterprise Income Tax Law and Its Implementation

The Chinese Enterprise Income Tax Law (“EIT Law”) and its implementation rules provide that from January 1, 2008, a uniform income tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises and permit certain High and New Technologies Enterprises (“HNTEs”) to enjoy preferential enterprise income tax rates subject to these HNTEs meeting certain qualification criteria.

The EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other distributions payable by a Chinese resident enterprise to investors who are “non-resident enterprises” (that do not have an establishment or place of business in China, or that have such establishment or place of business but the relevant dividend or other distribution is not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a Chinese resident enterprise is 5% if the Hong Kong enterprise owns at least 25% of the capital of the Chinese enterprise; otherwise, the

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dividend withholding tax rate is 10%. According to the Notice of the Chinese State Administration of Taxation on Issues relating to the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009 and effective on the same day, the corporate recipient of dividends distributed by Chinese enterprises must satisfy the direct ownership thresholds at all times during the twelve consecutive months preceding the receipt of the dividends. The Chinese State Administration of Taxation issued the Notice on How to Understand and Identify the Owner of Benefits in the China-HK Tax Agreement on October 27, 2009. Pursuant to these regulations and the Administrative Measures for Tax Treaty Treatment for Non-Resident Taxpayers promulgated by the Chinese State Administration of Taxation in August 2015, non-resident enterprises are required to file information sheets to the competent tax authorities in order to enjoy the favorable treatments under the treaties. However, the relevant tax authorities may check and verify at their discretion, and if a company is deemed to be a pass-through entity rather than a qualified owner of benefits, it cannot enjoy the favorable tax treatments provided in the tax arrangement. In addition, if transactions or arrangements are deemed by the relevant tax authorities to be entered into mainly for the purpose of enjoying favorable tax treatments under the tax arrangement, such favorable tax treatments may be subject to adjustment by the relevant tax authorities in the future.

On July 27, 2011, the Ministry of Finance, the General Administration of Customs, and the State Administration of Taxation issued the Notice on the Relevant Tax Policies for the Implementation of the Strategy of Extensive Development of the Western Regions, under which from January 1, 2011 to December 31, 2020, a reduced enterprise income tax rate of 15% is applicable to the enterprises set up in the western regions as designated by the relevant Chinese regulations with their main business in the encouraged industries. The encouraged industries are those listed in the Catalog of Encouraged Industries in the Western Regions as promulgated by NDRC. To qualify for the reduced tax rate, an enterprise must derive 70% or more of its revenue from the business listed in the Catalog of Encouraged Industries in the Western Regions.

Regulations Relating to Business Tax and Value-added Tax

Pursuant to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993 and effective on January 1, 1994, as amended on November 10, 2008 and effective January 1, 2009, any entity or individual conducting business in a service industry is generally required to pay business tax at the rate of 5% on the revenues generated from providing such services.

In November 2011, the Ministry of Finance and the State Administration of Taxation (“SAT”) promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax (Pilot Plan). Since January 2012, the SAT has been implementing the Pilot Plan, which imposes value-added tax (“VAT”) in lieu of business tax for certain industries in Shanghai. The Pilot Plan was expanded to other regions, including Beijing, in September 2012 and was further expanded nationwide beginning August 1, 2013. VAT is applicable at a rate of 6% in lieu of business taxes for certain services, and 17% for the sale of goods and provision of tangible property lease services. VAT payable on goods sold or taxable services provided by a general VAT taxpayer for a taxable period is the net balance of the output VAT for the period after crediting the input VAT for the period. In March 2016, the Ministry of Finance and SAT jointly issued the Notice on Adjustment of Transfer Business Tax to Value Added Tax effective from May 2016, according to which Chinese tax authorities have started imposing VAT on revenues from various service sectors, including real estate, construction, financial services and insurance as well as other lifestyle service sectors, replacing the business tax.

Regulations Relating to Environmental Protection

China has adopted extensive environmental laws and regulations with national and local standards for emissions control, discharge of waste water and storage and transportation, treatment and disposal of waste materials. At the national level, the relevant environmental protection laws and regulations include the Chinese Environmental Protection Law, the Chinese Law on the Prevention and Control of Air Pollution, the Chinese Law on the Prevention and Control of Water Pollution, the Chinese Law on the Promotion of Clean Production, the Chinese Law on the Prevention and Control of Noise Pollution, the Chinese Law on the Prevention and Control of Solid Waste Pollution, the Chinese Recycling Economy Promotion Law, the Chinese Law on Environmental Impact Assessment, the Administrative Regulations on the Levy and Use of Discharge Fees and the Measures for the Administration of the Charging Rates for Pollutant Discharge Fees. In recent years, the Chinese Government has introduced a series of new policies designed to generally promote the protection of the environment. For instance, on November 10, 2016, the General Office of the State Council has released the Implementing Plan for the Permit System for Controlling the Discharge of Pollutants (Plan). The Plan proposes the need of instituting a system for enterprises and public institutions to control their respective total amount of pollutants discharged, which shall be connected with the environmental impact assessment system organically. The Plan also stipulates that it is necessary to regulate the orderly issuance of pollutant discharge permits, to make a name list to manage the permission of pollutant discharge, to promote the administration of such permission system per industry and to impose severer administration and control over enterprises and public institutions located at such places where environment quality fails to reach relevant standards. Furthermore, the Plan requires that a national pollutant discharge permit management information platform shall be established by 2017 to strengthen the information disclosure and social supervision.

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Regulations Relating to Foreign Exchange and Dividend Distribution

Foreign Exchange Regulation

The Foreign Exchange Administration Regulations, most recently amended in August 2008, are the principal regulations governing foreign currency exchange in China. Under the Chinese foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. In contrast, approval from or registration with appropriate government authorities is required when RMB is converted into a foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.

In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in China, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not previously possible. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by the SAFE or its local branches over direct investment by foreign investors in China will be conducted by way of registration, and banks must process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches.

Under the Circular of the SAFE on Further Improving and Adjusting the Policies for Foreign Exchange Administration under Capital Accounts promulgated by the SAFE on January 10, 2014 and effective from February 10, 2014, administration over the outflow of the profits by domestic institutions has been further simplified. In principle, a bank is no longer required to examine transaction documents when handling the outflow of profits of no more than the equivalent of $50,000 by a domestic institution. When handling the outflow of profits exceeding the equivalent of $50,000, the bank, in principle, is no longer required to examine the financial audit report and capital verification report of the domestic institution, provided that it must examine, according to the principle of transaction authenticity, the profit distribution resolution of the board of directors (or the profit distribution resolution of the partners) relating to this profit outflow and the original copy of its tax record-filing form. After each profit outflow, the bank must affix its seal to and endorsements on the original copy of the relevant tax record-filing form to indicate the actual amount of the profit outflow and the date of the outflow.

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises (“SAFE Circular 19”), which became effective on June 1, 2015. According to SAFE Circular 19, the foreign exchange capital of foreign-invested enterprises may be settled on a discretionary basis, meaning that the foreign exchange capital in the capital account of a foreign-invested enterprise for which the rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operational needs of the foreign-invested enterprise. The proportion of such discretionary settlement is temporarily determined as 100%. The RMB converted from the foreign exchange capital will be kept in a designated account, and if a foreign-invested enterprise needs to make further payment from such account, it still must provide supporting documents and go through the review process with the banks.

Furthermore, SAFE Circular 19 stipulates that the use of capital by foreign-invested enterprises must adhere to the principles of authenticity and self-use within the business scope of enterprises. The capital of a foreign-invested enterprise and capital in RMB obtained by the foreign-invested enterprise from foreign exchange settlement must not be used for the following purposes:

 

(1)

directly or indirectly used for the payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations;

 

(2)

directly or indirectly used for investment in securities, unless otherwise provided by relevant laws and regulations;

 

(3)

directly or indirectly used for granting the entrusted loans in RMB, unless permitted by the scope of business, repaying the inter-enterprise borrowing (including advances by the third party), or repaying the bank loans in RMB that have been sub-lent to the third party and/or

 

(4)

paying the expenses related to the purchase of real estate that is not for self-use, except for the foreign-invested real estate enterprises.

On June 9, 2016, SAFE issued the Notice to Reform and Regulate the Administration Policies of Foreign Exchange Capital Settlement to further reform foreign exchange capital settlement nationwide.

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Our Chinese subsidiaries’ distributions to the offshore parent and carrying out cross-border foreign exchange activities shall comply with the various SAFE registration requirements described above.

Share Option Rules

Under the Administration Measures on Individual Foreign Exchange Control issued by the People’s Bank of China on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which Chinese citizens participate require approval from SAFE or its authorized branch. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, commonly known as SAFE Circular 7, or Share Option Rules, issued by the SAFE on February 15, 2012, Chinese residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (1) register with the SAFE or its local branches; (2) retain a qualified Chinese agent, which may be a Chinese subsidiary of the overseas listed company or another qualified institution selected by the Chinese subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants and (3) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We have made and will to continue to make efforts to comply with these requirements since the completion of our initial public offering in June 2017.

In addition, the State Administration of Taxation has issued certain circulars concerning employee share options or restricted shares, including the Circular of the State Administration of Taxation on Issues Concerning Individual Income Tax in Relation to Share Options, promulgated in August 2009. Under these circulars, the employees working in China who exercise share options or are granted restricted shares will be subject to Chinese individual income tax. The Chinese subsidiaries of such overseas listed companies have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If the employees fail to pay or the Chinese subsidiaries fail to withhold their income taxes in accordance with relevant laws and regulations, the Chinese subsidiaries may face fines or sanctions imposed by tax authorities or other Chinese government authorities.

Regulation of Dividend Distribution

The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in China are the Company Law of China, as amended, and the Foreign Investment Law, which took effect on January 1, 2020 and replaced the Wholly Foreign-owned Enterprise Law, the Cooperative Joint Venture Law, and the Equity Joint Venture Law. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with Chinese accounting standards and regulations. Both Chinese domestic companies and wholly-foreign owned Chinese enterprises are required to allocate at least 10% of their respective accumulated after-tax profits each year, if any, to fund certain capital reserve funds until the aggregate amount of these reserve funds have reached 50% of the registered capital of the enterprises. A Chinese company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.

Labor Laws and Social Insurance

Pursuant to the Chinese Labor Law and the Chinese Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the Chinese Labor Contract Law and the Chinese Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.

In addition, according to the Chinese Social Insurance Law, employers like our Chinese subsidiaries in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, and medical insurance and housing funds.

Rest of the World Regulation

For other countries outside of the U.S. and China, the requirements governing the conduct of clinical trials, drug licensing, pricing and reimbursement vary from country to country. In all cases the clinical trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical principles having their origin in the Declaration of Helsinki.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Employees

As of December 31, 2019, we had 574 full-time employees and 7 part-time employees. Of these, 236 are engaged in full-time research and development and laboratory operations, 191 are engaged in manufacturing activities and 147 are engaged in full-time

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selling, general and administrative functions. As of December 31, 2019, 45% of our personnel were located in the U.S, 48% were located in Asia, and 7% were located in Latin America. We have also engaged and may continue to engage independent consultants and contractors to assist us with our operations. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have never experienced any employment related work stoppages, and we consider our relations with our employees to be good.

Financial Information

We manage our operations and allocate resources in line with our three distinct reportable segments. Financial information regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2019, 2018, and 2017 and our total assets as of December 31, 2019 and 2018, is included in our Consolidated Financial Statements in Item 8 of this Annual Report.

Corporate Information

We were originally formed under the laws of the state of Delaware in November 2003 under the name Kinex Pharmaceuticals, LLC. In December 2012, we converted from a limited liability company to a Delaware corporation, Kinex Pharmaceuticals, Inc. In August 2015, we amended and restated our certificate of incorporation to change our name to Athenex, Inc. Our principal executive offices are located at 1001 Main Street, Suite 600, Buffalo, New York 14203, and our telephone number is (716) 427-2950. Our website address is www.athenex.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, proxy statements and other information with the Securities and Exchange Commission (SEC). Our filings with the SEC are available on the SEC’s website at www.sec.gov. You may also access our press releases, financial information and reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those Forms) on our website under the “Investor Relations” tab. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

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Item 1A.

Risk Factors.

Investing in our common stock involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information in this report, including our consolidated financial statements and 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 and 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.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred net losses every year since our inception and anticipate that we will continue to incur net losses for the foreseeable future.

Investment in pharmaceutical product development is highly speculative because it entails substantial upfront costs and expenses and significant risk that a drug candidate will fail to gain regulatory approval or become commercially viable. Since our formation, the company has relied on a combination of public and private securities offerings, public-private partnerships, the issuance of convertible notes and public grants to fund our operations. We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. We have not generated substantial revenue from product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations. As a result, we incurred losses in 2019, 2018 and 2017. For the years ended December 31, 2019, 2018 and 2017, we reported net losses of $125.5 million, $128.7 million and $131.4 million, respectively, and had an accumulated deficit of $567.5 million as of December 31, 2019. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from selling, general and administrative expenses associated with our operations.

We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our drug candidates, and begin to commercialize approved drugs, if any. Typically, it takes many years to develop a new drug before it is available for treating patients. 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, our ability to generate revenue and the timing and amount of milestones and other required payments to third parties in connection with our potential future arrangements with third parties. If any of our drug candidates fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We expect our research and development expenses to continue to be significant in connection with our continued investment in our drug candidates and our ongoing and planned clinical trials for our drug candidates. Furthermore, if we obtain regulatory approval for our drug candidates, we expect to incur increased selling, general and administrative expenses. In addition, as a public company, we incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows from operations for the foreseeable future. These losses have had and will continue to have a material adverse effect on our stockholders’ equity, financial position, cash flows and working capital.

Our ability to continue as a going concern will require us to obtain additional financing to fund our current operations, which may be unavailable on acceptable terms, or at all.

Our recurring losses from operations and our current operating plans raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2019 with respect to this uncertainty. Our ability to continue as a going concern will require us to obtain additional financing to fund our current operating plans. We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our current operating plans into the first quarter of 2021, but will not be sufficient to fund current operating plans through one year after the date that these consolidated financial statements are issued. We have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce or eliminate our research and drug development programs or commercialization efforts.

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Our financial results are subject to volatility related to our revenue and expenses, and despite beginning to generate revenue from product sales, we have not yet been profitable and may never become profitable.

Our financial results are subject to volatility based on a number of factors, including the timing of milestone licensing fees that we receive or are required to pay, the change in product types produced by APD and whether those products are in high demand, our ability to predict the products in high demand in the market, competition in the market for generic drugs. Our ability to generate revenue and become profitable depends upon our ability to successfully complete the development of, and obtain the necessary regulatory approvals for, our proprietary drug candidates, as we currently only have commercialized our API products, including oral paclitaxel and oral docetaxel, and specialty products, such as medical testing kits. Our product sales of API totaled $12.7 million, $18.0 million and $15.4 million in the years ended December 31, 2019, 2018 and 2017, respectively. Our specialty products launched in March 2017 and sales totaled $50.4 million, $30.4 million, and $17.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. Our product sales of API may be impacted by the current suspension of our operations at our API plant in Chongqing, China. We chose to suspend production based on concerns raised by the DEMC related to the location of our plant. The voluntary temporary suspension began in May 2019 and we hope to reach a resolution of the suspension with the DEMC. As a result of suspending these operations, we are currently unable to produce commercial batches of API, which has impacted our revenue. We can provide no assurances of when, if at all, commercial production of API will resume at the plant. Although we currently are producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials. Even if we are able to continue product sales of API, our revenue and gross margins are subject to fluctuation due to changes in product mix and the expenses we incur to continue our research and development and commercialization efforts.   

We expect to continue to incur substantial and increasing losses through the projected development and commercialization of our drug candidates. None of our proprietary drug candidates have been approved for marketing in the U.S., China or any other jurisdiction, and they may never receive such approval. Our ability to achieve revenue and profitability is dependent on our ability to complete the development of our proprietary drug candidates, obtain necessary regulatory approvals, and have our proprietary drugs manufactured and successfully marketed.

Even if we receive regulatory approval of our proprietary drug candidates for commercial sale, we do not know when they will generate revenue, if at all. Our ability to generate revenue from product sales of our drug candidates depends on a number of factors, including our ability to:

 

complete research regarding, and non-clinical and clinical development of, our proprietary drug candidates;

 

formulate appropriate dosing protocols, drug preparations and capsule encapsulation methods;

 

obtain regulatory approvals and marketing authorizations for drug candidates for which we complete clinical trials;

 

develop a sustainable and scalable manufacturing processes, including establishing and maintaining commercially viable supply relationships with third parties and establishing our own manufacturing capabilities and infrastructure;

 

compliantly launch and commercialize proprietary drug candidates for which we obtain regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;

 

obtain market acceptance of our proprietary drug candidates and their routes of administration as viable treatment options;

 

obtain optimal pricing for products in key global markets;

 

obtain adequate coverage and reimbursement for our proprietary drug candidates from government (including U.S. federal healthcare programs) and private payors;

 

identify, assess, acquire and/or develop new proprietary drug candidates;

 

address any competing technological and market developments;

 

negotiate and maintain favorable terms in any collaboration, licensing or other arrangements into which we may enter;

 

maintain, protect and expand our portfolio of intellectual property rights, including patents, trade secrets and know-how;

 

successfully commercialize our 503B outsourcing facility products and U.S. specialty pharmaceutical products;

 

further develop our API business; and

 

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we are required by the FDA, NMPA, or regulatory authorities in other jurisdictions to perform

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studies in addition to those that we currently anticipate. Even if our proprietary drug candidates are approved for commercial sale, we anticipate incurring significant costs associated with the commercial launch of these drugs.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce our operations. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will need to obtain additional financing to fund our operations, and if we are unable to obtain such financing, we may be unable to complete the development and commercialization of our drug candidates.

We have financed our operations with a combination of public and private securities offerings, public-private partnerships, issuance of convertible notes and public grants. Our drug candidates will require the completion of regulatory review, significant sales and marketing efforts and substantial investment before they can provide us with any product sales revenue. Our operations have consumed substantial amounts of cash since inception. The net cash used for our operating activities was $97.5 million, $109.4 million and $81.5 million for the years ended December 31, 2019, 2018 and 2017 respectively. We expect to continue to spend substantial amounts on advancing the clinical development of our proprietary drug candidates, launching and commercializing any proprietary drug candidates for which we receive regulatory approval, including building our own commercial organizations to address certain markets.

We will need to obtain additional financing to fund our future operations, including completing the development and commercialization of our proprietary drug candidates and to conduct additional clinical trials for the approval of our proprietary drug candidates if requested by regulatory bodies and to complete the development of any additional proprietary drug candidates we might discover. Moreover, our research and development expenses and other contractual commitments are substantial and are expected to increase in the future. In addition, we will require additional financial resources and personnel to begin operations at our public-private partnership facilities in Chongqing, China and Dunkirk, New York. To the extent the costs of constructing the Dunkirk facility exceed approximately $206 million, we will also be responsible for those costs.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including, but not limited to:

 

the progress, timing, scope and costs of our clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;

 

the outcome, timing and cost of regulatory approvals by the FDA, NMPA and regulatory authorities in jurisdictions where we seek such approvals, including the possibility that the FDA, NMPA or regulatory authorities may require that we perform more studies than those that we currently expect;

 

our ability to secure adequate coverage and reimbursement for our proprietary drug candidates from government (including U.S. federal health care programs) and private payors;

 

the number and characteristics of drug candidates that we may in-license and develop;

 

our ability to successfully and compliantly launch and commercialize our drug candidates;

 

the amount of sales and other revenues from drug candidates that we may commercialize, if any, including the selling prices for such potential products and the availability of adequate reimbursement by third-party payors;

 

the amount of rebates or other price concessions we may owe under U.S. federal health care programs that cover and reimburse our proprietary drug candidates;

 

the amount and timing of the milestone and royalty payments we receive from our collaborators under our licensing arrangements;

 

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

selling and marketing costs associated with our potential products, including the cost and timing of expanding our marketing and sales capabilities;

 

the terms and timing of any potential future collaborations, licensing or other arrangements that we may establish;

 

cash requirements of any future acquisitions and/or the development of other drug candidates;

 

the costs of operating as a public company;

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the cost and timing of completion of commercial-scale outsourced manufacturing activities; and

 

the time and cost necessary to respond to technological and market developments.

Until we can generate a sufficient amount of revenue, we may finance future cash needs through public or private equity offerings, debt financings, collaborations and strategic alliances. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. General market conditions or the market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital may be dependent upon our common stock being quoted on The Nasdaq Global Select Market or upon obtaining stockholder approval to issue a sufficient number of shares of our common stock. There can be no assurance that we will be able to satisfy the criteria for continued listing on The Nasdaq Global Select Market or that we will be able to obtain stockholder approval of such stock issuances if it is necessary. If adequate funds are not available to us on acceptable terms, or at all, we may be required to delay or reduce the scope of, or eliminate, one or more of our research or development programs or our commercialization efforts. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. In addition, if we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or drug candidates or to grant licenses on terms that may not be favorable to us.

We believe that our existing cash and cash equivalents and short-term investments will not be sufficient to enable us to complete all necessary development or commercially launch our proprietary drug candidates. If we are unable to raise capital when needed or on attractive terms, we will be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. Our inability to obtain additional funding when needed could seriously harm our business.

We entered into a $50.0 million senior secured loan agreement, which subjects us to significant interest rate and credit risk.

On June 29, 2018, we entered into a 5-year $50.0 million loan agreement with an affiliate of Perceptive, which closed on July 3, 2018, bearing interest at a floating per annum rate equal to the London Interbank Offering Rate (“LIBOR”) (with a floor of 2%) plus 9%. Thus, a change in the short-term interest rate environment (especially a material change) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares to decline. As of December 31, 2019, we did not have any outstanding interest rate swap contracts.

We may not be able to refinance, extend, or repay our substantial indebtedness owed to our senior secured lender, which would have a material adverse effect on our financial condition and ability to continue as a going concern.

We anticipate that we will need to raise a significant amount of debt or equity capital in the future in order to repay our outstanding debt obligations owed to our senior secured lender when they mature on July 3, 2023 and fund our operations. We are required to make monthly interest-only payments with a bullet payment of the principal amount of $50.0 million at maturity. If we are unable to raise sufficient capital to repay these obligations at maturity and we are otherwise unable to extend the maturity dates or refinance these obligations, we would be in default. We cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations or that we will be able to extend the maturity dates or otherwise refinance these obligations. Upon a default on the senior debt, our senior secured lender would have the right to exercise its rights and remedies to collect, which would include foreclosing on our assets. Accordingly, a default would have a material adverse effect on our business and, if our senior secured lender exercises its rights and remedies, we would likely be forced to seek bankruptcy protection.

Covenants in the agreements governing our existing debt agreement restrict the manner in which we conduct our business.

The senior secured loan agreement contains various covenants that limit, subject to certain exemptions, our ability and/or our restricted subsidiaries’ ability to, among other things:

 

Incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;

 

make loans, investments, or acquisitions;

 

engage in any other business other than the business engaged in on the date of the loan agreement;

 

pay dividends or make distributions on capital stock by any subsidiary;

 

make any unscheduled payments on our existing debt prior to the stated maturity thereof;

 

sell assets and capital stock of our subsidiaries;

 

enter into certain transactions with affiliates; and

 

sell, transfer, license, lease, or dispose of our or our subsidiaries’ assets.

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The senior secured loan agreement requires that we maintain a minimum aggregate balance of $4.0 million in cash free and clear of all liens and that we meet certain minimum revenue targets for each quarter during which the loan is outstanding. In addition, the loan agreement is secured by substantially all of our assets and is guaranteed by certain of our subsidiaries, including APD, AP, and APS.

The restrictions contained in our senior secured loan agreement governing our debt could adversely affect our ability to:

 

finance our operations;

 

make needed capital expenditures;

 

make strategic acquisitions or investments or enter into alliances;

 

withstand a future downturn in our business or the economy in general;

 

engage in business activities, including future opportunities, that may be in our interest; and

 

plan for or react to market conditions or otherwise execute our business strategies.

A breach of any of these covenants could result in a default under the senior secured loan agreement governing our debt. Further, additional indebtedness that we incur in the future may subject us to further covenants. If a default under any such loan agreement is not cured or waived, the default could result in the acceleration of debt, which could require us to repay debt prior to the date it is otherwise due and that could adversely affect our financial condition. If we default, Perceptive may seek repayment through our subsidiary guarantors or by executing on the security interest granted pursuant to the loan agreement.

Our ability to comply with the covenants contained in our senior secured loan agreement may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions, and other corporate opportunities that we believe would be beneficial to us. In addition, our obligations under the loan agreement are secured, on a first-priority basis, and such security interests could be enforced in the event of default by the collateral agent for the loan agreement.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or drug candidates.

We may seek additional funding through a combination of equity offerings, debt financings, collaborations and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of our common stock. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, 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. In addition, issuance of additional equity securities, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third party on unfavorable terms our rights to technologies or proprietary drug candidates that we otherwise would seek to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable terms.

An impairment of goodwill could have a material adverse effect on our results of operations.

Acquisitions frequently result in the recording of goodwill and other intangible assets. As of December 31, 2019, our existing goodwill represented $38.5 million, or 12.4% of our total assets, primarily as a result of our acquisitions of APS, CDE, Polymed Taihao and CIDAL. Goodwill is not amortized and is subject to impairment testing at least annually using a fair value based approach. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment and incorporate management assumptions about expected future cash flows and other valuation techniques. Future cash flows can be affected by changes in industry or market conditions, among other factors. The recoverability of goodwill is evaluated at least annually or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. We cannot accurately predict the amount and timing of any future impairment of assets, and, going forward, we may be required to take goodwill or other asset impairment charges relating to certain of our reporting units. Any such charges would have an adverse effect on our financial results.

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Risks Related to Clinical Development of Our Proprietary Drug Candidates

Our primary clinical candidates are still in the development stage and have not yet received regulatory approval, which may make it difficult to evaluate our current business and predict our future performance.

We are a globally-focused biopharmaceutical company formed in November 2003. Our operations to date have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting preclinical studies and clinical trials of our drug candidates. We have not yet successfully completed large-scale, pivotal clinical trials for all of our drug candidates, or obtained regulatory approvals for our drug candidates and have not yet established sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be accurate. In addition, as a developing business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown challenges.

We are focused on the discovery and development of innovative drugs for the treatment of cancers. The fact that we have not yet, among other things, demonstrated our ability to initiate or complete large-scale clinical trials or manufacture drugs at commercial scale, particularly in light of the rapidly evolving cancer treatment field, may make it difficult to evaluate our current business and predict our future performance. These constraints make any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving fields as we seek to transition to a company capable of supporting commercial activities. If we do not address these risks and difficulties successfully, our business will suffer. We depend substantially on the success of our proprietary drug candidates, which are in pre-clinical and clinical development.

As of December 11, 2019, we had a total of 25 planned, or ongoing clinical trials for our drug candidates. We have completed, two Phase 3 clinical trials for tirbanibulin ointment 1% for AK, and one Phase 3 clinical trial for Oral Paclitaxel for the treatment of patients with metastatic breast cancer. Our business and the ability to generate revenue related to product sales from our proprietary drug candidates will depend on the successful development, regulatory approval and commercialization for the treatment of patients with our drug candidates, which are still in development, and other drugs we may develop. Clinical development is a lengthy and expensive process with an uncertain outcome. The results of pre-clinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. In the case of any trials we conduct, results have in the past, and may in the future, fail to meet the desired safety and efficacy endpoints, or differ from earlier trials due to the larger number of clinical trial sites and additional countries and populations involved in such trials. We have invested a significant portion of our efforts and financial resources in the development of our existing drug candidates. The success of our proprietary drug candidates will depend on several factors, including:

 

successful enrollment in, and completion of, clinical studies;

 

receipt of regulatory approvals from the FDA, NMPA and other regulatory authorities for our drug candidates;

 

establishing commercial manufacturing capabilities, either by using our own facilities or making arrangements with third-party manufacturers;

 

conducting our clinical trials compliantly and efficiently, and in many cases, relying on third parties to do so or, the successful integration of the CRO capabilities of CIDAL into our business;

 

obtaining, maintaining and protecting our intellectual property rights, including patent, trade secrets, know-how and regulatory exclusivity;

 

ensuring we do not infringe, misappropriate or otherwise violate the patent, trade secret or other intellectual property rights of third parties;

 

competition with other drug candidates and drugs, including existing IV chemotherapy treatments, potential oncology biologics and other oral dosing technologies developed or being developed by competitors and

 

continued acceptable safety profile for our drug candidates following regulatory approval, if and when received.

If we do not achieve one or more of these requirements in accordance with our business plans or at all, we could experience significant delays in our ability to obtain approval for and/or to successfully commercialize our drug candidates, which would materially harm our business and we may not be able to generate sufficient revenues and cash flows to continue our operations.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, including genetic differences, patient adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial

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participants. In the case of any trials we conduct, results may differ from early trials due to the larger number of patients, clinical trial sites and additional countries and populations involved in such trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Our future clinical trial results may not be favorable as previous trials with the same compound, even with the same indication.

We may not be successful in our efforts to identify or discover additional drug candidates. Due to our limited resources and access to capital, we must and have in the past decided to prioritize development of certain product candidates; these decisions may prove to have been wrong and may adversely affect our business.

To date, we have focused our drug discovery efforts on developing our cancer platform, particularly our Orascovery and Src Kinase Inhibition product candidates. If our cancer platform fails to identify potential drug candidates, our business could be materially harmed. Additionally, our management, at the direction of our board of directors, has discretion in prioritizing which product candidates to develop.

Research programs to pursue the development of our drug candidates for additional indications and to identify new drug candidates and disease targets require substantial technical, financial and human resources whether or not we ultimately are successful. Our research programs may initially show promise in identifying potential indications and/or drug candidates, yet fail to yield results for clinical development for a number of reasons, including:

 

the research methodology used may not be successful in identifying potential indications and/or drug candidates;

 

potential drug candidates may, after further study, be shown to lack efficacy, have harmful adverse effects or other characteristics that indicate they are unlikely to be effective drugs; or

 

it may take greater human and financial resources to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs than we possess, thereby limiting our ability to diversify and expand our drug portfolio.

Because we have limited financial and managerial resources, we focus on research programs and drug candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other drug candidates or for other indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.

Accordingly, there can be no assurance that we will be able to identify additional therapeutic opportunities for our drug candidates or to develop suitable potential drug candidates through internal research programs, which could materially adversely affect our future growth and prospects. We may focus our efforts and resources on potential drug candidates or other potential programs that ultimately prove to be unsuccessful.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

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. We and our research partners have from time to time and may in the future experience difficulties in patient enrollment in our clinical trials for a variety of reasons, including:

 

the availability of a sizeable population of eligible patients;

 

the design of the trial;

 

our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

competing clinical trials for similar therapies or other new therapeutics;

 

clinicians’ and patients’ perceptions as to the potential advantages and side effects of the drug candidate being studied in relation to other available therapies,

 

our ability to obtain and maintain patient consents;

 

the failure of patients to complete a clinical trial; and

 

the availability of approved therapies that are similar in mechanism to our drug candidates.

In addition, our clinical trials will compete with other clinical trials for drug candidates that are in the same therapeutic areas as our drug candidates, and this competition will reduce the number and types of patients 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. Because the number of qualified clinical investigators is limited, we have conducted and expect to conduct some of our clinical trials at the same

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clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites.

Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our drug candidates.

Some of our drug candidates represent a novel approach to cancer treatment, which could result in delays in clinical development, heightened regulatory scrutiny, and delays in our ability to achieve regulatory approval or commercialization, or market acceptance by physicians and patients of our drug candidates.

Some of our drug candidates, particularly those developed through our Orascovery platform, represent a departure from more commonly used methods for cancer treatment, and therefore represent a novel approach that carries inherent development risks. For instance, our Orascovery platform intends to facilitate the delivery of chemotherapy agents orally, as opposed to IV, while our Src Kinase inhibitor candidates operate by a new mechanism of action. To develop our Orascovery platform, we must successfully develop oral formulations of the active ingredients and ensure they can be delivered safely and consistently in capsule form. The need to further develop or modify in any way the protocols related to our drug candidates to demonstrate safety or efficacy may delay the clinical program, regulatory approval or commercialization, if approved. Our Src Kinase inhibitor platform is based on a novel molecule with an additional mechanism of action that is not found in other Src Kinase inhibitors. Because of this, unexpected safety and tolerability concerns may arise during the development process.

In addition, potential patients and their doctors may be inclined to use conventional standard-of-care treatments rather than enroll patients in any future clinical trial or to use our product candidates commercially once approved. This may have a material impact on our ability to generate revenues from our drug candidates. Further, given the novelty of the administration of our drug candidates, hospitals and physicians may prefer traditional treatment methods, may be reluctant to adopt the use of our products or may require a substantial amount of education and training, any of which could delay or prevent acceptance of our products by physicians and patients and materially hinder successful commercialization of our drug candidates.

Our products and product candidates may cause undesirable, or an increase in the frequency of, side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, NMPA or other regulatory authorities. Further, if a product candidate receives marketing approval and we or others identify undesirable side effects caused by the product after the approval, or if drug abuse is determined to be a significant problem with an approved product, a number of potentially significant negative consequences could result, including:

 

regulatory authorities may withdraw or limit their approval of the product;

 

regulatory authorities may require the addition of labeling statements, such as a “Black Box warning” or a contraindication;

 

we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;

 

we may decide to remove the product from the marketplace;

 

we could be sued and held liable for injury caused to individuals exposed to or taking the product; and

 

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing an affected product or product candidate and significantly impact our ability to successfully commercialize or maintain sales of our product or product candidates and generate revenues.

If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA, NMPA or other regulatory authorities or do not otherwise produce positive results, we may incur costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our drug candidates.

We may experience various unexpected events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates, including:

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regulators, IRBs or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a

clinical trial at a prospective trial site;

 

clinical trials of our drug candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs;

 

the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment may be insufficient or slower than we anticipate or patients may drop out at a higher rate than we anticipate;

 

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

we might have to suspend or terminate clinical trials of our drug candidates for various reasons, including a finding of a lack of clinical response or a finding that participants are being exposed to unacceptable health risks;

 

regulators, IRBs or ethics committees may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

the cost of clinical trials of our drug candidates may be greater than we anticipate;

 

the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug candidates may be insufficient or inadequate; and

 

our drug candidates may cause adverse events, have undesirable side effects or other unexpected characteristics, causing us or our investigators to suspend or terminate the trials.

If we are required to conduct additional clinical trials or other testing of our drug candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our drug candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if they raise safety concerns, we may:

 

be delayed in obtaining regulatory approval for our drug candidates;

 

not obtain regulatory approval at all;

 

obtain approval for indications that are not as broad as intended;

 

have the drug removed from the market after obtaining regulatory approval;

 

be subject to additional post-marketing testing requirements;

 

be subject to restrictions on how the drug is distributed or used; or

 

be unable to obtain reimbursement for use of the drug.

Delays in testing or approvals may result in increases in our drug development costs. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all.

Significant clinical trial delays also could shorten any periods during which we have the exclusive right to commercialize our drug candidates or allow our competitors to bring drugs to market before we do and impair our ability to commercialize our drug candidates and may harm our business and results of operations.

Manufacturing risks, including our inability to manufacture API and clinical products used in the clinical trials of our proprietary product candidates could adversely affect our ability to commercialize our product candidates.

Our business strategy depends on our ability to manufacture API in sufficient quantities and on a timely basis so as to meet our needs to manufacture our product candidates for our clinical trials and to meet consumer demand for our future products, while adhering to product quality standards, complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks relating to our manufacturing capabilities, including:

 

our inability to manufacture API and clinical products in sufficient quantities to meet the needs of our clinical trials or to commercialize our products;

 

our inability to manufacture API and clinical products in the event our manufacturing facilities’ operations are suspended indefinitely or terminated due to events beyond our control;

 

our inability to secure product components in a timely manner, in sufficient quantities or on commercially reasonable terms;

 

our failure to increase production of products to meet demand;

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our inability to modify production lines to enable us to efficiently produce future products or implement changes in

current products in response to regulatory requirements;

 

difficulty identifying and qualifying alternative suppliers for components in a timely manner and

 

potential damage to or destruction of our manufacturing equipment or manufacturing facility.

In addition, we conduct manufacturing operations at our facility in Chongqing, China to manufacture API and our proprietary product candidates. As a result, our business is subject to risks associated with that facility in particular and doing business in China generally, including:

 

the possibility of our operations at the Chongqing facility being suspended indefinitely or terminated by an order of the local government due to events beyond our control;

the impact of the recent Coronavirus epidemic outbreak on our operations in China;

 

the possibility that the costs of building and maintaining the Chongqing facility exceed the revenue we are able to generate from manufacturing API at the facility;

 

adverse political and economic conditions, particularly those negatively affecting the trade relationship between the U.S. and China;

 

trade protection measures, such as tariff increases, and import and export licensing and control requirements;

 

potentially negative consequences from changes in tax laws;

 

difficulties associated with the Chinese legal system, including increased costs and uncertainties associated with enforcing contractual obligations in China;

 

potentially lower protection of intellectual property rights;

 

unexpected or unfavorable changes in regulatory requirements;

 

possible patient or physician preferences for more established pharmaceutical products and medical devices manufactured in the U.S.; and

 

difficulties in managing foreign relationships and operations generally.

 

Operations at our plant in Chongqing, China are currently suspended. We chose to suspend production based on concerns raised by the DEMC related to the location of our plant. The voluntary temporary suspension began in May 2019 and we hope to reach a resolution of the suspension with the DEMC. Although we currently are producing API for our ongoing clinical studies, we can make no assurances that such production will be able to provide sufficient quantities for all future clinical studies and that alternative suppliers will be available if needed to produce API for our clinical trials. However, the ongoing Coronavirus epidemic has temporarily suspended many business activities in China and may affect our ability to produce API at the Chonqing facility for our own clinical studies. In addition, we manufacture API for third parties. If operations at the Chongqing facility remain suspended, we may be unable to fulfill our obligations to timely supply these third parties with API, and we may have to expend additional capital to manufacture API at our other locations.

These risks are likely to be exacerbated by our limited experience with our current products and manufacturing processes. If, as we expect, our need for API increases, or demand for our products increase, we will have to invest additional resources to purchase components, hire and train employees and enhance our manufacturing processes and may have to use alternate suppliers of API to meet our needs. If we fail to increase our production capacity efficiently, our sales may not increase in line with our forecasts and our operating margins could fluctuate or decline. Any of these factors may affect our ability to manufacture our product and could reduce our revenues and profitability.

Risks Related to Obtaining Regulatory Approval for Our Drug Candidates

The regulatory approval processes of the FDA, NMPA and other regulatory authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our drug candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA, NMPA and other regulatory authorities in jurisdictions where we seek such approval is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a drug candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any drug candidate, and it is possible that none of our existing drug candidates or any drug candidates we may discover, in-license or acquire and seek to develop in the future will ever obtain regulatory approval.

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Our drug candidates could fail to receive regulatory approval from the FDA, NMPA or another regulatory authority for many reasons, including:

 

disagreement with the design or implementation of our clinical trials;

 

failure to demonstrate that a drug candidate is safe and effective for its proposed indication;

 

failure of clinical trial results to meet the level of statistical significance required for approval;

 

failure to demonstrate that a drug candidate’s clinical and other benefits outweigh its safety risks;

 

disagreement with our interpretation of data from preclinical studies or clinical trials;

 

the insufficiency of data collected from clinical trials of our drug candidates to support the submission and filing of a new drug application, or NDA, or other submission or to obtain regulatory approval;

 

the FDA, NMPA or another regulatory authority’s finding of deficiencies related to the product, manufacturing processes or facilities of ours or of third-party manufacturers with whom we contract for clinical and commercial supplies; and

 

changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.

The FDA, NMPA or a regulatory authority in another jurisdiction may require more information, including additional preclinical or clinical data, to support approval, which may delay or prevent approval in those territories and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our drug candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a drug candidate with a label that is not desirable for the successful commercialization of that drug candidate. In addition, if our drug candidate produces undesirable side effects or safety issues, the FDA may require the establishment of REMS, or the NMPA or a regulatory authority may require the establishment of a similar strategy, that may, for instance, significantly restrict distribution of our drug candidates and impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm the commercial prospects of our drug candidates.

The approval process for pharmaceutical products outside the U.S. varies among countries and may limit our ability to develop, manufacture and sell our products internationally. Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.

In order to market and sell our products internationally, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and may involve additional testing. We may conduct clinical trials for, and seek regulatory approval to market, our product candidates in countries other than the U.S. and China. Depending on the results of clinical trials and the process for obtaining regulatory approvals in other countries, we may decide to first seek regulatory approvals of a product candidate in countries other than the U.S., or we may simultaneously seek regulatory approvals in the U.S. and other countries. If we seek marketing approval for a product candidate outside the U.S., we will be subject to the regulatory requirements of health authorities in each country in which we seek approval. With respect to marketing authorizations in China, we will be required to seek regulatory approval from the NMPA. For marketing approval in Europe, we will seek to obtain marketing approval from the EMA. The approval procedure varies among regions and countries and may involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval.

Obtaining regulatory approvals from health authorities in countries outside the U.S. is likely to subject us to all of the risks associated with obtaining FDA approval described above. In addition, marketing approval by the FDA does not ensure approval by the health authorities of any other country, and marketing approvals by foreign health authorities do not ensure a similar approval by the FDA.

We are conducting, and may in the future conduct, clinical trials for our product candidates in sites outside the U.S. and the FDA may not accept data from trials conducted in such locations.

We have conducted, and may in the future conduct, certain of our clinical trials outside of the U.S., such as the U.K., China, Taiwan and Latin America. Although the FDA may accept data from clinical trials conducted outside the U.S., acceptance of this data is subject to certain conditions imposed by the FDA. There can be no assurance the FDA will accept data from any clinical trials we conduct outside of the U.S. If the FDA does not accept the data from any of our clinical trials conducted outside the U.S., it would likely result in the need for additional clinical trials, which would be costly and time-consuming and could delay or prevent the commercialization of any of our product candidates.

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Regulatory approval may be substantially delayed or may not be obtained for one or all of our drug candidates for a variety of reasons.

We may be unable to complete development of our drug candidates on schedule, if at all. The completion of the studies for our drug candidates will require funding beyond our current resources. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of our drug candidates, we may not have or be able to obtain adequate funding to complete the necessary steps for approval for any or all of our drug candidates. Preclinical studies and clinical trials required to demonstrate the safety and efficacy of our drug candidates are time consuming and expensive and together take several years or more to complete. For example, our current lead product candidate, oral paclitaxel and encequidar, which announced topline results from its Phase 3 clinical trial in the second half of 2019, has been in development since 2011. Delays in clinical trials, regulatory approvals or rejections of applications for regulatory approval in the U.S., United Kingdom, Taiwan, New Zealand, China, Latin America, or other jurisdictions may result from many factors, including:

 

our inability to obtain sufficient funds required for a clinical trial;

 

regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;

 

regulatory questions regarding interpretations of data and results and the emergence of new information regarding our drug candidates or other products;

 

clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;

 

failure to reach agreement with the FDA, NMPA or other regulators regarding the scope or design of our clinical trials;

 

delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial;

 

our inability to enroll and retain a sufficient number of patients who meet the inclusion and exclusion criteria in a clinical trial;

 

our inability to conduct a clinical trial in accordance with regulatory requirements or our clinical protocols;

 

clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

 

inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication;

 

failure of our third-party clinical trial managers to satisfy their contractual duties or meet expected deadlines;

 

delay or failure in adding new clinical trial sites;

 

ambiguous or negative interim results, or results that are inconsistent with earlier results;

 

unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding safety or effectiveness of drug candidates during clinical trials;

 

feedback from the FDA, NMPA, IRB, the Data and Safety Monitoring Board (“DSMB”) or comparable entities, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol;

 

unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;

 

decision by the FDA, NMPA, IRB, comparable entities or the Company, or recommendation by a DSMB or comparable entity, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

 

failure to demonstrate a benefit from using a drug candidate;

 

lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions;

 

our inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

our inability to obtain approval from IRBs or ethics committees to conduct clinical trials at their respective sites;

 

manufacturing issues, including problems with manufacturing or timely obtaining from third parties sufficient quantities of a drug candidate for use in a clinical trial; and

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difficulty in maintaining contact with patients during the study or after treatment, resulting in incomplete data.

Changes in regulatory requirements and guidance may also occur, and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethics committees for re-examination, which may impact the costs, timing or successful completion of a clinical trial.

According to the Opinions on Implementing Priority Review and Approval to Encourage Drug Innovation, the “Prioritized Evaluation and Approval Opinions,” which was promulgated and implemented as of December 21, 2017 by the NMPA, the NMPA conducts priority review and approval for the registration applications of Category 1 drugs. On May 17, 2018, the NMPA and NHC issued the Announcement on Optimizing the Review and Approval of Drug Registration, which further clarifies that a priority review and approval mechanism will be available. The current Chinese Drug Administration Law, which was promulgated on August 26, 2019 and came into effect on December 1, 2019, also stipulates that the government encourages research and development of innovative drugs for serious diseases such as cancer. The NMPA will allot more resource to accelerate the review and approval process for the registration of Category 1 drugs.

The applications for Category 1 drugs are handled with higher priority and enhanced communications with the CDE. Compared with Category 5 drugs, Category 1 drugs are qualified to apply for special examination and approval at both the CTA stage and the production registration application stage. If the special examination and approval are granted at the CTA stage, such treatment will apply to the production registration application stage without further approval. During the CTA stage, reduction or exemption of clinical trial may be available if Category 1 drugs are for orphan diseases or other special diseases. The advantages also include, by providing priority resources, shortening time limits to review and exam applications of Category 1 drugs’ clinical trials and of production registration, and to handle document submission and approval process. We cannot be sure that the NMPA will grant such priority treatment to any of our drugs candidates.

If we experience delays in the completion of, or the termination of, a clinical trial, of any of our drug candidates, the commercial prospects of our drug candidates will be harmed, and our ability to generate revenues from the sale of any of those drug candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.

If we experience delays in the completion of, or the termination of, a clinical trial, of any of our drug candidates, the commercial prospects of our drug candidates will be harmed, and our ability to generate revenues from the sale of any of those drug candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.

Our drug candidates have caused and may cause undesirable adverse events or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following any regulatory approval.

Undesirable adverse events related to our drug candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials that would preclude approval of our drug candidates by the FDA, NMPA, or another regulatory authority or, if approved, could result in a more restrictive label. Results of our trials could reveal a high and unacceptable severity or prevalence of adverse events. In such an event, our trials could be suspended or terminated and the FDA, NMPA or other regulatory authorities could order us to cease further development of, or deny approval of, our drug candidates for any or all targeted indications. Drug-related adverse events could affect patient recruitment or the ability of enrolled subjects to complete the trial, and could result in potential product liability claims. Any of these occurrences may significantly harm our reputation, business, financial condition and prospects.

In our clinical studies to date, we have observed the following SAEs that were deemed to be possibly, likely or definitely related to each of our product candidates:

 

Oral Paclitaxel - severe neutropenia, febrile neutropenia, sepsis, septic shock, altered state of consciousness, hypokalemia and cardiac arrest, dehydration, pneumonia, death, nausea, vomiting, diarrhea, fatigue, anorexia, alopecia and acute gastroenteritis;

 

Oral irinotecan - diarrhea, rash, gastrointestinal hemorrhage, vomiting, nausea, asthenia, neutropenia, anorexia, increased alanine aminotransferase, increased aspartate aminotransferase, enteritis, decreased neutrophil count and clostridium difficile infection;

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Tirbanibulin oral - allergic reaction, bacteremia, rash, syncope, perivascular dermatitis, neutropenic fever, hyponatremia, failure to thrive, hypersensitivity, lower extremity edema, mucositis, neutropenia, pancytopenia, thrombocytopenia, seizure and motor vehicle accident, embolic stroke, pneumonitis, fever, acute kidney injury, increased bilirubin and albumin levels, decreased blood platelet count, abdominal pain, arm pain, pain at the base of the neck, pyrexia, chills, rigors, tachypenea, oxygen desaturation, pneumonia, anemia, elevated ALT and AST, dehydration, leukopenia and tremor; and

 

KX2-361 - pulmonary embolism; thromboembolic event, hyperuricemia and nausea.

Additionally, if one or more of our drug candidates receives regulatory approval, and we or others later identify undesirable side effects caused by such drugs, a number of potentially significant negative consequences could result, including:

 

we may suspend marketing of the drug;

 

regulatory authorities may withdraw approvals of the drug;

 

regulatory authorities may require additional warnings on the label;

 

we may be required to develop a REMS for the drug or, if a REMS is already in place, to incorporate additional requirements under the REMS, or to develop a similar strategy as required by a regulatory authority;

 

we may be required to conduct post-marketing studies;

 

we could be sued and held liable for harm caused to subjects or patients; and

 

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug candidate, if approved, and could significantly harm our business, results of operations and prospects.

Even if we receive regulatory approval for our drug candidates, 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 drug candidates.

If our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy and other post-marketing information, including both federal and state requirements in the U.S. and requirements of regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive requirements of the FDA, NMPA and regulatory authorities, including, in the U.S., ensuring that quality control and manufacturing procedures conform to current cGMP regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA or other marketing application, and previous responses to inspection observations. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

Any regulatory approvals that we receive for our drug candidates may be subject to limitations on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the drug candidate. The FDA may also require a REMS program as a condition of approval of one or more of our drug candidates, which could entail requirements for long-term patient follow-up, 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, NMPA or a regulatory authority approves our drug candidates, we will have to comply with requirements including, for example, submissions of safety and other post-marketing information and reports, registration, and continued compliance with cGMP and GCP for any clinical trials that we conduct post-approval.

The FDA may impose consent decrees or withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the drug reaches the market. Later discovery of previously unknown problems with our drug candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-marketing studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

restrictions on the marketing or manufacturing of our drugs, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

fines, untitled or warning letters, or holds on clinical trials;

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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 drug candidates and

 

injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in a manner consistent with the provisions of the approved prescribing information. The FDA, NMPA and other regulatory authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. The policies of the FDA, NMPA and of other regulatory authorities may change. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. 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 regulatory approval that we may have obtained, and we may not achieve or sustain profitability.

Risks Related to Commercialization of Our Drug Candidates

If we are not able to obtain, or experience delays in obtaining, required regulatory approvals, we will not be able to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.

We currently do not have any proprietary drug candidates that have gained regulatory approval for sale in the U.S., China or any other country, and we cannot guarantee that we will ever obtain regulatory approval for marketable proprietary drugs. Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize drug candidates in a timely manner. We cannot commercialize drug candidates without first obtaining regulatory approval to market each drug from the FDA, NMPA or regulatory authorities in the relevant jurisdictions. Our proprietary drug candidates are currently undergoing various phases of FDA clinical trials. We cannot predict whether these trials and future trials will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.

Before obtaining regulatory approvals for the commercial sale of any drug candidate for a target indication, we must demonstrate in preclinical studies and well-controlled clinical trials, and, with respect to approval in the U.S., to the satisfaction of the FDA, that the drug candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. An NDA must include extensive preclinical and clinical data and supporting information to establish the drug candidate’s safety and effectiveness. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the drug. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval may not be obtained. If we submit an NDA to the FDA, the FDA decides whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA.

Regulatory authorities outside of the U.S., such as the regulatory authorities in emerging markets, also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our drug candidates. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking non-U.S. regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time-consuming. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval and other risks specific to the relevant jurisdiction. For all of these reasons, we may not obtain non-U.S. regulatory approvals on a timely basis, if at all.

If we are unable to obtain regulatory approval for our drug candidates in one or more jurisdictions, or any approval contains significant limitations, our target market will be reduced and our ability to realize the full market potential of our drug candidates will be harmed. Furthermore, if we are not able to obtain, or experience delays in obtaining, required regulatory approvals, we will not be able to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.

If our recently submitted NDA for tirbanibulin ointment is not accepted or not approved by the FDA, this would have a material adverse effect on our business, financial performance and results of operations.

We submitted an NDA for tirbanibulin ointment. There is a risk that the FDA will not accept our NDA for filing. In addition, the FDA may suggest that we need to conduct additional trials or other testing at significant costs before we can seek regulatory approval of tirbanibulin ointment. If we fail to obtain approval or experience delays in obtaining approval, any such decision or delays would have a material impact on our ability to generate revenue from the sales of tirbanibulin ointment. Accordingly, an inability to generate such revenue would have a material effect on our business, financial performance and results of operations.

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Even if any of our drug candidates receives regulatory approval, they may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

If any of our drug candidates receives regulatory approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments like chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these treatments to the exclusion of our drug candidates. In addition, physicians, patients and third-party payors may prefer other novel products to ours, and we may experience difficulties gaining acceptance for our orally administered drug candidates. We are also subject to regulatory restrictions on how we market our drug candidates. If our drug candidates do not achieve an adequate level of acceptance, we may not generate significant product sales revenues, and we may not become profitable. The degree of market acceptance of our drug candidates, if approved for commercial sale, will depend on a number of factors, including:

 

the clinical indications for which our drug candidates are approved;

 

physicians, hospitals, cancer treatment centers and patients considering our drug candidates as a safe and effective treatment;

 

the potential and perceived advantages of our drug candidates over alternative treatments;

 

the prevalence and severity of any side effects;

 

product labeling or product insert requirements of the FDA, NMPA or other regulatory authorities;

 

limitations or warnings contained in the labeling approved by the FDA, NMPA or other regulatory authorities;

 

the timing of market introduction of our drug candidates as well as competitive drugs;

 

the cost of treatment in relation to alternative treatments;

 

the amount of upfront costs or training required for physicians to administer our drug candidates;

 

obtaining optimal pricing for products in key global markets;

 

the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities (including U.S. federal healthcare programs);

 

the willingness of patients to pay out-of-pocket in the absence of coverage and reimbursement by third-party payors and government authorities;

 

relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies;

 

the emergence of new biomarker-driven therapies as alternatives to chemotherapy; and

 

the effectiveness of our sales and marketing efforts.

If our drug candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, cancer treatment centers or others in the medical community, we will not be able to generate significant revenue. Even if our drugs achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our drugs, are more cost effective or render our drugs obsolete.

Orphan drugs target rare diseases and must therefore capture significant market share at high per-patient cost to generate reasonable returns.

KX2-361 has obtained Orphan Drug Designation from the FDA and Oral Paclitaxel has obtained Orphan Drug Designations from both the FDA and EC, respectively. As orphan drug candidates target rare diseases with small patient populations, we believe that we would need to capture significant market share to achieve meaningful returns on these product candidates. Further, as is typical of drugs for rare conditions, we would need to establish relatively higher prices in order to generate a return on investment and achieve meaningful gross margins. There can be no assurance that we will be successful in commercializing our orphan drug product candidates, if at all, or that we will be able to generate sufficient revenues from their sales to produce a meaningful return due to the limited market size.

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Our manufacturing experience is limited and any failure by us to manufacture our products for commercial sale after receiving FDA approval would materially impact our revenue and financial condition.

The manufacture of drugs for commercial sale is subject to regulation by the FDA under cGMP regulations and by other regulators under other laws and regulations. We cannot assure you that we will continue to manufacture our products under cGMP regulations or other laws and regulations in sufficient quantities for commercial sale, or in a timely or economical manner.

Our manufacturing facilities require specialized personnel and are expensive to operate and maintain. Any delay in the regulatory approval or market launch of product candidates to be manufactured in these facilities will require us to continue to operate these expensive facilities and retain specialized personnel, which may increase our expected losses.

Through our public-private partnerships, additional cGMP manufacturing facilities for our use are currently being built in Dunkirk, New York, and the construction of a new API facility was complete in Chongqing, China. Our facility in Dunkirk, New York is being built pursuant to an agreement with FSMC. Under the current arrangement, we will select and hire contractors for the project and oversee the development of the Dunkirk facility. ESD, the parent entity of FSMC, is responsible for the costs of construction and all equipment for the facility, up to an aggregate of around $208 million (including approximately $8 million in additional funds available from the previous $25 million ESD grant), and ESD, not us, will own the facility and equipment. We have limited experience in overseeing the development of such a facility and we may not be able to complete the development within the timeframe expected, within the expected budget, or at all. If development of the Dunkirk facility is delayed or not completed it could materially adversely affect our operations and financial results. Our new API facility in Chongqing was constructed in accordance with an agreement with CQ. Under the current agreement, CQ is responsible for construction of the facility but we are responsible for the costs of all equipment for the facilities. CQ will own the land and buildings, and we will lease the facilities, rent-free, for the first 10-year term, with an option to extend the lease for an additional 10-year term, during which, if we are profitable, we will pay a monthly rent of 5 RMB per square meter of space occupied. We have committed to achieving certain operational, revenue and tax generation milestones within certain time periods once we commence operation. If we are not able to achieve such milestones, CQ will have the opportunity to terminate the agreement and dispose of the plants in its discretion.

Additionally, both the Dunkirk and Chongqing facilities will need to be cGMP validated prior to operating. The Chongqing facility is expected to commence operations in the second half of 2020. Validation is a lengthy process that must be completed before we can manufacture under cGMP requirements. We cannot guarantee that the FDA or foreign regulatory agencies will approve the manufacture of any products at these or other facilities, that such facilities will remain in compliance with cGMP regulations, or that such facilities will maintain a compliance status acceptable to the FDA or other regulatory agencies.

The manufacture of pharmaceutical products is a highly complex process in which a variety of difficulties may arise from time to time. We may not be able to resolve any such difficulties in a timely fashion, if at all. If anything were to interfere with the continuing manufacturing operations in our facilities, it could materially adversely affect our business and financial condition.

Currently, many of our product candidates are manufactured in small quantities for use in clinical trials. We cannot assure you that we will be able to successfully scale up the manufacture of each of our product candidates in a timely or economical manner, or at all. If any of these product candidates are approved by the FDA or other drug regulatory authorities for commercial sale, we will need to manufacture them in larger quantities. If we are unable to successfully scale up our manufacturing capacity, the regulatory approval or commercial launch of such product candidate may be delayed or there may be a shortage in supply of such product candidate.

If we fail to develop manufacturing capacity and experience, fail to continue to contract for manufacturing on acceptable terms, or fail to manufacture our product candidates economically on a commercial scale or in accordance with cGMP regulations, our development programs will be materially adversely affected. This may result in delays in receiving FDA or foreign regulatory approval for one or more of our product candidates or delays in the commercial production of a product that has already been approved. Any such delays could materially adversely affect our business and financial condition.

The manufacture of API is highly regulated by FDA, NMPA and other regulatory bodies and is subject to current good manufacturing practice requirements and to inspection by such regulators, which may result in adverse findings and actions against certain API manufacturing facilities.

API manufacturing facilities are subject to regulation by the applicable regulatory bodies in the place of manufacture as well as the regulatory agency in the country to which the product is exported. For instance, FDA’s cGMP regulations apply to these facilities and violation of these, or other, regulations may result in adverse action against the facility, including cessation of manufacturing activities. Our API manufacturing facilities in Chongqing are also subject to regulation by the NMPA. In addition, the Chongqing plant’s commercial operations are currently suspended based on concerns raised by the DEMC related to the location of our plant. If the FDA, NMPA, DEMC or other regulators discover a problem at one facility, we may be subject to increased scrutiny and/or adverse actions across our operations, including fines or orders to cease manufacturing, which could have a material impact on our operations, clinical development, regulatory approval process, business strategy or results of operations.

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We have limited experience in marketing proprietary drug products. If we are unable to establish such marketing and sales capabilities or enter into agreements with third parties to market and sell our proprietary drug candidates, we may not be able to generate sales revenue from such products.

We have limited sales, marketing and commercial product experience. We intend to continue to develop our in-house commercial organization and sales force for such products, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.

If we are unable to establish internal sales, marketing and commercial distribution capabilities for our proprietary drug candidates, we will need to pursue collaborative arrangements for the sales and marketing of our proprietary drugs. 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 less control over the marketing and sales efforts of such third parties which may present fraud and abuse and other regulatory considerations, and our revenue from product sales may be lower than if we had commercialized our proprietary drug candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our proprietary drug candidates.

There can be no assurance that we will be able to develop our in-house sales and commercial distribution capabilities or establish or maintain relationships with third-party collaborators to successfully commercialize any proprietary product, and as a result, we may not be able to generate sales revenue from such products.

We face substantial competition, and our competitors may discover, develop or commercialize competing drugs before or more successfully than we do.

The development and commercialization of new drugs is highly competitive. We face competition with respect to our current drug candidates and will face competition with respect to any drug candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell drugs or are pursuing the development of drugs for the treatment of the types of cancer for which we are developing our drug candidates. Some of these competitive drugs and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

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 approval from the FDA, NMPA or other regulatory authorities for their drugs 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 and/or slow our regulatory approval.

Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved drugs than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Even if we are able to commercialize any drug candidates, the drugs may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which could harm our business.

Successful sales of our drug candidates, if approved, depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the U.S., and commercial payors are critical to new drug acceptance.

The regulations that govern regulatory approvals, pricing and reimbursement for new therapeutic products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or licensing approval is granted. In some non-U.S. markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain

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regulatory approval for a drug in a particular country but be subject to price regulations that delay our commercial launch of the drug and negatively impact the revenues we are able to generate from the sale of the drug in that country. For example, according to the guidance issued in March 2015 by the central government of China, each province will decide which drugs to include in its provincial major illness reimbursement lists and the percentage of reimbursement, based on local funding. Adverse pricing limitations may hinder our ability to recover our investment in one or more drug candidates, even if our drug candidates obtain regulatory approval. For example, in China, according to a statement, Opinions on reforming the review and approval process for pharmaceutical products and medical devices, issued by the State Council in August 2015, the enterprises applying for new drug approval will be required to undertake that the selling price of new drug on Chinese mainland market shall not be higher than the comparable market prices of the product in its country of origin or Chinese neighboring markets, as applicable.

Our ability to commercialize any drugs successfully also will depend in part on the extent to which coverage and reimbursement for these drugs and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a drug is:

 

a covered benefit under its health plan;

 

safe, effective and medically necessary;

 

appropriate for the specific patient;

 

cost-effective and

 

neither experimental nor investigational.

We cannot be sure that reimbursement will be available for any drug that we commercialize and, if coverage and reimbursement are available, what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any drug for which we obtain regulatory approval. Obtaining reimbursement for our drugs may be particularly difficult because of the higher prices often associated with branded drugs and drugs administered under the supervision of a physician. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize any drug candidate that we successfully develop.

In the U.S., no uniform policy of coverage and reimbursement for drugs exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a drug from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our drugs on a payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a given drug, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of our drugs. However, under Medicare Part D—Medicare’s outpatient prescription drug benefit—there are protections in place to ensure coverage and reimbursement for oncology products and all Part D prescription drug plans are required to cover substantially all anti-cancer agents.

The State Council required central and provincial authorities across China to promote a medical insurance program for major illnesses, which targets covering at least 50% of the medical cost as incurred by treating major illnesses but falls out of the coverage of the basic insurance programs. The State Council requires provincial authorities to increase reimbursement rates over the next three years.

We intend to seek approval to market our drug candidates in the U.S., China and other selected jurisdictions. If we obtain approval in one or more non-U.S. jurisdictions for our drug candidates, we will be subject to rules and regulations in those jurisdictions. In some non-U.S. countries, the pricing of drugs and biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining regulatory approval of a drug candidate. In addition, market acceptance and sales of our drug candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our drug candidates and may be affected by existing and future health care reform measures.

We intend to test and market our drugs, if approved, in a variety of international markets and we are exploring the licensing of commercialization rights or other forms of collaboration worldwide, which exposes us to additional risks of conducting business in additional international markets.

We conduct business operations in regions including the U.S., China, Taiwan, New Zealand and the United Kingdom, and other non-U.S. markets, including certain countries in Latin America, are an important component of our growth strategy. If we fail to obtain licenses or enter into collaboration arrangements with third parties in these markets, or if these parties are not successful, our revenue-generating growth potential will be adversely affected.

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Moreover, international business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:

 

initiatives to develop an international sales, marketing and distribution organization may increase our expenses, divert our management’s attention from the acquisition or development of drug candidates or cause us to forgo profitable licensing opportunities in these geographies;

 

efforts to enter into collaboration or licensing arrangements with third parties in connection with our international sales, marketing and distribution efforts may increase our expenses or divert our management’s attention from the acquisition or development of drug candidates;

 

changes in a specific country’s or region’s laws, regulations or political and cultural climate or economic condition;

 

differing regulatory requirements for drug approvals and marketing internationally;

 

difficulty of effective enforcement of contractual provisions and intellectual property rights in local jurisdictions;

 

potentially reduced protection for intellectual property rights;

 

potential conflicting third-party patent or other intellectual property rights;

 

unexpected changes in tariffs, trade barriers and regulatory requirements, such as Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges;

 

economic weakness, including inflation or political instability, particularly in non-U.S. economies and markets;

 

compliance with tax, employment, immigration and labor laws for employees traveling abroad;

 

the effects of applicable non-U.S. tax structures and potentially adverse tax consequences;

 

currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incidental to doing business in another country;

 

workforce uncertainty and labor unrest, particularly in non-U.S. countries where labor unrest is more common than in the U.S.;

 

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a non-U.S. market with low or lower prices rather than buying them locally;

 

failure of our employees and contracted third parties to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act;

 

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, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

These and other risks may materially adversely affect our ability to obtain or sustain revenue from international markets.

The use of legal, regulatory, and legislative strategies by both brand and generic competitors, including but not limited to “authorized generics” and regulatory petitions, as well as the potential impact of proposed and newly enacted legislation, may increase costs associated with the introduction or marketing of our generic products, could delay or prevent such introduction, and could adversely affect our results of operations.

Our competitors, both branded and generic, often pursue strategies to prevent, delay, or eliminate competition from generic alternatives to branded products. These strategies include, but are not limited to:

 

entering into agreements whereby other generic companies will begin to market an authorized generic, a generic equivalent of a branded product, at the same time or after generic competition initially enters the market;

 

launching a generic version of their own branded product prior to or at the same time or after generic competition initially enters the market;

 

filing petitions with the FDA or other regulatory bodies seeking to prevent or delay approvals, including timing the filings so as to thwart generic competition by causing delays of our product approvals;

 

seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate bioequivalence or to meet other requirements for approval, and/or to prevent regulatory agency review of applications, such as through the establishment of patent linkage (laws and regulations barring the issuance of regulatory approvals prior to patent expiration);

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initiating legislative or other efforts to limit the substitution of generic versions of brand pharmaceuticals;

 

filing suits for patent infringement and other claims that may delay or prevent regulatory approval, manufacture, and/or scale of generic products;

 

introducing “next-generation” products prior to the expiration of market exclusivity for the reference product, which often materially reduces the demand for the generic or the reference product for which we seek regulatory approval;

 

persuading regulatory bodies to withdraw the approval of brand name drugs for which the patents are about to expire and converting the market to another product of the brand company on which longer patent protection exists;

 

obtaining extensions of market exclusivity by conducting clinical trials of brand drugs in pediatric populations or by other methods; and

 

seeking to obtain new patents on particular formulations of drugs or methods of administering drugs for which patent protection on the drug itself is about to expire.

If any other actions by our competitors and other third parties to prevent or delay activities necessary to the approval, manufacture, or distribution of our products are successful, our entry into the market and our ability to generate revenues associated with new products may be delayed, reduced, or eliminated, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or share price.

Our compounded preparations and the pharmacy compounding industry are subject to regulatory and customer scrutiny, which may impair our growth and sales.

Formulations prepared and dispensed by compounding pharmacies may contain ingredients found in FDA-approved drugs. Compounded formulations are subject to various statutory and FDA regulatory requirements. Outsourcing facilities are regulated under FDCA Section 503B.  Certain compounding pharmacies and outsourcing facilities have been the subject of negative media coverage in recent years; such actions have resulted in increased scrutiny of compounding activities from the FDA and state governmental agencies. For example, the FDA has in the past requested that a number of compounding pharmacies and outsourcing facilities recall unexpired drug products and cease sterile compounding operations due to lack of assurance of sterility.  Pharmacies and outsourcing facilities have also, at the request of FDA, suspended sterile production or voluntarily recalled certain sterile compounded products after an FDA inspection of relevant facilities. As a result, some prescribers and hospital/clinic purchasing agents may be hesitant to prescribe or procure compounded formulations, and some patients may be hesitant to purchase the same.

In addition, an outsourcing facility must meet certain conditions under Section 503B of the FDCA in order for its compounded products to be exempt from the FDCA’s premarket approval requirements, from the FDCA requirement that products be labeled with adequate directions for use, and serialization and product tracing requirements.  For example, the drug must be compounded by or under the direct supervision of a licensed pharmacist, in a facility registered with FDA pursuant to Section 503B of the FDCA.  The facility must also operate in compliance with FDA’s cGMP regulations.  If our outsourcing facility or any of our compounded products are found not to satisfy the criteria of Section 503B, the marketing of our products absent FDA approval and/or adequate directions for use on the product labeling could render our products adulterated or misbranded under the FDCA, which could have an adverse effect on our business.  Furthermore, if an outsourcing facility compounds drugs using bulk drug substances, such bulk drug substances must either appear on a list established by the FDA of bulk drug substances for which there is a clinical need, or must be on FDA’s published drug shortage list.

The source of any bulk substance active ingredient used in compounding must be a Section 510 registered manufacturer, and the ingredients must include a certificate of analysis.  If the outsourcing facility compounds using bulk drug substances, the bulk drug substances must either appear on FDA’s “interim” list of bulk substances that may be used in compounding under Section 503B a “bulks” list established by FDA, which are those bulk drug substances for which FDA has determined there is a clinical need.  Drugs may also be compounded if the FDA-approved drug appear on FDA’s published drug shortage list.  Although FDA has not yet finalized a list of bulk drug substances for which there is a clinical need, FDA has announced an interim policy pursuant to which bulk drug substances for which there is sufficient supporting information for FDA to evaluate them may be nominated for inclusion on FDA’s “Category 1” bulks list.  Provided certain conditions are met, FDA will apply its enforcement discretion to Category 1 substances pending evaluation of the substances for inclusion on FDA’s final list of bulk drug substances for which there is a clinical need.

FDA has also finalized guidance on determining whether a product is an “essential copy” of a commercially available product.  If our products were ever determined to be an essential copy of a commercially available product, FDA could engage in enforcement action. We use bulk drug substances in the preparation of certain of our compounded products. In the event the FDA’s evaluation of these bulk drug substances results in a determination not to include such substances on the FDA’s list of bulk drug substances for which there is a clinical need, or if FDA were to change its interim policy such that compounding with such bulk drug substances could not proceed while the FDA’s evaluation of the substances is pending or until the FDA has issued its final list of bulk

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drug substances for which there is a clinical need, our ability to continue marketing compounded products subject to Section 503B would be impaired, and our business could be harmed.

If a compounded drug formulation provided by our compounding services leads to patient injury or death, or results in a product recall, we may be exposed to significant liabilities and reputational harm.

The production, labeling and packaging of compounded drugs is inherently risky. The success of our compounded formulations and pharmacy operations depends to a significant extent upon perceptions of the safety and quality of our products. We could be adversely affected if our formulations are subject to negative publicity. We could also be adversely affected if any of our formulations or other products, any similar products sold by other companies, or any products sold by other outsourcing facilities, prove to be, or are alleged or asserted to be, harmful to patients. There are a number of factors that could result in the injury or death of a patient who receives one of our compounded formulations, including quality issues, manufacturing or labeling flaws, improper packaging or unanticipated or improper dispensing or uses of the products, any of which could result from human or other error. Any of these situations could lead to a recall of, or safety alert relating to, one or more of our products. Similarly, to the extent any of the components of approved drug products or other ingredients used by us to produce compounded formulations have quality or other problems that adversely affect the finished compounded preparations, our sales could be adversely affected. In addition, in the ordinary course of business, we may voluntarily retrieve products from the field in response to a customer complaint. Because of our dependence upon medical and patient perceptions, any adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar products sold by other companies, or related to compounded formulations generally, could have a material adverse impact on our business, results of operations and financial condition.

Risks Related to Our Intellectual Property

A significant portion of our intellectual property portfolio currently comprises pending patent applications that have not yet been issued as granted patents, and if our pending patent applications fail to issue our business will be adversely affected. If we are unable to obtain and maintain patent protection for our technology and drugs, our competitors could develop and commercialize technology and drugs similar or identical to ours, and our ability to successfully commercialize our technology and drugs may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the U.S., China and other countries with respect to our proprietary technology and drug candidates. We have sought to protect our proprietary position by filing patent applications in the U.S., China and other countries related to novel technologies and drug candidates that we consider important to our business As of December 31, 2019, we owned more than 150 granted patents and approximately 65 pending patent applications worldwide. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. There can be no assurance that our pending patent applications will result in issued patents. Moreover, even our issued patents do not guarantee us the right to practice our technology in relation to the commercialization of our platforms’ product candidates. Third parties may have blocking patents that could be used to prevent us from commercializing our patented technologies, platforms and product candidates and practicing our proprietary technology. There can also be no assurance that a third party will not challenge the validity of our patents or that we will obtain sufficient claim scope in those patents, in view of prior art, to prevent a third party from competing successfully with our drug candidates. We may become involved in interference, inter partes review, post grant review, ex parte reexamination, derivation, opposition or similar other proceedings challenging our patent rights or the patent rights of others. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and drug candidates, or limit the duration of the patent protection of our technology and drug candidates. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing drug candidates similar or identical to ours.

The patent position of biotechnology and pharmaceutical companies is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Changes in patent laws or the interpretation of patent laws in the U.S. and other countries may diminish the value of our patents or narrow the scope of our patent protection. Publications of discoveries in scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until eighteen months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

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We may not be able to protect our intellectual property rights throughout the world.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions, due to inconsistent policies regarding the scope of claims allowable in patents. Changes in patent laws and rules, either by legislation, judicial decisions, or regulatory interpretation in the U.S. and other countries may diminish our ability to protect our inventions and enforce our intellectual property rights, and more generally could affect the value of our intellectual property.

In addition, the laws of certain non-U.S. countries do not protect intellectual property rights to the same extent as U.S. federal and state laws do. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing drugs made using our inventions in and into the U.S. or non-U.S. jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own drugs and further, may export otherwise infringing drugs to non-U.S. jurisdictions where we have patent protection but where enforcement rights are not as strong as those in the U.S. These drugs may compete with our drug candidates and our patent or other intellectual property rights may not be effective or adequate to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in certain jurisdictions, including China. The legal systems of some countries do not favor the enforcement of patents, trade secrets and other intellectual property, particularly those relating to biopharmaceutical products, which could make it difficult in those jurisdictions for us to stop the infringement or misappropriation of our patents or other intellectual property rights, or the marketing of competing drugs in violation of our proprietary rights. Proceedings to enforce our patent and other intellectual property rights in non-U.S. jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business.

Furthermore, such proceedings could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims of infringement or misappropriation 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.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful and our patent rights relating to our drug candidates could be found invalid or unenforceable if challenged in court or before the U.S. Patent and Trademark Office or comparable non-U.S. authority.

Competitors may infringe our patent rights or misappropriate or otherwise violate our intellectual property rights. To counter infringement or unauthorized use, litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. Such litigation can be expensive and time-consuming. Our current and potential competitors may have the ability to dedicate substantially greater resources to enforce and/or defend their intellectual property rights than we can. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement proceeding, a court may decide that patent or other intellectual property rights owned by us are invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent or other intellectual property rights do not cover the technology in question. An adverse result in any litigation proceeding could put our patent, as well as any patents that may issue in the future from our pending patent applications, at risk of being invalidated, held unenforceable or interpreted narrowly. 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.

If we initiate legal proceedings against a third party to enforce any patent, or any patents that may issue in the future from our patent applications, that relates to one of our drug candidates, the defendant could counterclaim that such patent rights are invalid or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Third parties may also raise similar claims before administrative bodies in the U.S. or abroad, even outside the context of litigation. Such mechanisms include ex parte re-examination, inter partes review, post-grant review, derivation and equivalent proceedings in non-U.S. jurisdictions, such as opposition proceedings. Although any party alleging invalidity or unenforceability of our patents has a high burden of proof, nonetheless such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover and protect our drug candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity of our patents, for example, we cannot be certain that there is no invalidating prior art of which we, our patent counsel, and the patent examiner were unaware of during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on certain drug candidates. Such a loss of patent protection could have a material adverse impact on our business.

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We may be subject to claims challenging the inventorship of our patents and ownership of other intellectual property.

Although we are not currently experiencing any claims challenging the inventorship of our patents or ownership of our intellectual property, we may in the future be subject to claims that former employees, collaborators or other third parties have an interest in our patents or other intellectual property as inventors or co-inventors. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our drug candidates. Litigation may be necessary to defend against these and other claims challenging inventorship. If we fail in defending any such claims, we may lose rights such as exclusive ownership of, or right to use, our patent or other intellectual property rights. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time-consuming and could prevent or delay us from developing or commercializing our drug candidates.

Our commercial success depends in part on our avoiding infringement of the patents and other intellectual property rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including litigation in the U.S. courts, inter partes review, post grant review, interference and ex parte reexamination proceedings before the USPTO or oppositions and other comparable proceedings in non-U.S. jurisdictions. Numerous issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing drug candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our drug candidates or manufacturing processes may give rise to claims of infringement of the patent rights of others.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our drug candidates. Because patent applications can take many years to issue, patent applications that are currently pending may later result in issued patents that our drug candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies that are first publicized or commercialized after the filing date of those patents infringes upon them. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our drug candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to prevent us from commercializing such drug candidate unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent is held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the applicable drug candidate unless we obtain a license, limit our uses, or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all.

Third parties who bring successful claims against us for infringement of their intellectual property rights may obtain injunctive or other equitable relief, which could prevent us from developing and commercializing one or more of our drug candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of management and employee resources from our business. In the event of a successful claim of infringement or misappropriation against us, we may have to pay substantial damages, including treble damages and attorneys’ fees in the case of willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing drug candidates, which may be impossible or require substantial time and monetary expenditure and undertaking additional preclinical studies, clinical trials or regulatory review. In the event of an adverse result in any such litigation, or even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our drug candidates. We cannot predict whether any required license would be available on commercially reasonable terms, or at all, and we may fail to obtain any of these licenses on commercially reasonable terms, if at all. In the event that we are unable to obtain such a license, we would be unable to further develop and commercialize one or more of our drug candidates, which could harm our business significantly. We may also elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to litigation and any such license agreements may require us to pay royalties and other fees that could significantly harm our business.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical personnel, management personnel, or both from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the

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initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

If our products conflict with the intellectual property rights of third parties, we may incur substantial liabilities and we may be unable to commercialize products in a profitable manner or at all.

We seek to launch generic pharmaceutical products either where patent protection or other regulatory exclusivity of equivalent branded products has expired, where patents have been declared invalid or where products do not infringe the patents of others. However, at times, we may seek approval to market generic products before the expiration of patents relating to the branded versions of those products, based upon our belief that such patents are invalid or otherwise unenforceable or would not be infringed by our products. Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties. The manufacture, use and sale of generic versions of products has been subject to substantial litigation in the pharmaceutical industry. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. If our products were found to be infringing the intellectual property rights of a third-party, we could be required to cease selling the infringing products, causing us to lose future sales revenue from such products and face substantial liabilities for patent infringement, in the form of payment for the innovator’s lost profits or a royalty on our sales of the infringing product. These damages may be significant and could materially adversely affect our business. Any litigation, regardless of the merits or eventual outcome, would be costly and time consuming and we could incur significant costs and/or a significant reduction in revenue in defending the action and from the resulting delays in manufacturing, marketing or selling any of our products subject to such claims.

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 noncompliance with these requirements.

The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. Periodic maintenance fees on any issued patent are due to be paid to the USPTO and other patent agencies in several stages over the lifetime of the patent.  Although an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment of a patent application or lapse of a patent include failure to respond to official actions within prescribed time limits, non-payment of fees, and failure to properly legalize and submit formal documents. In any such event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

The terms of our patents may not be sufficient to effectively protect our drug candidates and business.

In most countries in which we file patent applications, including the U.S., the term of an issued patent is twenty years from the earliest claimed filing date of a non-provisional patent application in the applicable country. With respect to any issued patents in the U.S., we may be entitled to obtain a patent term extension or extend the patent expiration date provided we meet the applicable requirements for obtaining such patent term extensions. Although such extensions may be available, the life of a patent and the protection it affords is by definition limited. Even if patents covering our drug candidates are obtained, we may be open to competition from other companies as well as generic medications once the patent life has expired for a drug. If patents are issued on our currently pending patent applications, the resulting patents will be expected to expire on dates ranging approximately from 2024 to 2040, excluding any potential patent term extension or adjustment. Upon the expiration of our issued patents, we will not be able to assert such patent rights against potential competitors and our business and results of operations may be adversely affected.

In addition, the rights granted under any issued patents may not provide us with protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies. For these reasons, we may have competition for our technologies, platforms and product candidates. Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that a related patent may expire before any particular product candidate can be commercialized or that such patent will remain in force for only a short period following commercialization, thereby reducing any significant advantage of the patent.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar legislation in other countries extending the terms of our patents, if issued, relating to our drug candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA regulatory approval for our drug candidates, one or more of our U.S. patents, if issued, may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension of up

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to five years as compensation for patent term lost during drug development and the FDA regulatory review process. Patent term extensions, however, cannot extend the remaining term of a patent beyond a total of fourteen years from the date of drug approval by the FDA, and only one patent can be extended for a particular drug.

The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. We may not be granted an extension due to, for example, failure to apply within applicable deadlines, failure to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain a patent term extension for a given patent or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our drug will be shortened and our competitors may obtain earlier approval of competing drugs. As a result, our ability to generate revenues could be materially adversely affected.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our drug candidates.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patent rights. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity, and is therefore costly, time-consuming, and inherently uncertain. In addition, the U.S. has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. 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. For example, in Assoc. for Molecular Pathology v. Myriad Genetics, Inc., the U.S. Supreme Court held that certain claims to naturally-occurring substances are not patentable. Although we do not believe that our issued patents or any patents that may issue from our pending patent applications directed to our drug candidates if issued in their currently pending forms, as well as patent rights licensed by us, will be found invalid based on this decision, we cannot predict how future decisions by the courts, the U.S. Congress or the USPTO may impact the value of our patent rights. There could be similar changes in the laws of foreign jurisdictions that may impact the value of our patent or our other intellectual property rights.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We may also be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

In addition to our issued patents and pending patent applications, we rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position and to protect our drug candidates. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. These agreements provide that all confidential information concerning our business or financial affairs developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual, and which are related to our current or planned business or research and development or made during normal working hours, on our premises or using our equipment or proprietary information, are our exclusive property. In many cases our confidentiality and other agreements with consultants, outside scientific collaborators, sponsored researchers and other advisors require them to assign to us or grant us licenses to inventions they invent as a result of the work or services they render under such agreements or grant us an option to negotiate a license to use such inventions. However, any of these parties may breach such agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. 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 and our competitive position would be harmed.

Furthermore, many of our employees, including our senior management, were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees, including each member of our senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. We are not aware of any threatened or pending claims related to these matters or concerning the agreements with our senior management, but litigation may be necessary in the future to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

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In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our management and scientific personnel. Further, to the extent that our employees, contractors, consultants, collaborators and advisors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

We also seek to preserve the integrity and confidentiality of our proprietary technology and processes by maintaining physical security of our premises and physical and electronic security of our information technology systems. Although we have confidence in the security of our systems, security measures may be breached, and we may not have adequate remedies for any such breach.

We may not be successful in obtaining or maintaining necessary rights for our development pipeline through acquisitions and in-licenses.

Because our programs may involve additional drug candidates that require the use of proprietary rights held by third parties, the growth of our business may depend in part on our ability to acquire and maintain licenses or other rights to use these proprietary rights. We may be unable to acquire or in-license any compositions, methods of use, or other third-party intellectual property rights from third parties that we identify. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

In addition, companies that perceive us to be a competitor may be unwilling to assign or license intellectual property rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to required third-party intellectual property rights, our business, financial condition and prospects for growth could suffer.

If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could be required to pay monetary damages or could lose license rights that are important to our business.

We have entered into license agreements with third parties providing us with rights under various third-party patents and patent applications, including the rights to prosecute patent applications and to enforce patents. Certain of these license agreements impose and, for a variety of purposes, we may enter into additional licensing and funding arrangements with third parties that also may impose diligence, development or commercialization timelines and milestone payment, royalty, insurance and other obligations on us. Certain of these license agreements provide us with the exclusive right to practice technologies in major markets including North America, South America, the EU, Australia, New Zealand, Eastern Europe, China, Taiwan, Hong Kong, Macau and parts of Southeast Asia, although the right to practice the technologies and any inventions arising out of such technologies outside of these territories may be reserved to the licensing company. In addition, under certain of our existing licensing agreements, we are obligated to pay royalties on net product sales of our drug candidates once commercialized, pay a percentage of sublicensing revenues, make other specified payments relating to our drug candidates or pay license maintenance and other fees. We also have diligence and clinical development obligations under certain of these agreements that we are required to satisfy. If we fail to comply with our obligations under our current or future license agreements, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any drug or drug candidate that is covered by the licenses or we may face claims for monetary damages or other penalties under these agreements. Such an occurrence could diminish the value of these products and our company. Termination of the licenses provided in these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.

In particular, our ability to stop third parties from making, using, selling, offering to sell or importing any of our patented inventions, either directly or indirectly, will depend in part on our success in obtaining, defending, and enforcing patent claims that cover our technology, inventions and improvements. With respect to both licensed and company-owned intellectual property, we cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our platforms and product candidates and the methods used to manufacture those platforms and product candidates. Our issued patents and those that may issue in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related platforms or product candidates or limit the length of the term of patent protection that we may have for our technologies, platforms and product candidates.

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If our licensing and sublicensing activities result in non-compliance with our licensing agreements, our business relationships with our licensing partners may suffer and we may be required to pay monetary damages or rescind or amend existing agreements which are important to our business.

We have entered into agreements with third parties under which we have granted licenses to use certain of our patents and patent applications, including the rights to develop, seek regulatory approval for and sell products using our tirbanibulin ointments and KX2-361 products. We have also entered into similar agreements sublicensing the intellectual property for the Orascovery platform, which we have licensed from Hanmi. We have granted exclusive patent rights to certain of these partners and have granted them certain additional rights with respect to the intellectual property we have licensed to them. From time to time we may engage in other licensing transactions in which we acquire licenses to certain intellectual property or sublicense intellectual property rights. If we fail to comply with or are found to have violated the terms of any of our licenses, we may be required to rescind or amend our license agreements or pay damages to license counterparties or other rightsholders. This may also negatively impact our relationships with our licensing and sublicensing partners for our candidate platforms. For further information regarding the terms of our licenses, please see “Business—License and Collaboration Agreements”.

Risks Related to Our Reliance on Third Parties

We depend on our agreements with Hanmi to provide rights to the intellectual property relating to certain of our lead product candidates. Any termination or loss of significant rights under those agreements would adversely affect our development or commercialization of our lead product candidates.

We have licensed the intellectual property rights related to encequidar, an integral part of our current product candidates, from Hanmi pursuant to two license agreements. If, for any reason, our license agreements are terminated or we otherwise lose those rights, it would adversely affect our business. Our license agreements with Hanmi impose on us obligations relating to exclusivity, territorial rights, development, commercialization, funding, payment, diligence, sublicensing, insurance, intellectual property protection and other matters. If we breach any material obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages to Hanmi, and Hanmi may have the right to terminate our license, which could result in us being unable to develop, manufacture and sell our product candidates that incorporate encequidar.

In addition, under our 2013 license agreement with Hanmi, we have granted Hanmi a one-time right of first negotiation that, at Hanmi’s discretion, requires us to negotiate in good faith the sale of our rights in Oral Paclitaxel and Oral Irinotecan under such agreement to Hanmi at a purchase price determined by an internationally-recognized investment banking firm with an office in Hong Kong at any time prior to the earlier of (1) our first commercial sale of products using such technology or (2) receipt by Hanmi of written notice from our company of the sublicense of the rights in an applicable product to a third party. If Hanmi exercises this right of first negotiation and we reach an agreement to sell our rights under that licensing agreement, our ability to continue to develop certain of our product candidates would be significantly impaired and would adversely affect our business and results of operations.

Each of our license agreements with Hanmi expires on the earlier of (1) expiration of the last of Hanmi’s patent rights licensed under the agreement or (2) invalidation of Hanmi’s patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless either party gives notice to the other at least ninety days prior to expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement. The patent rights licensed to us under the agreements with Hanmi have expiry dates ranging from 2023 to 2033, unless the terms of such licensed patents are extended in accordance with applicable laws and regulations. Subject to certain conditions, Hanmi may also terminate the license agreements if we fail to comply with certain development milestones set out in each of the agreements. The agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party or by mutual agreement. For further information regarding the license terms, right of first negotiation and termination provisions of the Hanmi in-license agreements, please see “Business—License and Collaboration Agreements—In-Licenses —Hanmi Licensing Agreements.”  

We may rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, perform satisfactorily or operate in compliance with laws and regulations, we may not be able to obtain regulatory approval for or commercialize our drug candidates and our business could be substantially harmed.

We have relied upon and may, in the future, rely upon third-party CROs to monitor and manage data for our ongoing preclinical and clinical programs. We rely on these parties for execution of our preclinical studies and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, and regulatory requirements and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. In addition, as a result of our acquisition of CIDAL, our preclinical and clinical programs will largely be performed within the Company and we will be responsible for conducting clinical trials and complying with applicable laws and regulations.

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We and our CROs are required to comply with GCPs, which are regulations and guidelines enforced by the FDA, NMPA and other regulatory authorities for all of our drugs in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, NMPA or regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs terminate, or we are unable to successfully integrate CIDAL’s business into ours, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical, non-clinical and preclinical programs. In the event that any of our foreign CROs are impacted by political, social or financial instability, they may be unable to maintain production capacity or compliance with regulatory requirements. If CROs 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, regulatory requirements, environmental, health and safety laws and regulations, or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory a