S-1 1 d621316ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on December 30, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ARGOS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   2834   56-2110007

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

4233 Technology Drive

Durham, North Carolina 27704

(919) 287-6300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jeffrey D. Abbey

Chief Executive Officer

Argos Therapeutics, Inc.

4233 Technology Drive

Durham, North Carolina 27704

(919) 287-6300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David E. Redlick

Stuart M. Falber

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, Massachusetts 02109

(617) 526-6000

 

Michael D. Maline

Edward A. King

Goodwin Procter LLP

53 State Street

Boston, Massachusetts 02109

(617) 570-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

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

 

Large accelerated filer    ¨   Accelerated filer    ¨   Non-accelerated filer    x   Smaller reporting company    ¨
 

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities To Be Registered   Proposed Maximum Aggregate Offering Price(1)   Amount of Registration Fee(2)

Common Stock, $0.001 par value per share

  $60,000,000   $7,728

 

 

(1)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 30, 2013

PROSPECTUS

             Shares

 

ARGOS THERAPEUTICS, INC.   LOGO

Common Stock

$             per share

 

 

  Argos Therapeutics, Inc. is offering                  shares.

 

  We anticipate that the initial public offering price of our common stock will be between $         and $         per share.
  This is our initial public offering and no public market currently exists for our shares.

 

  We intend to apply to list our common stock on The NASDAQ Global Market under the symbol “ARGS”.
 

 

 

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012, and as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

 

 

 

 

      Per Share      

Total

Public offering price

   $                    $

Underwriting discounts and commissions

   $         $

Proceeds, before expenses, to Argos Therapeutics, Inc.

   $         $

 

 

 

We have granted the underwriters an option to purchase up to              additional shares of our common stock to cover over-allotments. The underwriters can exercise this option at any time within 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to investors on or about             ,         .

 

Piper Jaffray   Stifel   JMP Securities

Needham & Company

The date of this prospectus is             ,         .


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

THE OFFERING

     7   

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

     9   

RISK FACTORS

     11   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     46   

USE OF PROCEEDS

     48   

DIVIDEND POLICY

     50   

CAPITALIZATION

     51   

DILUTION

     53   

SELECTED CONSOLIDATED FINANCIAL DATA

     55   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     57   

BUSINESS

     84   

MANAGEMENT

     129   

EXECUTIVE COMPENSATION

     136   

TRANSACTIONS WITH RELATED PERSONS

     148   

PRINCIPAL STOCKHOLDERS

     164   

DESCRIPTION OF CAPITAL STOCK

     167   

SHARES ELIGIBLE FOR FUTURE SALE

     171   

MATERIAL FEDERAL U.S. TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

     174   

UNDERWRITING

     178   

LEGAL MATTERS

     183   

EXPERTS

     183   

WHERE YOU CAN FIND MORE INFORMATION

     183   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section beginning on page 11 and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.

Our Business

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Our most advanced product candidate is AGS-003, which we are developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. We are currently enrolling patients in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib (Sutent) for the treatment of mRCC under a special protocol assessment, or SPA, with the Food and Drug Administration, or FDA. The primary endpoint of the phase 3 clinical trial is overall survival. In our phase 2 clinical trial of AGS-003 in combination with sunitinib in mRCC patients, median overall survival was 30.2 months. This compares to median overall survival of 14.7 months in 1,189 mRCC patients with similar risk factors who were treated with sunitinib or other targeted therapies as shown in data collected by the International Metastatic Renal Cell Carcinoma Database Consortium, or the Consortium. We are developing our second Arcelis product candidate, AGS-004, for the treatment of HIV and are conducting a phase 2b clinical trial of AGS-004 that is being funded entirely by the National Institutes of Health, or NIH, under a $39.3 million contract.

Our Arcelis Platform

Our proprietary Arcelis technology platform utilizes biological components from a patient’s own cancer cells or virus to generate fully personalized immunotherapies. These immunotherapies employ specialized white blood cells called dendritic cells to activate an immune response specific to the patient’s own disease. Arcelis is based on the work of Dr. Ralph Steinman, winner of the 2011 Nobel Prize in medicine for the discovery of the role of dendritic cells in the immune system.

We believe our Arcelis-based immunotherapies are applicable to a wide range of cancers and infectious diseases and have the following attributes that we consider critical to a successful immunotherapy:

 

    target a patient’s disease-specific antigens, including mutated antigens, to elicit a potent immune response that is specific to the patient’s own disease;

 

    overcome the immune suppression that exists in cancer and infectious disease patients;

 

    induce memory T-cells, a specialized type of immune cell that is known to correlate with improved clinical outcomes for cancer and HIV patients;

 

    have minimal toxicity; and

 

    can be produced using an automated centralized manufacturing process at a cost that will be comparable to biologics.

We believe that our immunotherapies combine the advantages of other approaches to immunotherapy, including antigen-based approaches and pathway-based approaches such as checkpoint inhibition, while addressing the limitations they present.

 

 

 

 

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Our Development Programs

The following table summarizes our development programs for AGS-003 and AGS-004.

 

Product Candidate

  

Primary Indication

  

Status

AGS-003

   mRCC (clear cell)   

•     Ongoing pivotal phase 3 clinical trial; completion of enrollment expected in second half of 2014; overall survival data expected in first half of 2016

   mRCC (non-clear cell)   

•     Phase 2 clinical trial expected to begin in the first half of 2014

   Early stage RCC   

•     Two investigator-initiated phase 2 clinical trials expected to begin in the first half of 2014

   Other solid tumors   

•     Phase 2 clinical trials planned for 2014

AGS-004

   HIV   

•     Enrollment in phase 2b clinical trial complete; data expected in the second quarter of 2014

 

•     Two phase 2 clinical trials (one for HIV eradication and one for long-term viral control in pediatric patients) expected to begin in 2014

We hold all commercial rights to AGS-003 and AGS-004 in all geographies other than rights to AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, which we licensed to Pharmstandard International S.A., and rights to AGS-003 in South Korea, which we licensed to Green Cross Corp. We have granted to Medinet Co., Ltd. a license to manufacture in Japan AGS-003 for the treatment of mRCC and an option to acquire a license to sell in Japan AGS-003 for the treatment of mRCC.

AGS-003

We are initially developing AGS-003 to be used in combination with sunitinib and other targeted therapies for first-line treatment of mRCC. We are conducting a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib monotherapy for the treatment of newly diagnosed mRCC under an SPA with the FDA. We plan to enroll approximately 450 intermediate and poor risk patients with mRCC that pathologists have classified as clear cell. The primary endpoint of the trial is overall survival. We expect to complete patient enrollment in this trial in the second half of 2014 and to have overall survival data in the first half of 2016. We have established an independent data monitoring committee that will conduct interim analyses of the trial data for safety and futility at such times as 25%, 50% and 75% of the required events in the trial have occurred.

We conducted a 21 patient single arm phase 2 clinical trial of AGS-003 in combination with sunitinib in 11 intermediate risk and ten poor risk mRCC patients who had a time from diagnosis to initiation of systemic therapeutic treatment of less than one year, a negative prognostic indicator. Median overall survival for patients in the trial was 30.2 months. This compares to median overall survival of 14.7 months from initiation of treatment in 1,189 intermediate and poor risk patients who had a time from diagnosis to initiation of systemic therapeutic treatment of less than one year and were treated with sunitinib or other targeted therapies as shown in data collected by the Consortium and presented at the 2013 Annual Meeting of the American Society of Clinical Oncology, or ASCO.

In addition, 52% of the 21 patients in our phase 2 clinical trial survived for 30 or more months from enrollment in the trial, and 33% of the 21 patients survived for more than 4.5 years. This compares to data collected from six prior clinical trials of sunitinib and published in the British Journal of Cancer, in which 13% of the approximately 455 patients characterized as intermediate or poor risk patients in these trials survived for 30 or more months from initiation of sunitinib treatment. Furthermore, in our phase 2 clinical trial, we observed a statistically significant correlation between the increase in the number of CD8+ CD28+ memory T-cells and survival, progression free

 

 

 

 

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survival and reduced metastatic tumor burden. We believe that AGS-003 is the only cancer immunotherapy to show a statistically significant correlation between the magnitude of the target immune response and survival.

We also conducted a 22 patient single arm phase 1/2 clinical trial of AGS-003 as monotherapy in nine intermediate risk and 13 poor risk mRCC patients. Median overall survival for patients in the trial was 15.6 months. In addition, 23% of the 22 patients in our phase 1/2 clinical trial survived for more than 30 months following enrollment.

Renal cell carcinoma, or RCC, is the most common type of kidney cancer. According to the American Cancer Society, or ACS, 2013 Cancer Facts and Figures Report, approximately 65,000 new cases of kidney cancer and nearly 14,000 deaths due to kidney cancer are expected in 2013 in the United States. The National Comprehensive Cancer Network, or NCCN, estimates that 90% of kidney cancer cases are RCC and that 85% of these cases are classified as clear cell RCC. According to the ACS, approximately 25% of newly diagnosed RCC cases are mRCC. Additionally, patients initially diagnosed with early stage, or non-metastatic, RCC may later progress to mRCC. We estimate, based on publicly available information, that the current worldwide mRCC market for these targeted therapies is over $2 billion.

We are also exploring the use of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors. We plan to initiate clinical trials of AGS-003 for the treatment of these indications in 2014.

AGS-004

We are developing AGS-004 for the treatment of HIV and plan to focus this program on the use of AGS-004 in combination with other therapies for the eradication of HIV. The current standard of care, antiretroviral drug therapy, can reduce levels of HIV in a patient’s blood, increase the patient’s life expectancy and improve the patient’s quality of life. However, antiretroviral drug therapy cannot eliminate the virus, which persists in latently infected cells, remains undetectable by the immune system and can recur. In addition, antiretroviral therapy requires daily, life-long treatment and can have significant side effects.

We believe that by combining AGS-004 with therapies that are being developed to expose the virus in latently infected cells to the immune system, we can potentially eradicate the virus. In the second half of 2014, we plan to initiate a phase 2 clinical trial of AGS-004 in adult HIV patients to evaluate the use of AGS-004 in combination with one of these latency reversing therapies for this purpose. We also plan to explore the use of AGS-004 monotherapy to provide long-term control of HIV viral load in otherwise immunologically healthy patients and eliminate their need for antiretroviral drug therapy. Accordingly, in the first half of 2014, we plan to initiate a phase 2 clinical trial of AGS-004 monotherapy in pediatric patients infected with HIV who have otherwise healthy immune systems, have been treated with antiretroviral therapy since birth or shortly thereafter and, as a result, are lacking the antiviral memory T-cells to combat the virus.

We conducted a phase 2a clinical trial of AGS-004 in 29 HIV-infected patients in order to assess, after interruption of antiretroviral therapy, the ability of AGS-004 to control viral load and prevent viral load levels from returning to levels that were present in patients prior to treatment with antiretroviral drug therapy. In this single arm trial, patients received four monthly doses of AGS-004, while continuing to receive their existing antiretroviral therapy, before entering into a treatment interruption period during which the patients were to discontinue their antiretroviral therapy for 12 weeks and receive only AGS-004. In the trial, 24 patients entered the treatment interruption period in accordance with the trial protocol. At the end of their treatment interruption, these 24 patients had a mean reduction of 81% in their viral load as compared to their levels prior to beginning treatment with antiretroviral drug therapy. Without AGS-004, we would expect that a patient’s viral load would return to pre-treatment levels within 12 weeks following discontinuation of antiretroviral treatment. Accordingly, we believe that these results indicate that AGS-004 led to a reduction in virus replication and support the two planned phase 2 clinical trials of AGS-004 that we expect to initiate in 2014.

 

 

 

 

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In September 2013, we completed patient enrollment in our ongoing NIH-funded phase 2b clinical trial of AGS-004 in 53 HIV-infected patients. The primary endpoint of this trial is a comparison of the median viral load in AGS-004-treated patients with the median viral load in patients receiving placebo after 12 weeks of antiretroviral treatment interruption. Secondary endpoints of this trial include comparisons between AGS-004-treated patients and patients receiving placebo with respect to change in viral load from immediately prior to the commencement of antiretroviral therapy to the end of the planned treatment interruption, duration of treatment interruption, changes in CD4+ T-cell counts, an indicator of the health of the immune system, and safety. We designed this trial to confirm the data obtained in our phase 2a clinical trial and provide proof of concept of the ability of AGS-004 to induce an immune response to eliminate the cells responsible for viral replication. We expect to have data from this trial in the second quarter of 2014.

According to the World Health Organization, the number of people living with HIV worldwide was approximately 34 million in 2011. The Centers for Disease Control and Prevention estimates that more than 1.1 million people are currently living with HIV in the United States and the number of new cases of HIV infection in the United States will remain constant at approximately 50,000 cases per year. According to Datamonitor, sales of antiretroviral therapies in the United States and the five biggest European markets reached $13.3 billion in 2011.

Our Strategy

Our goal is to become a leading biopharmaceutical company focused on discovering, developing and commercializing personalized immunotherapies for the treatment of a wide range of cancers and infectious diseases. Key elements of our strategy are:

 

    complete clinical development and seek marketing approvals of AGS-003 for the treatment of mRCC;

 

    expand clinical development of AGS-003 in other cancers, including non-clear cell mRCC, early stage RCC and other solid tumors;

 

    commercialize AGS-003 in North America independently and with third parties outside North America;

 

    continue clinical development of AGS-004 for the treatment of HIV, potentially through government funding or other third party funding, and collaborate with third parties for commercialization on a worldwide basis;

 

    establish automated manufacturing processes based on our existing functioning prototypes of automated devices and, prior to the filing of our BLA for AGS-003, identify, lease, build out and equip a new North American facility for the commercial manufacture of products based on our Arcelis platform; and

 

    pursue expansion of our broad intellectual property protection for our Arcelis technology platform, product candidates and proprietary manufacturing processes through U.S. and international patent filings and maintenance of trade secret confidentiality.

Intellectual Property

We own or exclusively license 12 U.S. patents and nine U.S. patent applications, as well as approximately 60 foreign counterparts, covering our Arcelis technology platform and Arcelis-based product candidates.

 

 

 

 

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Risks Associated with Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

    We currently have no commercial products and have not received regulatory approval for any of our products.

 

    We will need to obtain significant financing, in addition to the net proceeds of this offering, prior to the commercialization of AGS-003, including to complete the planned leasing, build-out and equipping of a new commercial manufacturing facility and to fund other commercialization activities. If we are unable to obtain additional financing when needed, in the required amounts or at all, we may not be able to complete the planned leasing, build-out and equipping of the new commercial facility or other required commercialization activities or may be delayed in doing so.

 

    If our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib fails to demonstrate safety and efficacy to the satisfaction of the FDA, we would incur additional costs and experience delays in completing, or ultimately be unable to complete, the development and commercialization of AGS-003.

 

    To date, we have not completed a clinical trial of AGS-003 against a placebo or a comparator therapy, including sunitinib as a monotherapy. While we believe comparisons of results of earlier clinical trials of AGS-003 to results of clinical trials of sunitinib conducted by other parties and analyses of data from the Consortium can assist in evaluating the potential efficacy of AGS-003, results from two different trials or between a trial and an analysis of a treatment database often cannot be reliably compared and may not be predictive of the outcome of our planned pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib.

 

    Only one personalized immunotherapy has been approved by the FDA to date. Our use of our novel Arcelis technology to create our personalized immunotherapies may raise development issues that we may not be able to resolve and may raise regulatory issues that could delay or prevent approval of our personalized immunotherapies.

 

    We are focusing our program for AGS-004 on its use in combination with other therapies for the eradication of HIV. To date, no drugs have been approved by the FDA for HIV eradication. As a result, we cannot be certain as to the clinical trials we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 to eradicate HIV.

 

    We do not have experience in manufacturing Arcelis-based products on a commercial scale or using automated processes. If we are unable to successfully manufacture these products on a commercial scale, our business may be materially harmed.

 

    We plan to seek government or other third party funding for the continued development of AGS-004 and to collaborate with third parties for the development and commercialization of AGS-004. If we are unable to obtain such funding or establish such collaborations, we may not be able to commercialize or develop AGS-004.

 

    We have incurred significant losses since our inception and, as of September 30, 2013, we had an accumulated deficit of $142.8 million. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

 

 

 

 

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Our Corporate Information

We were incorporated under the laws of the State of Delaware in 1997 under the name Dendritix, Inc. We changed our name to Merix Bioscience, Inc. in 1999, and to Argos Therapeutics, Inc. in 2004. Our executive offices are located at 4233 Technology Drive, Durham, North Carolina 27704, and our telephone number is (919) 287-6300. Our website address is www.argostherapeutics.com. The information contained on, or accessible through, our website does not constitute part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

In this prospectus, unless otherwise stated or the context otherwise requires, references to “Argos,” “we,” “us,” “our” and similar references refer to Argos Therapeutics, Inc. and its subsidiaries. Argos Therapeutics®, Argos® and Arcelis™, the Argos Therapeutics logo and other trademarks or service marks of Argos appearing in this prospectus are the property of Argos. The other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Implications of Being an Emerging Growth Company

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure and other requirements that are applicable to other public companies that are not emerging growth companies. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

 

 

 

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THE OFFERING

 

Common stock offered:

            shares

 

Common stock outstanding after the offering:

            shares

 

Over-allotment option

The underwriters have an option for a period of 30 days to purchase up to             additional shares of our common stock to cover over-allotments.

 

Offering price

$         per share

 

Use of proceeds

We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents:

 

    to fund the costs of our ongoing pivotal phase 3 clinical trial of AGS-003 for the treatment of mRCC

 

    to fund the costs of our planned phase 2 clinical trials of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors;

 

    to fund the costs of our two planned phase 2 clinical trials of AGS-004, one for HIV eradication and one for long-term viral control in pediatric patients;

 

    to initiate the planned leasing, build-out and equipping of a new commercial manufacturing facility; and

 

    for working capital and general corporate purposes.

 

  See “Use of Proceeds” for more information.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

“ARGS”

 

 

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 1,414,380 shares of our common stock outstanding as of December 30, 2013 and 79,129,706 additional shares of our common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering.

The number of shares of our common stock to be outstanding after this offering excludes:

 

    11,743,297 shares of our common stock issuable upon the exercise of stock options outstanding as of December 30, 2013, at a weighted average exercise price of $0.91 per share;

 

    2,147,047 additional shares of our common stock available for future issuance as of December 30, 2013 under our 2008 stock incentive plan, or our 2008 plan;

 

                 additional shares of our common stock that will be available for future issuance, as of the closing of this offering, under our 2014 stock incentive plan;

 

    57,604 shares of our common stock issuable upon exercise of warrants outstanding as of December 30, 2013, at a weighted average exercise price of $2.14 per share; and

 

    2,998,733 shares of our common stock issuable upon exercise of warrants, at an exercise price of $0.97 per share, that we agreed to issue to Pharmstandard upon our entry into a manufacturing rights agreement with Pharmstandard. See “Business — Development and Commercialization Agreements — Pharmstandard.”

In addition, all information in this prospectus gives effect to the 1-for-22.6272 reverse stock split of our common stock which became effective on February 15, 2012 and, unless otherwise indicated, also reflects and assumes:

 

    no exercise of the outstanding options or warrants described above;

 

    the automatic conversion of all outstanding shares of our preferred stock into 79,129,706 shares of our common stock upon the closing of this offering;

 

    no exercise by the underwriters of their over-allotment option; and

 

    the restatement of our certificate of incorporation and the amendment and restatement of our by-laws upon the closing of this offering.

 

 

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

You should read the following summary consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2011 and 2012 and for the period from May 8, 1997 (inception) to December 31, 2012 from our audited consolidated financial statements included in this prospectus. We have derived the statements of operations data for the nine months ended September 30, 2012 and 2013 and for the period from May 8, 1997 (inception) to September 30, 2013, and the balance sheet data as of September 30, 2013 from our unaudited financial statements included in this prospectus. The unaudited financial data include, in the opinion of our management, all adjustments, consisting of normal recurring adjustments, that are necessary for a fair statement of our financial position and results of operations for these periods. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year.

 

     Year Ended December 31,     Nine Months Ended
September 30,
    Cumulative
Period from
May 8, 1997
(Inception) to
December 31,

2012
    Cumulative
Period from
May 8, 1997
(Inception) to
September 30,

2013
 
     2011     2012     2012     2013      
                 (unaudited)     (unaudited)           (unaudited)  

Statements of Operations Data:

            

Revenue

   $ 7,642,695      $ 7,039,010      $ 5,501,326      $ 3,705,942      $ 82,404,839      $ 86,110,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

            

Research and development

     12,668,025        17,616,892        12,956,055        16,922,000        181,635,074        198,557,074   

Net reimbursement under collaboration agreement

                                 (47,179,130     (47,179,130
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net research and development

     12,668,025        17,616,892        12,956,055        16,922,000        134,455,944        151,377,944   

General and administrative

     3,703,813        6,135,581        5,182,702        3,042,249        54,175,917        57,218,166   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,371,838        23,752,473        18,138,757        19,964,249        188,631,861        208,596,110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (8,729,143     (16,713,463     (12,637,431     (16,258,307     (106,227,022     (122,485,329
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

     (11,411,586     6,242,133        4,508,928        357,666        (15,795,926     (15,438,260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (20,140,729     (10,471,330     (8,128,503     (15,900,641     (122,022,948     (137,923,589

Net loss attributable to noncontrolling interest

     (63,047                          (760,107     (760,107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Argos Therapeutics, Inc.

     (20,077,682     (10,471,330     (8,128,503     (15,900,641     (121,262,841     (137,163,482

Accretion of redeemable convertible preferred stock (See Note 19)

     (926,542     (352,371     (266,403     5,250,020        (30,400,691     (25,150,671
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Preferred stock dividend due to exchanges of preferred shares (See Note 19)

                          (14,726,088            (14,726,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (21,004,224   $ (10,823,701   $ (8,394,906   $ (25,376,709   $ (151,663,532   $ (177,040,241
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss attributable to common stockholders per share

   $ (32.88   $ (9.10   $ (7.41   $ (18.53    
  

 

 

   

 

 

   

 

 

   

 

 

     

Basic and diluted weighted average shares outstanding

     638,795        1,189,836        1,132,318        1,369,341       
  

 

 

   

 

 

   

 

 

   

 

 

     

Pro forma basic and diluted loss per share attributable to common stockholders

     $          $         
    

 

 

     

 

 

     

Pro forma basic and diluted weighted average shares outstanding

            
    

 

 

     

 

 

     

 

 

 

 

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     As of September 30, 2013  
     Actual     Pro
Forma
     Pro Forma as
Adjusted
 

Balance Sheet Data:

       

Cash, cash equivalents and short-term investments

   $ 18,224,252      $                    $                

Working capital

     18,092,665        

Total assets

     21,012,625        

Redeemable convertible preferred stock

     87,326,134        

Total stockholders’ deficit

     (67,775,717     

The pro forma balance sheet data give effect to the issuance and sale in October 2013 and November 2013 of an aggregate of 19,958,486 shares of series E preferred stock for an aggregate purchase price of $25,992,595, the payment of $1,000,000 and loan of $9,000,000 to us by Medinet Co., Ltd. that we received in connection with our entry into a license agreement with Medinet in December 2013 and the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 79,129,706 shares of our common stock upon the closing of this offering.

The pro forma as adjusted balance sheet data give further effect to our issuance and sale of              shares of our common stock in this offering at an assumed initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity by approximately $              million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to the Development and Regulatory Approval of Our Product Candidates

We depend heavily on the success of our two product candidates, AGS-003 and AGS-004, both of which are still in clinical development. Clinical trials of our product candidates may not be successful. If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

We currently have no products approved for sale. We have invested a significant portion of our efforts and financial resources in the development of AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers and AGS-004 for the treatment of HIV. Our ability to generate product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of these product candidates. The success of these product candidates will depend on several factors, including the following:

 

    successful completion of clinical trials, including clinical results that are statistically significant as well as clinically meaningful in the context of the indications for which we are developing our product candidates;

 

    receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States;

 

    establishing commercial manufacturing capabilities by identifying, leasing, building out and equipping a commercial manufacturing facility for our Arcelis-based product candidates;

 

    maintaining patent and trade secret protection and regulatory exclusivity for our product candidates, both in the United States and internationally;

 

    launching commercial sales of the products, if and when approved, whether alone or in collaboration with others;

 

    commercial acceptance of our products, if and when approved, by patients, the medical community and third party payors;

 

    obtaining and maintaining healthcare coverage and adequate reimbursement;

 

    effectively competing with other therapies; and

 

    a continued acceptable safety profile of the products following any marketing approval.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business.

 

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If clinical trials of our product candidates, such as our ongoing pivotal phase 3 clinical trial of AGS-003 and our ongoing phase 2b clinical trial of AGS-004, fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

In particular, to date, we have not completed a clinical trial of AGS-003 against a placebo or a comparator therapy. While we believe comparisons to results from other reported clinical trials or from analyses of data from the International Metastatic Renal Cell Carcinoma Database Consortium, or the Consortium, can assist in evaluating the potential efficacy of our AGS-003 product candidate, there are many factors that affect the outcome for patients, some of which are not apparent in published reports. As a result, results from two different trials or between a trial and an analysis of a treatment database often cannot be reliably compared. Our ongoing pivotal phase 3 clinical trial of AGS-003 is intended to compare directly the combination of AGS-003 and sunitinib to treatment with sunitinib monotherapy. Based on the design of the trial, the data from the trial will need to demonstrate an increase of approximately six months in median overall survival for the AGS-003 plus sunitinib arm as compared to the sunitinib monotherapy control arm in order to show statistical significance and achieve the primary endpoint of the trial. We will need to show this statistically significant benefit of the combined therapy as compared to treatment with the sunitinib monotherapy as part of a submission for approval of AGS-003. However, demonstration of statistical significance and achievement of the primary endpoint of the trial do not assure approval by the FDA or similar regulatory authorities outside the United States.

Patients in our ongoing pivotal phase 3 clinical trial who receive treatment with sunitinib monotherapy may not have results similar to patients studied in other clinical trials of sunitinib or to patients in the Consortium database. If the patients in our ongoing pivotal phase 3 clinical trial who receive sunitinib plus placebo have results which are better than the results that occurred in those other clinical trials or the results described in the Consortium database, we may not demonstrate a sufficient benefit from AGS-003 in combination with sunitinib to allow the FDA to approve AGS-003 for marketing. In addition, only 21 patients received the combination of AGS-003 and sunitinib in our phase 2 clinical trial. If the patients in our ongoing pivotal phase 3 clinical trial who receive the combination of AGS-003 and sunitinib have results which are worse than the results that occurred in our phase 2 clinical trial, we may not demonstrate a sufficient benefit from the combination therapy to allow the FDA to approve AGS-003 for marketing.

For drug and biological products, the FDA typically requires the successful completion of two adequate and well-controlled clinical trials to support marketing approval because a conclusion based on two such trials will be more reliable than a conclusion based on a single trial. In the case of AGS-003, which is intended for a life-threatening disease, we intend to seek approval based upon the results of a single pivotal phase 3 clinical trial. The FDA reviewed our plans to conduct a single pivotal phase 3 clinical trial under its SPA process. In February 2013, the FDA advised us in a letter that it had completed its review of our plans under the SPA process. The FDA also informed us that in order for a single trial to support approval of an indication, the trial must be well conducted, and the results of the trial must be internally consistent, clinically meaningful and statistically very persuasive. If the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other study endpoints, the FDA may refuse to approve our BLA based upon a single clinical trial. In addition, because only 21 patients received the combination of AGS-003 and sunitinib in our

 

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phase 2 clinical trial, and as a result, we did not have enough evaluable patients to perform the statistical analysis to determine whether the primary endpoint of complete response rate was achieved in that trial, we expect that the data from our phase 2 clinical trial will have only a limited impact on the FDA’s ultimate assessment of efficacy of AGS-003. Thus, there can be no guarantee that the FDA will not require additional pivotal clinical trials as a condition for approving AGS-003.

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

 

    be delayed in obtaining marketing approval for our product candidates;

 

    not obtain marketing approval at all;

 

    obtain approval for indications or patient populations that are not as broad as intended or desired;

 

    obtain approval with labeling that includes significant use restrictions or safety warnings, including boxed warnings;

 

    be subject to additional post-marketing testing requirements;

 

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

 

    have the product removed from the market after obtaining marketing approval.

If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing or commercialization of our product candidates could be delayed or prevented.

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates. For example, in September 2011, the FDA placed the original protocol for our ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib on partial clinical hold due to unresolved questions regarding the planned measurement of the secretion of the cytokine interleukin-12, or IL-12, as part of the specifications for the release of AGS-003. We subsequently reached an agreement with the FDA regarding the IL-12 release specifications and the FDA lifted the partial clinical hold. Unforeseen events that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates include:

 

    regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

    we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

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

 

    the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate; for example, in our phase 2b clinical trial of AGS-004, we experienced a higher dropout rate than we anticipated due to the higher than expected number of patients who did not complete the full 12 week antiretroviral treatment interruption required by the protocol for the trial;

 

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

 

    we may decide, or regulators or institutional review boards may require us or our investigators to, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

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

 

    the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.

In addition, the patients recruited for clinical trials of our product candidates may have a disease profile or other characteristics that are different than we expect and different than the clinical trials were designed for, which could adversely impact the results of the clinical trials. For instance, our phase 2 combination therapy clinical trial of AGS-003 in combination with sunitinib was originally designed to enroll patients with favorable disease risk profiles and intermediate disease risk profiles and with a primary endpoint of complete response rate. However, the actual trial population consisted entirely of patients with intermediate disease risk profiles and poor disease risk profiles. This is a population for which published research has shown that sunitinib alone, as well as other of the targeted therapies for mRCC, rarely if ever produce complete responses in mRCC, and in our phase 2 clinical trial in this population the combination therapy of AGS-003 and sunitinib did not show a complete response rate that met the endpoint of the trial.

Our product development costs will also increase if we experience delays in testing or obtaining marketing approvals. 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. For example, in response to our submission of an investigational new drug application, or IND, for AGS-004, the FDA raised safety concerns regarding the analytical treatment interruption contemplated by our protocol for our phase 2 clinical trial of AGS-004, and required a one year safety follow-up after the final dose for each patient. This resulted in the need for an amendment to the trial protocol and a four month delay prior to initiating the phase 2 clinical trial in the United States. In addition to additional costs, significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates and may harm our business and results of operations.

The FDA has reviewed the protocol for our ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib under the SPA process. However, agreement by the FDA with the protocol under the SPA process does not guarantee that the trial will be successful or that, if successful, AGS-003 will receive marketing approval.

The FDA has reviewed, under the SPA process, the protocol for our ongoing phase 3 clinical trial of AGS-003 in combination with sunitinib. The SPA process is designed to facilitate the FDA’s review and approval of drug and biological products by allowing the FDA to evaluate the proposed design and size of phase 3 clinical trials that are intended to form the primary basis for determining a drug candidate’s efficacy. In February 2012, we received a letter from the FDA advising us that the FDA had completed its review of our protocol for the pivotal phase 3 clinical trial under the SPA process. In the letter, the FDA stated that it had determined that the protocol sufficiently addressed the trial’s objectives and that the trial was adequately designed to provide the necessary data to support a submission for marketing approval.

An SPA does not guarantee that AGS-003 will receive marketing approval. The FDA may raise issues related to safety, study conduct, bias, deviation from the protocol, statistical power, patient completion rates, changes in scientific or medical parameters or internal inconsistencies in the data prior to making its final decision. The FDA may also seek the guidance of an outside advisory committee prior to making its final decision. In addition,

 

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the combination of AGS-003 and sunitinib may not achieve the primary endpoint of the trial. Even if the primary endpoint in our pivotal phase 3 clinical trial is achieved, AGS-003 may not be approved. Many companies which have been granted SPAs have ultimately failed to obtain final approval to market their products.

In its February 2012 letter, the FDA informed us that in order for a single trial to support approval of an indication, the trial must be well conducted, and the results of the trial must be internally consistent, clinically meaningful and statistically very persuasive. If the results for the primary endpoint are not robust, are subject to confounding factors, or are not adequately supported by other study endpoints, the FDA may refuse to approve our BLA based upon a single clinical trial. There can be no guarantee that the FDA will not require additional pivotal clinical trials as a condition for approving AGS-003.

If we experience delays or difficulties in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

We may not be able to initiate or continue clinical trials for our product candidates, including our pivotal phase 3 clinical trial of AGS-003, if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. Our competitors may have ongoing clinical trials for product candidates that could be competitive with our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates. For example, during the phase 1/2 monotherapy clinical trial of AGS-003 that we conducted, our ability to enroll patients in the trial was adversely affected by the FDA’s approval of sorafenib and sunitinib, because patients did not want to receive, and physicians were reluctant to administer, AGS-003 as a monotherapy once new therapies that showed efficacy in clinical trials were introduced to the market and became widely available.

Patient enrollment is affected by other factors including:

 

    severity of the disease under investigation;

 

    eligibility criteria for the study in question;

 

    perceived risks and benefits of the product candidate under study;

 

    efforts to facilitate timely enrollment in clinical trials;

 

    patient referral practices of physicians;

 

    the ability to monitor patients adequately during and after treatment; and

 

    proximity and availability of clinical trial sites for prospective patients.

Based on the rate of enrollment in our ongoing pivotal phase 3 clinical trial of AGS-003, we expect to complete enrollment in the trial in the second half of 2014. However, the actual amount of time for full enrollment could be longer than planned. Enrollment delays in this phase 3 clinical trial or any of our other clinical trials may result in increased development costs for our product candidates, which would cause the value of the company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for this ongoing phase 3 clinical trial or any of our other clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. In addition, any significant delays or increases in costs of our ongoing phase 3 clinical trial of AGS-003 could result in the need for us to obtain additional funding to complete the trial.

 

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We are developing AGS-004 for use with latency reversing drugs to eradicate HIV. If latency reversing drugs are not successfully developed for HIV on a timely basis or at all, we will be unable to develop AGS-004 for this use or will be delayed in doing so. In addition, because there are currently no products approved for HIV eradication, we cannot be certain of the clinical trials we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 for this purpose.

We are focusing our development program for AGS-004 on the use of AGS-004 in combination with latency reversing drugs to eradicate HIV. We rely on these latency reversing drugs because we recognize that the ultimate objective of virus eradication is unlikely to be achieved with immunotherapy alone because the immune system is not able to recognize the HIV virus in latently infected cells with a low level or lack of expression of HIV antigens.

Several companies and academic groups are evaluating latency reversing drugs that can potentially activate latently infected cells to increase viral antigen expression and make the cells vulnerable to elimination by the immune system. We are not a party to any arrangements with these companies or academic groups. If these companies or academic groups determine not to develop latency reversing drugs for this purpose because the drugs do not sufficiently increase viral antigen expression or have unacceptable toxicities, or these companies or academic groups otherwise determine to collaborate with other developers of immunotherapies on a combination therapy for complete virus eradication, we will not be able to complete our AGS-004 development program. In addition, if these companies or academic groups do not proceed with such development on a timely basis, our AGS-004 program correspondingly would be delayed.

A number of the latency reversing drugs being evaluated for use in HIV patients are currently approved in the United States and elsewhere for use in the treatment of specified cancer indications. If these drugs are not approved by the FDA or equivalent foreign regulatory authorities for use in HIV, the FDA and these other regulatory authorities may not approve AGS-004 without the latency reversing drug having received marketing approval for HIV. If the FDA and these other regulatory authorities approve AGS-004 without the approval of the latency reversing drug for HIV, the use of AGS-004 in combination with the latency reversing drug for virus eradication would require sales of the latency reversing drug for off-label use. In such event, the success of the combination of AGS-004 and the latency reversing drug would be subject to the willingness of physicians, patients, healthcare payors and others in the medical community to use the latency reversing drug for off-label use and of government authorities and third party payors to pay for the combination therapy. In addition, we would be limited in our ability to market the combination for its intended use if the latency reversing drug were to be used off-label.

Currently, there are no products approved for the eradication of HIV. As a result, we cannot be certain as to the clinical trials we will need to conduct or the regulatory requirements that we will need to satisfy in order to obtain marketing approval of AGS-004 for the eradication of HIV.

If serious adverse or inappropriate side effects are identified during the development of our product candidates, we may need to abandon or limit our development of some of our product candidates.

All of our product candidates are still in preclinical or clinical development and their risk of failure is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive regulatory approval. If our product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. In addition, such effects or characteristics could cause an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates, require us to conduct additional clinical trials or other tests or studies, and could result in a more restrictive label, or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities.

 

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Our Arcelis-based product candidates are immunotherapies that are based on a novel technology utilizing a patient’s own tissue. This may raise development issues that we may not be able to resolve, regulatory issues that could delay or prevent approval or personnel issues that may prevent us from further developing and commercializing our product candidates.

AGS-003 and AGS-004 are based on our novel Arcelis technology platform. In the course of developing this platform and these product candidates, we have encountered difficulties in the development process. For

example, we terminated the development of MB-002, the predecessor to AGS-003, when the results from the initial clinical trial of MB-002 indicated that the product candidate only corrected defects in the production of one of two critical cytokines required for effective immune response. There can be no assurance that additional development problems will not arise in the future which we may not be able to resolve or which may cause significant delays in development.

In addition, regulatory approval of novel product candidates such as our Arcelis-based product candidates manufactured using novel manufacturing processes such as ours can be more expensive and take longer than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical products, due to our and regulatory agencies’ lack of experience with them. The FDA has only approved one personalized immunotherapy product to date. This lack of experience may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these product candidates or lead to significant post-approval limitations or restrictions.

The novel nature of our product candidates also means that fewer people are trained in or experienced with product candidates of this type, which may make it difficult to find, hire and retain capable personnel for research, development and manufacturing positions.

Development of our Arcelis-based product candidates is subject to significant uncertainty because each product candidate is derived from source material that is inherently variable. This variability could reduce the effectiveness of our Arcelis-based product candidates, delay any FDA approval of our Arcelis-based product candidates, cause us to change our manufacturing methods and adversely affect the commercial success of any approved Arcelis-based products.

The disease samples from the patients to be treated with our Arcelis-based products vary from patient to patient. This inherent variability may adversely affect our ability to manufacture our products because each tumor or virus sample that we receive and process will yield a different product. As a result, we may not be able to consistently produce a product for every patient and we may not be able to treat all patients effectively. Such inconsistency could delay FDA or other regulatory approval of our Arcelis-based product candidates or if approved, adversely affect market acceptance and use of our Arcelis-based products. If we have to change our manufacturing methods to address any inconsistency, we may have to perform additional clinical trials, which would delay FDA or other regulatory approval of our Arcelis-based product candidates and increase the costs of development of our Arcelis-based product candidates.

The inherent variability of the disease samples from the patients to be treated with our Arcelis-based products may further adversely affect our ability to manufacture our products because variability in the source material for our product candidates, such as tumor cells or viruses, may cause variability in the composition of other cells in our product candidates. Such variability in composition or purity could adversely affect our ability to establish acceptable release specifications and the development and regulatory approval processes for our product candidates may be delayed, which would increase the costs of development of our Arcelis-based product candidates.

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

Failure to obtain regulatory approval for either of our product candidates will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any

 

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jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

The process of obtaining regulatory approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. To date, the FDA has only approved one personalized immunotherapy product. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.

Failure to obtain regulatory approval in international jurisdictions would prevent our product candidates from being marketed abroad.

We are a party to arrangements with third parties, and intend to enter into additional arrangements with third parties, under which they would market our products outside the United States. In order to market and sell our products in the European Union and many other jurisdictions, we or such third parties must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

A fast track designation by the FDA may not actually lead to a faster development, regulatory review or approval process.

If a product is intended for the treatment of a serious or life-threatening condition and the product demonstrates the potential to address unmet needs for this condition, the treatment sponsor may apply for FDA fast track designation. In April 2012, the FDA notified us that we obtained fast track designation for AGS-003 for the treatment of mRCC. Fast track designation does not ensure that we will experience a faster development, regulatory review or approval process compared to conventional FDA procedures. Additionally, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.

 

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Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss, after attribution to the noncontrolling interest, was $20.1 million for the year ended December 31, 2011, $10.5 million for the year ended December 31, 2012 and $15.9 million for the nine months ended September 30, 2013. As of September 30, 2013, we had an accumulated deficit of $142.8 million. As a result of our operating losses and negative cash flows from operations, the report of our independent registered public accounting firm on our December 31, 2012 financial statements included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. To date, we have financed our operations primarily through private placements of our preferred stock, convertible debt financings, bank debt, government contracts, government and other third party grants and license and collaboration agreements. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any product candidates. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:

 

    continue our ongoing phase 3 clinical trial of AGS-003 for the treatment of mRCC and initiate additional clinical trials of AGS-003 for the treatment of cancers;

 

    initiate additional clinical trials of AGS-004 for the treatment of HIV;

 

    seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

    lease, build out and equip a new commercial facility for the manufacture of our Arcelis-based products;

 

    establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

 

    maintain, expand and protect our intellectual property portfolio;

 

    continue our other research and development efforts;

 

    hire additional clinical, quality control, scientific and management personnel; and

 

    add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.

To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This development and commercialization will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates, leasing, building out and equipping a new commercial manufacturing facility and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

 

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We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce, terminate or eliminate our product development programs, including our phase 3 clinical trial of AGS-003, our plans to lease, build out and equip a new commercial manufacturing facility or our commercialization efforts.

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue our phase 3 clinical trial of AGS-003, initiate additional clinical trials of AGS-003 and AGS-004, seek regulatory approval for our product candidates and lease, build out and equip a new commercial manufacturing facility. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, terminate or eliminate our product development programs, our plans to lease, build out and equip a new commercial manufacturing facility or our commercialization efforts.

As of September 30, 2013, we had cash, cash equivalents and short-term investments of $18.2 million and working capital of $18.1 million. We expect that the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments and anticipated funding under our NIH contract, will enable us to fund our operating expenses and capital expenditure requirements into             , including funding our ongoing phase 3 clinical trial of AGS-003, our planned phase 2 clinical trials of AGS-003 and AGS-004 and the initiation of the planned leasing, build-out and equipping of a new commercial manufacturing facility.

We will need to obtain significant financing, in addition to the net proceeds of this offering, prior to the commercialization of AGS-003, including to complete the planned leasing, build-out and equipping of a new commercial manufacturing facility and to fund any commercialization efforts in anticipation of regulatory approval of AGS-003. We expect that we will require approximately $          million to lease, build out and equip the new commercial manufacturing facility to a level necessary to file a BLA for AGS-003 with the FDA using the automated manufacturing processes that we plan to establish. We anticipate needing to expend funds for these purposes beginning in             . We also expect that we will require an additional $          million to $          million after the filing of the BLA to further build out and equip the manufacturing facility so as to have in place the commercial capacity that we anticipate will be required for commercial launch of AGS-003. If we are unable to obtain additional financing when needed, in the required amounts or at all, we may not be able to complete the planned leasing, build-out and equipping of the new commercial facility or may be delayed in doing so.

Our future capital requirements will depend on many factors, including:

 

    the progress and results of our ongoing pivotal phase 3 clinical trial of AGS-003 and other clinical trials of AGS-003 that we may conduct;

 

    the progress and results of our ongoing phase 2b clinical trial and other clinical trials of AGS-004 that we may conduct and our ability to obtain additional funding under our NIH contract for our AGS-004 program;

 

    the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;

 

    the costs and timing of our planned leasing, build-out and equipping of a new commercial manufacturing facility;

 

    the costs, timing and outcome of regulatory review of our product candidates;

 

    the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

 

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    revenue, if any, received from commercial sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;

 

    the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

    the extent to which we acquire or invest in other businesses, products and technologies;

 

    our ability to obtain government or other third party funding for the development of our product candidates; and

 

    our ability to establish collaborations on favorable terms, if at all, particularly arrangements to develop, market and distribute AGS-003 outside North America and arrangements for the development and commercialization of our non-oncology product candidates, including AGS-004.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Additional financing may not be available to us on acceptable terms, or at all.

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

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We will require substantial funding in addition to the net proceeds of this offering to complete the planned leasing, build-out and equipping of a new commercial manufacturing facility, fund our commercialization efforts and fund our operating expenses and other activities. 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 of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

We currently intend to collaborate with third parties for the development and commercialization of AGS-003 outside of North America. We plan to seek government or other third party funding for the continued development of AGS-004 following completion of the phase 2b clinical trial of AGS-004 and to collaborate with third parties for the development and commercialization of AGS-004. If we raise additional funds through government or other third party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

Risk Related to the Commercialization of our Product Candidates

We have no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

Our operations to date have been limited to financing and staffing our company, developing our technology and product candidates and establishing collaborations. We have not yet demonstrated an ability to successfully

 

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complete a pivotal clinical trial, obtain marketing approvals, manufacture a commercial scale product or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

In addition, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition at some point from a company with research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

Even if AGS-003 or AGS-004 receives regulatory approval, it may fail to achieve the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community necessary for commercial success.

We have never commercialized a product candidate. Even if AGS-003 or AGS-004 receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. Gaining market acceptance for our Arcelis-based products may be particularly difficult as, to date, the FDA has only approved one personalized immunotherapy and our Arcelis-based products are based on a novel technology. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

    efficacy and potential advantages compared to alternative treatments;

 

    the ability to offer our product candidates for sale at competitive prices;

 

    convenience and ease of administration compared to alternative treatments;

 

    the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

    the strength of sales, marketing and distribution support;

 

    the approval of other new products for the same indications;

 

    availability and amount of reimbursement from government payors, managed care plans and other third party payors;

 

    adverse publicity about the product or favorable publicity about competitive products;

 

    clinical indications for which the product is approved; and

 

    the prevalence and severity of any side effects.

If any of our product candidates receives marketing approval and we, or others, later discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability to market the product could be compromised.

Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, in a broader patient population or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

 

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

 

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    we may be required to recall the product or change the way the product is administered;

 

    additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular product;

 

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

 

    we may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;

 

    additional restrictions may be imposed on the distribution or use of the product via a risk evaluation and mitigation strategy, or REMS;

 

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

 

    the product may become less competitive; and

 

    our reputation may suffer.

Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved.

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to market and sell AGS-003 in North America independently and to enter into collaborations or other arrangements with third parties for the distribution or marketing of AGS-003 in the rest of the world. We plan to enter into collaborations or other arrangements with third parties for the distribution or marketing of AGS-004 and any of our other product candidates should such candidates receive marketing approval.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

 

    our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

    the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

 

    the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

    unforeseen costs and expenses associated with creating an independent sales and marketing organization.

 

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If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates, and will face competition with respect to any products 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 products or are pursuing the development of products for the treatment of the disease indications for which we are developing our product candidates. 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.

Some of these competitive products 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. Many marketed therapies for the indications that we are currently pursuing, or indications that we may in the future seek to address using our Arcelis platform, are widely accepted by physicians, patients and payors, which may make it difficult for us to replace them with any products that we successfully develop and are permitted to market.

There are several FDA-approved therapies for mRCC marketed and sold by large pharmaceutical companies. Approved monotherapies for mRCC include Nexavar (sorafenib), marketed by Bayer Healthcare Pharmaceuticals, Inc. and Onyx Pharmaceuticals, Inc.; Sutent (sunitinib) and Inlyta (axitinib), marketed by Pfizer, Inc.; Avastin (bevacizumab), marketed by Genentech, Inc., a member of the Roche Group; Votrient (pazopanib), marketed by GlaxoSmithKline plc; Torisel (temsirolimus), marketed by Pfizer; and Afinitor (everolimus), marketed by Novartis Pharmaceuticals Corporation.

In addition, we estimate that there are numerous cancer immunotherapy products in clinical development by many public and private biotechnology and pharmaceutical companies targeting numerous different cancer types. A number of these are in late stage development. One biotechnology company, Immatics Biotechnologies GmbH, or Immatics, is developing a therapeutic cancer vaccine, which is a mixture of defined tumor-associated peptides, for the treatment of RCC. Immatics is conducting a pivotal phase 3 clinical trial comparing its vaccine in combination with sunitinib against treatment with sunitinib alone in a subset of favorable and intermediate risk patients. If this clinical trial is successful, this combination therapy would be in direct competition with our AGS-003 and sunitinib combination therapy. In addition, if a standalone therapy for mRCC were developed that demonstrated improved efficacy over currently marketed therapies with a favorable safety profile and without the need for combination therapy, such a therapy might pose a significant competitive threat to AGS-003.

We are currently conducting a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib. We elected to study AGS-003 in clinical trials in combination with sunitinib due in part to sunitinib being the current standard of care for first-line treatment of mRCC. Although we do not expect to seek FDA approval of AGS-003 solely in combination with sunitinib and have provided that, under the protocol for the phase 3 clinical trial, investigators may discontinue sunitinib due to disease progression or toxicity and initiate second-line treatment with other targeted therapies, if we obtain approval by the FDA, such FDA approval may be limited to the combination of AGS-003 and sunitinib. In such event, the commercial success of AGS-003 would be linked to

 

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the commercial success of sunitinib. As a result, if sunitinib ceases to be the standard of care for first-line treatment of mRCC or another event occurs that adversely affects sales of sunitinib, the commercial success of AGS-003 may be adversely affected.

There are also numerous FDA-approved treatments for HIV, primarily antiretroviral therapies marketed by large pharmaceutical companies. Generic competition has developed in this market as patent exclusivity periods for older drugs have expired, with more than 15 generic bioequivalents currently on the market. The presence of these generic drugs is resulting in price pressure in the HIV therapeutics market and could affect the pricing of AGS-004. Currently, there are no approved therapies for the eradication of HIV. We expect that major pharmaceutical companies that currently market antiretroviral therapy products or other companies that are developing HIV product candidates may seek to develop products for the eradication of HIV.

Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and device 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 product candidates, the products may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which would harm our business.

The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the United States, recently passed legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain regulatory approval.

Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products 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. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the

 

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demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. These risks may be even greater with respect to our Arcelis-based products which are manufactured using a novel technology. None of our product candidates has been widely used over an extended period of time, and therefore our safety data are limited. We derive the raw materials for manufacturing of our Arcelis-based product candidates from human cell sources, and therefore the manufacturing process and handling requirements are extensive and stringent, which increases the risk of quality failures and subsequent product liability claims.

If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

    decreased demand for any product candidates or products that we may develop;

 

    injury to our reputation and significant negative media attention;

 

    withdrawal of clinical trial participants;

 

    significant costs to defend the related litigation;

 

    substantial monetary awards to trial participants or patients;

 

    loss of revenue; and

 

    the inability to commercialize any products that we may develop.

We currently hold $5.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. We will need to increase our insurance coverage when we begin commercializing our product candidates, if ever. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

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We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products.

We have based our research and development efforts on our Arcelis platform. Notwithstanding our large investment to date and anticipated future expenditures in our Arcelis platform, we have not yet developed, and may never successfully develop, any marketed drugs using this approach. As a result of pursuing the development of product candidates using our Arcelis platform, we may fail to develop product candidates or address indications based on other scientific approaches that may offer greater commercial potential or for which there is a greater likelihood of success.

Our long-term business plan is to develop Arcelis-based products for the treatment of various cancers and infectious diseases. We may not be successful in our efforts to identify or discover additional product candidates that may be manufactured using our Arcelis platform. Research programs to identify new product candidates require substantial technical, financial and human resources. These research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development.

If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

Risks Related to Our Dependence on Third Parties

Our reliance on government funding adds uncertainty to our research and commercialization efforts and may impose requirements that increase the costs of commercialization and production of our government-funded product candidates.

Our phase 2b clinical trial for AGS-004 for HIV is being funded entirely by the NIH. We plan to seek further government funding for continued development of AGS-004. However, increased pressure on governmental budgets may reduce the availability of government funding for programs such as AGS-004. In addition, contracts and grants from the U.S. government and its agencies include provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:

 

    terminate agreements, in whole or in part, for any reason or no reason;

 

    reduce or modify the government’s obligations under such agreements without the consent of the other party;

 

    claim rights, including intellectual property rights, in products and data developed under such agreements;

 

    impose U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;

 

    suspend or debar the contractor or grantee from doing future business with the government or a specific government agency;

 

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    pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions specific to government agreements; and

 

    limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal-year basis, thereby leaving some uncertainty about the future availability of funding for a program even after it has been funded for an initial period.

Government agreements normally contain additional terms and conditions that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These include, for example:

 

    specialized accounting systems unique to government contracts and grants;

 

    mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent;

 

    public disclosures of certain contract and grant information, which may enable competitors to gain insights into our research program; and

 

    mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs and environmental compliance requirements.

We expect to depend on collaborations with third parties for the development and commercialization of our product candidates. If those collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.

We currently intend to commercialize AGS-003 independently in North America. We intend to collaborate with other third parties to develop and commercialize AGS-003 outside North America. We have entered into a license agreement with Pharmstandard International S.A., or Pharmstandard, for the development and commercialization of AGS-003 in Russia and the other states comprising the Commonwealth of Independent States and a license agreement with Green Cross Corp., or Green Cross, for the development and commercialization of AGS-003 in South Korea. We have also entered into a license agreement with Medinet Co., Ltd., or Medinet, under which we granted Medinet a license to manufacture in Japan AGS-003 for the purpose of development and commercialization for the treatment of mRCC and an option to acquire a license to sell in Japan AGS-003 for the treatment of mRCC. We also plan to seek government or other third party funding for continued development of AGS-004 and to collaborate with third parties to develop and commercialize AGS-004. Our likely collaborators for any development, distribution, marketing, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies.

Under our existing arrangements we have limited control, and under any additional arrangements we may enter into with third parties we will likely have limited control, over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

Collaborations involving our product candidates would pose the following risks to us:

 

    collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

    collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

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    collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or, require a new formulation of a product candidate for clinical testing;

 

    collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

    a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

    collaborators may have the right to conduct clinical trials of our product candidates without our consent and could conduct trials with flawed designs that result in data that adversely affect our clinical trials, our ability to obtain marketing approval for our product candidates or market acceptance of our product candidates. Pharmstandard, Green Cross and Medinet each have this right under our license agreements with them;

 

    collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

 

    disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and

 

    collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates. For example, our collaboration with Kyowa Hakko Kirin Co., Ltd. with respect to AGS-003 and AGS-004 was terminated by our collaborator.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

If we are not able to establish additional collaborations, we may have to alter our development and commercialization plans.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we intend to collaborate with pharmaceutical and biotechnology companies for the development and commercialization of those product candidates. For example, we have entered into license agreements with third parties to develop and commercialize AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, South Korea and Japan, and we intend to collaborate with other third parties to develop and commercialize AGS-003 in other parts of the world and to collaborate with third parties to develop and commercialize AGS-004.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by

 

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the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under existing license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all.

If we are not able to obtain such funding or enter into collaborations for our product candidate, we may have to curtail the development of such product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop these product candidates or bring these product candidates to market and generate product revenue.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

We also rely on other third parties to store and distribute product supplies for our clinical trials. Any performance failure on the part of our existing or future distributors could delay clinical development or regulatory approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

 

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Risks Related to the Manufacturing of Our Product Candidates

We plan to identify, lease, build out and equip a new facility to manufacture our Arcelis-based products on a commercial scale using automated processes. We do not have experience in manufacturing Arcelis-based products on a commercial scale or using automated processes. If, due to our lack of manufacturing experience, we cannot manufacture our Arcelis-based products on a commercial scale successfully or manufacture sufficient product to meet our expected commercial requirements, our business may be materially harmed.

We currently have manufacturing suites in our facility located at our corporate headquarters in Durham, North Carolina. We manufacture our Arcelis-based product candidates for research and development purposes and for clinical trials at this facility. We plan to identify, lease, build out and equip a new facility to manufacture our Arcelis-based products on a commercial scale using automated processes. We may be unable to find a suitable space to lease for our new commercial manufacturing facility. Even if we are able to find such a space, in light of our limited financial resources, a landlord may not be willing to lease the space to us on terms acceptable to us, or at all.

We do not have experience in manufacturing products on a commercial scale or using automated processes. In addition, because we are aware of only one company that has manufactured a personalized immunotherapy product for commercial sale, there are limited precedents from which we can learn. We may encounter difficulties in the manufacture of our Arcelis-based products due to our limited manufacturing experience. These difficulties could delay the build-out and equipping of the new facility and regulatory approval of the manufacture of our Arcelis-based products using the new facility and the automated processes, increase our costs or cause production delays or result in us not manufacturing sufficient product to meet our expected commercial requirements, any of which could damage our reputation and hurt our profitability. If we are unable to successfully increase our manufacturing capacity to commercial scale, our business may be materially adversely affected.

We plan to build out and equip a new commercial manufacturing facility based on automated manufacturing processes and augment our manufacturing personnel in advance of any regulatory submission for approval of AGS-003. If we fail to build out and equip a new commercial manufacturing facility in compliance with regulatory requirements, implement our automated processes or augment our manufacturing personnel, we may not be able to initiate commercial operations or produce sufficient product to meet our expected commercial requirements.

In order to meet our business plan, which contemplates our manufacturing product internally using automated processes for the commercial requirements of AGS-003 and any other Arcelis-based product candidates that might be approved, we will need to lease, build out and equip a new commercial manufacturing facility and add manufacturing personnel in advance of any regulatory submission for approval of AGS-003. The leasing, build-out and equipping of our facilities will require substantial capital expenditures and additional regulatory approvals. In addition, it will be costly and time consuming to recruit necessary additional personnel.

Prior to implementing the automated manufacturing processes for Arcelis-based products and filing a BLA for approval of AGS-003, we will be required to:

 

    demonstrate that the disposable components and sterilization and packaging methods used in the manufacturing process are suitable for use in manufacturing in accordance with current good manufacturing practice, or cGMP, and current Good Tissue Practices, or cGTP;

 

    build and validate processing equipment that complies with cGMP and cGTP;

 

    identify, lease, build out and equip a suitable manufacturing facility to accommodate the automated manufacturing process;

 

    perform process testing with final equipment, disposable components and reagents to demonstrate that the methods are suitable for use in cGMP and cGTP manufacturing;

 

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    demonstrate consistency and repeatability of the automated manufacturing processes in the production of AGS-003 in our new facility to fully validate the manufacturing and control process using the actual automated cGMP processing equipment; and

 

    demonstrate comparability between AGS-003 that we produce using existing processes in our current facility and AGS-003 produced using the automated processes in our new facility.

We expect that this implementation will require approximately two years to complete, but such implementation could take longer, particularly if we are unable to achieve any of the required tasks on a timely basis, or at all.

If we are unable to successfully build out and equip our commercial manufacturing facility in compliance with regulatory requirements, implement the automated processes required, demonstrate comparability between the AGS-003 used in our pivotal trial and the AGS-003 produced using the automated processes in the new facility, or hire additional necessary manufacturing personnel appropriately, our filing for regulatory approval of AGS-003 may be delayed or denied and we may not be able to initiate commercial operations even if any of our product candidates are approved for marketing.

Lack of coordination internally among our employees and externally with physicians, hospitals and third- party suppliers and carriers, could cause manufacturing difficulties, disruptions or delays and cause us to not have sufficient product to meet our expected clinical trial requirements or potential commercial requirements.

Manufacturing our Arcelis-based product candidates requires coordination internally among our employees and externally with physicians, hospitals and third party suppliers and carriers. For example, a patient’s physician or clinical site will need to coordinate with us for the shipping of a patient’s disease sample and leukapheresis product to our manufacturing facility, and we will need to coordinate with them for the shipping of the manufactured product to them. Such coordination involves a number of risks that may lead to failures or delays in manufacturing our Arcelis-based product candidates, including:

 

    failure to obtain a sufficient supply of key raw materials of suitable quality;

 

    difficulties in manufacturing our product candidates for multiple patients simultaneously;

 

    difficulties in obtaining adequate patient-specific material, such as tumor samples, virus samples or leukapheresis product, from physicians;

 

    difficulties in completing the development and validation of the specialized assays required to ensure the consistency of our product candidates;

 

    failure to ensure adequate quality control and assurances in the manufacturing process as we increase production quantities;

 

    difficulties in the timely shipping of patient-specific materials to us or in the shipping of our product candidates to the treating physicians due to errors by third party carriers, transportation restrictions or other reasons;

 

    destruction of, or damage to, patient-specific materials or our product candidates during the shipping process due to improper handling by third party carriers, hospitals, physicians or us;

 

    destruction of, or damage to, patient-specific materials or our product candidates during storage at our facilities; and

 

    destruction of, or damage to, patient-specific materials or our product candidates stored at clinical and future commercial sites due to improper handling or holding by clinicians, hospitals or physicians.

 

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If we are unable to coordinate appropriately, we may encounter delays or additional costs in achieving our clinical and commercialization objectives, including in obtaining regulatory approvals of our product candidates and supplying product, which could materially damage our business and financial position.

If our existing manufacturing facility or the new commercial manufacturing facility that we plan to lease, build out and equip are damaged or destroyed, or production at one of these facilities is otherwise interrupted, our business and prospects would be negatively affected.

We currently have a single manufacturing facility and expect that the new commercial manufacturing facility that we plan to lease, build out and equip will be our only commercial manufacturing facility in North America. If our existing manufacturing facility or the new commercial manufacturing facility that we plan to lease, build out and equip, or the equipment in either of these facilities, is damaged or destroyed, we likely would not be able to quickly or inexpensively replace our manufacturing capacity and possibly would not be able to replace it at all. Any new facility needed to replace either our existing manufacturing facility or the planned new commercial manufacturing facility would need to comply with the necessary regulatory requirements, need to be tailored to our specialized automated manufacturing requirements and require specialized equipment. We would need FDA approval before selling any products manufactured at a new facility. Such an event could delay our clinical trials or, if any of our product candidates are approved by the FDA, reduce or eliminate our product sales.

We maintain insurance coverage to cover damage to our property and equipment and to cover business interruption and research and development restoration expenses. If we have underestimated our insurance needs with respect to an interruption in our clinical manufacturing of our product candidates, we may not be able to adequately cover our losses.

Risks Related to Our Intellectual Property

If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to a number of intellectual property license agreements with third parties, including with respect to each of AGS-003 and AGS-004, and we expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, under our license agreement with Duke University which relates to patents and patent applications directed towards the composition of matter of Arcelis-based products, dendritic cells loaded with RNA from tumors or pathogens, methods of manufacture of these products and methods of using these products to treat tumors, we are required to use commercially reasonable efforts to research, develop and market license products and to satisfy other specified obligations. If we fail to comply with our obligations under these licenses, our licensors may have the right to terminate these license agreements, in which event we might not be able to market any product that is covered by these agreements, or to convert the license to a non-exclusive license, which could materially adversely affect the value of the product candidate being developed under the license agreement. Termination of these license agreements or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms.

If we are unable to obtain and maintain patent protection for our technology and products, or if our licensors are unable to obtain and maintain patent protection for the technology or products that we license from them, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our success depends in large part on our and our licensors’ ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. We and our licensors have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. This process is expensive and

 

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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 efforts before it is too late to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties and are reliant on our licensors. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. If such licensors fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.

The patent position of biotechnology and pharmaceutical companies generally 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 and our licensors’ patent rights are highly uncertain. Our and our licensors’ pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

Third parties could practice our inventions in territories where we do not have patent protection. Furthermore, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, we own or exclusively license patents relating to our process of manufacturing a personalized drug product. A U.S. patent may be infringed by anyone who, without authorization, practices the patented process in the United States or imports a product made by a process covered by the U.S. patent. In foreign countries, however, importation of a product made by a process patented in that country may not constitute an infringing activity, which would limit our ability to enforce our process patents against importers in that country. Furthermore, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. If competitors are able to use our technologies, our ability to compete effectively could be harmed.

Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

Assuming the other requirements for patentability are met, in the United States, the first to invent the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is generally entitled to the patent. Under the America Invents Act, or AIA, enacted in September 2011, the United States moved to a first inventor to file system in March 2013. The United States Patent and Trademark Office only recently finalized the rules relating to these changes and courts have yet to address the new provisions. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights. Furthermore, we may become involved in interference proceedings, opposition proceedings, or other post-grant proceedings, such as reexamination or inter partes review proceedings, challenging our patent rights or the patent rights of others. An adverse determination in any such proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third party patent rights.

Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and licensed patents may be challenged

 

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in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to or stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. For example, certain of the U.S. patents we exclusively license from Duke University expire as early as 2016 and the European and Japanese patents exclusively licensed from Duke University expire in 2017. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents. To counter such infringement or unauthorized use, we may be required to file infringement claims against third parties, which can be expensive and time consuming. In addition, during an infringement proceeding, a court may decide that the patent rights we are asserting are invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated 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 during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we are reliant on them.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. We cannot ensure that third parties do not have, or will not in the future obtain, intellectual property rights such as granted patents that could block our ability to operate as we would like. There may be patents in the United States or abroad owned by third parties that, if valid, may block our ability to make, use or sell our products in the United States or certain countries outside the United States, or block our ability to import our products into the United States or into certain countries outside the United States.

We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology. For example, third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may be unable to obtain any required license on commercially reasonable terms or even obtain a license at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

We have research licenses to certain reagents and their use in the development of our product candidates. We would need commercial licenses to these reagents for any of our product candidates that receive approval for sale in the United States. We believe that commercial licenses to these reagents will be available. However, if we are unable to obtain any such commercial licenses, we may be unable to commercialize our product candidates without infringing the patent rights of third parties. If we did seek to commercialize our product candidates without a license, these third parties could initiate legal proceedings against us.

 

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We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. 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. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

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 and management personnel 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 price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development 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 initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. The types of protections available for trade secrets are particularly important with respect to our Arcelis platform’s manufacturing capabilities, which involve significant unpatented know-how. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, 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. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Risks Related to Legal Compliance Matters

Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.

Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to

 

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continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, cGTP requirements, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved label. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing.

In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

    restrictions on such products, manufacturers or manufacturing processes;

 

    restrictions on the marketing of a product;

 

    restrictions on product distribution;

 

    requirements to conduct post-marketing clinical trials;

 

    warning or untitled letters;

 

    withdrawal of the products from the market;

 

    refusal to approve pending applications or supplements to approved applications that we submit;

 

    recall of products;

 

    fines, restitution or disgorgement of profits or revenue;

 

    suspension or withdrawal of regulatory approvals;

 

    refusal to permit the import or export of our products;

 

    product seizure; or

 

    injunctions or the imposition of civil or criminal penalties.

Our relationships with customers and third party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, program exclusion, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third party payors play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

   

the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash

 

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or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

    the federal False Claims Act imposes civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

    the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

    the federal transparency requirements under the Health Care Reform Law will require manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

    analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

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Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class in certain cases. Cost reduction initiatives and other provisions of this and other more recent legislation could decrease the coverage and reimbursement that is provided for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act or other more recent legislation may result in a similar reduction in payments from private payors.

In March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with health care practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

With the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCIA, as part of the Health Care Reform Law, an abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The new abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be submitted to the FDA until four years, or approved by the FDA until 12 years, after the original brand product identified as the reference product was approved under a BLA. The new law is complex and is only beginning to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation and meaning is subject to uncertainty. While it is uncertain when any such processes may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

 

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We believe that if any of our product candidates were to be approved as biological products under a BLA, such approved products should qualify for the four-year and 12-year periods of exclusivity. However, there is a risk that the U.S. Congress could amend the BPCIA to significantly shorten these exclusivity periods as proposed by President Obama, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on Jeffrey Abbey, our President and Chief Executive Officer, Charles Nicolette, our Vice President of Research and Development and Chief Scientific Officer, and Fred Miesowicz, our Vice President of Manufacturing and Chief Operating Officer, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with each of our executive officers, these agreements do not prevent our executives from terminating their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our research, development and commercialization objectives.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

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We expect to expand our development, regulatory, manufacturing and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs, manufacturing and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to Our Common Stock and this Offering

After this offering, our executive officers, directors and principal stockholders will maintain the ability to control all matters submitted to stockholders for approval.

Upon the closing of this offering, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately                 % of our common stock (                % if the underwriters exercise in full their option to purchase additional shares). As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

Our largest stockholder, Pharmstandard, will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of key transactions, including any change of control.

Upon the closing of this offering, our largest stockholder, Pharmstandard, will own, in the aggregate, approximately                 % of our outstanding common stock (                % if the underwriters exercise in full their option to purchase additional shares). In addition, upon the closing of this offering, two members of our board of directors will be affiliates of Pharmstandard. As a result, we expect that Pharmstandard will be able to exert significant influence over our business. Pharmstandard may have interests that differ from your interests, and it may vote in a way with which you disagree and that may be adverse to your interests. The concentration of ownership of our capital stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and may adversely affect the market price of our common stock.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

    establish a classified board of directors such that not all members of the board are elected at one time;

 

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    allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

    limit the manner in which stockholders can remove directors from the board;

 

    establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

 

    require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

    limit who may call stockholder meetings;

 

    authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

    require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, you will experience immediate dilution of $         per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately     % of the aggregate price paid for all purchases of our stock but the shares purchased in this offering will represent an aggregate of only approximately     % of our total common stock outstanding after this offering.

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock listed on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of

 

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particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

    results of clinical trials of our product candidates or those of our competitors;

 

    the success of competitive products or technologies;

 

    potential approvals of our product candidates for marketing by the FDA or equivalent foreign regulatory authorities or our failure to obtain such approvals;

 

    regulatory or legal developments in the United States and other countries;

 

    the results of our efforts to commercialize our product candidates;

 

    developments or disputes concerning patents or other proprietary rights;

 

    the recruitment or departure of key personnel;

 

    the level of expenses related to any of our product candidates or clinical development programs;

 

    the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;

 

    actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

    variations in our financial results or those of companies that are perceived to be similar to us;

 

    changes in the structure of healthcare payment systems;

 

    market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

 

    general economic, industry and market conditions; and

 

    the other factors described in this “Risk Factors” section.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retain

 

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qualified members of our board of directors. We are currently evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the Securities and Exchange Commission, or the SEC, after we become a public company. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley Act of 2002. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common

 

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stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding              shares of common stock based on the number of shares outstanding as of             . Of these shares of our common stock,              shares, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable, without restriction, in the public market immediately following this offering. Of the remaining shares,              shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of              shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of our common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus. In this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock to be less favorable, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this prospectus include, among other things, statements about:

 

    the progress and timing of our development and commercialization activities;

 

    the timing and conduct of our phase 3 clinical trial of AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC, and our planned phase 2 clinical trials of AGS-003, including statements regarding the timing of enrollment and completion of the trials and the period in which the results of the trials are anticipated to become available;

 

    the timing and conduct of our phase 2b clinical trial of AGS-004 for the treatment of HIV and our two planned phase 2 clinical trials of AGS-004, one for HIV eradication and one for long-term viral control in pediatric patients, including statements regarding the timing of enrollment and the completion of the trials and the period in which results of the trials are anticipated to become available;

 

    our ability to obtain U.S. and foreign marketing approval for AGS-003 for the treatment of mRCC and for AGS-004 for the treatment of HIV, and the ability of these product candidates to meet existing or future regulatory standards;

 

    the potential benefits of our Arcelis platform and our Arcelis-based product candidates;

 

    our ability to identify, lease, build out and equip a new North American commercial manufacturing facility and supply on a commercial scale our Arcelis-based products;

 

    our intellectual property position and strategy;

 

    our expectations related to the use of proceeds from this offering;

 

    the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our product candidates;

 

    our ability to establish and maintain collaborations for the development and commercialization of our product candidates;

 

    developments relating to our competitors and our industry; and

 

    the impact of government laws and regulations.

We have based these forward-looking statements largely on our current plans, intentions, expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We may not actually achieve the plans, intentions or expectations disclosed in our

 

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forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this prospectus are made as of the date of this prospectus, and we do not assume any obligation to update any forward-looking statements, except as required by applicable law.

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. This prospectus also includes data based on our own internal estimates. While we believe these industry publications and third party research, surveys and studies are reliable, we have not independently verified such data.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of             shares of our common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise in full their over-allotment option, we estimate that the net proceeds from this offering will be approximately $         million.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

As of September 30, 2013, we had cash, cash equivalents and short-term investments of approximately $18.2 million. In the fourth quarter of 2013, we raised an additional $25,992,595 in net proceeds from the sale of shares of series E preferred stock in October 2013 and November 2013 and received a payment of $1.0 million and a loan of $9.0 million from Medinet upon our entry into a license agreement with Medinet in December 2013. We currently estimate that we will use the net proceeds from this offering, together with our cash, cash equivalents and short-term investments, as follows:

 

    approximately $         million to fund our pivotal phase 3 clinical trial of AGS-003 for the treatment of metastatic renal cell carcinoma, or mRCC;

 

    approximately $         million to fund the costs of our planned phase 2 clinical trials of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors;

 

    approximately $         million to fund the costs of our two planned phase 2 clinical trials of AGS-004, one for HIV eradication and one for long-term viral control in pediatric patients;

 

    approximately $         million to initiate the planned leasing, build-out and equipping of a new commercial manufacturing facility;

 

    $200,000 to pay a success fee to a former lender under a loan agreement that we have previously repaid in full; and

 

    the remainder for working capital and other general corporate purposes.

This expected use of the net proceeds from this offering and our existing cash, cash equivalents and short-term investments represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development and commercialization efforts, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties for our product candidates, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We have no current agreements, commitments or understandings for any material acquisitions or licenses of any products, businesses or technologies.

We expect that the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments and anticipated funding under our NIH contract, will enable us to fund our operating expenses and capital expenditure requirements into                 , including funding our ongoing pivotal phase 3 clinical trial of AGS-003 and our planned phase 2 clinical trials of AGS-003 and AGS-004. However, it is possible that we will not achieve the progress that we expect in our ongoing phase 3 clinical trial of AGS-003 or our planned additional clinical trials of AGS-003 and AGS-004 because the actual costs and timing of development, particularly clinical trials, are difficult to predict and subject to substantial risks and delays including slower than anticipated patient enrollment.

 

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We do not expect that the net proceeds from this offering and our existing cash, cash equivalents and short-term investments described above will be sufficient to enable us to complete our planned leasing, build-out and equipping of a new North American commercial manufacturing facility, which we will need to have completed in order to submit to the FDA a BLA for AGS-003 and to manufacture AGS-003 or any of our Arcelis-based products on a commercial scale, or to fund the commercialization of AGS-003.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in respect of our common stock in the foreseeable future.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of September 30, 2013, as follows:

 

    on an actual basis;

 

    on a pro forma basis to reflect the issuance and sale in October 2013 and November 2013 of an aggregate of 19,958,486 shares of series E preferred stock for an aggregate purchase price of $25,992,595, the payment of $1.0 million and loan of $9.0 million to us by Medinet Co., Ltd. that we received in connection with our entry into a license agreement with Medinet in December 2013; and the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 79,129,706 shares of our common stock upon the closing of this offering; and

 

    on a pro forma as adjusted basis to give further effect to our issuance and sale of                 shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

 

     As of September 30, 2013  
     Actual     Pro Forma      Pro Forma
as Adjusted
 
     (unaudited)     (unaudited)      (unaudited)  
     (in thousands, except share data)  

Cash, cash equivalents and short-term investments

   $ 18,224      $                    $                
  

 

 

   

 

 

    

 

 

 

Warrant liability

            

Redeemable convertible preferred stock

     87,326        

Stockholders’ deficit

       

Common stock, $0.001 par value, 100,000,000 shares authorized; and 1,360,686 shares issued and outstanding, actual;                  shares authorized and                  shares issued and outstanding, pro forma;                  shares issued and outstanding, pro forma as adjusted

     1        

Additional paid-in capital

     75,165        

Accumulated other comprehensive (loss) income

     (99     

Deficit accumulated during the development stage

     (142,843     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ deficit

     (67,776     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 19,550      $         $     
  

 

 

      

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization on a pro forma as adjusted basis by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The table above does not include:

 

    3,498,206 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2013 at a weighted average exercise price of $0.73 per share;

 

    10,400,421 additional shares of our common stock available for future issuance as of September 30, 2013 under our 2008 plan;

 

                         additional shares of our common stock that will be available for future issuance, upon the closing of this offering, under our 2014 stock incentive plan;

 

    2,599,768 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2013, at a weighted average exercise price of $0.03 per share, of which warrants to purchase 2,599,753 shares of our common stock were cancelled on December 27, 2013; and

 

    2,998,733 shares of our common stock issuable upon exercise of warrants, at an exercise price of $0.97 per share, that we agreed to issue to Pharmstandard upon our entry into a manufacturing rights agreement with Pharmstandard. See “Business — Development and Commercialization Agreements — Pharmstandard.”

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering.

Our historical net tangible book value as of September 30, 2013 was $         million, or $         per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding.

Our pro forma net tangible book value as of September 30, 2013 was $         million, or $         per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding after giving effect to the issuance and sale in October 2013 and November 2013 of an aggregate of 19,958,486 shares of series E preferred stock for an aggregate purchase price of $25,992,595, the payment of $1.0 million and loan of $9.0 million to us by Medinet Co., Ltd. that we received in connection with our entry into a license agreement with Medinet in December 2013 and the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 79,129,706 shares of our common stock upon the closing of this offering.

After giving effect to our issuance and sale of                 shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2013 would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $         to existing stockholders and immediate dilution of $         per share in pro forma as adjusted net tangible book value to new investors purchasing shares of our common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution:

 

Assumed initial public offering price per share

   $                   

Historical net tangible book value per share as of September 30, 2013

   $                   

Increase per share attributable to the assumed conversion of outstanding preferred stock

     
  

 

 

    

Pro forma net tangible book value per share as of September 30, 2013

     
  

 

 

    

Increase in net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma net tangible book value per share after giving effect to this offering

      $                
     

 

 

 

Dilution per share to new investors

      $                
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option or if any additional shares are issued in connection with outstanding options or warrants, you will experience further dilution.

 

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The following table summarizes, on a pro forma basis as of September 30, 2013, the total number of shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by new investors in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number    Percentage     Amount      Percentage    

Existing stockholders

               $                           %   $                

New investors

                         %  
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100.0   $                %  
  

 

  

 

 

   

 

 

    

 

 

   

The table above is based on actual shares of our common stock outstanding as of September 30, 2013 and                     additional shares of our common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $         million and increase (decrease) the percentage of total consideration paid by new investors by approximately     %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The table above excludes:

 

    3,498,206 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2013 at a weighted average exercise price of $0.73 per share;

 

    10,400,421 additional shares of our common stock available for future issuance as of September 30, 2013 under our 2008 plan;

 

                         additional shares of our common stock that will be available for future issuance, upon the closing of this offering, under our 2014 stock incentive plan;

 

    2,599,768 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2013, at a weighted average exercise price of $0.03 per share, of which warrants to purchase 2,599,753 shares of our common stock were cancelled on December 27, 2013; and

 

    2,998,733 shares of our common stock issuable upon exercise of warrants, at an exercise price of $0.97 per share, that we agreed to issue to Pharmstandard upon our entry into a manufacturing rights agreement with Pharmstandard. See “Business — Development and Commercialization Agreements — Pharmstandard.”

If the underwriters exercise their over-allotment option in full, the following will occur:

 

    the percentage of shares of our common stock held by existing stockholders will decrease to approximately     % of the total number of shares of our common stock outstanding after this offering; and

 

    the number of shares of our common stock held by new investors will increase to             , or approximately     % of the total number of shares of our common stock outstanding after this offering.

To the extent that outstanding options and warrants are exercised, you will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 and for the period from May 8, 1997 (inception) to December 31, 2012 from our audited consolidated financial statements included in this prospectus. We have derived the statements of operations data for the nine months ended September 30, 2012 and 2013 and for the period from May 8, 1997 (inception) to September 30, 2013, and the balance sheet data as of September 30, 2013 from our unaudited financial statements included in this prospectus. The unaudited financial data include, in the opinion of our management, all adjustments, consisting of normal recurring adjustments, that are necessary for a fair statement of our financial position and results of operations for these periods. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results to be expected for a full fiscal year.

 

     Year Ended December 31,
    Nine Months
Ended September 30,
    Cumulative
Period from
May 8, 1997
(Inception) to
December 31,

2012
    Cumulative
Period from
May 8, 1997
(Inception) to
September 30,

2013
 
     2011     2012     2012     2013      
                 (unaudited)     (unaudited)           (unaudited)  

Revenue

   $ 7,642,695      $ 7,039,010      $ 5,501,326      $ 3,705,942      $ 82,404,839      $ 86,110,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

            

Research and development

     12,668,025        17,616,892        12,956,055        16,922,000        181,635,074        198,557,074   

Net reimbursement under collaboration agreement

                                 (47,179,130     (47,179,130
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net research and development

     12,668,025        17,616,892        12,956,055        16,922,000        134,455,944        151,377,944   

General and administrative

     3,703,813        6,135,581        5,182,702       
3,042,249
  
    54,175,917        57,218,166   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,371,838        23,752,473        18,138,757        19,964,249        188,631,861        208,596,110   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (8,729,143     (16,713,463     (12,637,431     (16,258,307     (106,227,022     (122,485,329

Other income (expense)

            

Interest income

     1,259        4,604        1,917        2,827        4,097,954        4,100,781   

Interest expense

     (6,656,366     (292,496     (292,280     (513     (12,511,214     (12,511,727

Change in fair value of warrant liability

     (4,661,811     4,916,785        4,916,785        355,352        254,974        610,326   

Derivative (expense) income

     (94,668     1,036,403                      (39,450     (39,450

Investment tax credits

            694,331                      2,761,556        2,761,556   

Other expense

            (117,494     (117,494            (117,494     (117,494

Loss on sale of marketable securities

                                 (10,242,252     (10,242,252
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (11,411,586     6,242,133        4,508,928        357,666        (15,795,926     (15,438,260
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (20,140,729     (10,471,330     (8,128,503     (15,900,641     (122,022,948     (137,923,589

Net loss attributable to noncontrolling interest

     (63,047                          (760,107     (760,107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Argos Therapeutics, Inc.

     (20,077,682     (10,471,330     (8,128,503     (15,900,641     (121,262,841     (137,163,482

Accretion of redeemable convertible preferred stock (See Note 19)

     (926,542     (352,371     (266,403     5,250,020        (30,400,691     (25,150,671
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Preferred stock dividend due to exchanges of preferred shares (See Note 19)

                          (14,726,088            (14,726,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (21,004,224   $ (10,823,701   $ (8,394,906   $ (25,376,709   $ (151,663,532   $ (177,040,241
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss attributable to common stockholders per share

   $ (32.88   $ (9.10   $ (7.41   $ (18.53    
  

 

 

   

 

 

   

 

 

   

 

 

     

Basic and diluted weighted average shares outstanding

     638,795        1,189,836        1,132,318        1,369,341       
  

 

 

   

 

 

   

 

 

   

 

 

     

Pro forma basic and diluted loss per share attributable to common stockholders

     $          $         
    

 

 

     

 

 

     

Pro forma basic and diluted weighted average shares outstanding

            
    

 

 

     

 

 

     

 

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     As of December 31,     As of September 30,
2013
 
     2011     2012    
                 (unaudited)  

Balance Sheet Data:

      

Cash, cash equivalents and short-term investments

   $ 2,002,814      $ 12,363,736      $ 18,224,252   

Working capital (deficit)

     (19,541,194     5,741,666        18,092,665   

Total assets

     5,973,958        15,396,973        21,012,625   

Redeemable convertible preferred stock

     77,722,306        75,800,882        87,326,134   

Total stockholders’ deficit

     (96,355,106     (68,567,710     (67,775,717

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this prospectus. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Our most advanced product candidate is AGS-003, which we are developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. We are currently enrolling patients in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib (Sutent) for the treatment of clear cell mRCC under a special protocol assessment, or SPA, with the Food and Drug Administration, or FDA. We also plan to conduct phase 2 clinical trials to explore the use of AGS-003 in non-clear cell mRCC, in early stage RCC prior to and following nephrectomy, and in other solid tumors. We are developing our second Arcelis product candidate, AGS-004, for the treatment of HIV and are conducting a phase 2b clinical trial of AGS-004 that is being funded entirely by the National Institutes of Health, or NIH, under a $39.3 million contract. In 2014, we plan to initiate two phase 2 clinical trials of AGS-004, one for HIV eradication and one for long-term viral control in pediatric patients.

We have devoted substantially all of our resources to our drug development efforts, including advancing our Arcelis platform, conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have not generated any revenue from product sales and, to date, have funded our operations primarily through private placements of our preferred stock, convertible debt financings, bank debt, government contracts, government and other third party grants and license and collaboration agreements. From inception in May 1997 through September 30, 2013, we have raised a total of $263.6 million in cash, including:

 

    $139.5 million from the sale of our common stock, convertible debt, warrants and preferred stock;

 

    $32.9 million from the licensing of our technology; and

 

    $91.2 million from government contracts, grants and license and collaboration agreements.

We have incurred losses in each year since our inception in May 1997. Our net loss, after attribution to the noncontrolling interest, was $20.1 million for the year ended December 31, 2011, $10.5 million for the year ended December 31, 2012 and $15.9 million for the nine months ended September 30, 2013. As of September 30, 2013, we had an accumulated deficit of $142.8 million. As a result of our operating losses and negative cash flows from operations, the report of our independent registered public accounting firm on our December 31, 2012 financial statements included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Substantially all of our operating losses have resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

 

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We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially if and as we:

 

    continue our ongoing phase 3 clinical trial of AGS-003 for the treatment of mRCC and initiate additional clinical trials of AGS-003 for the treatment of cancers;

 

    initiate additional clinical trials of AGS-004 for the treatment of HIV;

 

    seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

    lease, build out and equip a new commercial facility for the manufacture of our Arcelis-based products;

 

    establish a sales, marketing and distribution infrastructure to commercialize products for which we may obtain regulatory approval;

 

    maintain, expand and protect our intellectual property portfolio;

 

    continue our other research and development efforts;

 

    hire additional clinical, quality control, scientific and management personnel; and

 

    add operational, financial and management information systems and personnel, including personnel to support our product development and planned commercialization efforts.

We do not expect to generate significant funds or product revenue, other than under our contract with the NIH as described below, unless and until we successfully complete development, obtain marketing approval and commercialize our product candidates, either alone or in collaboration with third parties, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of AGS-003, AGS-004 or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds through these means when needed, on favorable terms or at all.

NIH Funding

In September 2006, we entered into a multi-year research contract with the NIH and the National Institute of Allergy and Infectious Diseases, or NIAID, to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We are using funds from this contract to develop AGS-004, including to fund in full our phase 2b clinical trial of AGS-004. We have agreed to a statement of work under the contract, and are obligated to furnish all the services, qualified personnel, material, equipment, and facilities, not otherwise provided by the U.S. government, needed to perform the statement of work.

Under this contract, as amended, the NIH and NIAID have committed to fund up to a total of $39.3 million, including reimbursement of direct expenses and allocated overhead and general and administrative expenses of up to $37.9 million and payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This commitment extends to September 2015. Since September 2010, we have received reimbursement of our allocated overhead and general and administrative expenses at provisional indirect cost rates equal to negotiated provisional indirect cost rates agreed to with the NIH in September 2010. These provisional indirect cost rates are subject to adjustment based on our actual costs pursuant to the agreement with the NIH and may result in additional payments to us from the NIH and the NIAID to reflect our actual costs since September 2010.

 

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We have recorded revenue of $34.2 million through September 30, 2013 under the NIH contract. This contract is the only arrangement under which we currently generate revenue. As of September 30, 2013, there was up to approximately $5.1 million of potential revenue remaining to be earned under the agreement with the NIH.

Exchange of Series D-1 Preferred Stock for Series D Preferred Stock

In July 2013, the holders of shares of our series D-1 preferred stock exchanged all shares of our series D-1 preferred stock held by such investors for shares of our series D preferred stock. In this exchange, we issued an aggregate of 16,151,212 shares of our series D preferred stock in exchange for an aggregate of 7,433,870 shares of our series D-1 preferred stock. In connection with this exchange, warrants to purchase 32,869,928 shares of our series C preferred stock and warrants to purchase 1,332,622 shares of our series D-1 preferred stock were cancelled. We did not receive any cash proceeds in connection with the exchange.

In addition, in connection with the exchange, we reduced the original per share purchase price of the series D preferred stock from $3.528233 per share to $1.978565 per share. As a result of such reduction, we issued an aggregate of 6,373,782 additional shares of our series D preferred stock to the holders that had purchased shares of our series D preferred stock prior to such reduction for no additional consideration.

At the time of the exchange, we also amended our certificate of incorporation to reduce the liquidation preference and redemption price of our series A preferred stock to $0.32 per share, our series B preferred stock to $0.5632 per share, our series C preferred stock to $0.09248576 per share and our series D preferred stock to $1.978565 per share. In addition, we extended the redemption trigger date of our preferred stock by one year to July 31, 2018.

We recorded the issuance of additional shares of series D preferred stock in connection with the exchange of series D-1 preferred stock, the modifications to the liquidation preferences and redemption prices of the series A preferred stock, the series B preferred stock, the series C preferred stock and the series D preferred stock and the extension of the redemption trigger date as adjustments to additional paid-in capital.

Series E Preferred Stock Financing

In August 2013, we issued and sold 16,898,436 shares of our series E preferred stock at a price of $1.302333 per share resulting in gross proceeds of $22.0 million, pursuant to a series E preferred stock and warrant purchase agreement. In connection with the issuance and sale of series E preferred stock in August 2013, we issued to the purchasers of the series E preferred stock warrants to purchase an aggregate of 2,599,753 shares of our common stock at an exercise price of $0.01 per share. The warrants had a term of ten years and would only become exercisable if we did not receive $5.0 million in non-dilutive financing by December 31, 2013 or had not executed definitive documentation providing for an additional $5.0 million investment of non-dilutive financing as of December 31, 2013. In connection with the license agreement that we entered into with Medinet Co., Ltd., or Medinet, in December 2013, Medinet paid us $1.0 million and loaned us $9.0 million. See “—Collaborations—Medinet”. In connection with our receipt of these funds, the warrants were cancelled pursuant to their terms.

In connection with the issuance and sale of our series E preferred stock in August 2013, our existing investors that participated in the offering exchanged an aggregate of 111,837 shares of our series A preferred stock, 8,687,630 shares of our series B preferred stock and 10,586,174 shares of our series C preferred stock for a total of 2,985,863 shares of our series D preferred stock, and an aggregate of 12,607,779 shares of our series D preferred stock for 19,154,336 shares of our series E preferred stock.

In October 2013, we issued and sold to one purchaser an additional 921,423 shares of our series E preferred stock at a price of $1.302333 per share resulting in gross proceeds of $1.2 million. In connection with this issuance we

 

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issued to the purchaser warrants to purchase 141,757 shares of our common stock at an exercise price of $0.01 per share on the same terms as the warrants we issued to the initial purchasers of our series E preferred stock. In November 2013, we issued and sold to one purchaser an additional 19,037,063 shares of our series E preferred stock at a price of $1.302333 per share resulting in gross proceeds of $24.8 million. In connection with this issuance, we issued the purchaser warrants to purchase 2,928,773 shares of our common stock at an exercise price of $0.01 per share on the same terms as the warrants we issued to the initial purchasers of our series E preferred stock. These warrants were also cancelled in December 2013 in connection with our receipt of funds under our license agreement with Medinet.

In connection with their purchase of shares of our series E preferred stock, purchasers of our series E preferred stock committed to purchase additional shares of our series E preferred stock for an aggregate purchase price of $12.0 million in a second tranche closing upon the achievement of specified milestones with respect to our ongoing phase 3 clinical trial of AGS-003. This commitment will terminate in connection with the closing of this offering.

Collaborations

Pharmstandard

In August 2013, in connection with the purchase of shares of our series E preferred stock by Pharmstandard International S.A., or Pharmstandard, we entered into an exclusive royalty-bearing license agreement with Pharmstandard. Under this license agreement, we granted Pharmstandard and its affiliates a license, with the right to sublicense, to develop, manufacture and commercialize AGS-003 and other products for the treatment of human diseases which are developed by Pharmstandard using our personalized immunotherapy platform in the Russian Federation, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, which we refer to as the Pharmstandard Territory. We also provided Pharmstandard with a right of first negotiation for development and commercialization rights in the Pharmstandard Territory to specified additional products we may develop.

Pharmstandard agreed to pay us royalties on net sales of all licensed products in the low single digits until it has generated a specified amount of aggregate net sales. Once the net sales threshold is achieved, Pharmstandard will pay us royalties on net sales of specified licensed products, including AGS-003, in the low double digits below 20%. After the net sales threshold is achieved, Pharmstandard has the right to offset a portion of the royalties Pharmstandard pays to third parties for licenses to necessary third party intellectual property against the royalties that Pharmstandard pays to us. For further information regarding this collaboration, see “Business — Development and Commercialization Agreements — Pharmstandard.”

In November 2013, we entered into an agreement with Pharmstandard under which Pharmstandard purchased additional shares of our series E preferred stock. Under this agreement, we agreed to enter into a manufacturing rights agreement for the European market with Pharmstandard and that the manufacturing rights agreement would provide for the issuance of warrants to Pharmstandard to purchase 2,998,733 shares of our common stock at an exercise price of $0.97 per share. These warrants will not become exercisable until 61 days following the closing of this offering. However, if the initial public offering price in this offering exceeds $         per share, then the warrants will automatically terminate upon the closing of this offering.

Green Cross

In July 2013, in connection with the purchase of shares of our series E preferred stock by Green Cross Corp., or Green Cross, we entered into an exclusive royalty-bearing license agreement with Green Cross. Under this agreement we granted Green Cross a license to develop, manufacture and commercialize AGS-003 for mRCC in South Korea. We also provided Green Cross with a right of first negotiation for development and commercialization rights in South Korea to specified additional products we may develop.

Under the terms of the license, Green Cross has agreed to pay us $0.5 million upon the initial submission of an application for regulatory approval of a licensed product in South Korea, $0.5 million upon the initial regulatory

 

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approval of a licensed product in South Korea and royalties ranging from the mid-single digits to low double digits below 20% on net sales until the fifteenth anniversary of the first commercial sale in South Korea. For further information regarding this collaboration, see “Business — Development and Commercialization Agreements — Green Cross.”

Medinet

In December 2013, we entered into a license agreement with Medinet Co., Ltd., or Medinet. Under this agreement, we granted Medinet an exclusive, royalty-free license to manufacture in Japan AGS-003 and other products using our Arcelis technology solely for the purpose of the development and commercialization of AGS-003 and these other products for the treatment of mRCC. We refer to this license as the manufacturing license. In addition, under this agreement, we granted Medinet an option to acquire a nonexclusive, royalty-bearing license under our Arcelis technology to sell in Japan AGS-003 and other products for the treatment of mRCC. We refer to the option as the sale option and the license as the sale license.

In consideration for the manufacturing license, Medinet paid us $1.0 million. Medinet also loaned us $9.0 million in connection with us entering into the agreement. We have agreed to use these funds in the development and manufacturing of AGS-003 and the other products. Medinet also agreed to pay us milestone payments of up to a total of $9.0 million upon the achievement of developmental and regulatory milestones and $5.0 million upon the achievement of a sales milestone related to AGS-003 and these products. If Medinet exercises the sale option, it will pay us $1.0 million, as well as royalties on net sales at a rate to be negotiated until the later of the expiration of the licensed patent rights in Japan and the twelfth anniversary of the first commercial sale in Japan. If we cannot agree on the royalty rate, we have agreed to submit the matter to arbitration.

We borrowed the $9.0 million pursuant to an unsecured promissory note that bears interest at a rate of 3.0% per annum. The principal and interest under the note are due and payable on December 31, 2018. Under the terms of the note and the license agreement, any milestone payments related to the developmental and regulatory milestones that become due will be applied first to the repayment of the loan. We have the right to prepay the loan at any time. If we have not repaid the loan by December 31, 2018, then we have agreed to grant to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing under the loan as of December 31, 2018 will constitute pre-paid royalties under the license and will not be otherwise due and payable. Royalties under this license would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If we cannot agree on the royalty rate, we have agreed to submit the matter to arbitration. For further information regarding this collaboration, see “Business—Development and Commercialization Agreements—Medinet.”

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products. All of our revenue has been derived from government contracts and grants and payments under license and collaboration agreements. We have recognized $86.1 million in revenue from inception to September 30, 2013 from these sources. We may generate revenue in the future from government contracts and grants, payments from future license or collaboration agreements and product sales. We expect that any revenue we generate will fluctuate from quarter to quarter.

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

    salaries and related expenses for personnel in research and development functions;

 

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    fees paid to consultants and clinical research organizations, or CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

 

    allocation of facility lease and maintenance costs;

 

    depreciation of leasehold improvements, laboratory equipment and computers;

 

    costs related to production of product candidates for clinical trials;

 

    costs related to compliance with regulatory requirements;

 

    consulting fees paid to third parties related to non-clinical research and development;

 

    costs related to stock options or other stock-based compensation granted to personnel in research and development functions; and

 

    acquisition fees, license fees and milestone payments related to acquired and in-licensed technologies.

From inception through September 30, 2013, we have incurred $198.6 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of AGS-003 and AGS-004.

The table below summarizes our direct research and development expenses by program for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs, including in connection with our clinical trials, and related clinical trial fees. We have been developing AGS-003 and AGS-004, in parallel, and typically use our employee and infrastructure resources across multiple research and development programs. We do not allocate salaries, stock-based compensation, employee benefit or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table.

 

     Year Ended December 31,      Nine Months
Ended September 30,
 
         2011              2012              2012              2013      
                   (unaudited)      (unaudited)  
     (in thousands)  

Direct research and development expense by program:

           

AGS-003

   $ 1,763       $ 5,842       $ 4,258       $ 7,920   

AGS-004

     2,929         2,626         2,125         1,384   

Other

     1,310         403         345         38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total direct research and development program expense

     6,002         8,871         6,728         9,342   

Indirect research and development expense

     6,666         8,746         6,228         7,580   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expense

   $ 12,668       $ 17,617       $ 12,956       $ 16,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

    the scope, rate of progress, expense and results of our ongoing clinical trials;

 

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    the scope, rate of progress, expense and results of additional clinical trials that we may conduct;

 

    other research and development activities; and

 

    the timing of regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

AGS-003.    We initiated our ongoing pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib monotherapy in January 2013. We expect to complete patient enrollment in this trial in the second half of 2014 and to have overall survival data from this trial in the first half of 2016. We estimate that the direct costs that we will incur in connection with conducting the planned pivotal phase 3 clinical trial will total approximately $     million, of which we expect that $     million will be incurred in 2013. We are also exploring the use of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors. We plan to initiate clinical trials of AGS-003 for the treatment of these additional indications in 2014.

AGS-004.    We initiated our ongoing phase 2b clinical trial of AGS-004 in HIV-infected patients in July 2010. Our phase 2b clinical trial is funded entirely by the NIH. In September 2013, we completed patient enrollment in this clinical trial and expect to have data in the second quarter of 2014. We plan to initiate in the second half of 2014 a phase 2 clinical trial of AGS-004 in adult HIV patients who are being treated with antiretroviral drug therapy to evaluate the use of AGS-004 in combination with a latency reversing drug to eradicate the virus. We also plan to initiate in the first half of 2014 a phase 2 clinical trial of AGS-004 in pediatric HIV patients to evaluate the use of AGS-004 monotherapy to allow for long-term control of viral load and eliminate the need for antiretroviral therapy.

Other.    In July 2011, we completed enrollment in a phase 1a clinical trial of AGS-009, a monoclonal antibody, for the treatment of systemic lupus erythematosus, or lupus, a chronic and disabling autoimmune disorder. We have not conducted any further development following the completion of the trial. We do not plan to conduct further development of AGS-009 unless and until we receive third party or government funding.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, operational and finance, information technology and human resources functions. Other significant general and administrative expenses include allocation of facilities costs, professional fees for accounting and legal services and expenses associated with obtaining and maintaining patents.

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates and as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash and cash equivalents. We expect our interest income to increase following this offering as we invest the net proceeds from this offering pending their use in our operations.

 

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Interest expense consists primarily of cash and non-cash interest costs related to our debt.

In September 2010 and December 2010, we issued convertible notes in the original aggregate principal amount of $6.0 million. We refer to these notes as the 2010 convertible notes. These notes bore interest at a rate of 10.0% per annum and had an original maturity date of September 15, 2011. The maturity date was extended to December 31, 2011 in connection with the issuance of the convertible notes that we issued and sold in July 2011, or the July 2011 convertible notes, and was then further extended to March 31, 2012 in December 2011. In connection with the issuance of the 2010 convertible notes, we issued warrants to purchase a total of 20,759,953 shares of our series C preferred stock at an exercise price of $0.01 per share. As of the date of issuance, we allocated $3.2 million of the proceeds from the issuance and sale of the convertible notes to the warrants based on the warrants’ fair value and recorded that amount on the balance sheet as a warrant liability. We recorded the remaining $2.8 million in proceeds on the balance sheet as the convertible note liability. We increased the value assigned to the convertible note liability through interest expense using the effective interest method. At December 31, 2011, we recorded the 2010 convertible notes as a $6.8 million convertible note liability. We recognized $3.1 million and $0.2 million, of interest expense related to the 2010 convertible notes during the years ended December 31, 2011 and 2012, respectively.

In July 2011, we issued the July 2011 convertible notes in the original aggregate principal amount of $3.5 million. These notes bore interest at a rate of 10.0% per annum and had an original maturity date of December 31, 2011, which date was extended to March 31, 2012 in December 2011. In connection with the issuance of the July 2011 convertible notes, we issued warrants to purchase a total of 12,109,975 shares of series C preferred stock at an exercise price of $0.01 per share. As of the date of issuance, we allocated $3.4 million of the proceeds from the issuance and sale of the July 2011 convertible notes to the warrants based on the warrants’ fair value and recorded that amount on the balance sheet as a warrant liability. We recorded the remaining $0.1 million in proceeds on the balance sheet as convertible note liability. We increased the value assigned to the convertible note liability through interest expense using the effective interest method. At December 31, 2011, we recorded the July 2011 convertible notes as a $3.6 million convertible note liability. We recognized $3.6 million and $0.1 million of interest expense related to the July 2011 convertible notes during the years ended December 31, 2011 and 2012, respectively.

We did not record any gain or loss in connection with the extensions of the maturity dates of the 2010 convertible notes or the July 2011 convertible notes because we determined that the extension of the maturity date of the notes met the criteria of a troubled debt restructuring outlined in ASC Topic 470-60, Troubled Debt Restructurings. In April 2012, the principal and interest on the 2010 convertible notes and the July 2011 convertible notes totaling $10.7 million converted into an aggregate of 3,023,661 shares of our series D preferred stock.

Accretion of Preferred Stock

Our preferred stock is reflected on our balance sheet at its cost, less associated issuance costs. The preferred stock is redeemable at the option of the holders beginning in July 2018 for an aggregate price equal to $97.1 million. The amount reflected on the balance sheet for our preferred stock is increased by periodic accretions of the issuance costs so that the original amount reflected on the balance sheet will equal the aggregate redemption price. We expect all outstanding shares of our preferred stock to convert into an aggregate of 79,129,706 shares of our common stock upon the closing of this offering.

Derivative Income (Expense)

Prior to October 2012, we owned 49.94% of the capital of DC Bio. Under an amended and restated put agreement with the other shareholders of DC Bio, the other shareholders had the right to put the Common, Class A preferred and Class B preferred shares of DC Bio held by them to us in exchange for shares of our common stock, series B preferred stock and series C preferred stock at any time on or after March 31, 2011. We recorded a liability of $1.0 million on our balance sheet at December 31, 2011 reflecting the fair value of the put, which we calculated based on the estimated fair value of the shares of our common stock, series B preferred

 

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stock and series C preferred stock issuable in exchange for shares of DC Bio. In each reporting period, we recorded any change in the fair value of the shares underlying the put as expense, in the case of an increase in the fair value, and income, in the case of a decrease in fair value.

In October 2012 and December 2012, DC Bio repurchased the shares of DC Bio held by other entities. As of December 31, 2012, we owned 100.0% of the capital of DC Bio. We consolidate its results in our financial statements. The other shareholders’ previous ownership in DC Bio is reflected in our financial statements by reference to the equity attributable to noncontrolling interest.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing at the end of this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification 605, Revenue Recognition, or ASC 605. We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

We have previously entered into license agreements with collaborators. The terms of these agreements have included nonrefundable signing and licensing fees, as well as milestone payments and royalties on any future product sales developed by the collaborators under these licenses. We assess these multiple elements in accordance with ASC 605, in order to determine whether particular components of the arrangement represent separate units of accounting.

As a result of new guidance issued by the FASB, agreements entered into after December 31, 2010 will be accounted for in accordance with Accounting Standards Update, or ASU, No. 2009-13, Topic 605 - Multiple-Deliverable Revenue Arrangements, or ASU 2009-13. This guidance requires the application of the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists; otherwise, third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. We recognize upfront license payments as revenue upon delivery of the license only if the license has standalone value and the fair value of the undelivered performance obligations can be determined. If the fair value of the undelivered performance obligations can be determined, such obligations are accounted for separately as the obligations are fulfilled. If the license is considered to either not have stand-alone value or have stand-alone value but the fair value of any of the undelivered performance obligations cannot be determined, the arrangement is accounted for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed.

 

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Whenever we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized. If we cannot reasonably estimate the timing and the level of effort to complete our performance obligations under the arrangement, then we recognize revenue under the arrangement on a straight-line basis over the period that we expect to complete our performance obligations.

Our license agreements with Green Cross and Medinet provide for, and other agreements we may enter into may provide for, milestone payments. Revenues from milestones, if they are non-refundable and considered substantive, are recognized upon successful accomplishment of the milestones. If not considered substantive, milestones are initially deferred and recognized over the remaining performance obligation.

Our current license agreements with Pharmstandard, Green Cross and Medinet and any future license agreements we may enter into may provide for royalty payments. To date, we have not received any royalty payments and accordingly have not recognized any related revenue. We will recognize royalty revenue upon the sale of the related products, provided we have no remaining performance obligations under the arrangements.

We record deferred revenue when payments are received in advance of the culmination of the earnings process. This revenue is recognized in future periods when the applicable revenue recognition criteria have been met.

Under our NIH contract, we receive reimbursement of our direct expenses and allocated overhead and general and administrative expenses, as well as payment of other specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. We recognize revenue from reimbursements earned in connection with the NIH contract as reimbursable costs are incurred. We recognize revenues from the achievement of milestones under the NIH contract upon the accomplishment of any such milestone.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

 

    fees paid to CROs in connection with clinical trials;

 

    fees paid to investigative sites in connection with clinical trials;

 

    professional service fees; and

 

    unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not anticipate the future settlement of existing accruals to differ materially from our estimates.

 

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Valuation of Financial Instruments

Warrant Liability

We account for our preferred stock warrants in accordance with ASC Topic 480-10, Distinguishing Liabilities from Equity, which requires that a financial instrument, other than an outstanding share, that, at inception, includes an obligation to repurchase the issuer’s equity shares regardless of the timing or likelihood of the redemption, shall be classified as a liability. We measure the fair value of the warrant liability based on the fair value of the warrants which we determine based on an allocation of our enterprise value to all classes of equity and preferred stock, including the warrants. We utilize the probability-weighted expected return method, or PWERM method, to determine these values. In each reporting period, we record any change in fair value of the warrants as expense in the case of an increase in fair value and income in the case of a decrease in fair value.

In July 2013, in connection with the series D-1 exchange, all of our outstanding warrants to purchase shares of our series C preferred stock and series D-1 preferred stock were cancelled. There were no warrants to purchase preferred stock outstanding as of September 30, 2013.

Stock-Based Compensation

In accordance with ASC 718, Stock Compensation, we record the fair value of stock options, restricted stock awards and other stock-based compensation issued to employees as of the grant date as compensation expense. We typically recognize compensation expense over the requisite service period, which is the vesting period. For non-employees, we also record stock options, restricted stock awards and other stock-based compensation issued to these non-employees at their fair value as of the grant date. We then periodically remeasure the awards to reflect the current fair value at each reporting period and recognize expense over the related service period.

Stock-based compensation expense includes stock options and restricted stock granted to employees and non-employees and has been reported in our statements of operations as follows:

 

     Year Ended December 31,      Nine Months
Ended September 30,
 
         2011              2012          2012      2013  
                  

(unaudited)

     (unaudited)  
     (in thousands)  
                      

Research and development

   $   168       $ 512       $   323       $   282   

General and administrative

     312         546         347         317   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 480       $ 1,058       $ 670       $ 599   
  

 

 

    

 

 

    

 

 

    

 

 

 

We calculate the fair value of stock-based compensation awards using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions, including stock price volatility, the expected life of stock options, risk free interest rate and the fair value of the underlying common stock on the date of grant.

 

    We do not have sufficient history to estimate the volatility of our common stock price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, we consider characteristics such as industry, length of trading history, similar vesting terms and in-the-money option status. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common stock is relevant to measure expected volatility for future option grants.

 

    The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future.

 

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    The expected term represents the period that the stock-based awards are expected to be outstanding. Our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore we estimate the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

    We determine the risk-free interest rate by reference to implied yields available from U.S. Treasury securities with a remaining term equal to the expected life assumed at the date of grant.

 

    We estimate forfeitures based on our historical analysis of actual stock option forfeitures.

The assumptions that we used in the Black-Scholes option-pricing model for the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, are set forth below:

 

     Year Ended
December 31,
    Nine Months Ended
September 30, 2013
 
     2011     2012    

Risk-free interest rate

     2.17     1.20     1.64

Dividend yield

     0     0     0

Expected option term (in years)

     7        7        7   

Volatility

     91     94     94

Due to the absence of an active market for our common stock, the fair value of our common stock for purposes of determining the exercise price for stock option grants was determined by our board of directors, with the assistance and upon the recommendation of management, in good faith based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, including:

 

    the prices at which we most recently sold our preferred stock and the rights, preferences and privileges of the preferred stock as compared to those of our common stock, including the liquidation preferences of the preferred stock;

 

    our results of operations, financial position and the status of our research and development efforts, including the status of clinical trials for our product candidates under development;

 

    the composition of, and changes to, our management team and board of directors;

 

    the material risks related to our business;

 

    achievement of enterprise milestones, including the results of clinical trials and our entry into or termination of collaboration and license agreements;

 

    the market performance of publicly traded companies in the life sciences and biotechnology sectors, and recently completed mergers and acquisitions of companies comparable to us;

 

    external market conditions affecting the life sciences and biotechnology industry sectors;

 

    the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering, or IPO, given prevailing market conditions; and

 

    contemporaneous valuations.

 

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Stock Option Grants Since January 1, 2012

The following table presents the grant dates, number of underlying shares and related exercise prices of stock options granted to employees from January 1, 2012 through November 11, 2013, as well as the estimated fair value of our common stock on the applicable grant date.

 

Date of Grant

   Number of
Shares Subject
to Options
Granted
     Exercise
Price Per
Share
     Estimated Fair
Value of
Common Stock
at Grant Date
 

4/10/2012

     1,268,836       $ 0.70       $ 0.70   

6/5/2012

     21,066       $ 0.70       $ 0.70   

6/20/2012

     2,006       $ 0.70       $ 0.70   

12/11/2012

     876,724       $ 0.70       $ 0.63   

2/25/2013

     30,095       $ 0.70       $ 0.63   

6/21/2013

     124,878       $ 0.70       $ 0.63   

11/1/2013

     6,437,786       $ 0.97       $ 0.97   

11/11/2013

     1,082,656       $ 0.97       $ 0.97   

12/20/2013

     760,000       $ 1.22       $ 1.22   

The estimated fair value of common stock per share in the table above represents the determination by our board of directors of the fair value of our common stock as of the date of grant, taking into consideration various objective and subjective factors, including the conclusions of valuations of our common stock.

The intrinsic value of all outstanding vested and unvested options as of                     , 2013 is $         based on a per share price of $         for our common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, and based on                  shares of our common stock issuable upon the exercise of options outstanding as of                     , 2013 with a weighted average exercise price of $         per share.

Stock Option Grants in April 2012

Our board of directors granted stock options in April 2012, as indicated in the table above, with each grant having an exercise price of $0.70 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management and the following factors:

 

    we had withdrawn our registration statement for our planned IPO in March 2012;

 

    we issued and sold to our existing stockholders shares of our series D preferred stock for an aggregate purchase price of $19.7 million, including $10.7 million of outstanding principal and interest on the 2010 convertible notes and the 2011 convertible notes which converted to series D preferred stock in this financing in April 2012; and

 

    we needed to obtain additional financing before we could initiate our pivotal phase 3 clinical trial of AGS-003.

Based on these factors, our board of directors determined that the estimated fair value of our common stock on April 10, 2012 was $0.70 per share.

Stock Option Grants in June 2012

Our board of directors granted stock options on various dates in June 2012, as indicated in the table above, with each grant having an exercise price of $0.70 per share. In establishing this exercise price, in addition to the

 

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objective and subjective factors discussed above, our board of directors also considered input from management, as well as the fair value of our common stock, $0.70 per share, as determined by our board of directors in April 2012. Our board of directors then determined that the events and circumstances that occurred between April 10, 2012 and the grant dates in June 2012 did not indicate a change in the fair value of our common stock between April 2012 and the relevant grant dates in June 2012. The specific facts and circumstances considered by our board of directors included the following:

 

    we had not obtained additional financing since April 2012;

 

    we had not conducted any additional clinical development since April 2012; and

 

    we had not made any progress in our discussions with potential collaborators since April 2012.

Based on these factors, our board of directors determined that the estimated fair value of our common stock on June 5, 2012 and June 20, 2012 was $0.70 per share.

August 2012 Valuation

In a contemporaneous valuation of our common stock as of August 31, 2012, we used the PWERM approach to value our common stock. Although we did not rely on the market approach to determine our enterprise value, we did review the performance of a set of guideline comparable companies. Under the PWERM approach, share value is derived from the probability weighted average present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. We calculated the implied enterprise value using the PWERM approach. The fair value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to common stockholders under several future stockholder exit or liquidity event scenarios:

 

    an IPO on or before December 31, 2015;

 

    a strategic merger or sale of our company at a high valuation on or before June 30, 2016, which assumed an additional fundraising of $100 million to conduct a phase 3 clinical trial of AGS-003 and positive results from the trial by mid 2015;

 

    a strategic merger or sale of our company at a lower valuation on or before December 31, 2014, which assumed an additional fundraising of $55 million to conduct a phase 3 clinical trial of AGS-003 and positive interim results from the trial;

 

    a strategic merger or sale of our company at a lower valuation on or before March 31, 2015, which assumed an additional fundraising of $17 million to conduct a phase 2b clinical trial of AGS-003 and positive results from the trial;

 

    a strategic sale of our intellectual property on or before December 31, 2015, which assumed an additional fundraising of $90 million to conduct a phase 3 clinical trial of AGS-003 and poor results from the trial; and

 

    a strategic sale of our intellectual property on or before December 31, 2014, which assumed an additional fundraising of $17 million to conduct a phase 2b clinical trial of AGS-003 and poor results from the trial.

In the valuation, we used probability weightings of 22.5% for the IPO scenario, 22.5% for a strategic merger or sale of our company at a high valuation (positive results from the phase 3 clinical trial of AGS-003), 15% for a strategic merger or sale of our company at a lower valuation (positive interim results from the phase 3 clinical

 

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trial of AGS-003), 20% for a strategic merger or sale of our company at a lower valuation (positive results from a phase 2b clinical trial of AGS-003), 10% for a strategic sale of our intellectual property (poor results from the phase 3 clinical trial of AGS-003) and 10% for a strategic sale of our intellectual property (poor results from a phase 2b clinical trial of AGS-003). These probability weightings assigned to the respective exit scenarios were based on consideration of our various drug development programs, industry clinical success rates, our expected near-term and long-term funding requirements and an assessment of the current financing and biotechnology industry environments at the time of the valuation.

In the August 31, 2012 valuation, we applied a discount for lack of marketability of 25% to reflect the fact that our shares of common stock represented a minority interest in our company and there is no market mechanism to sell these shares. A common stockholder would have to wait for a liquidity event such as an IPO or a sale of our company to enable the sale of the common stock. We used an option pricing model to determine the value of this lack of marketability.

Based on these factors, we determined that the estimated fair value of our common stock on August 31, 2012 was $0.63 per share.

Stock Option Grants in December 2012

Our board of directors granted stock options in December 2012, as indicated in the table above, with each grant having an exercise price of $0.70 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management, as well as the August 31, 2012 valuation.

Our board of directors then determined that the events and circumstances that occurred between August 31, 2012 and December 11, 2012 did not indicate a significant change in the fair value of our common stock during that period. The specific facts and circumstances considered by our board of directors for the December 11, 2012 valuation included the following:

 

    we had not obtained additional financing since August 31, 2012 and did not have funding to complete our pivotal phase 3 clinical trial of AGS-003; and

 

    we had submitted a request to the NIH for additional funding for our phase 2b clinical trial of AGS-004, but had not yet received such funding.

Based on all of these factors, our board of directors determined that the estimated fair value of our common stock on December 11, 2012 was $0.63 per share. In establishing the exercise price of the December 2012 stock options, our board of directors recognized that the August 31, 2012 valuation described above had valued our common stock at a price that was less than the price at which our common stock had been valued in June 2012, but determined not to grant stock options at an exercise price that was less than the $0.70 per share exercise price used for the June 2012 option grants.

Stock Option Grants in February 2013 and June 2013

Our board of directors granted stock options on February 25, 2013 and June 21, 2013 as indicated in the table above, with each grant having an exercise price of $0.70 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management, as well as the fair value of our common stock, $0.63 per share, as determined by our board of directors in December 2012. Our board of directors then determined that the events and circumstances that occurred between December 11, 2012 and the grant dates in February 2013 and June 2013 did not indicate a change in the fair value of our common stock between December 2012 and the relevant grant dates in February 2013 and June 2013. The specific facts and circumstances considered by our board of directors included the following:

 

    we initiated our pivotal phase 3 clinical trial of AGS-003 in January 2013 and dosed the first patient in May 2013;

 

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    we had not obtained additional financing since August 31, 2012; and

 

    we only had enough cash to fund our operations through July 2013.

Based on all of these factors, our board of directors determined that the estimated fair value of our common stock on February 25, 2013 and June 21, 2013 was $0.63 per share. In establishing the exercise price of the February 2013 and June 2013 stock options, our board of directors recognized that the fair value of the common stock as determined by the board in both February 2013 and June 2013 was less than the price at which our common stock had been valued in the June 2012 valuation, but determined not to grant stock options at an exercise price that was less than the $0.70 per share exercise price used for the December 2012 option grants.

September 2013 Valuation

In a contemporaneous valuation of our common stock as of September 30, 2013, we used the PWERM approach to value our common stock. Although we did not rely on the market approach to determine our enterprise value, we did review the performance of a set of guideline comparable companies. We calculated the implied enterprise value using the PWERM approach. The fair value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to common stockholders under several future stockholder exit or liquidity event scenarios:

 

    an IPO on or before January 31, 2014;

 

    an IPO by October 31, 2014 after the full enrollment of patients and achievement of positive preliminary results in the phase 3 clinical trial of AGS-003, and which assumed an additional fundraising of $20 million prior to the IPO;

 

    a strategic merger or sale of our company at a high valuation on or before June 30, 2016, which assumed an additional fundraising of $70 million to conduct the phase 3 clinical trial of AGS-003 and positive results from the trial by early 2016; and

 

    a strategic sale of our intellectual property on or before March 31, 2016, which assumed a delay in the conduct of the phase 3 clinical trial of AGS-003, an additional fundraising of $60 million to complete the clinical trial and poor results from the trial.

In the valuation, we used probability weightings of 30% for the IPO on or before January 31, 2014, 20% for the IPO by October 31, 2014 (after full enrollment of patients in the phase 3 clinical trial of AGS-003 and positive preliminary results), 20% for a strategic merger or sale of our company at a high valuation (positive results from the phase 3 clinical trial of AGS-003) and 30% for a strategic sale of our intellectual property (poor results from a phase 3 clinical trial of AGS-003). These probability weightings assigned to the respective exit scenarios were based on consideration of our various drug development programs, industry clinical success rates, our expected near-term and long-term funding requirements and an assessment of the current financing and biotechnology industry environments at the time of the valuation. The valuation also reflected the sale and issuance of 16,898,436 shares of series E preferred stock, at a per share purchase price of $1.302333, for an aggregate purchase price of $22 million in August 2013 and the commitment by purchasers of series E preferred stock to purchase additional shares of series E preferred stock at subsequent closings and the Company’s plans to conduct this offering.

In the September 30, 2013 valuation, we applied a discount for lack of marketability of 15% to reflect the fact that our shares of common stock represented a minority interest in our company and there is no market mechanism to sell these shares. A common stockholder would have to wait for a liquidity event such as an IPO or a sale of our company to enable the sale of the common stock. We used an option pricing model to determine the value of this lack of marketability.

 

 

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Based on these factors, we determined that the estimated fair value of our common stock on September 30, 2013 was $0.97 per share.

Stock Option Grants in November 2013

Our board of directors granted stock options on various dates in November 2013, as indicated in the table above, with each grant having an exercise price of $0.97 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management, as well as the September 30, 2013 valuation.

Our board of directors then determined that the events and circumstances that occurred between September 30, 2013 and various grant dates in November 2013 did not indicate a significant change in the fair value of our common stock during that period. The specific facts and circumstances considered by our board of directors for the November 2013 valuations included the following:

 

    we completed additional closings of our series E preferred stock financing in October 2013 and November 2013, which had been contemplated in the September 30, 2013 valuation;

 

    we continued enrollment of our ongoing phase 3 clinical trial of AGS-003 and the timelines for the trial had not changed since September 30, 2013; and

 

    we held an organizational meeting for this offering and proceeded with the preparation of the registration statement of which this prospectus is a part consistent with our plans reflected in the September 30, 2013 valuation.

Based on all of these factors, our board of directors determined that the estimated fair value of our common stock on November 1, 2013 and November 11, 2013 was $0.97 per share.

December 2013 Valuation

In a contemporaneous valuation of our common stock as of December 20, 2013, we used the PWERM approach to value our common stock. Although we did not rely on the market approach to determine our enterprise value, we did review the performance of a set of guideline comparable companies. We calculated the implied enterprise value using the PWERM approach. The fair value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to common stockholders under several future stockholder exit or liquidity event scenarios:

 

    an IPO on or before January 31, 2014;

 

    an IPO by October 31, 2014 after the full enrollment of patients and achievement of positive preliminary results in the phase 3 clinical trial of AGS-003, and which assumed an additional fundraising of $20 million prior to the IPO;

 

    a strategic merger or sale of our company at a high valuation on or before June 30, 2016, which assumed an additional fundraising of $70 million to conduct a phase 3 clinical trial of AGS-003 and positive results from the trial by early 2016; and

 

    a strategic sale of our intellectual property on or before March 31, 2016, which assumed a delay in the conduct of a phase 3 clinical trial of AGS-003, an additional fundraising of $60 million to complete the clinical trial and poor results from the trial.

In the valuation, we used probability weightings of 60% for the IPO on or before January 31, 2014, 5% for the IPO by October 31, 2014 (after full enrollment of patients in the phase 3 clinical trial of AGS-003 and positive

 

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preliminary results), 5% for a strategic merger or sale of our company at a high valuation (positive results from the phase 3 clinical trial of AGS-003) and 30% for a strategic sale of our intellectual property (poor results from a phase 3 clinical trial of AGS-003). These probability weightings assigned to the respective exit scenarios were based on consideration of our various drug development programs, industry clinical success rates, our expected near-term and long-term funding requirements and an assessment of the current financing and biotechnology industry environments at the time of the valuation. These weightings were also based on the continued progression of our plans to conduct this offering.

In the December 20, 2013 valuation, we applied a discount for lack of marketability of 10% to reflect the fact that our shares of common stock represented a minority interest in our company and there is no market mechanism to sell these shares. A common stockholder would have to wait for a liquidity event such as an IPO or a sale of our company to enable the sale of the common stock. We used an option pricing model to determine the value of this lack of marketability.

Based on these factors, we determined that the estimated fair value of our common stock on December 20, 2013 was $1.22 per share.

Stock Option Grants in December 2013

Our board of directors granted stock options on December 20, 2013, as indicated in the table above, with each grant having an exercise price of $1.22 per share. In establishing this exercise price, in addition to the objective and subjective factors discussed above, our board of directors also considered input from management.

Based on all of these factors, our board of directors determined that the estimated fair value of our common stock on December 20, 2013 was $1.22 per share and determined to grant stock options at an exercise price of $1.22 per share.

There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance; the time to completing an IPO, a strategic merger or sale, or other liquidity event; and the timing and probability of continuing to successfully progress our various product candidates toward commercialization, as well as determinations of the appropriate valuation methods. If different assumptions had been applied in the valuations, our stock-based compensation expense, net loss and net loss per share could have been significantly different. While the assumptions used to calculate and account for stock-based compensation awards represents management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to the underlying assumptions and estimates, our stock-based compensation expense could vary significantly from period to period.

 

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Results of Operations

Comparison of the Nine Months Ended September 30, 2012 (unaudited) and the Nine Months Ended September 30, 2013 (unaudited)

The following unaudited table summarizes the results of our operations for each of the nine months ended September 30, 2012 and 2013, together with the changes in those items in dollars and as a percentage:

 

     Nine Months Ended
September 30,
    $
Change
    %
Change
 
     2012     2013      
     (in thousands)        
     (unaudited)  

Revenue

   $ 5,501      $ 3,706      $ (1,795     (32.6 %) 

Operating expenses

        

Research and development

     12,956        16,922        3,966        30.6

General and administrative

     5,183        3,042        (2,141     (41.3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     18,139        19,964        1,825        10.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,638     (16,258     (3,620     28.6

Interest income

     1        2        1        *   

Interest expense

     (292            292        *   

Change in fair value of warrant liability

     4,917        355        (4,562     (92.8 )% 

Derivative expense

     (117            117        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,129   $ (15,901   $ (7,772     95.6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  * Not meaningful

Revenue

Substantially all of our revenue is derived from our NIH contract. Revenue was $5.5 million for the nine months ended September 30, 2012, compared with $3.7 million for the nine months ended September 30, 2013, a decrease of approximately $1.8 million, or 32.6%. The $1.8 million decrease for the nine months ended September 30, 2013 is due to decreased reimbursement under our NIH contract associated with decreased activity with respect to our phase 2b clinical trial of AGS-004.

Research and Development Expenses

Research and development expenses were $13.0 million for the nine months ended September 30, 2012, compared with $16.9 million for the nine months ended September 30, 2013, an increase of 30.6%. This increase in research and development expense primarily reflects a $2.6 million increase in direct research and development costs and an increase in indirect research and development expense of $1.3 million. The increase in direct research and development expenses resulted primarily from the following:

 

    Direct research and development expense for AGS-003 increased from $4.3 million for the nine months ended September 30, 2012 to $7.9 million in the nine months ended September 30, 2013. This increase primarily reflects increased activity in connection with the commencement in January 2013 of the pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib; and

 

    Direct research and development expense with respect to AGS-004 decreased from $2.1 million in the nine months ended September 30, 2012 to $1.4 million in the nine months ended September 30, 2013 primarily due to the decreased activity in our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined.

 

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The increase in indirect research and development was primarily due to higher personnel costs as we had 52 employees engaged in research and development activities at end of the nine months ended September 30, 2012 compared with 75 employees at the end of the nine months ended September 30, 2013.

General and Administrative Expenses

General and administrative expenses were $5.2 million for the nine months ended September 30, 2012, compared with $3.0 million for the nine months ended September 30, 2013, a decrease of 41.3%. This decrease reflects a $0.5 million decrease in audit and tax consulting fees and a $1.7 million decrease in legal expenses reflecting our increased legal expenses in 2012 associated with our IPO that we withdrew in March 2012.

Interest Expense

Interest expense was $0.3 million for the nine months ended September 30, 2012, compared with $0 for the nine months ended September 30, 2013. During the nine months ended September 30, 2012, interest expense primarily resulted from interest accrued on our outstanding 2010 convertible notes and July 2011 convertible notes. On April 10, 2012, the aggregate principal and interest on the 2010 convertible notes and the July 2011 convertible notes totaling $10.7 million converted into an aggregate of 3,023,661 shares of our series D preferred stock.

Change in Fair Value of Warrant Liability

Income from the change in fair value of the warrant liability was $4.9 million for the nine months ended September 30, 2012, compared with income of $0.4 million for the nine months ended September 30, 2013. These amounts represented the decrease in the fair value of the warrant liability during the respective periods. In July 2013, in connection with the series D-1 exchange, all of our outstanding warrants to purchase shares of our series C preferred stock and series D-1 preferred stock were cancelled. There were no warrants to purchase preferred stock outstanding as of September 30, 2013.

Comparison of the Year Ended December 31, 2011 and the Year Ended December 31, 2012

The following table summarizes the results of our operations for each of the years ended December 31, 2011 and 2012, together with the changes in those items in dollars and as a percentage:

 

     Year Ended
December 31,
    $
Change
    %
Change
 
     2011     2012      
     (in thousands)              

Revenue

   $ 7,643      $ 7,039      $ (604     (7.9 %) 

Operating expenses

        

Research and development

     12,668        17,617        4,949        39.1

General and administrative

     3,704        6,135        2,431        65.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,372        23,752        7,380        45.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (8,729     (16,713     (7,984     91.5

Interest income

     1        5        4        *   

Interest expense

     (6,656     (293     6,363        (95.6 %) 

Change in fair value of warrant liability

     (4,662     4,917        9,579        (205.5 %) 

Derivative (expense) income

     (95     1,036        1,131        *   

Investment tax credits

            694        694        *   

Other expense

            (117     (117     *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,141   $ (10,471   $ 9,670        (48.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  * Not meaningful

 

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Revenue

Revenue was $7.6 million for the year ended December 31, 2011, compared to $7.0 million for the year ended December 31, 2012, a decrease of approximately $0.6 million, or 7.9%. The $0.6 million decrease for the year ended December 31, 2012 primarily reflects decreased revenue from the NIH reflecting the fact that we did not achieve any milestones under the NIH agreement in 2012, while we achieved seven milestones in 2011.

Research and Development Expenses

Research and development expenses were $12.7 million for the year ended December 31, 2011, compared with $17.6 million for the year ended December 31, 2012, an increase of approximately $4.9 million, or 39.1%. This increase in research and development expense primarily reflects a $2.8 million increase in direct research and development expense and an increase in indirect research and development expense of $2.1 million. The increase in direct research and development expenses resulted primarily because:

 

    direct research and development expense for AGS-003 increased from $1.8 million for the year ended December 31, 2011 to $5.8 million in the year ended December 31, 2012. This increase reflects increased activity in preparation for our pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib in the year ended December 31, 2012;

 

    direct research and development expense for AGS-004 decreased from $2.9 million in the year ended December 31, 2011 to $2.6 million in the year ended December 31, 2012 due to the decreased activity in our phase 2b clinical trial of AGS-004 as the number of patients receiving treatment in the trial declined; and

 

    direct research and development expense for AGS-009 decreased from $1.2 million in the year ended December 31, 2011 to $0.3 million in the year ended December 31, 2012 reflecting the discontinuation of development of AGS-009 after completion of the phase 1a clinical trial in the second quarter of 2012.

The increase in indirect research and development expense was primarily due to higher personnel costs of $1.7 million caused by the net increase of 16 employees in 2012 and the payout of bonuses in the year ended December 31, 2012, as we did not grant bonuses in the year ended December 31, 2011, and an increase in consulting fees of $0.2 million and license fees of $0.2 million.

General and Administrative Expenses

General and administrative expenses were $3.7 million for the year ended December 31, 2011, compared with $6.1 million for the year ended December 31, 2012, an increase of 65.6%. This increase reflects a $0.5 million increase in audit and tax fees and a $1.7 million increase in legal expenses related to our IPO that we withdrew in early 2012 and a $0.2 million increase in consulting costs.

Interest Expense

Interest expense was $6.7 million for the year ended December 31, 2011, compared with $0.3 million for the year ended December 31, 2012. During both years, interest expense almost solely resulted from interest accrued on the outstanding convertible notes. The decrease in interest expense in 2012 reflects the conversion of the principal and interest on the convertible term notes totaling $10.7 million into an aggregate of 3,023,661 shares of our series D preferred stock in April 2012.

Change in Fair Value of Warrant Liability

Expense from the change in fair value of the warrant liability was $4.7 million for the year ended December 31, 2011, compared with income of $4.9 million for the change in the fair value of the warrant liability for the year

 

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ended December 31, 2012. The expense in 2011 represents the increase in the fair value of the warrant liability during 2011. The income in 2012 reflects the decrease in the fair value of the warrant liability during 2012.

Derivative (Expense) Income

Derivative expense was $0.1 million for the year ended December 31, 2011, compared with income of $1.0 million for the year ended December 31, 2012. Derivative income in 2012 reflected the termination of the put option held by the shareholders of DC Bio which resulted in the recognition of the derivative liability as income.

Investment Tax Credits

Investment tax credits were $0.7 million for the year ended December 31, 2012. We recorded no investment tax credits in the year ended December 31, 2011. Under Canadian and Ontario law, DC Bio is entitled to refunds on scientific research and experimental development investment tax credits. Because the investment tax credits are subject to a claim review and audit by the Canadian Revenue Agency, we recognize these tax credits when they are received.

Liquidity and Capital Resources

Sources of Liquidity

As of September 30, 2013, we had cash, cash equivalents and short-term investments of approximately $18.2 million.

Since our inception in May 1997 through September 30, 2013, we have funded our operations principally with $139.5 million from the sale of common stock, convertible debt, warrants and preferred stock, including the preferred stock sold by DC Bio, $32.9 million from the licensing of our technology, and $91.2 million from government contracts, grants and license and collaboration agreements.

The gross proceeds we have received from the issuance and sale of our preferred stock as of September 30, 2013 are as follows:

 

Issue

   Year      Gross
Proceeds
 
            (in thousands)  

Series A

     2000       $ 1,594   

Series B

     2001       $ 39,382   

Series B-1

     2004       $ 5,000   

Series C

     2008       $ 33,462   

Series D

     2012       $ 9,022   

Series D-1

     2012       $ 15,978   

Series E

     2013       $ 22,007   

From August 2013 through November 2013, we sold an aggregate of 36,856,922 shares of our series E preferred stock in a private placement to certain of our existing holders of preferred stock and additional accredited investors at a purchase price of $1.302333 per share. The sale of series E preferred stock was structured in multiple tranches and with multiple closing dates. Under the agreement we sold 16,898,436 shares of our series E preferred stock for an aggregate purchase price of $22.0 million in August 2013, 921,423 shares of our series E preferred stock for an aggregate purchase price of $1.2 million in October 2013 and 19,037,063 shares of our series E preferred stock for an aggregate purchase price of $24.8 million in November 2013. The purchasers of our series E preferred stock committed to purchase additional shares of series E preferred stock for an aggregate purchase price of $12.0 million in a second tranche closing upon the achievement of specified milestones with respect to our phase 3 clinical trial of AGS-003 pursuant to the terms of the series E preferred stock and warrant purchase agreement. This commitment will terminate in connection with the closing of this offering.

 

 

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In December 2013, we entered into a license agreement with Medinet. In consideration, Medinet paid us $1.0 million and loaned us $9.0 million. For further information regarding this collaboration, see “Business—Development and Commercialization Agreements—Medinet.”

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below:

 

    

 

Year Ended December 31,

    Nine Months
Ended September 30,
 
             2011                     2012             2012     2013  
                 (unaudited)     (unaudited)  
     (in thousands)  

Net cash provided by (used in):

        

Operating activities

   $ (4,586   $ (13,198   $ (9,812   $ (15,247

Investing activities

     (244     (5,281     (760     3,785   

Financing activities

     1,688        24,871        24,903        21,476   

Effect of exchange rate changes on cash

     3        (180            (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (3,139   $ 6,212      $ 14,331      $ 10,009   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities.    Net cash used in operating activities of $9.8 million during the nine months ended September 30, 2012 (unaudited) was primarily a result of our net loss of $8.1 million, coupled with changes in operating assets and liabilities of $0.1 million and non-cash items of $1.8 million. These non-cash items reflect the gain recorded due to the decrease in fair value of our warrant liability of $4.9 million, partially offset by the write-off of previously deferred financing costs of $1.8 million, non-cash interest costs related to our debt of $0.3 million, depreciation of $0.3 million and compensation expense related to stock options of $0.7 million.

Net cash used in operating activities of $15.2 million during the nine months ended September 30, 2013 (unaudited) was primarily a result of our $15.9 million net loss and non-cash items of $0.7 million. These non-cash items reflect the depreciation of $0.5 million and compensation expense related to stock options of $0.6 million, partially offset by the gain recorded due to the decrease in fair value of our warrant liability of $0.4 million.

Net cash used in operating activities of $4.6 million during the year ended December 31, 2011 was primarily a result of our $20.1 million net loss, partially offset by changes in operating assets and liabilities of $3.0 million and non-cash items of $12.6 million. These non-cash items included non-cash interest costs related to our debt of $0.7 million, an increase to our warrant liability of $10.6 million, depreciation of $0.7 million, compensation expense related to stock options of $0.5 million and derivative expense of $0.1 million.

Net cash used in operating activities of $13.2 million during the year ended December 31, 2012 was primarily a result of our $10.5 million net loss, changes in operating assets and liabilities of $0.4 million and non-cash items of $2.3 million. These non-cash items reflect the gain recorded due to the decrease in fair value of our warrant liability of $4.9 million and derivative income of $1.0 million, partially offset by the write-off of previously deferred financing costs of $1.8 million, non-cash interest costs related to our debt of $0.3 million, depreciation of $0.5 million and compensation expense related to stock options of $1.0 million.

Investing Activities.    Net cash (used in) provided by investing activities amounted to ($0.8) million for the nine months ended September 30, 2012 (unaudited), $3.8 million for the nine months ended September 30, 2013 (unaudited), $(0.2) million for the year ended December 31, 2011 and $(5.3) million for the year ended December 31, 2012. Cash used in investing activities during all of these periods primarily reflected our purchases of equipment or purchases of short-term investments. Cash provided by investment activities during each of these periods, if applicable, was primarily due to sales of short-term investments.

 

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Financing Activities.    Net cash provided by financing activities amounted to $24.9 million for the nine months ended September 30, 2012 (unaudited), $21.5 million for the nine months ended September 30, 2013 (unaudited), $1.7 million for the year ended December 31, 2011 and $24.9 million for the year ended December 31, 2012. The cash provided by financing activities for the nine months ended September 30, 2012 (unaudited) consisted of proceeds from the sale of preferred stock of $25.0 million, partially offset by stock issuance costs of $0.2 million. Cash provided by financing activities for the nine months ended September 30, 2013 (unaudited) consisted of proceeds of $22.0 million from the sale of our series E preferred stock, partially offset by stock issuance costs of $0.5 million. Cash provided by financing activities for the year ended December 31, 2011 consisted of proceeds from the issuance and sale of the July 2011 convertible notes and was partially offset by deferred financing costs of $1.8 million related to our planned IPO and the registration statement we initially filed in 2011 and withdrew in March 2012 and payments of approximately $27,000 on certain of our notes payable. The cash provided by financing activities for the year ended December 31, 2012 consisted primarily of the proceeds from the sale of preferred stock of $25.0 million and loan proceeds of $0.1 million, partially offset by stock issuance costs of $0.2 million.

Funding Requirements

To date, we have not generated any product revenue from our development stage product candidates. We do not know when, or if, we will generate any product revenue. We do not expect to generate significant product revenue unless or until we obtain marketing approval of, and commercialize AGS-003 or AGS-004. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue our phase 3 clinical trial of AGS-003, initiate additional clinical trials of AGS-003 and AGS-004, seek regulatory approval for our product candidates and lease, build out and equip a new commercial manufacturing facility. In addition, if we obtain regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. We will need substantial additional funding in connection with our continuing operations.

We expect that the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments and anticipated funding under our NIH contract, will enable us to fund our operating expenses and capital expenditure requirements into                     . We intend to devote the net proceeds from this offering and our cash, cash equivalents and short term investments to fund our pivotal phase 3 clinical trial of AGS-003, to fund our planned phase 2 clinical trials of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors, to fund the costs of our two planned phase 2 clinical trials of AGS-004, one for HIV eradication and one for long-term viral control in pediatric patients, and to initiate the planned leasing, build-out and equipping of a new commercial manufacturing facility and the remainder for general corporate purposes. We also will use $200,000 of the net proceeds of this offering to pay a success fee to a former lender under a loan agreement that we have previously repaid in full.

We will need to obtain significant financing, in addition to the net proceeds of this offering, prior to the commercialization of AGS-003, including to complete the planned leasing, build-out and equipping of a new commercial manufacturing facility and to fund any commercialization efforts in advance of regulatory approval of AGS-003. We expect that we will require approximately an additional $         million to lease, build out and equip the new commercial manufacturing facility to a level necessary to file a BLA for AGS-003 with the FDA using the automated manufacturing processes that we plan to establish. We anticipate needing the additional funds for these purposes beginning in                     . We are actively exploring potential sites and financing arrangements in connection with the lease, build out and equipping of a commercial manufacturing facility and are in discussions with developers and governmental authorities regarding potential sites and financial support. We expect to enter into arrangements that include financial support, and we expect such arrangements will likely involve material obligations and debt liabilities. If we are unable to obtain additional financing when needed, in the required amounts or at all, we may not be able to complete the planned leasing, build-out and equipping of the new commercial facility or may be delayed in doing so.

 

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We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

Our future capital requirements will depend on many factors, including:

 

    the progress and results of our ongoing pivotal phase 3 clinical trial of AGS-003 and other clinical trials of AGS-003 that we may conduct;

 

    the progress and results of our ongoing phase 2b clinical trial and other clinical trials of AGS-004 that we may conduct and our ability to obtain additional funding under our NIH contract for our AGS-004 program;

 

    the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates;

 

    the costs and timing of our planned leasing, build-out and equipping of a new commercial manufacturing facility;

 

    the costs, timing and outcome of regulatory review of our product candidates;

 

    the costs of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive regulatory approval;

 

    revenue, if any, received from sales of our product candidates, should any of our product candidates be approved by the FDA or a similar regulatory authority outside the United States;

 

    the costs of preparing, filing and prosecuting patent applications, maintaining, enforcing our intellectual property rights and defending intellectual property-related claims;

 

    the extent to which we acquire or invest in businesses, products and technologies;

 

    our ability to obtain government or other third party funding for the development of our product candidates; and

 

    our ability to establish collaborations on favorable terms, if at all, particularly arrangements to develop, market and distribute AGS-003 outside North America and arrangements for the development and commercialization of our non-oncology product candidates, including AGS-004.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government contracts, government and other third party grants or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances 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 of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

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We plan to seek government or other third party funding for the continued development of AGS-004 following completion of the phase 2b clinical trial of AGS-004. If we are unable to raise government or other third party funding when needed, we may be required to delay, limit, reduce or terminate our development of AGS-004 or to grant rights to develop and market AGS-004 that we would otherwise prefer to keep for ourselves.

Our recurring operating losses 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 financial statements as of and for the year ended December 31, 2012 with respect to this uncertainty. We have no current source of revenue to sustain our present activities, and we do not expect to generate product revenue until, and unless, the FDA or other regulatory authorities approve AGS-003 or another one of our product candidates and we successfully commercialize such product candidate. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations.

Contractual Obligations and Commitments

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2012 and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 

Operating Lease

   $  1,170       $  313       $  572       $  285       $  —   

Note Payable

     80         32         48                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,250       $ 345       $ 620       $ 285       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We plan to lease a new commercial manufacturing facility for the manufacture of our Arcelis-based products. We expect that we will incur a significant long-term financial commitment in connection with the lease of such facility.

We are a party to license agreements with universities and other third parties, as well as patent assignment agreements, under which we have obtained rights to patents, patent applications and know-how. Under these agreements, we have agreed to pay the other parties milestone payments upon the achievement of specified clinical, regulatory and commercialization events and royalties based on future sales of products. We have not included these payments in the table as we cannot estimate if, when or in what amounts such payments will become due under these agreements.

Net Operating Losses

As of December 31, 2012, we had U.S. Federal and state, and Canadian federal and provincial net operating loss carryforwards of approximately $86.2 million, $106.3 million, $4.6 million and $4.6 million, respectively. These net operating loss carryforwards begin to expire in 2018, 2017, 2014 and 2014, respectively. As of December 31, 2012, we had U.S. Federal and state tax credit carryforwards of approximately $4.2 million and $0.3 million, respectively. These credit carryforwards begin to expire in 2020 and 2019, respectively. The utilization of the net operating loss and tax credit carryforwards may be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code, and state and foreign tax laws. Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of net operating loss, or NOL, carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in our stock by more than 50 percentage points over a three year testing period, or Section 382 Ownership Change. If we have undergone a Section 382 Ownership Change, an annual limitation would be imposed on certain of our tax attributes, including NOL and capital loss carryforwards, and certain other losses, credits, deductions or tax basis. As of December 31, 2012, we have not performed a formal study to determine whether

 

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there are Section 382 limitations that apply. As of December 31, 2012, we had Canadian investment tax credit carryforwards of approximately $40,955 that begin to expire in 2024.

As of September 30, 2013, we have received $2.0 million in refunds through scientific research and experimental development tax credits through our consolidated subsidiary in Canada.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under Securities and Exchange Commission, or SEC, rules.

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. The new guidance became effective for reporting periods beginning after December 15, 2012 and is applied prospectively. We adopted this guidance on January 1, 2013, and the adoption did not have any impact on its financial position, results of operations or cash flows as the amounts reclassified out of accumulated other comprehensive loss are not significant.

In July 2013, the FASB issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for us on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. We are currently assessing the impacts of this new guidance.

Quantitative and Qualitative Disclosure about Market Risk

Our primary exposure to market risk is limited to our cash, cash equivalents and short-term investments, all of which have maturities of one year or less. The related interest income sensitivity is affected by changes in the general level of short-term U.S. interest rates. We primarily invest in high quality, short-term marketable debt securities issued by high quality financial and industrial companies.

Due to the short-term duration and low risk profile of our cash, cash equivalents and short-term investments, an immediate 10.0% change in interest rates would not have a material effect on the fair value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our cash, cash equivalents and short-term investments.

We do not believe that our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and short-term investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in fair value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

 

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BUSINESS

Overview

We are a biopharmaceutical company focused on the development and commercialization of fully personalized immunotherapies for the treatment of cancer and infectious diseases based on our proprietary technology platform called Arcelis. Our most advanced product candidate is AGS-003, which we are developing for the treatment of metastatic renal cell carcinoma, or mRCC, and other cancers. We are currently enrolling patients in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib (Sutent) for the treatment of mRCC under a special protocol assessment, or SPA, with the Food and Drug Administration, or FDA. The primary endpoint of the phase 3 clinical trial is overall survival. In our phase 2 clinical trial of AGS-003 in combination with sunitinib in mRCC patients, median overall survival was 30.2 months. This compares to median overall survival of 14.7 months in 1,189 mRCC patients with similar risk factors who were treated with sunitinib or other targeted therapies as shown in data collected by the International Metastatic Renal Cell Carcinoma Database Consortium, or the Consortium. We are developing our second Arcelis product candidate, AGS-004, for the treatment of HIV and are conducting a phase 2b clinical trial of AGS-004 that is being funded entirely by the National Institutes of Health, or NIH, under a $39.3 million contract.

Our Arcelis Platform

Our proprietary Arcelis technology platform utilizes biological components from a patient’s own cancer cells or virus to generate fully personalized immunotherapies. These immunotherapies employ specialized white blood cells called dendritic cells to activate an immune response specific to the patient’s own disease. Arcelis is based on the work of Dr. Ralph Steinman, winner of the 2011 Nobel Prize in medicine for the discovery of the role of dendritic cells in the immune system. We believe our Arcelis-based immunotherapies are applicable to a wide range of cancers and infectious diseases and have the following attributes that we consider critical to a successful immunotherapy:

 

    target a patient’s disease-specific antigens, including mutated antigens, to elicit a potent immune response that is specific to the patient’s own disease;

 

    overcome the immune suppression that exists in cancer and infectious disease patients;

 

    induce memory T-cells, a specialized type of immune cell that is known to correlate with improved clinical outcomes for cancer and HIV patients;

 

    have minimal toxicity; and

 

    can be produced using an automated centralized manufacturing process at a cost that will be comparable to biologics.

We believe that our immunotherapies combine the advantages of other approaches to immunotherapy, including antigen-based approaches and pathway-based approaches such as checkpoint inhibition, while addressing the limitations they present.

 

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Our Development Programs

The following table summarizes our development programs for AGS-003 and AGS-004.

 

Product Candidate

  

Primary Indication

  

Status

AGS-003

   mRCC (clear cell)   

•     Ongoing pivotal phase 3 clinical trial; completion of enrollment expected in second half of 2014; overall survival data expected in first half of 2016

   mRCC (non-clear cell)   

•     Phase 2 clinical trial expected to begin in the first half of 2014

   Early stage RCC   

•     Two investigator-initiated phase 2 clinical trials expected to begin in the first half of 2014

   Other solid tumors   

•     Phase 2 clinical trials planned for 2014

AGS-004

   HIV   

•     Enrollment in phase 2b clinical trial complete; data expected in the second quarter of 2014

 

•     Two phase 2 clinical trials (one for HIV eradication and one for long-term viral control in pediatric patients) expected to begin in 2014

We hold all commercial rights to AGS-003 and AGS-004 in all geographies other than rights to AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, which we licensed to Pharmstandard International S.A., and rights to AGS-003 in South Korea, which we licensed to Green Cross Corp. We have granted to Medinet Co., Ltd. a license to manufacture in Japan AGS-003 for the treatment of mRCC and an option to acquire a license to sell in Japan AGS-003 for the treatment of mRCC.

AGS-003

We are initially developing AGS-003 to be used in combination with sunitinib and other targeted therapies for first-line treatment of mRCC. We are conducting a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib monotherapy for the treatment of newly diagnosed mRCC under an SPA with the FDA. We plan to enroll approximately 450 intermediate and poor risk patients with mRCC that pathologists have classified as clear cell. The primary endpoint of the trial is overall survival. We expect to complete patient enrollment in this trial in the second half of 2014 and to have overall survival data in the first half of 2016. We have established an independent data monitoring committee that will conduct interim analyses of the trial data for safety and futility at such times as 25%, 50% and 75% of the required events in the trial have occurred.

We conducted a 21 patient single arm phase 2 clinical trial of AGS-003 in combination with sunitinib. In this trial, we treated 11 intermediate risk and ten poor risk mRCC patients who had a time from diagnosis to initiation of systemic therapeutic treatment of less than one year, a negative prognostic indicator, with the combination of AGS-003 and sunitinib. Median overall survival for patients in the trial was 30.2 months. This compares to median overall survival of 14.7 months from initiation of treatment in 1,189 intermediate and poor risk patients who had a time from diagnosis to initiation of systemic therapeutic treatment of less than one year and were treated with sunitinib or other targeted therapies as shown in data collected by the Consortium. Dr. Daniel Heng from the University of Calgary’s Baker Cancer Center presented the Consortium data at the 2013 Annual Meeting of the American Society of Clinical Oncology, or ASCO.

In addition, 52% of the 21 patients in our phase 2 clinical trial survived for 30 or more months from enrollment in the trial, and 33% of the 21 patients survived for more than 4.5 years. This compares to data collected from six prior clinical trials of sunitinib and published in the British Journal of Cancer, in which 13% of the approximately 455 patients characterized as intermediate or poor risk patients in these trials survived for 30 or more months from initiation of sunitinib treatment. Furthermore, in our phase 2 clinical trial, we observed a statistically significant correlation between the increase in the number of CD8+ CD28+ memory T-cells and

 

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survival, progression free survival and reduced metastatic tumor burden. We believe that AGS-003 is the only cancer immunotherapy to show a statistically significant correlation between the magnitude of the target immune response and survival.

We also conducted a 22 patient single arm, phase 1/2 clinical trial of AGS-003 as monotherapy in nine intermediate risk and 13 poor risk mRCC patients. Median overall survival for patients in the trial was 15.6 months. In addition, 23% of the 22 patients in our phase 1/2 clinical trial survived for more than 30 months following enrollment.

Renal cell carcinoma, or RCC, is the most common type of kidney cancer. According to the American Cancer Society, or ACS, 2013 Cancer Facts and Figures Report, approximately 65,000 new cases of kidney cancer and nearly 14,000 deaths due to kidney cancer are expected in 2013 in the United States. The National Comprehensive Cancer Network, or NCCN, estimates that 90% of kidney cancer cases are RCC, and that 85% of these cases are classified as clear cell RCC. According to the ACS, approximately 25% of newly diagnosed RCC cases are mRCC. Additionally, patients initially diagnosed with early stage, or non-metastatic, RCC may later progress to mRCC. We estimate, based on publicly available information, that the current worldwide mRCC market for these targeted therapies is over $2 billion.

We are also exploring the use of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors. We plan to initiate clinical trials of AGS-003 for the treatment of these indications in 2014.

AGS-004

We are developing AGS-004 for the treatment of HIV and plan to focus this program on the use of AGS-004 in combination with other therapies for the eradication of HIV. The current standard of care, antiretroviral drug therapy, can reduce levels of HIV in a patient’s blood, increase the patient’s life expectancy and improve the patient’s quality of life. However, antiretroviral drug therapy cannot eliminate the virus, which persists in latently infected cells, remains undetectable by the immune system and can recur. In addition, antiretroviral therapy requires daily, life-long treatment and can have significant side effects.

We believe that by combining AGS-004 with therapies that are being developed to expose the virus in latently infected cells to the immune system, we can potentially eradicate the virus. In the second half of 2014, we plan to initiate a phase 2 clinical trial of AGS-004 in adult HIV patients to evaluate the use of AGS-004 in combination with one of these latency reversing therapies for this purpose. We also plan to explore the use of AGS-004 monotherapy to provide long-term control of HIV viral load in otherwise immunologically healthy patients and eliminate their need for antiretroviral drug therapy. Accordingly, in the first half of 2014, we plan to initiate a phase 2 clinical trial of AGS-004 monotherapy in pediatric patients infected with HIV who have otherwise healthy immune systems, have been treated with antiretroviral therapy since birth or shortly thereafter and, as a result, are lacking the antiviral memory T-cells to combat the virus.

We conducted a phase 2a clinical trial of AGS-004 in 29 HIV-infected patients in order to assess, after interruption of antiretroviral therapy, the ability of AGS-004 to control viral load and prevent viral load levels from returning to levels that were present in patients prior to treatment with antiretroviral drug therapy. In this single arm trial, patients received four monthly doses of AGS-004, while continuing to receive their existing antiretroviral therapy, before entering into a treatment interruption period during which the patients were to discontinue their antiretroviral therapy for 12 weeks and receive only AGS-004. In the trial, 24 patients entered the treatment interruption period in accordance with the trial protocol. At the end of their treatment interruption, these 24 patients had a mean reduction of 81% in their viral load as compared to their levels prior to beginning treatment with antiretroviral drug therapy. Without AGS-004, we would expect that a patient’s viral load would return to pre-treatment levels within 12 weeks following discontinuation of antiretroviral treatment. Accordingly, we believe that these results indicate that AGS-004 led to a reduction in virus replication and support the two planned phase 2 clinical trials of AGS-004 that we expect to initiate in 2014.

 

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In September 2013, we completed patient enrollment in our ongoing NIH-funded phase 2b clinical trial of AGS-004 in 53 HIV-infected patients. The primary endpoint of this trial is a comparison of the median viral load in AGS-004-treated patients with the median viral load in patients receiving placebo after 12 weeks of antiretroviral treatment interruption. Secondary endpoints of this trial include comparisons between AGS-004-treated patients and patients receiving placebo with respect to change in viral load from immediately prior to the commencement of antiretroviral therapy to the end of the planned treatment interruption, duration of treatment interruption, changes in CD4+ T-cell counts, an indicator of the health of the immune system, and safety. We designed this trial to confirm the data obtained in our phase 2a clinical trial and provide proof of concept of the ability of AGS-004 to induce an immune response to eliminate the cells responsible for viral replication. We expect to have data from this trial in the second quarter of 2014.

According to the World Health Organization, the number of people living with HIV worldwide was approximately 34 million in 2011. The Centers for Disease Control and Prevention estimates that more than 1.1 million people are currently living with HIV in the United States and the number of new cases of HIV infection in the United States will remain constant at approximately 50,000 cases per year. According to Datamonitor, sales of antiretroviral therapies in the United States and the five biggest European markets reached $13.3 billion in 2011.

Strategy

Our goal is to become a leading biopharmaceutical company focused on discovering, developing and commercializing personalized immunotherapies for the treatment of a wide range of cancers and infectious diseases. Key elements of our strategy are:

 

    complete clinical development and seek marketing approvals of AGS-003 for the treatment of mRCC;

 

    expand clinical development of AGS-003 in other cancers, including non-clear cell mRCC, early stage RCC and other solid tumors;

 

    commercialize AGS-003 in North America independently and with third parties outside North America;

 

    continue clinical development of AGS-004 for the treatment of HIV, potentially through government funding or other third party funding, and collaborate with third parties for commercialization on a worldwide basis;

 

    establish automated manufacturing processes based on our existing functioning prototypes of automated devices and, prior to the filing of our BLA for AGS-003, identify, lease, build out and equip a new North American facility for the commercial manufacture of products based on our Arcelis platform; and

 

    pursue expansion of our broad intellectual property protection for our Arcelis technology platform, product candidates and proprietary manufacturing processes through U.S. and international patent filings and maintenance of trade secret confidentiality.

Immunotherapy to Treat Cancer and Infectious Diseases

Cancer cells occur frequently in the human body, yet are effectively controlled by T-cells in the immune system, which recognize proteins produced by the cancer cells, known as antigens, as abnormal and kill the associated cancer cells. Two specific types of T-cells are necessary for an effective anti-cancer immune response: CD8+ T-cells, which kill cancer cells, and CD4+ T-cells, which provide a “help” signal that activates and directs the CD8+ T-cell response.

 

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Cancer cells utilize several strategies to escape detection by the immune system and T-cells. For example, cancer cells secrete factors that act systemically to prevent T-cells from responding to activation signals, resulting in the inability of T-cells to carry out their role of killing cancer cells. Chronic viral infections such as HIV or hepatitis C present the same challenges to the immune system as cancer because the immune system must overcome this disease-induced immune suppression to recognize and respond to virus-infected cells.

Immunotherapy is intended to stimulate and enhance the body’s natural mechanism for recognizing and killing cancer cells and virus-infected cells. Current immunotherapeutic approaches to treat cancer can generally be separated into two different mechanisms of action: antigen-based approaches that target one or more specific antigens and pathway-based approaches that target specific immunologic pathways.

Antigen-Based Approaches

Cancer immunotherapies that use an antigen-based approach are designed to stimulate an immune response against one or more tumor-associated antigens. In most cases, the tumor-associated antigens that are being targeted are non-mutated, or normal, antigens, which are usually well tolerated by the immune system. In the context of cancer, these normal antigens are either produced at abnormally high levels or predominantly in tumor cells, or both. The goal of antigen-based immunotherapies is to activate the patient’s own immune system to seek out and kill the cancer cells that carry the targeted antigen. Dendreon Corporation’s Provenge (sipuleucel-T) for metastatic castrate-resistant prostate cancer is the only antigen-based immunotherapy that has been approved by the FDA. Because these immunotherapies are designed to target specific antigens, they are less likely to have toxicity. However, antigen-based immunotherapies may have limited efficacy because they are only able to capture one or a limited number of antigens, which may or may not be present in the patient’s cancer cells, and do not capture mutated antigens.

Pathway-Based Approaches

Immunotherapies that rely on the pathway approach are designed to overcome immunosuppression in patients by blocking signaling pathways that prevent T-cell activation and function. A new class of monoclonal antibody-based immunotherapies known as checkpoint inhibitors are being developed on the basis of this approach. For example, Bristol-Myers Squibb’s immunotherapy Yervoy (ipilimumab), an FDA-approved treatment for patients with unresectable or metastatic melanoma, is designed to act by blocking the function of a protein expressed in activated T-cells called CTLA4, which acts as a T-cell “off” switch. By blocking the function of CTLA4, the patient’s T-cells can become activated, resulting in an immune response against tumors. Another pathway that immunotherapies are being developed to address is the PD-1/PD-L1 pathway. In this pathway, activated T-cells expressing the protein PD-1 are disabled when binding occurs between PD-1 and its ligand, PD-L1, which is expressed on tumor cells. Immunotherapies are being developed to interrupt this pathway by binding to the PD-1 protein or the PD-L1 ligand to prevent them from binding with each other. Immunotherapies that use a pathway approach have demonstrated the ability to effectively overcome immunosuppression and enable T-cells to function against tumor cells. However, pathway-based immunotherapies are limited because they act systemically to enable T-cells to function and do not specifically target a patient’s tumor or the associated antigens. This lack of specificity can negatively impact healthy tissue and generate unwanted toxicity.

Designing Immunotherapies Using Our Arcelis Platform

We believe that our proprietary Arcelis platform enables us to produce fully personalized immunotherapies that combine the advantages of the antigen-based and pathway-based approaches to immunotherapy while addressing the limitations and disadvantages of these approaches. We have designed our Arcelis platform to create product candidates which have attributes that we believe are critical to a successful immunotherapy:

 

   

Target disease-specific antigens, including mutated antigens.    The immunotherapy should target antigens, including mutated antigens, associated with the patient’s disease. We believe that immunotherapies that target only non-mutated, or normal, tumor-associated antigens will be limited

 

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in terms of efficacy as non-mutated antigens are generally poor at stimulating immune responses. Our Arcelis platform uses messenger RNA, or mRNA, from the patient’s own cancer or virus to yield a fully personalized immunotherapy that contains the patient’s disease-specific antigens, including mutated antigens, and is designed to elicit a potent immune response specific to the patient’s own disease.

 

    Overcome disease-induced immune suppression.    The immunotherapy must be able to generate an effective immune response in patients whose immune systems are compromised by their disease. Both tumors and HIV are known to impair the functionality of CD4+ T helper cells, which aid their escape from CD8+ T-cell attack. Our Arcelis-based immunotherapies do not require CD4+ helper T-cells to mount an immune response with effective anti-tumor or anti-viral activity as we add the protein known as CD40 ligand, or CD40L, to provide the signaling that the CD4+ helper T-cells would otherwise provide.

 

    Induce memory T-cells.    The immunotherapy should be able to induce specific T-cells, such as CD8+CD28+ memory T-cells, that are known to correlate with improved clinical outcomes for cancer and HIV patients. These memory T-cells are long lived and necessary for a durable immune response. Our Arcelis process produces dendritic cells that secrete IL-12, which is necessary to induce and expand patient-specific CD8+CD28+ memory T-cells. These memory T-cells are able to seek out and kill cancer or virus-infected cells that express the antigens identical to those displayed on the surface of the dendritic cells. In addition, because these T-cells do not express PD-1, they are not subject to inhibition by the PD-1/PD-L1 pathway.

 

    Have minimal toxicity.    The immunotherapy should have minimal toxicity, which would potentially enable it to be combined with other therapies for cancer and infectious diseases. The mechanism of action of Arcelis-based products induces patient- and disease-specific memory T-cells. This target customization and specificity is less likely to impact healthy tissue and cause toxicity. Our Arcelis-based product candidates have been well tolerated in clinical trials in more than 150 patients with no serious adverse events attributed to our immunotherapies.

Our Arcelis platform is focused on dendritic cells which present antigens to the attention of the human immune system, including, in particular, T-cells, and are critical to the immune system’s recognition of proteins derived from cancer cells or virus-infected cells. Dendritic cells are capable of internalizing cancer or virus protein antigens and displaying fragments of these protein antigens on their surface as small peptides. The dendritic cells then present these peptide antigens to T-cells. This allows the T-cells to bind to these peptide antigens and, in the case of cancer, kill cancer cells and, in the case of infectious disease, kill virus-infected cells to control the spread of infectious pathogens.

 

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The following graphic illustrates the processes comprising our Arcelis platform:

 

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At the clinical site.    As shown in the graphic above, the manufacture of our Arcelis-based immunotherapies requires two components derived from the patient:

 

    A disease sample: In the case of cancer, the sample consists of tumor cells, and in the case of infectious disease, the sample consists of blood containing the virus. The disease sample is generally collected at the time of diagnosis or initial treatment.

 

    Monocytes: Monocytes are a type of white blood cell, which are obtained through a laboratory procedure called leukapheresis that occurs after diagnosis and at least three weeks prior to initiating treatment with our immunotherapy.

At our centralized manufacturing facility.    The tumor cells or the blood sample and the leukapheresis product are shipped to our centralized manufacturing facility following collection at the clinical site. After receipt of these components at our facility, we take the following steps:

 

    We isolate the patient’s disease mRNA, which carries the genetic information to recreate the patient’s disease antigens, from the disease sample and amplify the mRNA so that only a small disease sample is required to manufacture the immunotherapy.

 

    Separately, we extract the monocytes from the leukapheresis product and culture them using a proprietary process to produce matured dendritic cells.

 

    We then culture the matured dendritic cells in a solution of the patient’s isolated mRNA and a proprietary synthetic CD40L RNA. We apply a brief electric pulse to the solution in a process referred to as electroporation, which enables the patient’s mRNA and the CD40L RNA to pass into, or load, the dendritic cells. The dendritic cells process the CD40L RNA into CD40L protein, enabling the dendritic cells to secrete IL-12, a cytokine required to induce and expand CD8+CD28+ memory T-cells.

 

    We then further culture the mRNA-loaded dendritic cells so that these cells allow for antigen expression from the patient’s mRNA and presentation in the form of peptides on the surface of the dendritic cells. These mature, loaded dendritic cells are formulated into the patient’s plasma that was collected during the leukapheresis to become the Arcelis-based product.

 

    After verifying the quality of the product, we then vial, freeze and ship the product to the clinic, which thaws the product and administers it to the patient by intradermal injection.

Patient treatment.    Upon injection into the skin of the patient, the mature, loaded dendritic cells migrate to the lymph nodes near the site of the injection. It is at these lymph nodes that the dendritic cells come into contact

 

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with T-cells. This interaction with the loaded dendritic cells is intended to cause a measurable increase in patient- and disease-specific memory T-cells.

We believe that our Arcelis platform allows us to create fully personalized immunotherapies capable of treating a wide range of cancers and infectious diseases using an automated manufacturing process at a cost that will be comparable to other biologics. Specifically, our Arcelis platform allows us to:

 

    produce several years of customized therapy for a patient from a small disease sample and a single leukapheresis from that patient;

 

    produce additional years of therapy for a patient at a later date without requiring an additional disease sample from the patient;

 

    use a centralized manufacturing facility for North America, which is possible because our Arcelis process can utilize monocytes obtained through leukapheresis within four days of the procedure, and doses of our immunotherapies can be shipped frozen in a cryoshipper that can maintain the target temperature for at least two weeks;

 

    cryopreserve the doses generated from the single manufacturing process for each patient in a direct injectable formulation that allows the doses to remain stable and usable for up to five years; and

 

    produce immunotherapies that can be administered by intradermal injection in an outpatient procedure.

AGS-003 for the Treatment of Metastatic Renal Cell Carcinoma and Other Cancers

We are initially developing AGS-003 for use in combination with sunitinib and other targeted therapies for the treatment of mRCC. Sunitinib is an oral small molecule drug sold under the trade name Sutent and is the current standard of care for initial treatment, or first-line treatment, of mRCC following diagnosis.

We are currently enrolling mRCC patients in a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib compared to sunitinib monotherapy that we are conducting under an SPA with the FDA. We plan to enroll approximately 450 patients in the trial. We expect to complete patient enrollment in this trial in the second half of 2014 and to have overall survival data from this trial in the first half of 2016. In addition, we have established an independent data monitoring committee that will conduct interim analyses of the data from the trial for safety and futility at such times as 25%, 50% and 75% of the required events in the trial have occurred. In April 2012, the FDA notified us that we have obtained fast track designation for AGS-003 for the treatment of mRCC. In addition, we are exploring the use of AGS-003 in non-clear cell mRCC, early stage RCC prior to and following nephrectomy and other solid tumors.

Renal Cell Carcinoma

RCC is the most common type of kidney cancer. The ACS estimates that there will be approximately 65,000 new cases of kidney cancer and nearly 14,000 deaths from this disease in the United States in 2013. The NCCN estimates that 90% of kidney cancer cases are RCC. For patients with RCC that had metastasized by the time RCC was first diagnosed, a condition referred to as newly diagnosed mRCC, the five-year survival rate has historically been approximately 12%.

ACS statistics indicate that approximately 25% of newly diagnosed RCC patients present with mRCC annually in the United States. Additional patients who were initially diagnosed with earlier stage RCC may also progress to mRCC as these patients suffer relapses. The NCCN estimates that between 20% to 30% of patients with early stage RCC will relapse within three years of surgical excision of the primary tumor. Although the NCI does not provide prevalence of RCC by stage, based on the NCCN’s three-year relapse rate, we estimate that there may be up to an additional 10,000 to 15,000 cases of mRCC identified annually in the United States. Combining newly diagnosed mRCC patients with patients who relapse, we estimate that there may be between 20,000 to 25,000

 

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new cases of mRCC in the United States each year. We estimate, based on publicly available information, including 2012 quarterly and annual reports of companies that market targeted therapies approved for mRCC, that the current worldwide mRCC market for these targeted therapies is over $2 billion.

Physicians generally diagnose mRCC by examining a tumor biopsy under a microscope. Upon evaluation of the visual appearance of the tumor cells, a pathologist will classify the mRCC into clear cell or non-clear cell types. According to the NCCN, approximately 85% of all RCC diagnoses are clear cell RCC. Because clear cell types are the most common type of tumor cell, most of the more recently approved therapies for mRCC have limited their clinical trials to patients with the clear cell type of tumor cell. However, the FDA has not limited the approval of these therapies to clear cell types of mRCC, so they may be used for both clear cell and non-clear cell types.

mRCC Patient Classification

Upon diagnosis, the prognosis for patients with mRCC is classified into three overall disease risk profiles — favorable, intermediate and poor — using objective prognostic risk factors. These risk factors were originally developed by researchers at Memorial Sloane Kettering Cancer Center and subsequently revised by Dr. Heng and contributors from the Consortium based on clinical data from patients treated with sunitinib and other targeted therapies. These risk factors, which we refer to as the Heng risk factors, have been correlated to adverse overall survival in mRCC and include:

 

    time from diagnosis to the initiation of systemic therapeutic treatment of less than one year, which is indicative of more aggressive disease. We refer to this risk factor as the less than one year to treatment risk factor;

 

    low levels of hemoglobin, a protein in the blood that carries oxygen;

 

    elevated corrected calcium levels;

 

    diminished overall patient performance status or physical functioning;

 

    elevated levels of neutrophils, a type of white blood cell; and

 

    elevated platelet count.

Patients exhibiting zero risk factors at the time of treatment are included in the favorable risk group; patients exhibiting one or two risk factors are included in the intermediate risk group; and patients exhibiting three or more risk factors are included in the poor risk group. Even when treated with standard of care therapies such as sunitinib, patients in the intermediate risk group have an expected survival of less than two years, and patients in the poor risk group have an expected survival of less than one year. In January 2013, Dr. Heng published in Lancet Oncology the following data from the Consortium database regarding overall survival of mRCC patients in these three risk groups treated with sunitinib and other targeted therapies:

 

    in 157 favorable risk patients, the median overall survival was 43 months;

 

    in 440 intermediate risk patients, the median overall survival was 22.5 months; and

 

    in 252 poor risk patients, the median overall survival was 7.8 months.

Current Treatment

The initial treatment for most mRCC patients when the primary tumor is intact is surgical removal of the tumor, usually requiring partial or complete removal of the affected kidney, referred to as nephrectomy. The NCCN generally recommends systemic treatment with approved therapies for mRCC patients following nephrectomy for patients whose tumors have metastasized or for patients who present with mRCC upon diagnosis or as a result of a relapse from an earlier stage of RCC.

 

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Historically, mRCC has been treated with non-specific, cytokine-based immunotherapies such as interferon-a and IL-2, which have demonstrated a clinical benefit in a small number of mRCC patients. However, due to their lack of specificity, these therapies have been demonstrated to have severe toxicities, which can lead to cardiopulmonary, neuropsychiatric, dermatologic, renal, hepatic and hematologic side effects and limits their use. For example, although high-dose IL-2 is the only therapy to have demonstrated durable complete mRCC remissions, its toxicity restricts its use to a small minority of patients and for a short duration.

In the past few years, several targeted therapies, such as Sutent (sunitinib), Votrient (pazopanib), Torisel (temsirolimus), Nexavar (sorafenib), Avastin (bevacizumab) plus interferon-a, Afinitor (everolimus) and Inlyta (axitinib), have been approved for the treatment of mRCC. While most of these targeted therapies have been evaluated in first-line treatment of mRCC, Sutent demonstrated a higher rate of progression free survival and overall survival in its pivotal phase 3 clinical trial than that shown by the other targeted therapies in their pivotal phase 3 clinical trials. According to Decision Resources, in 2011, Sutent was the drug of choice for more than three-quarters of hospital-based oncologists in the United States for intermediate risk mRCC patients.

Although most of these targeted therapies have demonstrated prolonged progression free survival as compared to interferon-a, they are rarely associated with durable remissions or enhanced long-term survival, particularly in patients who are classified as intermediate or poor risk at the time of treatment. In addition, each of these targeted therapies has shortcomings that limit their use in the treatment of mRCC, including significant toxicities, such as neutropenia and other hemotologic toxicities, fatigue, diarrhea, hand-foot syndrome, hypertension and other cardiovascular effects. The overlapping and combined toxicities of the targeted therapies have prevented their use in combination therapies. For instance, researchers conducting a phase 1 clinical trial of the combination of sunitinib and temsirolimus discontinued the trial due to toxicities. We believe that the inability to date to combine these therapies without additive toxicity and the absence of durable remissions and prolonged survival in patients with intermediate and poor risk disease indicates there is an unmet need for novel therapeutic approaches for mRCC that can improve efficacy without adding any appreciable toxicity.

AGS-003 Opportunity

We believe, based on the clinical results of AGS-003, that the combination of AGS-003 with sunitinib or other targeted therapies has the potential to address this unmet need for the following reasons:

 

    We believe that because the mechanism of action of AGS-003 is unrelated to the mechanism of action of sunitinib or the other targeted therapies, combining AGS-003 with these therapies has the potential to have an additive efficacy benefit.

 

    We believe that if a combination therapy with AGS-003 shows improved efficacy, the combination could be used as the standard of care for first-line treatment of mRCC in our targeted patient population.

 

    We believe that the lack of significant toxicity of AGS-003 will enable it to be combined with sunitinib and the other targeted therapies at a full dose for both therapies without added toxicity.

 

    We believe that, by following an initial cycle of sunitinib with AGS-003 in combination therapy, patients are likely to have a lower metastatic tumor burden, or at least a slowing of tumor progression, at the time of initiation of AGS-003 therapy, making it more likely that AGS-003 would have the opportunity to elicit immune responses and demonstrate an effect on the tumor.

 

    We believe that continued dosing of sunitinib, as well as certain of the other targeted therapies, decreases regulatory T-cells and myeloid-derived suppressor cells, both of which are immunosuppressive cells known to expand during cancer and suppress T-cell responses. As a result, by combining with these therapies, we believe that AGS-003 may be able to generate more potent T-cell responses.

 

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Development Status

We are conducting an ongoing pivotal phase 3 clinical trial of AGS-003. We have conducted three clinical trials of AGS-003 and its predecessor product, MB-002, which include:

 

    a phase 2 combination therapy clinical trial of AGS-003 in combination with sunitinib;

 

    a phase 1/2 monotherapy clinical trial of AGS-003; and

 

    a phase 1/2 monotherapy clinical trial of MB-002.

We submitted to the FDA an investigational new drug application, or IND, for AGS-003 in March 2003.

Phase 2 Combination Therapy Clinical Trial.    From July 2008 to October 2009, we enrolled 21 newly diagnosed mRCC patients in a single arm, multicenter, open label phase 2 clinical trial of AGS-003 in combination with sunitinib. We conducted this clinical trial at nine clinical sites in the United States and Canada. Our design for the trial required adult patients with previously untreated mRCC, no prior nephrectomy or at least one accessible lesion for biopsy, a histologically confirmed predominantly clear cell tumor, and suitability for sunitinib therapy. The primary endpoint of the trial was complete response rate. Secondary endpoints included progression free survival, overall survival, safety, clinical benefit rate and immune response.

Patients in the trial generally received one initial six-week cycle of sunitinib, consisting of four weeks on drug and two weeks on drug holiday, prior to initiating the combined treatment with AGS-003. Patients then received a dose of AGS-003 every three weeks for a total of five doses, while also continuing three additional six-week cycles of sunitinib. This 24-week induction phase was followed by a booster phase during which patients received a dose of AGS-003 once every three months and continued to receive sunitinib in six-week cycles until disease progression.

The following table summarizes certain key data from the 11 intermediate risk and 10 poor risk patients enrolled in the phase 2 combination therapy clinical trial.

 

Outcome

  

(N=21)

Median OS(1)

   30.2 months

Median PFS(2)

   11.2 months

Complete response(3)

   0 patients

Partial response(4)

   8 patients

Stable disease(5)

   5 patients

Immune response

   CD8+ CD28+ memory T-cells correlated with OS, PFS and reduced metastatic tumor burden; IL-2 and interferon-g (IFN-g) recovery

 

(1)Overall survival, or OS, is the length of time from the initiation of treatment to the patient’s death.

(2)Progression free survival, or PFS, is the length of time from treatment initiation to the worsening of the patient’s disease or the patient’s death.

(3)Complete response is the disappearance of all measurable target lesions and non-target lesions.

(4)Partial response is the overall tumor regression based on a decrease of at least 30% in the overall amount of measurable tumor mass in the body and improvement or no change in non-target lesions.

(5)Stable disease is neither sufficient decrease in tumor size to qualify as a partial response nor sufficient increase in tumor size to qualify as disease progression.

Particular observations from these data and the trial, which have informed our further clinical development of AGS-003, include:

Efficacy Analysis

 

    Seven patients survived for more than 4.5 years following enrollment in this trial. As of October 31, 2013, five of these seven patients remained alive and continued to be monitored for overall survival. Two of these patients have not progressed and continue to be dosed.

 

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    Five poor risk patients did not receive five doses of AGS-003 due to early disease progression. Median overall survival in the 16 patients who received at least five doses of AGS-003 was 36.0 months.

 

    The following graphic shows, as of October 31, 2013, the number of months that each patient in the phase 2 clinical trial survived from the time of enrollment in the trial. The five patients who remained alive as of October 31, 2013 are indicated by the arrows at the end of the bar. The five poor risk patients who did not receive five doses of AGS-003 are indicated with an “x” at the end of the bar.

Phase 2 Combination Therapy Clinical Trial of AGS-003:

Overall Survival

 

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    Of the eight patients who exhibited a partial response, five patients exhibited partial responses during the 24-week induction phase, including two patients who exhibited partial responses prior to initiation of treatment with AGS-003. The other three patients exhibited partial responses after prolonged dosing with AGS-003 during the booster phase. We do not believe that these late occurring partial responses have been observed in clinical trials of sunitinib alone. As a result, we believe that these late responses may relate to the immunologic effects of prolonged AGS-003 dosing and AGS-003’s effect on CD8+ CD28+ memory T-cells.

 

    We observed a statistically significant correlation between increased progression free survival and prolonged survival (p<0.001). Statistical significance is determined by methods that establish the p-value of the results. Typically, results are considered statistically significant if they have a p-value of 0.05 or less, meaning that there is less than a one-in-20 likelihood that the observed results occurred by chance.

 

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Immune Response Analysis

 

    In the 14 patients in the trial who received at least five doses of AGS-003 and could be evaluated for memory T-cell response, we observed a statistically significant correlation between the increase in the number of CD8+ CD28+ memory T-cells over the initial five doses of AGS-003 and survival (p<0.002), progression free survival (p<0.031) and reduced metastatic tumor burden (p<0.045). We presented at the 2013 Annual Meeting of ASCO, Genitourinary Cancers Symposium results, as of May 14, 2012, showing the correlation with survival. The following graphics show, for each of these 14 patients, the increase in their tumor-specific memory T-cells that they exhibited as measured immediately prior to their first dose of AGS-003 and immediately following the patient’s fifth dose of AGS-003, or the absence of such increase, as compared to such patient’s survival. The patient identification numbers in the graphics below correspond to the patient identification numbers in the overall survival graphic on page 95.

Phase 2 Combination Therapy Clinical Trial of AGS-003:

Correlation of Immune Response and Overall Survival

 

Increase in Tumor-Specific Memory T-cells:

Immediately Prior to First Dose Compared to Following Fifth Dose

 

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Overall Survival from Initiation of Treatment as of May 14, 2012

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    AGS-003 was found to have positive impact on immune cell function and restoration of cellular immunity in a majority of patients, including an increase in levels of IL-2 and IFN-g.

 

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Safety

 

    The adverse events in this trial associated with AGS-003 were generally only mild injection site reactions, while the toxicities associated with sunitinib were consistent with those expected from treatment with sunitinib alone.

The original design for the phase 2 clinical trial called for the recruitment of 50 patients to generate 38 fully evaluable patients. However, in October 2009, we terminated enrollment in this trial early due to a lack of funding. As a result, only 21 patients were enrolled and received at least one dose of AGS-003. In addition, the trial was originally designed to enroll patients with favorable and intermediate risk disease profiles. Instead, the actual population enrolled consisted entirely of patients with intermediate or poor risk disease profiles who had the less than one year to treatment risk factor. Because the patient population had poorer prognoses when they entered the trial than we expected and we did not have a sufficient number of evaluable patients, we did not perform the statistical analysis to determine whether the primary endpoint of complete response rate was achieved. As a result, we expect the data from this trial to be considered by the FDA for the purpose of evaluating the safety and feasibility of AGS-003, but that it will only have a limited impact on the FDA’s ultimate assessment of the efficacy of AGS-003.

Based on our experience with the phase 2 clinical trial, we concluded that the secondary endpoints in the trial, progression free survival and overall survival, along with immune response, were the appropriate endpoints to consider for measuring the efficacy of AGS-003 in combination with sunitinib in patients with mRCC in our pivotal phase 3 clinical trial.

AGS-003 Phase 2 Combination Therapy Clinical Trial, as Compared to Independent Third Party mRCC Data.    At ASCO in June 2013, Dr. Heng presented data from the Consortium database regarding overall survival and progression free survival for intermediate and poor risk patients treated with sunitinib and other targeted therapies, including data with respect to 1,189 intermediate and poor risk patients with the less than one year to treatment risk factor.

A summary comparison of the overall survival data from the Consortium database presented in June 2013 and our phase 2 clinical trial of AGS-003 in combination with sunitinib is set forth in the graphic below. This graphic compares the median overall survival data from the Consortium intermediate and poor risk patients with the less than one year to treatment risk factor with the median overall survival data from the 21 patients in our phase 2 clinical trial of AGS-003 in combination with sunitinib, all of whom had the less than one year to treatment risk factor. A majority of the Consortium patients and the patients in our phase 2 clinical trial had one or more additional risk factors.

Phase 2 Combination Therapy Clinical Trial of AGS-003:

Comparison of Median Overall Survival Data

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Progression free survival for intermediate and poor risk patients in the Consortium database with the less than one year to treatment risk factor was 5.6 months, as compared to the 11.2 months of median progression free survival that we observed in the 21 patients in our phase 2 clinical trial of AGS-003 in combination with sunitinib.

In addition, data published in the British Journal of Cancer in 2013 reported on the long-term survival of 1,059 mRCC patients treated with sunitinib as first-line or second-line therapy in six prior clinical trials of sunitinib, including the pivotal phase 3 clinical trial of sunitinib. The graphic below sets forth, with respect to the approximately 455 patients characterized as intermediate or poor risk patients in the sunitinib trial data published by the British Journal of Cancer, the percentage of patients who survived for more than 30 months from initiation of treatment and, with respect to patients in our phase 2 clinical trial of AGS-003 in combination with sunitinib, the percentage of patients who survived for more than 30 months from enrollment in the trial:

Phase 2 Combination Therapy Clinical Trial of AGS-003:

Comparison of Survival > 30 Months

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  * The data that was presented in the British Journal of Cancer included data categorized by risk profile group. The number of patients in each risk profile group was presented as a percentage of a total population of 1,059 mRCC patients. Accordingly, the 455 intermediate risk and poor risk patients referenced in this table and elsewhere in this prospectus represent an approximation based on those percentages.

Although we believe comparisons between our data and these collections of data are useful in evaluating the overall results of our phase 2 clinical trial, the treatment of the Consortium patients and the sunitinib patients was conducted at different sites, at different times and in different patient populations than the treatment in our phase 2 combination therapy trial. The treatment also differed because certain of the Consortium patients received therapies other than sunitinib and certain of the patients in the sunitinib trials received sunitinib as a second-line treatment. All of the patients in our phase 2 clinical trial received sunitinib as first-line treatment. Our ongoing pivotal phase 3 combination therapy clinical trial of AGS-003 is the first trial that we have conducted that directly compares sunitinib and AGS-003 as a combination therapy against sunitinib as monotherapy. Results of this head-to-head comparison may differ significantly from the comparisons presented above and elsewhere in this prospectus.

Phase 1/2 Monotherapy Clinical Trial.    From April 2006 through October 2008, we enrolled 22 newly diagnosed mRCC patients in a single arm, multicenter, open label phase 1/2 clinical trial of AGS-003 as monotherapy. These patients were enrolled at six sites in the United States and Canada. The trial was designed as a two-stage trial. In stage 1, we would recruit 24 patients to generate at least 18 evaluable patients, and in stage 2, we would recruit an additional 22 patients to generate at least a total of 35 evaluable patients. In order to advance to stage 2 of the trial, we were required to achieve the primary endpoint for stage 1, which was three patients with a complete or partial response. Secondary endpoints included progression free survival, overall survival, safety and immunogenicity.

 

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Our design for the trial required patients to be adults with mRCC with no prior nephrectomy, no history of prior RCC therapy and sufficient renal function in the remaining kidney. The trial was designed to enroll patients with favorable and intermediate risk disease profiles.

In the trial, patients were to be administered a dose of AGS-003 every two weeks for a total of five doses, followed by a dose of AGS-003 every month for an additional four doses during the 24-week induction phase of the trial. These doses were to be followed by booster doses every three months until disease progression. However, due to the approval of sunitinib and sorafenib at the time we were beginning to enroll patients in the trial and the resulting change in the standard of care for mRCC, we experienced delays in enrolling patients in the trial. As a result, we discontinued the trial after enrolling 22 patients and shifted our development focus for subsequent trials to AGS-003 as a combination therapy.

The following table summarizes certain key data from the nine intermediate risk and 13 poor risk patients enrolled in the phase 1/2 monotherapy clinical trial:

 

Outcome

  

(N=22)

Median OS

   15.6 months

Median PFS

   5.6 months

Complete response

   0 patients

Partial response

   1 patient

Stable disease

   7 patients

Immune response

   IL-2 and IFN-g recovery

Particular observations from these data and the trial, which have informed our further clinical development of AGS-003, include:

 

    As of October 31, 2013, one patient, who subsequently was treated with AGS-003 in combination with sunitinib, was still alive nearly eight years after initiation of AGS-003. Four other patients survived for more than 40 months following enrollment in the trial.

 

    The following graphic shows, as of October 31, 2013, the number of months that each patient in the phase 1/2 monotherapy clinical trial survived following enrollment in the trial.

Phase 1/2 Monotherapy Clinical Trial of AGS-003:

Overall Survival

 

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    Only three patients received a targeted therapy following treatment with AGS-003, which we believe indicates that the clinical benefit demonstrated in this trial was a result of AGS-003 treatment.

 

    Despite the intermediate and poor risk population, eight of the evaluable patients experienced some degree of tumor regression at one point during the induction phase of treatment with AGS-003.

 

    AGS-003 was found to have a positive impact on immune cell function and restoration of cellular immunity in a majority of patients, including an increase in levels of IL-2 and IFN-g. We did not measure CD8+CD28+ memory T-cells in this trial as, at the time this trial was conducted, the technology for monitoring CD8+CD28+ memory T-cells had not yet been developed.

 

    AGS-003 was well-tolerated, with adverse events limited to mild injection site reactions, transient flu-like symptoms and tenderness in the lymph nodes.

The graphic below compares the median overall survival data for the Consortium intermediate and poor risk patients with the less than one year to treatment risk factor with the median overall survival data from the 22 patients in our phase 1/2 clinical trial of AGS-003, all of whom had the less than one year to treatment risk factor and a majority of whom had one or more additional risk factors. A majority of the intermediate and poor risk Consortium patients also had one or more additional risk factors.

Phase 1/2 Monotherapy Clinical Trial of AGS-003:

Comparison of Median Overall Survival Data

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The graphic below shows the percentage of intermediate and poor risk patients in our phase 1/2 clinical trial who survived for more than 30 months from enrollment in the trial as compared to the percentage of sunitinib-treated intermediate and poor risk mRCC patients who survived for more than 30 months from initiation of treatment as set forth in the British Journal of Cancer report.

Phase 1/2 Monotherapy Clinical Trial of AGS-003:

Comparison of Survival > 30 Months

 

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Phase 1/2 Monotherapy Clinical Trial of MB-002.    Prior to developing AGS-003, we developed a predecessor mRNA-loaded dendritic cell drug product candidate, MB-002, for the treatment of mRCC. From April 2004 through March 2005, we enrolled 20 newly diagnosed mRCC patients in a single arm, multicenter, open label phase 1/2 clinical trial of MB-002 as monotherapy. The overall endpoints for this trial included safety, feasibility of developing and supplying patient-specific product to clinical sites from a central facility, clinical benefit, progression free survival and immunologic response. In order to achieve success for this trial, we had to demonstrate the product was safe, could be readily manufactured and supplied from a central facility, generated anti-tumor activity and had the ability to induce an immunologic response capable of restoring IL-2 and IFN-g based T-cell responses in treated patients.

This trial was designed to enroll patients with newly diagnosed mRCC, whether or not displaying symptoms, with no prior nephrectomy and with sufficient renal function in the remaining kidney. Patients with brain metastases, those who had received prior RCC therapy and those with active autoimmune disease were excluded from the trial.

In the trial, patients were administered a dose of MB-002 every two weeks for five doses, followed by a dose of MB-002 every month for four doses, during the 24-week induction phase. This dosing of MB-002 was followed by booster doses every three months until disease progression.

The following table summarizes certain key data from the 20 intermediate and poor risk patients enrolled in the phase 1/2 monotherapy clinical trial of MB-002:

 

Outcome

  

(N=20)

Median PFS

   6.3 months

Complete response

   0 patients

Partial response

   0 patients

Stable disease

   10 patients

Immune response

   IL-2 recovery only

 

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Particular observations from these data and the trial, which informed our development of AGS-003, include:

 

    Five patients in the trial, including the two patients whom we enrolled in the monotherapy rollover clinical trial described below, survived for more than 30 months from initiation of treatment.

 

    Four patients experienced some tumor regression at one point during the induction phase of treatment with MB-002.

 

    MB-002 was well-tolerated, with adverse events limited to mild injection site reactions, transient flu-like symptoms and tenderness in the lymph nodes.

 

    MB-002 was feasible to manufacture and deliver from a central facility to clinical trial sites in the United States and Canada.

 

    The immunologic response data suggested that MB-002 was only able to partially overcome the immune suppression observed in mRCC. While IL-2 recovery was observed in the majority of patients, IFN-g recovery was not observed in the majority of patients.

Because MB-002 corrected defects in the production of only one of the two critical cytokines — IL-2, but not IFN-g — required for an effective immune response, we conducted further laboratory research and developed an optimized product candidate, AGS-003. AGS-003 differs from MB-002 due to the manner in which we mature the dendritic cells and our addition of CD40L RNA in the manufacturing process. Based on in vitro experiments that simulate immunization in the laboratory, we observed that AGS-003 could overcome both critical cytokine defects in RCC patient cells and fully restore immune response. We subsequently confirmed this observation in vivo in the phase 1/2 monotherapy clinical trial of AGS-003 and in the phase 2 combination therapy clinical trial of AGS-003 and sunitinib.

In 2006, we enrolled two of the intermediate risk patients who had completed dosing in the phase 1/2 monotherapy clinical trial of MB-002 and who had experienced at least two years of stable disease in a separate, open label rollover trial of AGS-003 monotherapy. As this trial was an extension trial and observational in nature, the endpoints for this trial consisted of continued safety assessments and immunologic assessments to denote any differences between MB-002 and AGS-003. In this trial, the two patients received an induction phase of AGS-003 doses, followed by continued booster doses, consistent with the AGS-003 dosing schedule in the phase 1/2 monotherapy clinical trial of AGS-003, and were treated with AGS-003 for an additional four and 4.25 years, respectively, until disease progression occurred. One patient survived for 7.8 years, and the second patient had survived for more than eight years as of August 2012.

Ongoing and Planned Clinical Development

Pivotal Phase 3 Combination Therapy Clinical Trial.    We are currently conducting a pivotal phase 3 clinical trial of AGS-003 in combination with sunitinib for the treatment of newly diagnosed mRCC under an SPA with the FDA. We refer to this trial as the ADAPT trial. We initiated the ADAPT trial in January 2013 and dosed the first patient in May 2013.

We have designed this trial to be a randomized, multicenter, open label trial of AGS-003 in combination with sunitinib compared to sunitinib monotherapy. We plan to enroll approximately 450 patients in the trial to generate 290 events for the primary endpoint of overall survival. We plan to enroll these patients at approximately 130 clinical sites in North America and Europe. Under the trial protocol, these patients will be randomized between the AGS-003 – sunitinib combination arm and the sunitinib monotherapy control arm on a two-to-one basis. We expect to complete enrollment of this clinical trial in the second half of 2014 and to have data from this trial in the first half of 2016. We have established an independent data monitoring committee that will conduct interim analyses of the data from the trial for safety and futility at such times as 25%, 50% and 75% of the required events in the trial have occurred.

 

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We have designed this trial with a primary endpoint of overall survival. Secondary endpoints include progression free survival, overall response rate and safety. In order to achieve the primary endpoint, results from the trial must demonstrate an increase of approximately six months in median overall survival for the AGS-003 plus sunitinib arm compared to the sunitinib monotherapy arm. Such a result would be statistically significant (p £ 0.05).

Our design for this trial requires adult patients who have been newly diagnosed with mRCC with primary tumor intact and metastatic disease following nephrectomy, who have predominantly clear cell RCC based upon the tumor collected at nephrectomy and who have not received any prior therapies for RCC. Participating patients must be suitable candidates for sunitinib therapy and possess poor risk or intermediate risk disease at presentation, with the less than one year to treatment risk factor and not more than four Heng risk factors in total. As part of the trial design, the two arms of the trial will be balanced based upon known prognostic risk factors. Patients who are randomized will be stratified by number of risk factors (1, 2, 3 or 4) as well as whether they have measurable versus non-measurable metastatic disease following nephrectomy. We expect the patient population in the pivotal phase 3 clinical trial to be generally comparable to the patient population treated in our phase 2 combination therapy clinical trial. However, due to the limit on risk factors provided for by the protocol for the phase 3 clinical trial, we expect that the proportion of patients in the phase 3 clinical trial who are characterized as poor risk will be lower in the phase 3 clinical trial than in the phase 2 clinical trial.

Under the trial protocol, patients in the AGS-003-sunitinib arm are dosed with AGS-003 once every three weeks for five doses, followed by a booster dose every three months. In accordance with its label, sunitinib dosing is administered in six-week cycles, consisting of four weeks on drug and two weeks on drug holiday. AGS-003 dosing is initiated at the end of the initial six-week sunitinib cycle. The first dose of AGS-003 is administered prior to the start of sunitinib dosing in the second sunitinib cycle. This dosing regimen is identical to the dosing regimen used in our phase 2 combination therapy clinical trial of AGS-003 and sunitinib, except that the start of the sixth dose is scheduled for week 24 to better provide patients the opportunity to receive a total of eight doses across 48 weeks. Patients in the sunitinib monotherapy control arm receive sunitinib on the same dosing schedule as patients receive sunitinib in the AGS-003-sunitinib combination arm.

Under the trial protocol, AGS-003 is administered for at least 48 weeks so that patients receive at least eight doses of AGS-003. Dosing will cease prior to 48 weeks if two events of disease progression or unacceptable toxicity occur or upon the joint decision of the patient and the investigator. If after 48 weeks of dosing of AGS-003, a patient has stable disease or is responding to treatment, dosing will continue once every three months until disease progression. If an investigator determines to discontinue sunitinib, either due to disease progression or toxicity, the investigator can, at any time during the trial after the first six week cycle of sunitinib, initiate second-line therapy with one of the other approved targeted therapies, including pazopanib, axitinib, everolimus or temsirolimus. In the event of discontinuation of sunitinib for patients in the combination therapy arm, such patients would continue with AGS-003 dosing in combination with the second-line therapy. In our phase 2 combination therapy clinical trial, dosing ceased upon the first event of disease progression and second-line therapy was not permitted.

 

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A graphic of the trial design is shown below.

Phase 3 Clinical Trial of AGS-003

 

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Other Development Activities.    We believe that AGS-003 may be capable of treating a wide range of cancers and are planning to evaluate AGS-003 in clinical trials in additional cancer indications.

 

    We plan to conduct an open label phase 2 clinical trial of AGS-003 in patients with mRCC and non-clear cell histology, which we expect to begin in the first half of 2014. In the trial, we plan to evaluate the safety, efficacy and immunologic effects of AGS-003 when combined with surgery and targeted therapy in approximately 30 to 40 patients.

 

    We plan to support two investigator-initiated phase 2 clinical trials, which are designed to evaluate treatment with AGS-003 in patients with early stage RCC prior to and following nephrectomy. We expect that these trials will begin in the first half of 2014 and be conducted in between 40 and 60 patients in total across the two trials.

 

    We plan to initiate in 2014 two additional clinical trials of AGS-003 in other solid tumor types, such as non-small cell lung cancer and head and neck cancer.

AGS-004 for the Treatment of Human Immunodeficiency Virus

We are developing AGS-004, our second Arcelis-based product candidate, for the treatment of HIV. We have completed two early stage clinical trials of AGS-004. In addition, in September 2013, we completed patient enrollment in a phase 2b clinical trial of AGS-004 and expect to have data from the trial in the second quarter of 2014. The NIH is funding the phase 2b clinical trial under a $39.3 million contract awarded to us in 2006.

Based on the clinical data that we have generated to date, we have determined to focus our development program on the use of AGS-004 in combination with other therapies to achieve complete virus eradication and the use of AGS-004 monotherapy to provide long-term control of HIV viral load in immunologically healthy patients and eliminate the need for antiretroviral drug therapy. We plan to initiate phase 2 clinical trials of AGS-004 for each of these uses in 2014.

Human Immunodeficiency Virus

HIV is characterized by a chronic viral infection and an associated deterioration of immune function. Specifically, the virus disables and kills crucial human immune cells called CD4+ T-cells. CD4+ T-cells are

 

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necessary to generate and maintain antiviral T-cells, including the CD8+CD28+ memory T cells that kill virus-infected cells. Over time, this viral impact on an infected person’s immune system outpaces the body’s natural ability to replace CD4+ T-cells and immunodeficiency results. As a result, the longer a person has been infected with the virus, the more functionally impaired these cells become.

At the same time, HIV infection causes the immune cells in HIV patients, including CD4+ T-cells and CD8+ T-cells, that are not killed by the virus to be in a chronic state of activation. The persistent state of immune activation in HIV patients results in chronic inflammation. We believe that this inflammation plays a role in the elevated rates of age-related comorbidities, including malignancies and cardiovascular disease observed in HIV patients. In addition, the activation of the CD4+ T-cells supports virus replication which leads to the production of new virus and increased viral load.

HIV is a persistent virus that can rapidly adapt to its environment by mutating and creating HIV variants that are drug resistant and can evade immune attack. As a result, there are a large number of mutated variants of HIV existing in any one infected individual and no two individuals have identical viral sequences.

According to the World Health Organization, the number of people living with HIV in the world was approximately 34 million in 2011. The Centers for Disease Control and Prevention estimates that more than 1.1 million people are currently living with HIV in the United States and the number of new cases of HIV infection in the United States is expected to remain constant at approximately 50,000 cases per year.

Current treatments for HIV.    In 1996, a combination of oral medications known as antiretroviral therapy was introduced to treat patients with HIV. Since then, the introduction of new drug classes of antiretroviral therapy and combination drug treatment strategies has enhanced treatment for HIV. According to Datamonitor, sales of antiretroviral therapies in the United States and the five biggest European markets reached $13.3 billion in 2011.

Antiretroviral therapy in HIV-infected patients can decrease levels of HIV in the blood to below the limits of detection, increase life expectancy and improve quality of life. However, there continues to be an unmet need for HIV therapies for the following reasons:

 

    Antiretroviral therapy can have significant side effects. The most recent U.S. guidelines on antiretroviral treatment contain a number of tables of adverse effects of combination regimens and how to manage them. Some combinations present potentially life-threatening complications and other complications that are chronic, cumulative and overlapping, and sometimes irreversible.

 

    Antiretroviral therapy requires life-long daily treatment. The risks of long-term daily administration of antiretroviral therapy remain unknown but are potentially significant. In addition, the requirement for life-long daily treatment has made strict adherence to the treatment regime difficult. Poor compliance has led to the development of drug resistant HIV variants that are ineffectively controlled by the available armamentarium of antiretroviral therapies.

 

    Antiretroviral drug therapy cannot eradicate the virus and, therefore, does not cure HIV-infected patients. For example, up to 20% of patients receiving antiretroviral drug therapy fail to achieve normal CD4+ T-cell counts, resulting in a continued weakened immune system. In addition, certain patients are not able to achieve effective control of the virus using current treatment regimens. Antiretroviral therapy cannot eradicate the virus because the virus persists in latently infected cells. These cells, which constitute the HIV latent reservoir, do not express HIV antigens and are therefore invisible to the immune system. Instead, these cells serve as the source for virus replication and viral rebound in the absence of antiretroviral therapy. Following discontinuation of treatment with antiretroviral drug therapy, HIV viral levels return to levels observed prior to treatment with antiretroviral therapy within 12 weeks of treatment interruption.

 

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AGS-004 Opportunity

We believe, based on the mechanism of action of AGS-004 and the clinical data that we have generated, that AGS-004 has the potential to address this unmet need for the following reasons:

 

    Potential to Eradicate HIV in Combination with Latency Reversing Drugs.    A number of companies and academic groups are evaluating drugs that can potentially activate the latently infected cells to increase viral antigen expression and make the cells vulnerable to elimination by the immune system. We believe that treating HIV-infected patients, who are being successfully treated with antiretroviral drug therapy, with a combination of AGS-004 and one of these latency reversing drugs could lead to activation of antigen expression from the latently infected cells along with a potent memory T-cell response that is specific to the patient’s own unique viral antigens. We believe that this approach could potentially result in complete eradication of the patient’s virus.

 

    Long-Term Viral Load Control in Immunologically Healthy Patients.    We believe that AGS-004 may allow for long-term virus control and eliminate the need for life-long treatment with antiretroviral drug therapy in infected patients who have minimal immune suppression but no T-cell response against their virus. We have designed AGS-004 to induce CD8+ CD28+ memory T-cells that are specific to the patient’s own unique viral antigens, do not require CD4+ T-cell help to kill viral cells and do not result in CD4+ T-cell activation which typically increases viral replication and viral load. As reported in Clinical & Experimental Immunology, researchers have demonstrated that elevated levels of CD8+CD28+ memory T-cells in the blood are a statistically significant predictor of long-term non-progression in HIV-infected patients not treated with antiretroviral therapy drugs. As a result, we believe that inducing these memory T-cells may lead to viral control. Patients with minimal immune suppression and no T-cell response include pediatric patients who have been successfully treated with antiretroviral drugs since birth or shortly thereafter and have generally healthy immune systems.

 

    Minimal Toxicity.    AGS-004 has been well tolerated in clinical trials with no serious adverse events being attributed to it. As a result, we believe we can combine AGS-004 with other HIV therapies without additional toxicities.

 

    Lack of Chronic Inflammation.    We have designed AGS-004 to elicit a patient-specific and disease-specific immune response that does not cause any additional inflammation. In a retrospective analysis of our phase 1 clinical trial of AGS-004, we observed that AGS-004 did not induce changes in markers that are associated with chronic inflammation in HIV patients.

Description and Development Status

AGS-004 is a fully personalized immunotherapy based on our Arcelis platform. It is produced by electroporating dendritic cells with mRNA encoding for patient-specific HIV antigens that have been derived from a patient’s virus-infected blood and with RNA that encodes the CD40L protein. The process for producing AGS-004 is the same process as is used to produce AGS-003, with the one key difference being that AGS-003 contains all of the antigens from a patient’s tumor cells while AGS-004 contains all variants unique to each individual patient of four selected HIV antigens (Gag, Nef, Vpr and Rev). We designed AGS-004 to include these antigens because immunity to them has been observed in long-term non-progressors and elite controllers, two groups of rare patients able to control virus replication without antiretroviral drug therapy. Because no two patients share identical HIV antigen sequences and there are a large number of mutated variants of HIV existing in each infected patient, by using mRNA that is specific to the patient’s virus and that captures all of the unique patient-specific variants of each antigen, we believe our immunotherapy maximizes the relevance of the immune responses induced in each patient.

 

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We are conducting a phase 2b clinical trial of AGS-004. We have conducted two earlier stage clinical trials of AGS-004, which include:

 

    a phase 2a clinical trial of AGS-004; and

 

    a phase 1 clinical trial of AGS-004.

We submitted to the FDA an IND for AGS-004 in August 2008.

Phase 2a Clinical Trial.    From 2008 to 2009, we enrolled 29 patients in a single arm, multicenter, open label phase 2a clinical trial of AGS-004. These patients were enrolled at eight clinical sites in Canada. Eight of these 29 patients had previously participated in our phase 1 clinical trial of AGS-004. We refer to these patients as rollover patients.

Despite treatment with antiretroviral drug therapy, HIV persists in latently infected cells, and following discontinuation of treatment, HIV viral levels return to levels observed prior to treatment with antiretroviral therapy. We designed the trial in this context to assess the ability of AGS-004 to control viral load after interruption of antiretroviral drug therapy and to prevent viral load levels from returning, following discontinuation of treatment, to pre-antiretroviral treatment levels. We believe that the data from the trial demonstrate that AGS-004 can lead to a reduction in virus replication by targeting and eliminating cells that produce new virus.

The primary endpoint of the phase 2a clinical trial was a measurement of the ability of AGS-004 to improve immune control of HIV as measured by the proportion of patients capable of maintaining a minimal HIV viral load of less than 1,000 copies/mL and CD4+ T-cell counts above 350 cells/mm3 on at least three time points during a 12-week antiretroviral treatment interruption. FDA guidelines recommend initiation of antiretroviral drug therapy for patients with a CD4+ T-cell count below 350 cells/mm3. Secondary endpoints included safety, change in viral load from pre-antiretroviral therapy to the end of the antiretroviral treatment interruption and changes in CD4+ T-cell counts.

To be included in this trial, patients had to be adults with chronic HIV-1 infection and undetectable viral loads as a result of their ongoing treatment with antiretroviral drug therapy. Patients must also have had adequate CD4+ T-cell counts and a pre-antiretroviral therapy plasma viral sample to be used to manufacture AGS-004.

Patients initially received four monthly doses of AGS-004, together with their antiretroviral therapy. After receiving those doses, antiretroviral therapy, or ART, was discontinued and patients entered into a planned 12-week antiretroviral treatment interruption period, which is referred to as a structured treatment interruption, or STI. During the 12-week treatment interruption period, two additional monthly doses of AGS-004 were administered. Patients who maintained plasma viral loads under 10,000 copies/mL and CD4+ T-cell counts above 350 cells/mm3 were eligible to remain off of antiretroviral therapy beyond the 12-week treatment interruption period and receive up to two additional booster doses of AGS-004 at eight weeks after the second monthly dose administered during STI and at 12 weeks after the first booster dose. A graphic of the trial design is shown below:

Phase 2a Clinical Trial Design

 

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Outcomes regarding viral load control

In the trial, 24 patients entered into the antiretroviral treatment interruption period in accordance with the trial protocol. The trial protocol specified that only patients with CD4+ T-cell counts above 450 cells/mm3 and undetectable viral loads were eligible to enter the antiretroviral treatment interruption period. The five patients who did not enter the treatment interruption period according to the trial protocol had CD4+ T cell counts below 450 cells/mm3.

AGS-004 achieved the primary endpoint of the trial as eight patients maintained HIV viral loads of less than 1,000 copies/ml and CD4+ T-cell counts greater than 350 cells/mm3 during at least three time points measured two weeks apart during the antiretroviral drug treatment interruption period.

In addition, 17 of the 24 patients who entered into the treatment interruption period in accordance with the trial protocol maintained a reduction in their levels of viral load compared to their pre-antiretroviral therapy viral load levels. We believe that change in viral load from pre-antiretroviral therapy to the end of antiretroviral treatment interruption was the most relevant endpoint in the trial to our plans to develop AGS-004 for the eradication of HIV.

The graphic below shows the change in viral load from immediately prior to the commencement of antiretroviral therapy for all 24 patients who entered the 12-week treatment interruption phase of the trial. For patients who did not complete the 12-week treatment interruption phase, the last viral load measurement prior to the patient restarting antiretroviral therapy was used for the calculation.

Phase 2a Clinical Trial:

Change in Viral Load at Antiretroviral Therapy Restart or Completion of 12-week Treatment

Interruption for All Patients Entering Antiretroviral Treatment Interruption per Protocol

 

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The patients who entered the treatment interruption period in accordance with the trial protocol had a mean reduction of 81% in viral load after completion of 12 weeks of antiretroviral drug interruption or prior to restart of antiretroviral therapy compared to their viral loads measured before the initiation of antiretroviral drug therapy. The mean reduction in the four rollover patients who entered the 12-week antiretroviral treatment interruption in accordance with the trial protocol was 97%. Based on the results in the rollover patient subgroup, we believe that administration of more than four doses of AGS-004 prior to antiretroviral treatment interruption may lead to better viral load control after cessation of antiretroviral treatment.

 

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In addition, we measured CD4+ T-cell count as a secondary endpoint in the trial. Of the 24 patients entering the 12-week antiretroviral treatment interruption, 21 patients maintained CD4+ T-cell counts above 350 cells/mm3 and completed 12 weeks of treatment interruption.

Safety analysis

In this trial, AGS-004 was safe and well tolerated. No AGS-004-related serious adverse events were reported. The most common adverse event was mild injection site reactions. During the antiretroviral treatment interruption, no notable differences in incidence of adverse events occurred compared to when patients were receiving AGS-004 in combination with antiretroviral drug therapy.

Retrospective analysis regarding impact on HIV latent reservoirs

Latently infected cells differ from other infected cells in that the HIV genome is permanently integrated into the chromosomal DNA of the latently infected cells. These latently infected cells persist long-term and constitute the HIV latent reservoir, which serves as a source for low level virus replication and viral rebound in the absence of antiretroviral therapy. As a result, demonstration that latently infected cells can be targeted by immune responses induced by AGS-004 is essential to our development strategy pertaining to virus eradication.

Following the phase 2a clinical trial, we conducted a retrospective analysis of the effect of AGS-004 on cells harboring chromosomally integrated HIV DNA. We conducted this analysis in the 20 patients from the trial who had blood cells available prior to AGS-004 treatment and after the first four monthly doses of AGS-004 during continuous antiretroviral therapy. In the analysis, we observed that although the impact of AGS-004 on CD4+ T-cells with integrated HIV DNA in the 20 patient population was not statistically reduced, in the five rollover patients we analyzed, there was an average of a 23.3% reduction in CD4+ T-cells with integrated HIV DNA from the first measurement to the final dose of AGS-004. We believe that these data may indicate that administering more doses of AGS-004 during antiretroviral drug therapy may result in more efficient targeting of latently infected cells, a desirable property for our development strategy regarding eradication.

Phase 1 Clinical Trial.    From 2006 to 2007, we enrolled ten patients in a first-in-man single arm, single center, open label phase 1 clinical trial of AGS-004. The primary endpoint of this trial was the ability of AGS-004 to generate anti-HIV CD8+ CD28+ memory T-cell responses. The secondary endpoint was the safety of AGS-004 in combination with antiretroviral therapy. The inclusion and exclusion criteria were substantially similar to those for the phase 2a clinical trial of AGS-004. In the trial, patients received four doses of AGS-004 one month apart. This trial met its predefined endpoint of demonstrating CD8+ CD28+ memory T-cell responses against multiple HIV antigens in four of the nine patients whose materials were available for testing. AGS-004 was well-tolerated, with adverse events limited to mild injection site reactions, transient flu-like symptoms and tenderness in the lymph nodes.

Following completion of the phase 1 clinical trial, we completed a retrospective analysis of the contribution of AGS-004 to chronic inflammation using archived blood samples collected from patients during this trial. In this analysis, we assessed changes in CD4+ T-cells and CD+8 T-cells and analyzed the levels of immune activation based on markers for proliferation and cell activation before and after AGS-004 administration. This analysis showed that AGS-004 did not induce changes in the proportion of CD4+ and CD8+ T-cells compared to levels of such T-cells measured prior to AGS-004 administration and did not cause any elevation in systemic T-cell immune activation. We believe that these data indicate that AGS-004 is capable of inducing antiviral immune responses without an associated increase in markers associated with chronic inflammation.

Ongoing and Planned Clinical Development

Phase 2b Clinical Trial.    We are conducting a randomized, placebo controlled, double blind phase 2b clinical trial of AGS-004 in chronically infected patients on antiretroviral therapy that we initiated in July 2010. We designed this trial to confirm the data obtained in the phase 2a clinical trial. In September 2013, we completed patient enrollment in the phase 2b clinical trial. We initially planned to enroll 42 chronically infected patients in

 

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the trial at nine clinical sites in the United States and Canada with the intent to generate 36 events for the primary endpoint analysis. However, due to a higher than anticipated dropout rate by patients who were unable to complete the full 12 week treatment interruption period, we needed to enroll 53 patients in the trial to generate 36 events for the primary endpoint analysis. These patients were randomized between AGS-004 treatment and a placebo control on a two-to-one basis. We expect to have data from the trial in the second quarter of 2014.

HIV infection is classified as “chronic” or “acute” based on how long the patient has been infected prior to starting antiretroviral drug therapy. Patients with chronic HIV infection are patients who have initiated antiretroviral drug therapy after at least six months from the time of initial infection. Patients with acute HIV infection are patients who have initiated antiretroviral drug therapy less than 45 days after initial infection. This trial enrolled adult patients with chronic HIV-1 infection and undetectable viral loads as a result of treatment with antiretroviral drug therapy. Patients also had to have adequate CD4+ T-cell counts and a pre-antiretroviral therapy plasma viral sample to be used to manufacture AGS-004.

In this trial, patients first receive intradermal doses of AGS-004 or placebo every four weeks for a total of four doses, together with their antiretroviral therapy. Following the fourth dose of AGS-004 or placebo, patients discontinue their antiretroviral therapy but continue to receive AGS-004 or placebo every four weeks for 12 weeks. Patients who demonstrate control of viral replication under 10,000 copies/ml and maintain CD4+ T-cell counts above 350 cells/mm3 can remain off antiretroviral therapy and continue their treatment interruption past 12 weeks. Following the end of treatment interruption, all patients are eligible for continued treatment with the combination of AGS-004 and antiretroviral therapy. A schematic of the trial design is shown below.

Phase 2b Study Design for the Chronically Infected Cohort

 

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The primary endpoint of the trial is a comparison of the median viral load in the AGS-004-treated patients with the median viral load in patients receiving placebo after 12 weeks of antiretroviral treatment interruption. The primary endpoint will be achieved if there is a ³1.1 log 10 difference in median viral load between the AGS-004-treated cohort compared to the placebo-treated cohort. A 1.1 log 10 reduction means a 92% lower virus concentration in the AGS-004-treated cohort compared to the placebo-treated cohort. Secondary endpoints include comparisons between AGS-004-treated patients and the patients receiving placebo with respect to change in viral load from pre-antiretroviral therapy to the end of 12 weeks of treatment interruption, duration of treatment interruption, changes in CD4+ T-cell counts and safety.

In September 2011, we modified the protocol of the phase 2b clinical trial to add to the trial a single arm, open-label, unblinded cohort of 12 patients with acute HIV-1 infection and undetectable viral loads as a result of treatment with antiretroviral drug therapy. Patients in this cohort are being dosed in the same manner as patients in the chronically infected arm of the clinical trial. However, in this cohort, patients have to demonstrate a positive CD8+ CD28+ anti-HIV memory T-cell response in order to become eligible to enter the 12 week treatment interruption period. The primary endpoints for this cohort include the time to detectable viral load during the antiretroviral therapy interruption period and comparison of changes in CD4+ T-cell counts during the antiretroviral therapy interruption period between the acute cohort and the chronic cohort.

 

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We are evaluating AGS-004 in this patient population to assess AGS-004 in patients who initiated antiretroviral drug therapy during the acute phase of infection and as a result may have sustained less immune damage. We believe that the results from this cohort will provide us with valuable information as we seek to advance our program to develop AGS-004 for long-term control of HIV viral load in immunologically healthy patients and eliminate the need for antiretroviral drug therapy.

Planned Adult Eradication Trial.    We plan to initiate in the second half of 2014 a phase 2 clinical trial of AGS-004 in adult HIV patients who are being treated with antiretroviral drug therapy to evaluate the use of AGS-004 in combination with a latency reversing drug to eradicate the virus. We are currently developing the clinical protocol for this trial with Dr. David Margolis, Professor of Medicine at the University of North Carolina and leader of the Collaboratory of AIDS Researchers for Eradication, or CARE, who has been a pioneer in the research of HIV latent reservoir reversing treatments.

Planned Pediatric Functional Cure Trial.    We believe that a patient population that could benefit from AGS-004 monotherapy consists of 14+ year old, HIV-infected individuals who have been treated with antiretroviral therapy since birth or shortly thereafter. These individuals are characterized by having very small HIV latent reservoirs and otherwise healthy immune systems, while lacking antiviral CD8+ CD28+ memory T-cell responses. We believe that successfully inducing antiviral CD8+ CD28+ memory T-cell responses in these patients could allow for long-term viral load control and eliminate the need for life-long antiretroviral therapy. We plan to initiate in the first half of 2014 a phase 2 clinical trial of AGS-004 in pediatric HIV patients to evaluate the use of AGS-004 monotherapy to allow for long-term control of viral load and eliminate the need for antiretroviral therapy. We are currently developing the clinical protocol for this trial to immunize pediatric HIV patients who were infected at birth and treated with antiretroviral therapy at or near birth. We are developing this clinical protocol in collaboration with Drs. Katherine Luzuriaga, University of Massachusetts, and Deborah Persuad, John Hopkins Medical Center, both specializing in pediatric virology.

NIH Contract.    Our development of AGS-004 has received significant funding from the U.S. federal government. In September 2006, we entered into a multi-year research contract with the NIH and the National Institute of Allergy and Infectious Diseases, or NIAID, to design, develop and clinically test an autologous HIV immunotherapy capable of eliciting therapeutic immune responses. We are using funds from this contract to develop AGS-004. Under this contract, as it has been amended, the NIH and the NIAID have committed to fund up to $39.3 million, including reimbursement of our direct expenses and allocated overhead and general and administrative expenses of up to $37.9 million and payment of specified amounts totaling up to $1.4 million upon our achievement of specified development milestones. This commitment extends until September 2015.

We have agreed to a statement of work under the contract, and are obligated to furnish all the services, qualified personnel, material, equipment, and facilities, not otherwise provided by the U.S. government, needed to perform the statement of work. In accordance with the laws applicable to government intellectual property rights under federal contracts, we have a right under our contract with the NIH to elect to retain title to inventions conceived or first reduced to practice under the NIH contract, subject to the right of the U.S. government to a royalty-free license to practice or have practiced for or on behalf of the United States the subject invention throughout the world. The government also has special statutory “march-in” rights to license or to require us to license such inventions to third parties under limited circumstances. In addition, we may not grant to any person the exclusive right to use or sell any such inventions in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

Other Programs

In addition to our development of AGS-003 and AGS-004 and our Arcelis-based platform, we are also developing AGS-009, a monoclonal antibody, for the treatment of systemic lupus erythematosus, or lupus, a chronic and disabling autoimmune disorder, and AGS-010, a recombinant human soluble CD83 protein, for organ and tissue transplantation and the treatment of autoimmune and inflammatory diseases. We discovered

 

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AGS-009 through our dendritic cell biology research. AGS-010 is the result of our research efforts into how the ability to turn off specific undesirable immune responses can have a therapeutic effect on all immune mediated diseases, including transplant rejection and autoimmune and inflammatory diseases. We plan to seek third party funding to fund the further development of AGS-009 and AGS-010.

Manufacturing

We currently manufacture our Arcelis-based products, AGS-003 and AGS-004, for use in our clinical trials of those product candidates at our facility in Durham, North Carolina. Our facility includes manufacturing suites for the production of products using our Arcelis technology platform. We have designed these suites to comply with the FDA’s current good manufacturing practice, or cGMP, requirements. We have manufactured the product for our development and clinical trial activities associated with AGS-003 and AGS-004 to date, and are manufacturing the product for our pivotal phase 3 combination therapy trial of AGS-003 using our current processes at our current facility. In order to produce AGS-003 on a commercial scale, we will require a full scale manufacturing facility and updated processes. Accordingly, we plan to establish automated manufacturing processes based on existing functioning prototypes of automated devices, to identify and lease suitable space for a new commercial manufacturing facility and build out and equip the new facility for manufacture of our Arcelis-based products. As part of our BLA for AGS-003, we will need to demonstrate analytical comparability between AGS-003 that we produce using our current processes in our current facility and AGS-003 produced using the automated processes in our planned new facility.

We are actively exploring potential sites and financing arrangements in connection with the lease, build out and equipping of a commercial manufacturing facility and are in discussions with developers and governmental authorities regarding potential sites and financial support. We expect to enter into arrangements that include financial support, and we expect such arrangements will likely involve material obligations and debt liabilities.

Commercial Manufacturing Facility and Automated Process.    We plan to establish automated manufacturing processes based on existing functioning prototypes of automated devices for the production of commercial quantities of our Arcelis-based product. These devices can be used to perform all steps required for the manufacture of our Arcelis-based product candidates. We intend to identify and lease suitable space for the build-out and equipping of a new commercial manufacturing facility for the manufacture of AGS-003, AGS-004 and other Arcelis-based products.

We plan to implement the automated processing in a modular manufacturing system in the new commercial facility. The modular facility design allows for expansion of the commercial capacity in line with the market demand of our product candidates. We believe that this modular approach will require less capital investment at product launch as manufacturing capacity can be increased incrementally as product demand increases after commercialization. We believe the modular manufacturing approach is optimal for personalized immunotherapies and allows for scalable capacity, minimizes facility size and complexity at launch, and results in a lower cost of goods for the commercial product.

In the new facility, we plan to use the automated equipment to perform Arcelis product processing in closed, single-use disposable containers. A patient’s disease sample would only be in contact with these disposable sets or containers and not with the balance of our manufacturing equipment. Because our equipment would never be in direct contact with patient material, we believe that the time required to prepare the equipment between batches would be minimal. We also believe that automated processing of material in disposable containers will reduce the complexity and size of the facility by reducing the amount of required labor. We expect that automation will help ensure consistency of the manufacturing processes and facilitate compliance with cGMP.

Prior to implementing automated manufacture of AGS-003, we will be required to demonstrate that the new facility and the automated equipment are constructed and operated in accordance with cGMP and the comparability between AGS-003 that we produce using the manual processes in our current facility and AGS-003 produced using the automated processes in our new facility. We anticipate that it will require approximately two years from the time we begin the build out to build out and equip the facility to a level

 

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necessary to file a BLA for AGS-003 with the FDA using the automated manufacturing processes. Following the filing of a BLA, we would need to further build out and equip the facility so as to have in place the commercial capacity that we anticipate will be required for commercial launch of AGS-003.

In addition to providing commercial scale manufacturing of AGS-003, we believe that this facility and automated process will provide us key advantages, including:

 

    centralized manufacturing capable of delivering products to clinical sites throughout North America;

 

    an automated manufacturing platform that is scalable for large disease indications such as HIV and other cancer indications; and

 

    manufacturing with a cost of goods that we expect will be comparable to other biologics and methods that are scalable, consistent and broadly applicable across patients and indications.

Sales and Marketing

We hold exclusive commercial rights to all of our product candidates in all geographies other than rights to AGS-003 in Russia and the other states comprising the Commonwealth of Independent States, which are held by Pharmstandard, and rights to AGS-003 in South Korea, which are held by Green Cross. We have granted to Medinet a license to manufacture in Japan AGS-003 for the treatment of mRCC and an option to acquire a license to sell in Japan AGS-003 for the treatment of mRCC. We currently intend to retain North American marketing rights for AGS-003 and any future oncology products that we may develop. To maximize the value of these rights, we would expect to build a commercial infrastructure for such products comprised of a targeted specialty sales force led by several sales management personnel, an internal marketing and medical affairs staff and a specialty distribution team. Our sales infrastructure would also include personnel to establish and direct reimbursement activities with third party payors, such as managed care organizations, group purchasing organizations, oncology group networks and government accounts. We plan to hire selected personnel to fill key positions in advance of the approval of AGS-003. We currently have no sales and marketing or distribution capabilities or in-house personnel specializing in these functions. Outside North America, we plan to seek to enter into collaboration agreements with other pharmaceutical or biotechnology firms to commercialize AGS-003.

For AGS-004, we plan to seek to enter into collaboration agreements with other pharmaceutical or biotechnology firms to commercialize this product candidate on a worldwide basis.

Competition

The biotechnology and pharmaceutical industries are highly competitive. There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engaged in the research and development of products that may be similar to or competitive with our products. There are a number of multinational pharmaceutical companies and large biotechnology companies currently marketing or pursuing the development of products or product candidates targeting the same indications as our product candidates. It is probable that the number of companies seeking to develop products and therapies for the treatment of unmet needs in these indications will increase. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approaches, and others are based on entirely different approaches.

Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render our product candidates obsolete or non-competitive. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. We expect any products that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, the level of generic competition and the availability of reimbursement from government and other third party payors.

 

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mRCC

Historically, mRCC was treated with chemotherapy, radiation and hormonal therapies, as well as cytokine-based therapies such as interferon-a and IL-2. More recently, the FDA has approved several targeted therapies as monotherapies for mRCC, including Nexavar, marketed by Bayer Healthcare Pharmaceuticals, Inc. and Onyx Pharmaceuticals, Inc., Sutent and Inlyta, marketed by Pfizer, Inc., Avastin, marketed by Genentech, Inc., a member of the Roche Group, and Votrient, marketed by GlaxoSmithKline. Other recently approved targeted therapies for the treatment of mRCC are Torisel, marketed by Pfizer, and Afinitor, marketed by Novartis Pharmaceuticals Corporation. We believe that each of these existing therapies has efficacy or safety limitations and, as a result, that there remains an unmet need for novel therapeutic approaches for mRCC that can improve efficacy without adding appreciable toxicity. We believe that the safety profile that AGS-003 has demonstrated to date, which may enable it to be used in combination with these therapies with little or no additional toxicities, gives AGS-003 the potential to address this unmet need. Accordingly, existing therapies with which AGS-003 would be used as part of a combination would not be competitive with AGS-003. However, a standalone therapy for mRCC that demonstrated improved efficacy over currently marketed therapies with a favorable safety profile and without the need for combination therapy might pose a significant competitive threat to AGS-003.

Immatics Biotechnologies GmbH is developing a therapeutic cancer vaccine, IMA-901, which is a mixture of defined tumor-associated peptides, for the treatment of RCC. Immatics is conducting a pivotal phase 3 clinical trial comparing IMA-901 in combination with sunitinib against sunitinib alone in a subset of favorable and intermediate risk patients. If this clinical trial is successful, IMA-901 and sunitinib combination therapy would be in direct competition with AGS-003 and sunitinib combination therapy. Immatics could have a competitive advantage if it is able to introduce its product to the market before the time, if any, at which we receive marketing approval for AGS-003.

We estimate that there are numerous other cancer immunotherapy products in clinical development by many public and private biotechnology and pharmaceutical companies targeting numerous different cancer types. A number of these product candidates are in late-stage clinical development.

HIV

There are numerous FDA-approved treatments for HIV, primarily antiretroviral therapies, marketed by large pharmaceutical companies. In addition, generic competition has recently developed as patent exclusivity periods for older drugs have expired, with more than 15 generic bioequivalents currently on the market. The presence of these generic drugs is resulting in price pressure in the HIV therapeutics market. Currently, there are no approved therapies for the eradication of HIV. We expect that major pharmaceutical companies that currently market antiretroviral therapy products or other companies that are developing HIV product candidates may seek to develop products for the eradication of HIV.

Intellectual Property

Our success depends in part on our ability to obtain and maintain proprietary protection for our products and product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. We are seeking a range of patent and other protections for our product candidates and platform technology. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Patents

We own or exclusively license 12 U.S. patents and nine U.S. patent applications, as well as approximately 60 foreign counterparts, covering our Arcelis technology platform and Arcelis-based product candidates.

We use our Arcelis technology platform to generate fully personalized mRNA-loaded dendritic cell immunotherapies. As described above, the process of obtaining a disease sample and dendritic cells from a

 

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patient, using those materials to manufacture a fully personalized drug product and shipping the drug product to the clinical site for use in the treatment of the patient involves many important steps. These steps include:

 

    amplifying mRNA from a disease sample obtained from the patient;

 

    differentiating dendritic cell precursors (monocytes) isolated from the patient into immature dendritic cells;

 

    maturing the immature dendritic cells in culture and loading the mature dendritic cells with the amplified mRNA and CD40L protein; and

 

    formulating the matured, loaded dendritic cells in the patient’s plasma with cryoprotectants to protect the cells in the resulting drug product when the drug product is frozen and thawed.

We have sought to protect these steps or the equipment related to carrying out one or more of these steps through patents or trade secrets. We have also sought to protect the resultant drug product through patents.

These patents and patent applications are directed to one or more aspects of our Arcelis technology platform or Arcelis-based products. Specifically, these patents and patent applications are collectively directed to:

 

    Arcelis-based compositions of matter and products;

 

    methods of manufacturing Arcelis-based products;

 

    methods of using Arcelis-based products for treatment of tumors;

 

    compositions that we use in the manufacture of Arcelis-based AGS-004 products; and

 

    equipment that we intend to use for assisting the automated manufacture of Arcelis-based products.

We believe that all of the above aspects of our Arcelis technology platform are required to successfully produce our Arcelis-based product candidates and are covered by a combination of our patents, patent applications, trade secrets and know-how. The U.S. patents expire between 2016 and 2029, and the U.S. patent applications, if issued, would expire between 2016 and 2033, the counterpart patents in Europe and Japan expire between 2017 and 2027, and the counterpart patent applications in Europe and Japan, if issued, would expire between 2017 and 2033. Included in these patents and patent applications are:

 

    five U.S. patents and one U.S. patent application that are collectively directed toward the composition of matter of Arcelis-based products (dendritic cells loaded with RNA from tumors or pathogens), methods of manufacture of these products and methods of using these products to treat tumors. Each of the five U.S. patents encompass the AGS-003 composition of matter. One of the five U.S. patents encompasses the AGS-004 composition of matter. The U.S. patents expire in 2016 and the U.S. patent application, if issued, would expire in 2016. Corresponding patents in Europe and Japan and a pending corresponding patent application in Europe, if issued, would expire in 2017.

 

    three U.S. patents, one U.S. patent application and corresponding patent application in Europe and patent in Japan collectively directed towards an automated apparatus for the manipulation of nucleic acids in a closed container, components thereof and related methods of use. The U.S. and Japanese patents expire in 2027, and the patent applications in the United States and Europe, if issued, would expire in 2027.

 

    one U.S. patent and corresponding European and Japanese patents collectively directed towards cryoconserved dendritic cells and related methods of manufacture. The U.S., European and Japanese patents expire in 2021.

 

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    one U.S. patent and three U.S. patent applications, two corresponding European patents, one corresponding Japanese patent and corresponding patent applications in Europe and Japan collectively directed towards methods of maturing dendritic cells and the composition of matter of dendritic cells that have undergone this maturation process. The U.S. patent expires in 2025 and the U.S. applications, if issued, would expire in 2025, the European patents expire in 2025 and 2027, the Japanese patent expires in 2025 and the patent applications in Europe and Japan, if issued, would expire in 2025 and 2027, respectively.

 

    one U.S. patent and one U.S. patent application and corresponding patent application in Europe and patent in Japan collectively directed towards methods of manufacture of dendritic cells from monocytes stored for more than six hours and up to four days without freezing and the composition of matter of dendritic cells that have been manufactured from these monocytes. The U.S. patent expires in 2029 and the U.S. patent application, if issued, will expire in 2026, the Japanese patent will expire in 2026 and the patent application in Europe, if issued, would expire in 2026.

 

    one U.S. patent application, one patent application in Europe and one patent in Japan are collectively directed towards the composition of matter of AGS-004 and related methods of manufacture. The U.S. patent application and the patent application in Europe, if issued, would expire in 2025. The Japanese patent will expire in 2025.

 

    one U.S. patent and one U.S. patent application are directed towards the composition of matter and related methods of use of some of the primers that we use in the manufacture of AGS-004. The U.S. patent will expire in 2028, and the U.S. patent application, if issued, would expire in 2028.

 

    one international PCT patent application is directed towards a centrifuge vessel for use in the automated manufacture of AGS-003 and AGS-004. Corresponding U.S., European and Japanese patent applications, if filed and issued, would expire in 2033.

In addition, if the use of Arcelis-based products for the treatment of RCC and HIV are approved by the FDA, then, depending upon factors such as the timing and duration of FDA review and the timing and conditions of FDA approval, as well as factors such as patent claim scope, some of our issued U.S. patents (or patents that may issue from our pending U.S. patent applications) may be eligible for limited patent term extension under the Hatch-Waxman Act.

Trade Secrets

In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. For example, significant aspects of the process by which we manufacture our Arcelis-based drug product candidates are based on unpatented trade secrets and know-how. Trade secrets and know-how can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and physical and electronic security of our information technology systems. Although we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators 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.

 

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Key Licenses

We are party to a number of license agreements that are important to our business.

Duke University.    Pursuant to a 2000 agreement with Duke University, we hold an exclusive worldwide license to specified patents, patent applications and know-how owned or otherwise controlled by Duke, including for use in the development, manufacture and commercialization of dendritic cells loaded with tumor or pathogen RNA. Under the agreement, we:

 

    issued 221 shares of our common stock to Duke upon execution of the agreement;

 

    must pay all costs of prosecution and maintenance of the licensed patent rights;

 

    must pay an annual minimum royalty to Duke beginning with the calendar year beginning the second January 1 after first approval of a licensed product approved by the FDA or a comparable regulatory authority in a foreign country or any sale of a licensed product that does not require regulatory approval; and

 

    must pay low single-digit percentage royalties, subject to reduction in specified circumstances, to Duke on net sales of licensed products, which are creditable against the annual minimum royalty.

We are required to use reasonable commercial diligence to research, develop and market licensed products, to develop manufacturing capabilities, and to sublicense those patent rights for applications which we are not pursuing. If we fail to satisfy these obligations and do not cure such failure after receiving written notice from Duke, Duke may terminate the agreement or convert it to a nonexclusive license.

We may terminate our agreement with Duke at any time upon three months’ written notice. The agreement will terminate upon expiration of the last to expire of the patent rights licensed under the agreement. The U.S. patents licensed under the agreement expire in 2016 and the patents licensed under the agreement in Europe and Japan expire in 2017. Either party may terminate the agreement upon written notice for fraud, willful misconduct or illegal conduct of the other party that materially adversely affects the terminating party. If either party fails to fulfill any of its material obligations under the agreement, subject to a cure process specified in the agreement, the non-breaching party may terminate the agreement. A party’s ability to cure a breach will only apply to the first two breaches. In addition, the agreement will terminate if we become insolvent, bankrupt or placed in the hands of a receiver or trustee.

Celldex Therapeutics, Inc.    In July 2011, we entered into an agreement with Celldex Therapeutics, Inc., or Celldex, pursuant to which Celldex granted us a non-exclusive license to specified patents and patent applications directed to compositions and methods for processing dendritic cells. Upon the execution of the agreement, we paid Celldex $50,000 of a $100,000 upfront license fee. We paid the balance of this fee on January 31, 2012. Under this agreement, we must pay:

 

    a $75,000 annual license fee;

 

    a specified milestone payment based on the achievement of a specified regulatory milestone; and

 

    a specified dollar amount per dose of AGS-003 we sell.

We may terminate our agreement with Celldex at any time upon notice to Celldex. We or Celldex may terminate the agreement, subject to a cure period specified in the agreement, upon a material breach of the other party by providing written notice and waiting a specified period. The agreement will terminate upon the expiration of the last to expire of the patent rights licensed under the agreement on country-by-country basis. The latest date of expiration of the licensed Celldex patents is 2016.

 

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Development and Commercialization Agreements

An important part of our business strategy is to enter into arrangements with third parties for the development and commercialization of our product candidates.

Pharmstandard.    In August 2013, in connection with the purchase of shares of our series E preferred stock by Pharmstandard International S.A., or Pharmstandard, we entered into an exclusive royalty-bearing license agreement with Pharmstandard. Under this license agreement, we granted Pharmstandard and its affiliates a license, with the right to sublicense, to develop, manufacture and commercialize AGS-003 and other products for the treatment of human diseases, which are developed by Pharmstandard using our personalized immunotherapy platform, in the Russian Federation, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, which we refer to as the Pharmstandard Territory. We also provided Pharmstandard with a right of first negotiation for development and commercialization rights in the Pharmstandard Territory to specified additional products we may develop.

Under the terms of the license agreement, Pharmstandard licensed us rights to clinical data generated by Pharmstandard under the agreement and granted us an option to obtain an exclusive license outside of the Pharmstandard Territory to develop and commercialize improvements to our Arcelis technology generated by Pharmstandard under the agreement, a non-exclusive worldwide royalty-free license to Pharmstandard improvements to manufacture products using our Arcelis technology and a license to specified follow-on licensed products generated by Pharmstandard outside of the Pharmstandard Territory, each on terms to be negotiated upon our request for a license. In addition, Pharmstandard agreed to pay us pass-through royalties on net sales of all licensed products in the low single digits until it has generated a specified amount of aggregate net sales. Once the net sales threshold is achieved, Pharmstandard will pay us royalties on net sales of specified licensed products, including AGS-003, in the low double digits below 20%. These royalty obligations last until the later of the expiration of specified licensed patent rights in a country or the twelfth anniversary of the first commercial sale in such country on a country by country basis and no further royalties on specified other licensed products. After the net sales threshold is achieved, Pharmstandard has the right to offset a portion of the royalties Pharmstandard pays to third parties for licenses to necessary third party intellectual property against the royalties that Pharmstandard pays to us.

The agreement will terminate upon expiration of the royalty term, upon which all licenses will become fully paid up perpetual exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and we may terminate the agreement if Pharmstandard challenges or assists a third party in challenging specified patent rights of ours. If Pharmstandard terminates the agreement upon our material breach or bankruptcy, Pharmstandard is entitled to terminate our licenses to improvements generated by Pharmstandard, upon which we may come to rely for the development and commercialization of AGS-003 and other licensed products outside of the Pharmstandard Territory, and Pharmstandard is entitled to retain its licenses from us and to pay us substantially reduced royalty payments following such termination.

In November 2013, we entered into an agreement with Pharmstandard under which Pharmstandard purchased additional shares of our series E preferred stock. Under this agreement, we agreed to enter into a manufacturing rights agreement for the European market with Pharmstandard and that the manufacturing rights agreement would provide for the issuance of warrants to Pharmstandard to purchase 2,998,733 shares of our common stock at an exercise price of $0.97 per share. These warrants will not become exercisable until 61 days following the closing of this offering. However, if the initial public offering price in this offering exceeds $         per share, then the warrants will automatically terminate upon the closing of this offering.

Green Cross.    In July 2013, in connection with the purchase of our series E preferred stock by Green Cross Corp., or Green Cross, we entered into an exclusive royalty-bearing license agreement with Green Cross. Under this agreement we granted Green Cross a license to develop, manufacture and commercialize AGS-003 for mRCC in South Korea. We also provided Green Cross with a right of first negotiation for development and commercialization rights in South Korea to specified additional products we may develop.

 

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Under the terms of the license, Green Cross has agreed to pay us $500,000 upon the initial submission of an application for regulatory approval of a licensed product in South Korea, $500,000 upon the initial regulatory approval of a licensed product in South Korea and royalties ranging from the mid-single digits to low double digits below 20% on net sales until the fifteenth anniversary of the first commercial sale in South Korea. In addition, Green Cross has granted us an exclusive royalty free license to develop and commercialize all Green Cross improvements to our licensed intellectual property in the rest of the world, excluding South Korea, except that, as to such improvements for which Green Cross makes a significant financial investment and that generate significant commercial benefit in the rest of the world, we are required to negotiate in good faith a reasonable royalty that we will be obligated to pay to Green Cross for such license. Under the terms of the agreement, we are required to continue to develop and to use commercially reasonable efforts to obtain regulatory approval for AGS-003 in the United States

The agreement will terminate upon expiration of the royalty term, which is 15 years from the first commercial sale, upon which all licenses will become fully paid up perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy and we may terminate the agreement if Green Cross challenges or assists a third party in challenging specified patent rights of ours. If Green Cross terminates the agreement upon our material breach or bankruptcy, Green Cross is entitled to terminate our licenses to improvements and retain its licenses from us and to pay us substantially reduced milestone and royalty payments following such termination.

Medinet.    In December 2013, we entered into a license agreement with Medinet. Under this agreement, we granted Medinet an exclusive, royalty-free license to manufacture in Japan AGS-003 and other products using our Arcelis technology solely for the purpose of the development and commercialization of AGS-003 and these other products for the treatment of mRCC. We refer to this license as the manufacturing license. In addition, under this agreement, we granted Medinet an option to acquire a nonexclusive, royalty-bearing license under our Arcelis technology to sell in Japan AGS-003 and other products for the treatment of mRCC. We refer to the option as the sale option and the license as the sale license.

Under the manufacturing license, if Medinet does not exercise the sale option, Medinet may only manufacture AGS-003 and these other products for us or our designee. If Medinet does not exercise the sale option, we and Medinet have agreed to negotiate in good faith a supply agreement under which Medinet would supply us or our designee with AGS-003 and these other products for development and sale for the treatment of mRCC in Japan. If Medinet exercises the sale option, it may only manufacture AGS-003 and these other products for itself, its related parties and its sublicensees. During the term of the manufacturing license, we may not manufacture AGS-003 or these other products for us or any designee for development or sale for the treatment of mRCC in Japan.

Medinet may exercise the option at any time until the earlier of December 31, 2015 and the date 30 days after we have provided Medinet with an interim report on our phase 3 clinical trial of AGS-003 following such time as 50% of the required events in the trial have occurred.

In consideration for the manufacturing license, Medinet paid us $1.0 million. Medinet also loaned us $9.0 million in connection with us entering into the agreement. We have agreed to use these funds in the development and manufacturing of AGS-003 and the other products. Medinet also agreed to pay us milestone payments of up to a total of $9.0 million upon the achievement of developmental and regulatory milestones and $5.0 million upon the achievement of a sales milestone related to AGS-003 and these products. If Medinet exercises the sale option, it will pay us $1.0 million, as well as royalties on net sales at a rate to be negotiated until the later of the expiration of the licensed patent rights in Japan and the twelfth anniversary of the first commercial sale in Japan. If we cannot agree on the royalty rate, we have agreed to submit the matter to arbitration.

We borrowed the $9.0 million pursuant to an unsecured promissory note that bears interest at a rate of 3.0% per annum. The principal and interest under the note are due and payable on December 31, 2018. Under the terms of the note and the license agreement, any milestone payments related to the developmental and regulatory milestones that become due will be applied first to the repayment of the loan. We have the right to prepay the

 

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loan at any time. If we have not repaid the loan by December 31, 2018, then we have agreed to grant to Medinet a non-exclusive, royalty-bearing license to make and sell Arcelis products in Japan for the treatment of cancer. In such event, the amounts owing under the loan as of December 31, 2018 will constitute pre-paid royalties under the license and will not be otherwise due and payable. Royalties under this license would be paid until the expiration of the licensed patent rights in Japan at a rate to be negotiated. If we cannot agree on the royalty rate, we have agreed to submit the matter to arbitration.

Medinet has also granted us a royalty-free, sublicensable, transferable, exclusive license under Medinet

improvements to our intellectual property in the rest of the world and for uses other than for mRCC in Japan.

Under the agreement, if Medinet exercises the sale option, we have the right at any time after such exercise to revoke both the manufacturing license and the sale license to be granted to Medinet or the sale license only. If we exercise this right, we will be obligated to make a one-time payment to Medinet calculated based on the nonroyalty payments made to us by Medinet under the agreement, repay the outstanding amount due under the loan and assume certain obligations of Medinet, and Medinet will be obligated to assist us in transitioning the relevant rights in Japan to us or a party that we designate. If we exercise our revocation right with respect to the sale license only, the one-time payment will equal the total amount of nonroyalty payments. If we exercise our revocation right with respect to the manufacturing license and the sale license, the one-time payment will equal 150% or 200% of the nonroyalty payments depending on the timing of the exercise of the revocation right.

The agreement will terminate upon expiration of the royalty term, upon which all licenses will become fully paid up, perpetual non-exclusive licenses. Either party may terminate the agreement for the other party’s uncured material breach or if specified conditions occur relating to the other party’s insolvency or bankruptcy, and we may terminate the agreement if Medinet challenges or assists a third party in challenging specified patent rights of ours. If Medinet terminates the agreement upon our material breach or bankruptcy, Medinet is entitled to terminate our licenses to improvements and retain its royalty-bearing licenses from us.

Kirin.    In 2004, we entered into a Collaboration and License Agreement, or the Kirin agreement, with Kirin. We and Kirin agreed to terminate the agreement in 2009. Upon termination, Kirin assigned to us its ownership interest in specified jointly owned patent rights. In return, we must pay Kirin low single-digit percentage royalties on net sales of AGS-003 for the treatment of mRCC and AGS-004 for the treatment of HIV or comparable products beginning with their first commercial sale and continuing for 15 years thereafter.

Government Regulation

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of pharmaceutical and biological products such as those we are developing and may market. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.

U.S. Drug and Biological Product Approval Process

In the United States, the FDA regulates drugs and biological products under the Federal Food, Drug, and Cosmetic Act, or FDCA, the Public Health Service Act, or PHSA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.

 

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The process required by the FDA before a drug or biological product may be marketed in the United States generally involves the following:

 

    completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;

 

    submission to the FDA of an IND which must become effective before human clinical trials may begin;

 

    approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;

 

    performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish the safety and efficacy of the proposed drug or biological product for each indication;

 

    submission to the FDA of a new drug application, or NDA, or a BLA;

 

    satisfactory completion of an FDA advisory committee review, if applicable;

 

    satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and

 

    FDA review and approval of the NDA or BLA.

Preclinical Studies.    Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess its potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.

Clinical Trials.    Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution. Information about certain clinical trials must be submitted within specific timeframes to the NIH for public dissemination on their ClinicalTrials.gov website.

Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

 

    Phase 1: The drug or biological product is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.

 

    Phase 2: The drug or biological product is administered to a limited patient population 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.

 

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    Phase 3: The drug or biological product is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase 1, phase 2 and phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects 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 drug has been associated with unexpected serious harm to patients.

Special Protocol Assessment.    The SPA process is designed to facilitate the FDA’s review and approval of drug and biological products by allowing the FDA to evaluate the proposed design and size of phase 3 clinical trials that are intended to form the primary basis for determining a drug or biological product’s efficacy. Upon specific request by a clinical trial sponsor, the FDA will evaluate the trial protocol and respond to a sponsor’s questions regarding, among other things, primary efficacy endpoints, trial conduct and data analysis, within 45 days of receipt of the request. The FDA ultimately assesses whether the trial protocol design and planned analysis of the trial adequately address objectives in support of a regulatory submission. All agreements and disagreements between the FDA and the sponsor regarding an SPA must be clearly documented in an SPA letter or the minutes of a meeting between the sponsor and the FDA.

Even if the FDA agrees to the design, execution and analyses proposed in protocols reviewed under an SPA, the FDA may revoke or alter its agreement under the following circumstances:

 

    public health concerns emerge that were unrecognized at the time of the protocol assessment;

 

    a sponsor fails to follow a protocol that was agreed upon with the FDA;

 

    the relevant data, assumptions, or information provided by the sponsor in a request for SPA change are found to be false statements or misstatements or are found to omit relevant facts; or

 

    the FDA and the sponsor agree in writing to modify the trial protocol and such modification is intended to improve the study.

Marketing Approval.    Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA or BLA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA or BLA is subject to a substantial application user fee.

In addition, under the Pediatric Research Equity Act of 2003, or PREA, as amended and reauthorized, an NDA, BLA or supplement to an NDA or BLA for certain types of new drug or biological products must contain data that are adequate to assess the safety and effectiveness of the drug or biological product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.

The Food and Drug Administration Safety and Innovation Act, or FDASIA, amended the FDCA and requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit

 

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an initial Pediatric Study Plan, or PSP, within sixty days of an end-of-phase 2 meeting or as may be agreed between the sponsor and FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials, or other clinical development programs.

The FDA also could require submission of a risk evaluation and mitigation strategy, or REMS, plan to mitigate any identified or suspected serious risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.

The FDA conducts a preliminary review of all NDAs and BLAs within the first 60 days after submission before accepting them for filing to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA or BLA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA or BLA to determine, among other things, whether the product is safe and effective (described as safe, pure and potent for BLAs) and the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, purity and potency. The FDA is required to refer an application for a novel drug or biological product to an advisory committee or explain why such referral was not made. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA or BLA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP and integrity of the clinical data submitted.

The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to develop our product candidates and secure necessary governmental approvals, which could delay or preclude us from marketing our products.

If the FDA’s evaluation of the NDA or BLA and inspection of the manufacturing facilities and clinical trial sites are favorable, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA or BLA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug or biological product with specific prescribing information for specific indications. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

 

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Even if the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including phase 4 clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.

Special FDA Expedited Review and Approval Programs.    The FDA has various programs, including fast track designation, accelerated approval and priority review, that are intended to expedite or simplify the process for the development and FDA review of drug and biological products that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.

To be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious aspect of a serious or life threatening disease or condition and will fill an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors.

In addition, the FDA may give a priority review designation to drugs or biological products that provide safe and effective therapy where no satisfactory alternative exists or a significant improvement compared to marketed products in the treatment, diagnosis or prevention of a disease. For products regulated by the Center for Biologics Evaluation and Research, or CBER, the product must be intended to treat a serious or life- threatening disease or condition. A priority review means that the targeted time for the FDA to review an application is six months, rather than ten months. Most products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.

Under the provisions of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, a sponsor also can request designation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug or biological product that is intended, alone or in combination with one or more other drugs or biological products, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Products designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy.

Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.

Post-Approval Requirements.    Any drug or biological products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

 

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The FDA may impose a number of post-approval requirements as a condition of approval of an NDA or BLA. For example, the FDA may require post-marketing testing, including phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization. Regulatory approval of oncology products often requires that patients in clinical trials be followed for long periods to determine the overall survival benefit of the drug or biologic.

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs and biological products are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

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

 

    restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

 

    fines, warning letters or holds on post-approval clinical trials;

 

    refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals;

 

    product seizure or detention, or refusal to permit the import or export of products; or

 

    injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies 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.

In addition, the distribution of prescription pharmaceutical and biological products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.

Exclusivity and Approval of Competing Products

Non-Patent Exclusivity.    Under the Patient Protection and Affordable Care Act, or PPACA, newly- approved biological products may benefit from statutory periods of non-patent data and marketing exclusivity. The PPACA, among other things, permits the FDA to approve biosimilar or interchangeable versions of biological products through an abbreviated approval pathway following periods of data and marketing exclusivity. Biological products that are considered to be “reference products” are granted two overlapping periods of data and marketing exclusivity: a four-year period during which no abbreviated biologics license application, or abbreviated BLA, relying upon the reference product may be submitted to the FDA, and a twelve-year period

 

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during which no abbreviated BLA relying upon the reference product may be approved by FDA. For purposes of the PPACA, a reference product is defined as the single biological product licensed under a full BLA against which a biological product is evaluated in an application submitted under an abbreviated BLA.

We believe that our investigational products, if approved via full BLAs, will be considered “reference products” that are entitled to both four-year and twelve-year exclusivity under the PPACA. The FDA, however, has not issued any regulations or final guidance explaining how it will implement the PPACA, including the exclusivity provisions for reference products. In February 2012, the FDA issued three draft guidance documents that provide its preliminary thoughts on how to interpret and implement the abbreviated BLA provisions of the PPACA. The FDA has requested public comments on these draft guidance documents, including the proper interpretation of PPACA exclusivity provisions. It is thus possible that the FDA will decide to interpret the PPACA in such a way that our products are not considered to be reference products for purposes of the PPACA or be entitled to any period of data or marketing exclusivity. Even if our products are considered to be reference products and obtain exclusivity under the PPACA, another company nevertheless could also market a competing version of any of our biological products if such company can complete, and the FDA permits the submission of and approves, a full BLA. Although protection under PPACA will not prevent the submission or approval of another “full” BLA, the applicant would be required to conduct its own preclinical and adequate and well-controlled clinical trials to demonstrate safety, purity, and potency (i.e., effectiveness).

Pediatric Exclusivity.    Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the four- and 12-year non-patent exclusivity periods described above. This six-month exclusivity may be granted based on the voluntary completion of a pediatric study or studies in accordance with an FDA-issued “Written Request” for such a study or studies.

Orphan Drug Designation and Exclusivity.    Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug (including a biologic) intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA.

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full NDA or full BLA, to market the same drug for the same indication for seven years. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the previously approved orphan drug. For purposes of large molecule drugs, the FDA defines “same drug” as a drug that contains the same principal molecular structural features, but not necessarily all of the same structural features, and is intended for the same use as the drug in question. Notwithstanding the above definitions, a drug that is clinically superior to an orphan drug will not be considered the “same drug” and thus will not be blocked by orphan drug exclusivity.

A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the drug to meet the needs of patients with the rare disease or condition.

The FDA also administers a clinical research grants program, whereby researchers may compete for funding to conduct clinical trials to support the approval of drugs, biologics, medical devices, and medical foods for rare diseases and conditions. An application for an orphan grant should propose one discrete clinical trial to facilitate FDA approval of the product for a rare disease or condition. The study may address an unapproved new product or an unapproved new use for a product already on the market.

 

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Foreign Regulation

Although we do not currently market any of our products outside the United States and have no current plans to engage in product commercialization outside the United States, we may decide to do so in the future. In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and can involve additional product testing and additional administrative review periods, and may be otherwise complicated by some of our products and product candidates being controlled substances. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.

To date, we have not initiated any discussions with the European Medicines Agency, or EMEA, or any other foreign regulatory authorities with respect to seeking regulatory approval for any of our products in Europe or in any other country outside the United States.

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. Sales of any of our product candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third party payors, including government health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product once coverage is approved. Third party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the approved drugs for a particular indication.

In order to secure 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 the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in product development.

The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort. Third party payors are increasingly challenging the prices charged for medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at an appropriate return on investment. The U.S. government, state legislatures and foreign governments 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 substitution of generic products for branded prescription drugs. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals such as the drug product candidates that we are developing and could adversely affect our net revenue and results.

 

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Pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross