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As filed with the Securities and Exchange Commission on May 2, 2014

Registration No. 333-

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Ambrx, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware   2834   57-1147346

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

10975 North Torrey Pines Road

La Jolla, CA 92037

(858) 875-2400

(Address, including zip code, and telephone number, including

area code, of Registrant’s principal executive offices)

 

 

Lawson Macartney, Ph.D., B.V.M.S.

President and Chief Executive Officer

Ambrx, Inc.

10975 North Torrey Pines Road

La Jolla, CA 92037

(858) 875-2400

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

 

 

 

Copies to:

Faye H. Russell, Esq.

Michael E. Sullivan, Esq.

Latham & Watkins LLP

12670 High Bluff Drive

San Diego, CA 92130

(858) 523-5400

 

Thomas S. Levato, Esq.

Maggie L. Wong, Esq.

Goodwin Procter LLP

The New York Times Building

620 Eighth Avenue

New York, NY 10018

(212) 813-8800

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

       $ 86,250,000        $ 11,109   

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase.

(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.

 

 

 

 


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SUBJECT TO COMPLETION, DATED MAY 2, 2014

 

The information contained in this preliminary 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 preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PRELIMINARY PROSPECTUS

 

 

 

LOGO

             Shares

Common Stock

$             per share

 

 

This is the initial public offering of Ambrx, Inc. We are offering              shares of our common stock. Prior to this offering, there has been no public market for our common stock. We estimate that the initial public offering price of our common stock will be between $             and $             per share.

We have applied to list our common stock on The NASDAQ Global Market under the symbol “AMBX.”

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we 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 13.

 

 

 

     Per Share        Total  

Initial public offering price

   $                      $                

Underwriting discounts and commissions(1)

   $                      $                

Proceeds, before expenses, to us

   $                      $                

 

(1) We have agreed to reimburse the underwriters for certain expenses. See “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to a total of             additional shares of common stock on the same terms and conditions set forth above.

The underwriters expect to deliver the shares of common stock to purchasers on             , 2014.

 

 

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

 

 

 

Stifel

  Wells Fargo Securities
Canaccord Genuity   Needham & Company
  Roth Capital Partners  

The date of this prospectus is             , 2014.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     53   

Use of Proceeds

     54   

Dividend Policy

     55   

Capitalization

     56   

Dilution

     58   

Selected Financial Data

     61   

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

     63   

Business

     83   

Management

     139   

Executive and Director Compensation

     147   

Principal Stockholders

     161   

Certain Relationships and Related Person Transactions

     164   

Description of Capital Stock

     167   

Shares Eligible for Future Sale

     171   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

     174   

Underwriting

     178   

Legal Matters

     186   

Experts

     186   

Where You Can Find Additional Information

     186   

Index to Financial Statements

     F-1   

 

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until             , 2014 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Special Note Regarding Forward-Looking Statements.”

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.


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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 and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read this entire prospectus carefully, especially the section entitled “Risk Factors” and our financial statements and the related notes thereto, before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “our company” and “Ambrx” refer to Ambrx, Inc.

Overview

Our Company

Ambrx is a clinical stage biotechnology company focused on discovering and developing first-in-class and best-in-class optimized protein therapeutics known as bio-conjugates. Our proprietary technology platforms enable us to attach pharmaceutically active molecules to specific sites within proteins, a process known as site-specific conjugation, and to design biologics with precision that is similar to that used to design modern small molecule drugs. We refer to this as protein medicinal chemistry. We believe our ability to target specific sites of conjugation more precisely than prior generations of bio-conjugates and produce homogeneous therapeutics allows us to discover new protein drugs and design safer, more effective versions of current therapeutics. We have developed a pipeline of novel product candidates that include antibody drug conjugates, or ADCs, bi- and multi-specific drug conjugates and long-acting therapeutic proteins. Our most advanced ADC program is ARX788, an ADC for cancers expressing human epidermal growth factor 2, or HER2, for which we intend to begin clinical trials in early 2015. Our most advanced long-acting proteins are ARX201, a once-weekly human growth hormone, or hGH, that has successfully completed a Phase 2b clinical trial, and ARX328, a long-acting leptin for lipodystrophy and weight management, for which we intend to submit an investigational new drug application, or IND, to the U.S. Food and Drug Administration, or FDA, in mid-2014. In addition to our internal pipeline, we collaborate with leading pharmaceutical companies, including Bristol-Myers Squibb Company, or BMS, Merck Sharp & Dohme Corp., or Merck, Eli Lilly and Company, or Eli Lilly, Agensys, Inc., or Agensys, Zhejiang Medicine Co., Ltd., or ZMC, and Zhejiang Hisun Pharmaceutical Co., Ltd., or Hisun. Our most advanced collaboration product candidate in human health is ARX618, a long-acting Fibroblast Growth Factor 21, or FGF21, for type 2 diabetes, which our collaborator BMS has advanced through Phase 1 clinical trials and expects to begin Phase 2 clinical trials for in the second half of 2014. To date, our collaborations have provided us with over $200 million in non-dilutive funding and have the potential to provide milestone payments as well as royalties on the sale of collaboration products. We currently have no internal products approved for commercial sale and have not received any revenues from the sale of products.

Biologic and Bio-conjugate Market Overview

According to data from the IMS Institute for Healthcare Informatics, global sales of biologic drugs, defined as proteins, antibodies and vaccines, were approximately $157 billion in 2011. Over the past 30 years, biologic drugs have had a dramatic impact on disease therapy. Genetically engineered, or recombinant, proteins such as insulin and interferon have become mainstay therapies in the treatment of a broad range of diseases. Similarly, antibodies such as Herceptin and Humira have had a significant impact on the treatment of certain diseases, most notably cancer and autoimmune diseases. Despite their success, many biologics have limitations, including short half-life, a measure of duration of action in the body, for therapeutic proteins, and limited potency for naked antibodies. Bio-conjugate technologies have been designed to address these limitations by attaching molecules to proteins of interest. For example, for therapeutic proteins, molecules such as polyethylene glycol, or PEG, have been attached to extend their half-life, and cell killing, or cytotoxic, molecules have been attached to antibodies to increase their potency. Although an improvement on prior biologics, earlier generation bio-conjugate

 

 

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technologies generally conjugate to an amino acid that is present at multiple sites in the protein and therefore do not allow for conjugation at a specific site. As a result, drug product from the same production run may consist of proteins that are conjugated at different sites and with a different number of conjugated molecules, which is known as heterogeneity.

Heterogeneity can have a significant impact on the therapeutic effect of a bio-conjugate, as conjugation to the same amino acid at different sites can result in markedly different biological effects. For example, conjugating at one site may allow the protein to retain its full biological function while conjugating at another site may eliminate it. Thus, conjugation at one site may allow the protein to be pharmacologically active, while conjugation at another site may eliminate the same activity or result in toxicity. Furthermore, some sites in the protein may be critical to its overall stability and pharmacokinetics, or PK, whereas others may not. Consequently, heterogeneous mixtures of bio-conjugates often are suboptimal in terms of efficacy, safety, in vivo time-of-action, protein and linker stability and ease of manufacture. Heterogeneity is an issue for both long-acting proteins and ADCs. Independently published data show that the random conjugation of PEG to hGH gives rise to multiple PEG-conjugated, or PEGylated, variants of different sizes that, when separated, exhibit variable PK and physiological properties. For the ADCs Adcetris and Kadcyla, the conjugation of the drug payloads to monoclonal antibodies has been adapted to yield specific average drug payload to antibody ratios, or DARs, of approximately four-to-one. However, because the technique for conjugating the drug payload to the antibody involves a random conjugation process, the drug produced by the process contains molecules with DARs ranging from zero to eight and which contain the drug payload at a variety of positions within the protein. This heterogeneity likely limits patients’ exposure to truly efficacious conjugates, increases the exposure to non-efficacious, but potentially toxic conjugates, and decreases the half-life of the conjugate.

Our Bio-Conjugation Technology

We believe our technology platforms enable us to overcome the limitations of earlier generation bio-conjugates by applying our protein medicinal chemistry to consistently attach our proprietary linkers, payloads and half-life extenders to proteins at specific sites and create a homogeneous drug product. We can then test this drug product for pharmaceutical characteristics and physiological effects to develop a more precise understanding of how conjugating at different locations affects the activity of a drug. This enables us to select the optimal combination of conjugation site, linker and payload to create bio-conjugates which have the potential for increased efficacy and improved safety, resulting in a wider therapeutic index. A wider therapeutic index allows a higher dosage to increase the pharmacological effect with a similar safety profile or a lower dosage that achieves the same pharmacological effect with an improved safety profile. We can create proteins in both bacterial and mammalian cell systems, enabling us to create bio-conjugates in the system most appropriate for a given product candidate. Our bacterial platform, ReCODE, has generated our most mature programs, including several collaboration programs and several internal programs focused on long-acting therapeutic proteins. We apply our mammalian platform, EuCODE, to generate the majority of our ADC product candidates. Our technology platforms and product candidates are protected by an extensive intellectual property estate, which includes over 100 issued U.S. patents and pending U.S. patent applications and over 500 issued patents and pending patent applications in other jurisdictions.

 

 

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Our Product Candidates

The following chart depicts our internal and collaboration product candidates in development, as well as development programs under which discovery or preclinical development activities are being conducted. Our pipeline includes potential first-in-class as well as potential best-in-class bio-conjugate product candidates developed using our EuCODE and ReCODE platforms and includes ADCs, bi- and multi-specific drug conjugates and long-acting proteins.

LOGO

ARX788

Our lead ADC program is ARX788, which is a HER2 antibody conjugated with our proprietary linker and cytotoxic drug payload, Amberstatin, or AS269. ARX788 is currently in preclinical development for the treatment of breast cancer and other solid tumors that express and overexpress HER2. While significant advances have been achieved in the treatment of cancers with HER2-targeted therapies, in many cases the cancer still progresses after multiple lines of treatment. In addition, existing HER2-targeted therapies, such as Kadcyla, are not approved for the treatment of cancers that express, but do not overexpress, HER2. Preclinical studies suggest that ARX788 may demonstrate increased potency and tolerability relative to current therapies, including Kadcyla, and therefore we believe ARX788, if approved, may have the potential to benefit a broader spectrum of cancer patients, including those whose tumors express less HER2 than those that can be treated with the currently available HER2-targeted therapies, while also improving outcomes for those patients that are eligible for current HER2-targeted therapies. We expect to submit a regulatory dossier for ARX788 in Australia by the end of 2014 and initiate clinical trials thereafter in collaboration with ZMC.

 

 

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ARX201

ARX201 is a long-acting form of hGH, which has successfully completed a Phase 2b clinical trial in Europe in young adults with growth hormone deficiency, or GHD, a medical condition that results when the pituitary gland does not produce enough hGH. Global annual sales from currently marketed hGH products, which are used for the treatment of GHD as well as other related indications, were approximately $2.9 billion in 2012. We believe ARX201, which is designed to be administered once weekly, may provide considerable improvement in terms of convenience and compliance over currently available hGH products, which require once-daily dosing. We expect to submit an IND to the FDA in mid-2014 for ARX201 in order to expand clinical trials of ARX201 into the United States. With one or more collaborators, we plan to initiate a Phase 3 clinical trial of ARX201 for the treatment of GHD in young adults in late 2014 or early 2015 and a Phase 2a clinical trial of ARX201 for the treatment of GHD in children in the first half of 2015. We plan to apply for orphan drug designation for ARX201 in pediatric populations.

ARX328

ARX328 is a long-acting form of leptin that is currently in preclinical development as a leptin-replacement therapy in patients with lipodystrophy, a group of conditions that arise due to the defective metabolism of fat, and for weight management through the maintenance of weight loss in obese individuals. We have used our proprietary technology to incorporate a novel, non-native amino acid at a specified site in leptin that allows for the precise placement of PEG to retain leptin activity while prolonging the time of pharmacological activity. ARX328 has been shown to be tolerable and successful in stimulating and maintaining a reduction of body weight in multiple animal models, and we believe it will be able to be administered once weekly. If approved, we expect that ARX328 would be the first long-acting leptin with once-weekly, subcutaneous dosing. We expect to submit an IND for ARX328 to the FDA in mid-2014 in order to initiate Phase 1 clinical trials.

Additional Product Candidates

We are also completing preclinical assessments of other internally developed ADC and bi-specific product candidates, including those listed below. We expect that the preclinical datasets for these candidates will become available during 2014. Assuming positive preclinical results, we anticipate taking one or more of these molecules into preclinical development beginning in 2015.

 

    PSMA ADC for the treatment of metastatic castration-resistant prostate cancer and glioblastoma multiforme;

 

    CD70 ADC for the treatment of renal and nasopharyngeal cancers;

 

    Bi-specific Anti-CD3 X Folate for the treatment of ovarian cancer; and

 

    CD184-FK506 ADC for the treatment of immunological diseases.

Our Collaborations

In addition to our internal pipeline, collaborations are an important element of furthering our technologies. Our collaborations increase the number of Ambrx-enabled products in development, help validate and expand our technology platforms and provide non-dilutive funding. We have entered into several strategic collaborations for our technology platforms and product candidates, which have provided us with over $200 million in non-dilutive funding. We are eligible to receive potential milestone payments under these collaborations as well as royalties on the sale of collaboration products, if approved. Our collaboration product candidate that is closest to commercialization is a long-acting protein for animal health that is partnered with Eli Lilly’s Elanco Animal Health division, and is expected to reach the U.S. market by 2015.

 

 

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Our collaborators include the following:

BMS. We have entered into three collaboration and license agreements with BMS. In the first two collaboration agreements, we granted to BMS exclusive, worldwide licenses to develop and commercialize product candidates for FGF21 and Relaxin, respectively. ARX618 for the treatment of type 2 diabetes is the lead product candidate under the FGF21 collaboration and ARX720 for the treatment of heart failure is the lead product candidate under the Relaxin collaboration. ARX618 has successfully completed Phase 1 clinical trials, and BMS expects to begin Phase 2 clinical trials for it in the second half of 2014. BMS expects to begin Phase 1 clinical trials for ARX720 in late 2014. In the third collaboration, we granted to BMS an exclusive worldwide license to use Ambrx technology to develop and commercialize ADCs incorporating BMS’ antibodies, payloads and targets. In the aggregate, we have received upfront payments totaling $37.5 million under these collaboration agreements and are eligible to receive clinical, regulatory, and commercial milestone payments of up to $405.0 million with respect to FGF21, $112.0 million with respect to Relaxin and up to $97.0 million with respect to each ADC target, based on the successful development and commercialization of products, as well as royalties on the net sales of such products. In addition, we are also eligible to receive research and development funding.

Merck. Our collaboration with Merck focuses primarily on the research and development of novel bio-conjugates for both oncology and non-oncology therapeutic targets. We granted to Merck an exclusive, worldwide research license to utilize our specified drug technology, patent rights and know-how, including our ReCODE and EuCODE technology platforms, to discover, identify and optimize polypeptide drug conjugates in a number of collaboration targets selected by Merck. We received an upfront payment of $15.0 million and are eligible to receive research and development funding. For each target within the collaboration, if Merck exercises its option for an exclusive license, we have the potential to receive up to an additional $98.0 million in preclinical, clinical, regulatory and sales-based milestones. We will also be entitled to receive tiered royalties in the single digit percentages of aggregate worldwide net sales of each licensed product.

Eli Lilly. We entered into a collaborative research, license and commercialization agreement with Eli Lilly to discover, develop and commercialize a broad portfolio of Ambrx-enabled bio-conjugates for animal health. We granted Eli Lilly an exclusive, worldwide license to utilize certain of our drug technology, trade secrets, know-how, patent rights and inventions to develop and commercialize certain product candidates in the field of animal health, as well as human and non-human food safety applications. We have received approximately $8.0 million in upfront payments and are eligible to earn up to $1.0 million per product candidate upon achievement of specified preclinical and regulatory milestones as well as tiered royalties. Our most advanced product candidate from this collaboration is expected to reach the U.S. market by 2015. In addition, we are eligible to receive research and development funding.

Agensys. In April 2013, we entered into a research collaboration and exclusive license agreement with Agensys, a wholly owned subsidiary of Astellas Pharma, Inc., that applies our platform technology to specific antibodies and targets within the Agensys pipeline with the objective of creating Ambrx-enabled ADCs based on Agensys technology. Under our agreement with Agensys, we received an upfront payment of $15.0 million and are eligible to receive research and development funding. For each target within the collaboration, we have the potential to receive $95.0 million in preclinical, clinical, regulatory and sales-based milestones. Additionally, we are entitled to receive tiered royalties on a target-by-target basis in the high single digit percentages of aggregate worldwide net sales of each licensed product.

ZMC. In June 2013, we entered into a co-development and license agreement with ZMC for ARX788 and other HER2 ADC products covered by our intellectual property rights, in which we granted ZMC an exclusive license to use certain of our patents and know-how to develop, manufacture and sell licensed products in the People’s Republic of China, or China. We have retained the rights to develop and commercialize licensed products outside of China. However, we have granted to ZMC a non-exclusive license for conducting activities in certain other mutually approved jurisdictions, including Australia, to support regulatory approval in China.

 

 

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Under our agreement with ZMC, we are entitled to receive tiered royalties in the low double-digit percentages of aggregate net sales of licensed products in China. In addition, we are eligible to receive research and development funding.

Hisun. In April 2014, we entered into a co-development and license agreement with Hisun for the research, development and commercialization of certain bi-specific product candidates and products for the treatment of cancer. We granted Hisun an exclusive license to use certain of our patents and know-how to develop, use, manufacture and sell certain licensed products in China. The agreement contemplates two collaboration programs with designated targets. We are entitled to receive a payment in the low single digit millions of dollars each year during the initial three-year research term, and we are also entitled to receive tiered royalties in the mid to high single digit percentages of net sales of licensed products in China.

Our Strategy

We have developed proprietary platforms, and an extensive intellectual property estate, that we believe allow us to design and develop first-in-class and best-in-class bio-conjugates. We are committed to using our site-specific conjugation expertise and protein medicinal chemistry approach to identify and develop next generation bio-conjugates to fulfill unmet medical needs. We recognize the following elements as being critical to this mission:

 

    Rapidly advance the development of our proprietary product candidates. We are using our technology platforms to develop novel and differentiated proprietary product candidates. By optimizing the safety and efficacy profiles of our product candidates, we believe we will be able to expedite their development and address unmet medical needs. We anticipate submitting an IND for ARX328 in mid-2014 and a regulatory dossier for ARX788 in Australia by the end of 2014. Our goal is to submit at least one IND every 12 to 18 months beginning in 2016. In addition, we have successfully completed a Phase 2b clinical trial with ARX201, a once-weekly hGH, and we anticipate progressing ARX201 into a Phase 3 development program with one or more collaborators in late 2014 or early 2015.

 

    Create new product candidates that combine the therapeutic benefits of biological molecules with the precise design of small molecules. Our goal is to create novel, next-generation, targeted therapeutics using our ReCODE and EuCODE platforms. These platforms allow the integrated optimization of conjugation site, linker and payload. We have a comprehensive suite of linkers, conjugation chemistries and payloads which allow us to design targeted therapeutics with the optimal profile in terms of efficacy, safety and stability. Our current discovery focus is on targeted bio-therapeutics, such as ADCs and bi- and multi-specific drug conjugates. We are currently evaluating three ADCs, PSMA, CD70 and CD184-FK506, and one bi-specific therapeutic, anti-CD3 X Folate, for preclinical development. We anticipate taking one or more of these candidates into preclinical development in early 2015.

 

    Leverage our technology to advance existing collaborations and selectively establish new collaborations. An important part of our strategy is to form collaborations to maximize the value of our product candidates and advance our technology. We have three different frameworks for our collaborations. Product-focused collaborations are agreements under which we grant our collaborators rights to develop and commercialize our proprietary product candidates in markets where we otherwise would not participate or where our partners’ capabilities position them to maximize the value of these candidates. Technology-focused collaborations are agreements under which we apply our proprietary technology to enable our partners to optimize their product candidates. Finally, platform expansion collaborations include agreements with research institutes and biotechnology companies that have complementary technologies.

 

   

Strengthen our leadership position in the discovery and optimization of site-specific bio-conjugates. We intend to build on our technology platforms, methods and know-how through internal and collaborative efforts. For example, we are exploring multi-specific targeting modalities that should result in the improved

 

 

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delivery of payloads with greater specificity to target cells. We believe that, in the future, the ability to deliver drugs more effectively and more specifically to diseased tissues through the engagement of multiple antigens, rather than a single antigen, will enable us to develop novel bio-conjugates for use outside oncology and thus treat a broader range of diseases. We refer to this as a multi-specific approach. We are also working to discover multi-payload ADCs and novel linker chemistries and to expand our platform technology. We believe that by adding complementary technologies to our current platform base, we will maintain our leadership position in bio-conjugates.

 

    Commercialize our product candidates independently and with collaborators. Our technology enables us to create product candidates for a wide range of diseases. We intend to develop and opportunistically commercialize our product candidates in the United States in disease areas where the majority of prescribing physicians are specialists that can be reached with a targeted sales force. We also intend to seek collaborators to co-develop and commercialize our product candidates in the United States for disease areas where the majority of prescribing physicians are general practitioners. In addition, we intend to seek collaborators to develop and commercialize our product candidates outside of the United States.

 

    Expand our intellectual property position. We own or have rights to over 100 issued U.S. patents and pending U.S. patent applications and over 500 issued patents and pending patent applications in various other jurisdictions relating to various aspects of our technology platforms and our product candidates, as well as their manufacture and use. We intend to continue to expand our intellectual property protections by seeking and maintaining domestic and international patents on inventions that are commercially important to our business. We will also rely on know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Risks Related to Our Business

Our ability to implement our business strategy is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others:

 

    Since our inception, we have incurred significant operating losses as a result of our platform development, preclinical activities and clinical activities and have an accumulated deficit of $80.1 million as of March 31, 2014, and anticipate that we will continue to incur losses for the foreseeable future.

 

    We will require additional capital for the further development and commercialization of our product candidates, and cannot be certain that additional funding will be available on acceptable terms, or at all. If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates, including ARX788, ARX201 and ARX328.

 

    We are substantially dependent on the successful development and commercialization of our internal product candidates, including ARX788, ARX201, ARX328 and any future internal product candidates that we may identify, and we cannot give any assurance that we will receive regulatory approval for, or successfully commercialize, any of these product candidates.

 

    Our existing collaborations, including those with BMS, Merck, Eli Lilly, Agensys, ZMC and Hisun, are important to our business, and future collaborations may also be important to us. If we are unable to maintain any of these collaborations, or if these collaborations are not successful, our business could be adversely affected.

 

    We may need to enter into additional collaborations for the development and commercialization of additional product candidates or to leverage our existing technology platforms, and we may not be able to do so.

 

 

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    Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results or the ability to successfully commercialize a product candidate, if approved.

 

    We rely on third parties, including FujiFilm Diosynth Biotechnologies and WuXi PharmaTech, to manufacture our preclinical and clinical drug supplies and we intend to rely on third parties to produce commercial supplies of any of our product candidates, if approved. The development and commercialization of our product candidates could be stopped, delayed or made less profitable if those third parties fail to obtain and maintain regulatory approval of their facilities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

 

    If our efforts to protect the proprietary nature of the intellectual property related to our ReCODE and EuCODE technology platforms, including all of the patents and patent applications we have licensed from The Scripps Research Institute (representing over 20 issued U.S. patents, over 50 granted foreign patents and over 20 pending patent applications worldwide), and also including the patents and patent applications that we own, including U.S. Patent Nos. 7,632,823; 7,736,872; 7,846,689; 7,883,866; 7,838,265; 7,829,310; 7,858,344; and 8,420,792, are not adequate, we may not be able to compete effectively in our market.

Corporate and Other Information

We were formed as a Delaware corporation on January 31, 2003. Our principal executive offices are located at 10975 North Torrey Pines Road, La Jolla, CA 92037, and our telephone number is (858) 875-2400. Our website address is www.ambrx.com. The information contained in, or accessible through, our website does not constitute part of this prospectus.

We use our registered trademark, AMBRX, in this prospectus. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and trade names.

Implications of being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

 

 

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We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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THE OFFERING

 

Common stock offered by us

                shares

Common stock to be outstanding after this offering

                shares

Option to purchase additional shares

   The underwriters have a 30-day option to purchase up to a total of              additional shares of common stock.

Use of proceeds

   We expect to use the net proceeds from this offering to fund research and development activities of our product candidates, to expand and enhance our technology platforms and for working capital and general corporate purposes. See “Use of Proceeds” for a description of the intended use of proceeds from this offering.

Offering price

   $             per share

Risk factors

   You should read the “Risk Factors” section of this prospectus and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

Proposed NASDAQ Global Market symbol

   AMBX

 

 

The number of shares of common stock to be outstanding after this offering is based on 70,628,895 shares outstanding as of March 31, 2014, after giving effect to the conversion of all of our outstanding shares of preferred stock as of March 31, 2014 into 61,428,152 shares of common stock, and excludes:

 

    14,563,256 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014 at a weighted average exercise price of $0.58 per share; and

 

    1,007,502 shares of our common stock reserved for future issuance under our 2013 equity incentive plan.

Except as otherwise indicated, all information in this prospectus assumes:

 

    no exercise by the underwriters of their option to purchase additional shares of common stock;

 

    the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the completion of this offering;

 

    the automatic conversion of all outstanding shares of our preferred stock into 61,428,152 shares of common stock immediately prior to the completion of this offering; and

 

    a one-for-         reverse stock split of our common stock to be effected before the completion of this offering.

 

 

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SUMMARY FINANCIAL DATA

The following tables set forth a summary of our historical financial data as of, and for the periods ended on, the dates indicated. We have derived the statements of operations data for the years ended December 31, 2012 and 2013 and the balance sheet data as of December 31, 2013 from our audited financial statements included elsewhere in this prospectus. We have derived the summary statements of operations data for the three months ended March 31, 2013 and 2014 and balance sheet data as of March 31, 2014 from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position as of March 31, 2014 and results of operations for the three months ended March 31, 2013 and 2014. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the sections of this prospectus entitled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of our future results.

 

   

Years Ended December 31,

    Three Months
Ended March 31,
 
         2012               2013              2013              2014      
          (unaudited)  
    (in thousands, except share and per share data)  

Statements of Operations Data:

        

Collaboration revenues

  $ 44,461       $ 17,034      $ 2,432      $ 5,032   

Operating expenses:

        

Research and development

    16,262         27,540        3,661        8,509   

General and administrative

    5,735         6,853        1,509        1,944   
 

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

    21,997         34,393        5,170        10,453   
 

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    22,464         (17,359     (2,738     (5,421

Total other income (expense)

    343         368        222        40   
 

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    22,807         (16,991     (2,516     (5,381

Provision for income taxes

    242         53        —          —     
 

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 22,565       $ (17,044   $ (2,516   $ (5,381
 

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders (1):

        

Basic

  $ 0.20       $ (1.90   $ (0.28   $ (0.60
 

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.19       $ (1.90   $ (0.28   $ (0.60
 

 

 

    

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per share attributable to common stockholders (1):

        

Basic

    8,870,946         8,970,927        8,959,804        9,017,233   
 

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

    9,587,848         8,970,927        8,959,804        9,017,233   
 

 

 

    

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders, basic and diluted (unaudited) (1)

     $ (0.24     $ (0.08
    

 

 

     

 

 

 

Shares used to compute pro forma net income (loss) per share attributable to common stockholders, basic and diluted (unaudited) (1)

       70,399,079          70,445,385   
    

 

 

     

 

 

 

 

(1) See Note 1 to our audited financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the historical and pro forma net income (loss) per share, basic and diluted, and the number of shares used in the computation of the per share amounts.

 

 

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     As of March 31, 2014  
     Actual     Pro
Forma(1)
    Pro Forma
As Adjusted(1)(2)
 
     (unaudited, in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 61,555      $ 61,555      $     

Working capital

     41,026        41,026     

Total assets

     70,018        70,018     

Convertible preferred stock

     102,503        —       

Accumulated deficit

     (80,069     (80,069  

Total stockholders’ equity (deficit)

     (75,880     26,623     

 

(1) Gives effect to the automatic conversion of all shares of our convertible preferred stock outstanding as of March 31, 2014 into an aggregate of 61,428,152 shares of common stock immediately prior to the completion of this offering and the resultant reclassification of our convertible preferred stock to additional paid-in capital, a component of stockholders’ equity (deficit). We have based our assumption regarding the conversion of preferred stock into common stock immediately prior to the completion of this offering on stockholder consents we have obtained approving the conversion.
(2) Gives further effect to the issuance and sale of              shares of common stock in this offering at the assumed initial public offering price of $             per share (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. Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) 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. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $             million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and prospects. In such an event, the market price of our common stock could decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Our Financial Position and Capital Requirements

Since our inception, we have incurred significant operating losses as a result of our platform development, preclinical activities and clinical activities and have an accumulated deficit of $80.1 million as of March 31, 2014, and anticipate that we will continue to incur losses for the foreseeable future.

Since inception, we have incurred significant operating losses. As of March 31, 2014, we had an accumulated deficit of $80.1 million. To date, we have financed our operations primarily through private placements of preferred stock and funding from our collaborations. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital. Our operations to date have been limited to expanding the scope of our ReCODE and EuCODE technologies, performing pre-clinical activities on behalf of our collaborators and for our internal programs, conducting early-stage clinical trials for our programs and supporting our collaborators’ research and development. Our losses have resulted principally from costs incurred in our platform development, preclinical activities and clinical activities related to our programs.

We anticipate that our operating losses will substantially increase over the next several years as we execute our plan to expand our discovery, research, development and commercialization activities, including the clinical development and commercialization of our product candidates, and incur the additional costs of operating as a public company. In addition, if we obtain regulatory approval of any of our product candidates, we may incur significant sales and marketing expenses, as well as costs related to the manufacture of our products and the maintenance of our product supply. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or whether or when we will become profitable, if ever.

We will require additional capital for the further development and commercialization of our product candidates, and cannot be certain that additional funding will be available on acceptable terms, or at all. If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates, including ARX788, ARX201 and ARX328.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the clinical development of our product candidates, including our planned clinical trials.

We estimate that our net proceeds from this offering will be approximately $         million, based upon an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We believe that such proceeds, together with our existing cash and cash equivalents, will be sufficient to fund our operations through at least the next 18 months. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We will require

 

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additional capital for the further development and commercialization of our product candidates and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate. Our future capital requirements will depend on many factors, including:

 

    our collaboration agreements remaining in effect, our ability to achieve milestones under these agreements, our collaborators exercising their options under these agreements and our entering into additional collaboration agreements;

 

    our ability to initiate, and the progress and results of, our planned clinical trials of ARX788, ARX201 and ARX328; as well as the progress and results of clinical trials of our product candidates that are being developed by our collaborators;

 

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

 

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

 

    the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval and do not collaborate for commercialization;

 

    the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

 

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

 

    the extent to which we acquire or in-license other products and technologies.

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or other research and development initiatives. We also could be required to:

 

    seek collaborators for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;

 

    relinquish or license on unfavorable terms our rights to our product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves; or

 

    make additional expenditures to license or acquire additional product candidates.

Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.

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

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements

 

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with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms unfavorable to us.

We have limited sources of revenues and have not generated any revenues to date from product sales. Except for 2008 and 2012, we have never been profitable in any fiscal year since our inception and we may never achieve profitability again or sustain such profitability, which could depress the market price of our common stock, and could cause you to lose all or a part of your investment.

Our ability to become profitable depends on our ability to develop and commercialize our product candidates. To date, we have no internal or collaboration products approved for commercial sale in the United States and have not generated any revenues from sales of any product candidate, and we do not know when, or if, we will generate revenues in the future. We have one collaboration product approved for sale in Mexico in the field of animal health, but we have no products approved for use in humans. Other than the trials conducted for FGF21 and our collaboration product in the field of animal health, no clinical trials have been conducted in the United States to date with respect to any of our internal or collaboration product candidates. We do not anticipate generating revenues, if any, from sales of any of our internal product candidates for at least the next several years and we will never generate sales revenues from our internal or collaboration product candidates if we or our collaborators do not obtain regulatory approval to market them. Our collaboration revenues vary significantly quarter to quarter depending on the achievement of certain milestones, and the timing and achievement of these milestones are not in our control. Our ability to generate future revenues depends heavily on our success in:

 

    developing and securing U.S. and/or foreign regulatory approvals for our product candidates;

 

    entering into additional collaboration agreements for certain of our product candidates;

 

    achieving milestones and royalties under our collaboration agreements;

 

    manufacturing commercial quantities of our product candidates at acceptable cost;

 

    achieving broad market acceptance of our product candidates in the medical community and with third-party payors and patients;

 

    commercializing our product candidates, assuming we receive regulatory approval; and

 

    pursuing clinical development of our product candidates in additional indications.

Even if we do generate product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Pursuant to Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, or IRC, annual use of our net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. As of December 31, 2011, we have completed an analysis regarding the limitation of net operating loss and research and development credit carryforwards under IRC Sections 382 and 383, and determined that we experienced an ownership change in June 2006. As a result of this ownership change, our net operating losses and research and development credits generated prior to June 2006 are limited under IRC Sections 382 and 383. Additionally, we have removed from the deferred tax assets $3.7 million of federal net operating loss carryforwards and $18.3 million of California net operating loss carryforwards that will expire unused solely due to the ownership change in June 2006. If it is determined that we have in the past experienced one or more additional ownership changes, or if we experience one or more ownership changes as a result of this offering or future transactions in our stock, we may be further limited in our ability to use our net operating loss carryforwards and other tax attributes to reduce taxes owed on the net taxable income that we earn. As of December 31, 2013, we had federal and state net operating loss

 

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carryforwards of approximately $26.2 million and $28.8 million, respectively, and federal and state research and development credit carryforwards of approximately $3.9 million and $3.1 million, respectively, which are currently limited and could be limited further if we experience an “ownership change.” Any such limitations on the ability to use our net operating loss carryforwards and other tax attributes could potentially result in increased future tax liability to us. For the three-year periods ending December 31, 2013 and March 31, 2014, we have not issued significant amounts of capital stock and do not anticipate that we have experienced a cumulative change in ownership of more than 50% during that period.

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

We are substantially dependent on the successful development and commercialization of our internal product candidates, including ARX788, ARX201, ARX328 and any future internal product candidates that we may identify, and we cannot give any assurance that we will receive regulatory approval for, or successfully commercialize, any of these product candidates.

We currently have a limited number of product candidates in clinical development, and our business depends on their successful development and commercialization. We currently have no drug products for sale and we may never be able to develop marketable drug products. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products, among other things, are subject to extensive regulation by the FDA and other regulatory authorities outside the United States.

The development of ARX788, ARX201, ARX328 and any other product candidates we develop will require substantial investment in additional clinical development, management of clinical, preclinical and manufacturing activities, regulatory approval in multiple jurisdictions, obtaining manufacturing supply capability, building a commercial organization, and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market our product candidates until we receive regulatory approval from the FDA or applicable regulatory authorities outside the United States. We are substantially dependent on the success of our internal product candidates, and we cannot provide any assurance that we will obtain regulatory approval for any of these product candidates or that these product candidates will be successfully commercialized.

We have not previously submitted a biologics license application, or BLA, to the FDA, or similar drug approval filings to comparable foreign authorities, for any product candidate, and we cannot be certain that any of our product candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market one or more of our product candidates, our revenues will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval and have commercial rights, and we may not generate significant revenues from sales of such products, if approved.

We plan to seek regulatory approval to commercialize our product candidates in the United States, the European Union and in additional countries. While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in each country we must comply with numerous and varying regulatory requirements of each such country regarding safety and efficacy, as well as governing, among other things, clinical trials and commercial sales, pricing and distribution of our product candidates, and we cannot predict success in these jurisdictions.

Our existing collaborations, including those with BMS, Merck, Eli Lilly, Agensys, ZMC and Hisun, are important to our business, and future collaborations may also be important to us. If we are unable to maintain any of these collaborations, or if these collaborations are not successful, our business could be adversely affected.

We have entered into collaborations with other biopharmaceutical companies to develop several of our product candidates, and such collaborations currently represent a significant portion of our product pipeline. In addition,

 

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we have entered into other collaborations pursuant to which we have provided access to our technology platforms to our collaborators to enable the optimization of their own product candidates. Our collaboration and license agreements include those with BMS, Merck, Eli Lilly, Agensys, ZMC and Hisun. These collaborations have provided us with important funding for our development programs and we expect to receive additional funding under these collaborations. Our existing collaborations, and any future collaborations we enter into, may pose a number of risks, including:

 

    collaborators have significant discretion in determining the efforts and resources that they will apply to the development and commercialization of product candidates under these collaborations;

 

    collaborators may not perform their obligations as expected;

 

    collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval, or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;

 

    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 the products or product candidates that are the subject of our collaboration agreements with them, which may cause collaborators to cease to devote resources to the commercialization of the product candidates that are covered under our collaboration with them;

 

    a collaborator with marketing and distribution rights to one or more product candidates that are subject to a collaboration agreement with us and achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such product or products;

 

    disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, lead to additional responsibilities for us with respect to product candidates, or result in litigation or arbitration, any of which would be time-consuming and expensive;

 

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

 

    collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;

 

    collaborations may be terminated and, if terminated, in certain instances, we would potentially lose the right to pursue further development or commercialization of the applicable product candidates;

 

    collaborators may learn about our technology and use this knowledge to compete with us;

 

    negative results in preclinical or clinical trials conducted by our collaborators could produce results that harm or impair other products using our technology;

 

    there may be conflicts between collaborators that could negatively affect those collaborations or others; and

 

    the number and type of our collaborations could adversely affect our attractiveness to future collaborators or acquirers.

If our collaborations do not result in the successful development and commercialization of products or if one of our collaborators terminates its agreement with us, or if our collaborators elect not to exercise their option under their collaboration agreement, we may not receive any future research and development funding or milestone or royalty payments under the collaboration. For example, we had a collaboration with Merck Serono International S.A. for

 

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ARX201 that was terminated in 2010 and resulted in the return to us of all rights to ARX201. In addition, if BMS does not achieve positive results in its planned Phase 2 clinical trial of ARX618 for the treatment of type 2 diabetes, BMS may elect to terminate our collaboration with respect to ARX618, and we would not receive future milestone or royalty payments under such collaboration. If we do not receive the funding we expect under these agreements, our continued development of our product candidates could be delayed, reduced or abandoned and we may need additional resources to develop additional product candidates. All of the risks relating to product development, regulatory approval and commercialization described in this prospectus also apply to the activities of our collaborators and there can be no assurance that our collaborations will produce positive results or successful products on a timely basis or at all. In addition, if BMS terminates our collaboration with them, under certain circumstances, we may owe BMS royalties with respect to product candidates covered by our agreements with BMS that we elect to commercialize, depending on the stage of development at which such product commercialization rights reverted back to us. If Merck terminates our collaboration with them, under certain circumstances, the royalties and milestone payments owed to us by Merck may be reduced or Merck may not be obligated to pay us any further royalties or milestone payments. See “Business—Collaborations” for more information regarding the termination provisions of our collaboration agreements. Additionally, subject to its contractual obligations to us, if a collaborator of ours is involved in a business combination or otherwise changes its business priorities, the collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed to it by us. If one or more of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and our perception in the business and financial communities, as well as our stock price, could be adversely affected.

We may need to enter into additional collaborations for the development and commercialization of additional product candidates or to leverage our existing technology platforms, and we may not be able to do so.

We may in the future determine to collaborate with additional pharmaceutical and biotechnology companies for development and potential commercialization of therapeutic products. We face significant competition in seeking appropriate collaborators. Our ability to 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. If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a 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. For example, we plan to enter into one or more collaborations to develop and commercialize ARX201, our long-acting hGH product candidate. If we are unable to enter into a collaboration for ARX201, we may have to delay or substantially change our clinical development plans, which could delay or hinder its clinical development and commercialization, or we may elect to cease further development of ARX201. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our product platforms and our business may be materially and adversely affected. In addition, if we are unable to establish suitable collaborations to access new technologies, payloads, linker chemistries and other expertise, we may not be able to advance our technology platforms and may lose our leadership in this area to competing companies that are able to create more advanced technologies.

If we lose our technological advantages, we may not be able to compete in the marketplace.

We believe that our site specific conjugation technologies give us a technological advantage over our competitors. However, the biotechnology industry is characterized by rapid technological progress and intense competition. As a result, we may not realize the expected benefits from these technologies. For example, a large pharmaceutical company, with significantly more resources than we have, could pursue a similar or competing bio-conjugation technology that proves to be more effective than our own. Businesses, academic institutions,

 

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governmental agencies and other public and private research organizations are conducting research to develop technologies that may compete with those we use. It is possible that our competitors could acquire or develop technologies that would render our technology obsolete or noncompetitive. If we cease to have a technological advantage over our competitors, our business would be adversely affected.

If we fail to develop and commercialize any of our internal product candidates, we may be unable to grow our business.

The development and commercialization of our product candidates requires us to spend significant resources to conduct drug discovery activities or to acquire or in-license the rights to such product candidates. In addition, development and commercialization of our product candidates will require time-consuming development efforts prior to commercial sale, including preclinical studies, extensive clinical trials and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. We cannot assure you that we will be able to discover or develop our product candidates, or that any product candidates we may develop will be approved, manufactured or produced economically, successfully commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives. If we are unable to develop or commercialize our product candidates, our business and prospects will suffer.

In addition, although our ReCODE platform has been commercially validated at a scale of 50,000 liters, we have not yet demonstrated the commercial scalability of our EuCODE technology or an ability to successfully overcome many of the other risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biotechnology industry. We cannot be certain that our platforms will produce viable product candidates or that we will be able to produce commercially viable drugs that safely and effectively treat diseases. Even if we are successful in completing preclinical and clinical development and receiving regulatory approval for one commercially viable product candidate for the treatment of one disease, we cannot be certain that we will also be able to develop and receive regulatory approval for our other product candidates for the treatment of other forms of that disease or other diseases. If we fail to develop any commercially viable drugs our business prospects would be harmed significantly.

Our platforms and product candidates employ novel technologies, and the FDA and other regulatory authorities may have limited experience with approving products that utilize these technologies.

Our platforms and our products in development are based on new technologies, such as site-specific conjugation of amino acids to proteins and antibodies. Given the complexity of our technologies, we intend to work closely with FDA and other regulatory authorities to perform the requisite scientific analyses and evaluation of our methods to obtain regulatory approval for our product candidates. It is possible that the validation process may take time and resources, require independent third-party analyses or not be accepted by the FDA and other regulatory authorities. For some of our product candidates that are based on these technology platforms, the regulatory approval path and requirements may not be clear, which could add significant delay and expense. Delays or failure to obtain regulatory approval of any of the products that we or our collaborators develop using our novel technologies would adversely affect our business.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results or the ability to successfully commercialize a product candidate, if approved.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having

 

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progressed through preclinical studies and initial clinical trials. For example, although the results of our Phase 2b clinical trial of ARX201 in Europe demonstrated a sustained clinical effect during weekly administration at several dosage levels, we may not achieve positive results in our planned future clinical trials of this product candidate for a variety of reasons, including:

 

    we may fail to demonstrate efficacy in the planned Phase 3 clinical trial;

 

    our reliance on a new cell line and product manufacturer for future clinical trials may cause complications in the production of ARX201; and

 

    due to their anticipated enrollment of larger numbers of patients, later-stage clinical trials may not produce the same or similar results as earlier trials with fewer patients.

A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials or during commercialization due to lack of efficacy, safety profiles or otherwise, notwithstanding promising results in early clinical trials. For example, Nutropin Depot, a long-acting form of hGH developed by Genentech, Inc. was approved by the FDA in 1999 and withdrawn from the market in 2004 due to the significant resources required to continue manufacturing and commercializing the product, and despite promising results in clinical trials. In addition, our future clinical trials, or those of our collaborators, may not be successful. If our product candidates, or those of our collaborators that are subject to our collaboration agreements, are not shown to be safe and effective in clinical trials, these programs could be delayed or terminated. Any such failure may harm our business, prospects and financial condition.

If we experience significant delays in the clinical development and regulatory approval of our product candidates, our business will be substantially harmed.

We may experience delays in commencing and completing clinical trials of ARX788, ARX201, ARX328 or our other product candidates. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Although we are targeting the initiation of clinical trials for ARX788, ARX201 and ARX328, these planned trials may be delayed for a variety of reasons, including delays related to:

 

    our ability to complete any additional preclinical studies and manufacturing qualifications necessary to receive clearance from the FDA and applicable foreign regulatory authorities to commence our planned clinical trials;

 

    our ability to identify and engage one or more collaborators in order to initiate our planned Phase 3 and Phase 2a clinical trials of ARX201 for the treatment of GHD in adults and children, respectively;

 

    the availability of financial resources for us to commence and complete our planned trials;

 

    reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

    obtaining institutional review board, or IRB, approval at each clinical trial site;

 

    recruiting suitable patients to participate in a trial;

 

    having patients complete a trial or return for post-treatment follow-up;

 

    the costs of conducting clinical trials or the manufacture of clinical supplies of our product candidates being greater than we have anticipated;

 

    clinical trial sites deviating from trial protocol or dropping out of a trial;

 

    adding new clinical trial sites; or

 

    manufacturing sufficient quantities of our product candidate for use in clinical trials.

 

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Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. In addition, significant numbers of patients who enroll in our clinical trials may drop out during the trials for various reasons that may be beyond our control. We believe we have appropriately accounted for such increased risk of dropout rates in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are correct, or that we will not experience higher numbers of dropouts than anticipated, which would result in the delay of completion of such trials beyond our expected timelines. Furthermore, we have relied, and expect to continue to rely, on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance.

We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board for such trial, or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. We could also encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials in lieu of prescribing existing treatments that have established safety and efficacy profiles. If we experience termination of, or delays in the completion of, any clinical trial of a product candidate, the commercial prospects of such product candidate will be harmed, and our ability to generate product revenues will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, prospects, financial condition and results of operations significantly. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval.

If we are unable to obtain regulatory approval of our product candidates, we will not be able to commercialize them and our business will be adversely impacted.

We have not obtained regulatory approval for any product candidates that we are developing. If we fail to obtain regulatory approval to market our product candidates, we will be unable to sell our product candidates, which will significantly impair our ability to generate any revenues. To receive approval we must, among other things, demonstrate with substantial evidence from clinical trials that the product candidate is both safe and effective for each indication for which approval is sought, and failure can occur in any stage of development. Satisfaction of the approval requirements typically takes several years and the time and money needed to satisfy them may vary substantially, based on the type, complexity and novelty of the pharmaceutical product. We have not commenced any Phase 3 clinical trials of any product candidate to date, and we cannot predict if or when our planned clinical trials will generate the data necessary to support a BLA, and if or when we might receive regulatory approvals for any of our product candidates.

Product candidates could fail to receive regulatory approval for many reasons, including the following:

 

    the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

 

    we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for any of its proposed indications;

 

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    the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

 

    we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

    the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

    the data collected from clinical trials may not be sufficient to the satisfaction of FDA or comparable foreign regulatory authorities to support the submission of a BLA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere;

 

    the FDA or comparable foreign regulatory authorities may determine that the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies do not conform to applicable requirements, including current good manufacturing practice, or cGMP; and

 

    the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failure to obtain regulatory approval to market our product candidates, which would significantly harm our business, prospects, financial condition and results of operations. In addition, even if we were to obtain approval, regulatory authorities may grant approval contingent on the performance of costly post-marketing clinical trials or the imposition of a risk evaluation and mitigation strategy, or REMS, requiring substantial additional post-approval safety measures. Moreover, any approvals that we obtain may not cover all of the clinical indications for which we are seeking approval, or could contain significant limitations in the form of narrow indications, warnings, precautions or contra-indications with respect to conditions of use. In such event, our ability to generate revenues would be greatly reduced and our business would be harmed.

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

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. For example, certain patients treated with ARX201 have experienced drug-related side effects including central and peripheral edema, which is a side effect commonly associated with growth hormone therapy. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

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

 

    regulatory authorities may withdraw approvals of such product;

 

    regulatory authorities may require additional warnings on the label;

 

    we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

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

 

    our reputation may suffer.

 

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

Even if we or our collaborators obtain and maintain regulatory approval for a product candidate in one jurisdiction, that product candidate may not receive regulatory approval in any other jurisdiction, which would limit market opportunities and adversely affect our business.

Obtaining and maintaining regulatory approval for a product candidate in one jurisdiction does not guarantee that we or our collaborators will be able to obtain or maintain regulatory approval in any other jurisdiction. For example, even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities in foreign countries will separately evaluate and determine whether to approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our products is also subject to approval. As with the FDA, obtaining approval of a marketing authorization application from the European Medicines Agency, or EMA, is a similarly lengthy and expensive process and the EMA has its own procedures for approval of product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling, require other post-market restrictions or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and the EU, including China, where we collaborate with ZMC and Hisun, also have requirements for approval of product candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in other countries. Also, even if we or our collaborators obtain regulatory approval for a product candidate, that approval may subsequently be withdrawn. If we or our collaborators fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, the target market for our internal product candidates or those product candidates that are subject to our collaboration agreements, as applicable, will be reduced and our ability to realize the full market potential of our internal product candidates and to receive milestone or royalty payments with respect to product candidates that are subject to our collaboration agreements will be harmed, which would adversely affect our business, prospects, financial condition and results of operations.

We may not obtain orphan drug designation for ARX201 or ARX328, and even if we obtain orphan drug designation, we may not enjoy the benefits of that designation.

We plan to apply for orphan drug designation for ARX201 in pediatric populations and we may attempt to develop our preclinical product candidate, ARX328, as a leptin-replacement therapy in subsets of patients with lipodystrophy, which may be an orphan disease. In the United States, under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition. Such diseases and conditions are those that affect fewer than 200,000 individuals in the United States or, if they affect more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making a drug product available in the United States for these types of diseases or conditions will be recovered from sales of the product. Orphan drug designation must be requested before submitting a BLA to the FDA. If the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process, but it can lead to financial incentives, such as opportunities for grant funding toward clinical trial costs, tax advantages and user-fee waivers. If a product that has orphan drug designation

 

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subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug marketing exclusivity for a period of seven years. Orphan drug marketing exclusivity generally prevents the FDA from approving another application for the same drug for the same indication for seven years, except in limited circumstances, including if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. Orphan drug marketing exclusivity rights in the United States may also be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. Moreover, a designated orphan drug may not receive orphan drug marketing exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. For example, if we successfully develop and obtain marketing approval for ARX328 for both of our proposed indications, one of which is not an orphan indication, we would not enjoy a seven year exclusive marketing period following approval of the non-orphan indication.

We have not yet applied for orphan drug designation for ARX201 or ARX328 and cannot assure you that any application we may submit to the FDA for orphan drug designation will be granted in the future. If we are unable to obtain orphan drug designation in the United States, we will not be eligible to obtain the seven year market exclusivity that could result from orphan drug designation or be afforded the financial incentives associated with orphan drug designation, and our business, prospects, financial condition and results of operations could suffer. Even if we obtain orphan drug designation, we may not be the first to obtain marketing approval for any particular orphan indication due to the uncertainties associated with the development of pharmaceutical products, or our product may be approved for an indication broader than the orphan indication for which we obtain orphan drug designation, and therefore we may not enjoy any exclusivity period. Further, if we obtain orphan designation and marketing approval that entitles us to orphan drug exclusivity, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition.

Risks Related to Our Business and Industry

Even if we receive regulatory approval for a product candidate, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.

Any regulatory approvals that we receive for a product candidate may be subject to limitations on the approved indicated uses for which a product candidate may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a REMS as a condition to approval of a product candidate, which could include requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for such product candidate will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP requirements and good clinical practice, or GCP, requirements for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

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

 

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    fines, warning letters or holds on clinical trials;

 

    refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;

 

    product seizure or detention, or refusal to permit the import or export of a product candidate; and

 

    injunctions or the imposition of civil or criminal penalties.

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

Even if we obtain regulatory approval for a product candidate, the product candidate may not gain market acceptance among physicians, patients and others in the medical community.

If a product candidate is approved for commercialization, its acceptance will depend on a number of factors, including:

 

    the clinical indications for which such product candidate is approved;

 

    physicians and patients considering the product candidate as a safe and effective treatment;

 

    the potential and perceived advantages of such product candidate over alternative treatments;

 

    the prevalence and severity of any side effects;

 

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

 

    the timing of market introduction of such product candidate as well as competitive products;

 

    the cost of treatment in relation to alternative treatments;

 

    the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities;

 

    relative convenience and ease of administration; and

 

    the effectiveness of our sales and marketing efforts.

If a product candidate is approved but fails to achieve market acceptance among physicians, patients, or others in the medical community, we will not be able to generate significant revenues, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

Coverage and reimbursement of a product candidate may be limited or unavailable in certain market segments, which could make it difficult to sell such product candidate profitably.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, determine which drugs they will cover and the amount of reimbursement. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

    a covered benefit under its health plan;

 

    safe, effective and medically necessary;

 

    appropriate for the specific patient;

 

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    cost-effective; and

 

    neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products, once approved. We may be unable to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability. In addition, generic equivalents of our products may enter the market, and if we are unable to differentiate the benefits of our products over these less expensive alternatives, we may never generate meaningful product revenues.

We intend to seek approval to market our product candidates in both the United States and in selected foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the EU, the pricing of prescription pharmaceuticals and biological products is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval for a product candidate. In addition, market acceptance and sales of a product candidate will depend significantly on the availability of adequate coverage and reimbursement from third-party payors, and may be affected by existing and future health care reform measures.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. By way of example, in the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the PPACA, was enacted in March 2010. The PPACA, among other things, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, extended the rebate program to individuals enrolled in Medicaid managed care organizations, and addressed new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs that are line extension products. In addition, the PPACA established annual fees on manufacturers of certain branded prescription drugs, required manufacturers to participate in a discount program for certain outpatient drugs under Medicare Part D, and promoted programs that increase the federal government’s comparative effectiveness research, which will impact existing government healthcare programs and will result in the development of new programs. An expansion in the government’s role in the U.S. healthcare industry may further lower rates of reimbursement for pharmaceutical products.

Other legislative changes have been proposed and adopted in the United States since the Healthcare Reform Act was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 which, among other things, further reduced Medicare payments to several providers, including hospitals, and cancer treatment centers.

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:

 

    the demand for a product candidate, if we obtain regulatory approval;

 

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    our ability to set an appropriate price for our products;

 

    our ability to generate revenues and achieve or maintain profitability;

 

    the level of taxes that we are required to pay; and

 

    the availability of capital.

Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers, which may adversely affect our future profitability.

We currently have no marketing and sales organization and have no experience in marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenues.

We currently do not have a commercial infrastructure for the marketing, sales and distribution of pharmaceutical products. We have entered into agreements with third parties to develop and commercialize certain product candidates. However, there can be no guarantee that these agreements will be successful or that we will realize their anticipated benefits. In order to commercialize any of our internal product candidates without a commercialization partner, we would need to build our own marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services.

The establishment and development of our own sales force or the establishment of a contract sales force to market our product candidates would be expensive and time-consuming and could delay any commercial launch. Moreover, we cannot be certain that we would be able to successfully develop this capability. We would have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. We would also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates. To the extent we rely on third parties to commercialize our product candidates, if approved, we may have little or no control over the marketing and sales efforts of such third parties and our revenues from product sales may be lower than if we had commercialized our product candidates ourselves. In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize our product candidates.

A variety of risks associated with marketing product candidates internationally could materially adversely affect our business.

We plan to seek regulatory approval, either directly or through our collaborators, for our product candidates outside of the United States and, accordingly, we expect that we will be subject to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:

 

    differing regulatory requirements in foreign countries;

 

    the potential for parallel importing, when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

    unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

    economic weakness, including inflation, or political pressures or instability in particular foreign economies and markets;

 

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

 

    foreign taxes, including withholding of payroll taxes;

 

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

 

    difficulties staffing and managing foreign operations;

 

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    workforce uncertainty in countries where labor unrest is more common than in the United States;

 

    potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;

 

    challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

    production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

    business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations and the impact of our strategy to develop capabilities in emerging markets such as China.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The biopharmaceutical industry is characterized by intense competition and rapid innovation. Although we believe that we hold a leading position in protein biosynthesis, protein therapeutics and ADCs, our competitors may be able to develop other technology platforms or therapeutics that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. With respect to ARX201 in particular, there are a number of potentially competing hGH products in clinical development and there may be additional potentially competing hGH products in preclinical development. Moreover, if we commercialize ARX201, it will face competition from existing hGH products that are currently on the market. See “Business—Competition.” Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis products that are more effective or less costly than our product candidates. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability profile, reliability, convenience of dosing, price and reimbursement.

Even if we obtain regulatory approval for a product candidate, the availability and price of our competitors’ products, including their ability to provide price discounting or rebates, could limit the demand, and the price we are able to charge, for such product candidate. We will not achieve our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians, patients, or the parents or legal guardians of patients with respect to products targeted for use in children, to switch from existing methods of treatment, or if physicians switch to other new drug products or choose to reserve our product candidates for use in limited circumstances. The inability to compete with existing or subsequently introduced drug products would have a material adverse impact on our business, prospects, financial condition and results of operations.

Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel therapeutics or to in-license novel compositions or technologies that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing medicines before we do, which would have a material adverse impact on our business.

 

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We may use our financial and human resources to pursue a particular research program or product candidate and fail to capitalize on programs or product candidates that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and human resources, we focus on a limited number of research programs and product candidates. As a result, we may forego or delay pursuit of opportunities with other programs or product candidates or for other indications or markets 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 future product candidates for specific indications may not yield any commercially viable products. 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 collaborative, 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, or we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a collaboration arrangement.

We may form or seek additional collaborations in the future, and we may not realize the benefits of such collaborations.

We may form or seek additional collaborations, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our current product candidates and future product candidates that we may develop. These relationships or those like them may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish strategic collaborations or other alternative arrangements for our product candidates because our research and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic collaboration agreements related to our product candidates could also delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including our President and Chief Executive Officer, Lawson Macartney, Ph.D., B.V.M.S. The loss of the services of any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our business, prospects, financial condition or results of operations.

Our scientific team has expertise in many different aspects of drug discovery and development. We conduct our operations at our facility in La Jolla, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is very intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms. In order to induce valuable employees to remain at Ambrx, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly

 

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affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.

Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with certain of our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

Many of the other biotechnology and pharmaceutical companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They may also provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we can offer. If we are unable to continue to attract and retain high quality personnel, our ability to advance the development of our product candidates and obtain regulatory approval and potentially commercialize them will be limited.

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

As of March 31, 2014, we had 79 employees, 74 of whom are full-time. As our development and commercialization plans and strategies develop, and as we transition into operating as a public company, we expect to hire additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

    identifying, recruiting, integrating, maintaining and motivating additional employees;

 

    managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and

 

    improving our operational, financial and management controls, reporting systems and procedures.

Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. To date, we have used the services of outside vendors to perform tasks including clinical trial management, statistics and analysis, regulatory affairs, formulation development and other drug development functions. Our growth strategy may also entail expanding our group of contractors or consultants to implement these tasks going forward. Because we rely on numerous consultants, effectively outsourcing many key functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and product candidates that we develop and, accordingly, may not achieve our research, development and commercialization goals.

 

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Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters is located in California near major earthquake faults and fire zones. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

Our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA; manufacturing standards; federal and state healthcare fraud and abuse laws and regulations; and laws that require the reporting of financial information or data accurately. Specifically, the sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee and other third-party misconduct. Although we intend to adopt a code of business conduct and ethics that will be effective upon the completion of this offering, the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages,

 

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reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

If any of our product candidates is approved, we may be subject to healthcare laws, regulation and enforcement. Our failure to comply with those laws could have a material adverse effect on our results of operations and financial conditions.

Although we currently do not have any products on the market, if any of our product candidates is approved, once we or our collaborators begin commercializing such candidate(s), we may be subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

    the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

 

    U.S. federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;

 

    the U.S. federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program by obtaining any money or property from such health benefit care program through false representations, or falsifying, concealing, or covering up a material fact, making a false statement, or using or making any false or fraudulent document in connection with the delivery of or payment for health care benefits or services;

 

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

 

    the U.S. federal transparency laws, including the federal Physician Payment Sunshine Act, that requires drug manufacturers to disclose payments and other transfers of value provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members, and payments and other transfer of value provided to such physician owners and immediate family members; and

 

    state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government that otherwise restricts payments that may be made to healthcare providers; state laws that require drug manufacturers to track and report gifts, compensation and other remuneration and items of value provided to healthcare professionals and entities; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

The PPACA broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute

 

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constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs. In addition, clinical development of our product candidates, and any sales of our product candidates once commercialized outside the United States, will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if our product candidates allegedly cause injury or are found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

    decreased demand for our product candidates;

 

    injury to our reputation;

 

    withdrawal of clinical trial participants;

 

    initiation of investigations by regulators;

 

    costs to defend the related litigation;

 

    diversion of management’s time and our resources;

 

    substantial monetary awards to trial participants or patients;

 

    product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

    loss of revenue;

 

    exhaustion of any available insurance and our capital resources;

 

    the inability to commercialize our product candidates; and

 

    a decline in our share price.

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry $5.0 million per occurrence of product liability insurance covering our clinical trials. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits

 

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of our insurance coverage. If we determine that it is prudent to increase our product liability coverage due to the commercial launch of any approved product, we may be unable to obtain such increased coverage on acceptable terms, or at all. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

Our product candidates are regulated as biological products, or biologics, which may subject them to competition sooner than anticipated.

The Biologics Price Competition and Innovation Act of 2009, or BPCIA, was enacted as part of the Affordable Care Act to establish an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation as an “interchangeable” biosimilar. The BPCIA defines a biosimilar as a biological product that is highly similar to the reference product, notwithstanding minor differences in clinically inactive components. An interchangeable biosimilar is one expected to produce the same clinical results as the reference product in any given patient, and which is capable of being substituted for the reference product without a healthcare provider’s intervention. When a follow-on biologic is intended to be used repeatedly, it is only interchangeable if alternating between the biosimilar and the reference product yields no additional risk of reduced efficacy or safety. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product was approved under a BLA. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement BPCIA 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.

We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity and intend to include in our future BLA submission a request for reference product exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, 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.

In addition, foreign regulatory authorities may also provide for exclusivity periods for approved biological products. For example, biological products in Europe may be eligible for an eight year period of data exclusivity plus an additional two years of market exclusivity. However, biosimilar products have been approved under a pathway of the centralized procedure since 2006. The pathway allows sponsors of a biosimilar product to seek and obtain regulatory approval based in part on the clinical trial data of an originator product to which the biosimilar product has been demonstrated to be “similar.” In many cases, this allows biosimilar products to be brought to market without conducting the full suite of clinical trials typically required of originators. It is unclear whether we would face competition to our products in European markets sooner than anticipated.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme disruptions in the recent years including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that renewed deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile

 

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business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive an economic downturn, which could directly affect our ability to attain our operating goals on schedule and on budget.

At March 31, 2014, we had approximately $61.6 million of cash and cash equivalents. While we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents since March 31, 2014, no assurance can be given that renewed deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Furthermore, our stock price may decline due in part to the volatility of the stock market or a general economic downturn.

Risks Related to Our Dependence on Third Parties

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We will rely upon third-party CROs to monitor and manage data for our preclinical and clinical programs. We will rely heavily on these parties for execution of our preclinical and clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on our CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the GCP requirements. In addition, our clinical trials must be conducted with drug product produced under cGMP requirements and will require a large number of test subjects. Our failure or any failure by our CROs to comply with these requirements or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of our CROs violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

While we do not currently have any active contracts with CROs, we anticipate that any future CROs will have the right to terminate their agreements with us in the event of an uncured material breach. In addition, some of our CROs may have an ability to terminate their agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated.

We may not be able to enter into arrangements with CROs on commercially reasonable terms, or at all. In addition, our CROs will not be our employees and, except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our preclinical, clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could harm our competitive position. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they

 

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obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval for or successfully commercialize any of our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Switching or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Although we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition and results of operations.

We rely on third parties, including FujiFilm Diosynth Biotechnologies and WuXi PharmaTech, to manufacture our preclinical and clinical drug supplies and we intend to rely on third parties to produce commercial supplies of any of our product candidates, if approved. The development and commercialization of our product candidates could be stopped, delayed or made less profitable if those third parties fail to obtain and maintain regulatory approval of their facilities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture any of our product candidates on a clinical or commercial scale. Instead, we rely on contract manufacturers for such production.

We expect to continue to depend on third-party contract manufacturers for the foreseeable future. We have not entered into long-term agreements with our current contract manufacturers, and though we intend to do so prior to commercial launch in order to ensure that we maintain adequate supplies of finished drug product, we may be unable to enter into such an agreement or do so on commercially reasonable terms, which could have a material adverse impact upon our business. We currently obtain our supplies of finished drug product through individual purchase orders. We currently rely on FujiFilm Diosynth Biotechnologies for the production of the active pharmaceutical ingredients, or APIs, in our product candidates for use in our clinical trials, other than with respect to the production of the API in ARX788, for which we rely on WuXi PharmaTech. However, we will need to identify and qualify a new third-party manufacturer of APIs prior to commercialization of our product candidates. Any delay in identifying and qualifying a new manufacturer of APIs could delay the potential commercialization of our product candidates, and, in the event that we do not have sufficient APIs to complete our planned clinical trials, it could delay such trials.

The facilities used by our contract manufacturers to manufacture our product candidates must complete a pre-approval inspection by the applicable regulatory authorities, including the FDA, to assess compliance with applicable requirements, including cGMPs, after a BLA or comparable foreign regulatory marketing application is submitted. We do not control the manufacturing process of our product candidates and are completely dependent on our contract manufacturing partners for compliance with the FDA’s cGMP requirements for manufacture of both the active drug substances and finished drug product. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s strict regulatory requirements, they will not be able to secure or maintain regulatory compliance for the manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities determine that these facilities for the manufacture of our product candidates are noncompliant, or if our suppliers or contract manufacturers decide they no longer want to supply or manufacture for us, we may need to find alternative manufacturing facilities, in which case we might not be able to identify manufacturers for clinical or commercial supply on acceptable terms, or at all, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates.

 

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We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we use to manufacture our drugs and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials, and if approved, ultimately for commercial sale. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete the clinical trial, any significant delay in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.

In addition, the manufacture of biologics such as our product candidates is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of biologics often encounter difficulties in production, particularly in scaling up and validating initial production and absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our supply of our product candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of our product candidates will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide our product candidate to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.

If our third-party manufacturers use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological materials by our third-party manufacturers. Our manufacturers are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage, handling and disposal of medical, radioactive and hazardous materials. Although we believe that our manufacturers’ procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting from medical, radioactive or hazardous materials. As a result of any such contamination or injury we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical radioactive or hazardous materials. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts, which could harm our business, prospects, financial condition or results of operations.

 

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Risks Related to Our Intellectual Property

If our efforts to protect the proprietary nature of the intellectual property related to our ReCODE and EuCODE technology platforms, including all of the patents and patent applications we have licensed from The Scripps Research Institute (representing over 20 issued U.S. patents, over 50 granted foreign patents and over 20 pending patent applications worldwide), and also including the patents and patent applications that we own, including U.S. Patent Nos. 7,632,823; 7,736,872; 7,846,689; 7,883,866; 7,838,265; 7,829,310; 7,858,344; and 8,420,792, are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technology platforms and product candidates. The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

Composition-of-matter patents are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. We cannot be certain that the claims in our issued patents and pending patent applications covering composition-of-matter and forms of our product candidates will be considered patentable by the United States Patent and Trademark Office, or the U.S. PTO, courts in the United States, or by the patent offices and courts in foreign countries. Method-of-use patents protect the use of a product for a specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent.

Some of our patents related to our technology platforms and product candidates were in-licensed from The Scripps Research Institute, or TSRI, and were therefore not written by us or our attorneys, and we did not have control over the drafting and prosecution of these patents. Further, TSRI might not have given the same attention to the drafting and early prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over their drafting and prosecution, which could have resulted in inadequate disclosure and/or claims. This could lead to findings of invalidity or unenforceability of the patents we in-licensed or patents issuing with reduced claim scope.

In addition, the patent applications that we own, in-license or that we may license in the future may fail to result in issued patents with claims that cover our technology platforms or product candidates in the United States or in other foreign countries. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which prior art can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if the patents do successfully issue and even if such patents cover one or more of our product candidates, third parties may challenge the validity, enforceability or scope of the patent claims, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect or provide exclusivity for our technology platforms or product candidates, or prevent others from designing around our patent rights. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

If the breadth or strength of protection provided by the patents and patent applications that we own or license exclusively are threatened, or if they fail to provide meaningful exclusivity for our technology platforms or product candidates, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, our product candidates. Many patent applications covering our technology platforms and product

 

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candidates are still pending. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be challenged by third parties. Any successful challenge of these patents or any other patents owned by, or exclusively licensed to, us could deprive us of rights necessary for the successful commercialization of any product candidates that we or our collaborators may develop. Further, if there are delays in the clinical trials for any of our product candidates, the period of time during which we or our collaborators could market the product candidates under patent protection may be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing and some remain so until issued, we cannot be certain that we were the first to file any patent application. Furthermore, if third parties have filed such applications, an interference proceeding can be provoked by a third-party or instituted by the U.S. PTO to determine who was the first to invent any of the subject matter covered by the claims of our patent applications. In the United States, the natural expiration of a patent is generally 20 years after its earliest priority date. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Once the patent life has expired for our product candidates, we may be open to competition from generic medications, which would adversely affect our business and operations.

Our ability to obtain patents is highly uncertain because some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law and included a number of significant changes to U.S. patent law. These included changes in the way patent applications will be prosecuted and may also affect patent litigation. The U.S. PTO has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in March 2013. The Leahy-Smith Act has also introduced procedures making it easier for third parties to challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-Smith Act contains new statutory provisions that still require the U.S. PTO to issue new regulations for their implementation and it may take the courts years to interpret the provisions of the new statute. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the cost of prosecuting our patent applications, our ability to obtain patents based on our patent applications and our ability to enforce or defend our issued patents. An inability to obtain, enforce and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition.

If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and other elements of our technology platforms, product candidates and discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require our employees to assign their inventions to us, and require our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, our agreements and security measures may be breached, and we may not have adequate remedies for

 

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any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.

If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation for extending the term of patents covering each of our product candidates, our business may be materially harmed.

Depending upon the timing, duration and conditions of FDA marketing approval of our product candidates, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension of up to five years for a patent covering an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process. However, we may not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to market competing products sooner. As a result, our revenue from applicable products could be reduced, possibly materially.

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

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. For example, if the issuance to us, in a given country, of a patent covering an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation of the validity, enforceability, or scope of the claims in, or the written description or enablement in, a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect our intellectual property in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection. If we are unable to prevent unauthorized material disclosure of the non-patented intellectual property related to our technologies or product candidates to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

Further, many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing

 

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countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

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

We are a party to an exclusive license agreement with TSRI under which we have been granted rights to intellectual property that are important to our business and we expect that we may need to enter into additional license agreements in the future. Our existing license agreement with TSRI imposes on us, and we expect that future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license. See “Business—Collaborations” for a description of our license agreements, which includes a description of the termination provisions of these agreements. Furthermore, if either TSRI or The Regents of the University of California, which co-owns with TSRI certain of the patent rights licensed to us under our TSRI license agreement, were to grant a license to a third party in breach of their respective contractual obligations relating to the licensed patent rights, we could lose exclusivity with respect to the development and commercialization of product candidates arising under our TSRI agreement.

As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we cannot provide any assurances that third-party patents do not exist which might be enforced against our current product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.

Licensing of intellectual property is important to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

 

    the scope of rights granted under the license agreement and other interpretation-related issues;

 

    whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

    our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

    our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and

 

    the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our collaborators.

 

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If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

Third-party claims of intellectual property infringement may prevent, delay or stop our product development and drug discovery efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the U.S. PTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may give rise to claims of infringement of the patent rights of others.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the manufacture or use of our product candidates. Because patent applications can take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover any aspect of the manufacturing process for any of our product candidates, any molecules formed during the manufacturing process or any final product candidate itself, including the formulation or method of use of such product candidate, the holders of any such patents may be able to block our ability to commercialize the product candidate unless we obtained a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our product candidates, for example, formulations, processes for manufacture or methods of use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to develop and commercialize the product candidate unless we obtained a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, our ability to commercialize our product candidates may be impaired or delayed, which could in turn significantly harm our business.

Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our product candidates, which could harm our business significantly.

 

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

Presently we have in-licensed patent rights from TSRI that permit us to develop our product candidates. Because our programs may involve additional product candidates that may require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to acquire, in-license or use these proprietary rights. In addition, our product candidates may require specific formulations to work effectively and efficiently and these rights may be held by others. We may be unable to acquire or in-license certain third-party intellectual property rights from third parties that we identify. The licensing and acquisition of third-party intellectual property rights is a competitive area, and companies, which may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive in order to commercialize our product candidates. More established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

For example, we collaborate with an academic institution to accelerate our preclinical research or development under a written agreement with the institution. Typically, institutions provide us with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such right of first negotiation for intellectual property, we may be unable to negotiate a license within the specified time frame or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our program.

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

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

Competitors may infringe our patents or the patents of our licensors. For example, we are aware of two companies, Sutro Biopharma, Inc. and Allozyne, Inc., that are performing site-specific modification of proteins by encoding a non-native amino acid at a predetermined position within proteins. We believe that the approaches used by these companies differ from those employed by us. However, in order to stop infringement or unauthorized use of any of our patent rights, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that one or more patents of ours or our licensors is not valid, is unenforceable, and/or is not infringed, 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. A third party defendant may also request post grant review or inter partes review by the U.S. PTO of any patent we assert. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business.

Interference proceedings provoked by third parties or brought by the U.S. PTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation or interference proceedings may be unsuccessful and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able

 

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to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

Issued patents covering our technology platforms or our product candidates could be found invalid or unenforceable if challenged in court or before the U.S. PTO.

If we or one of our licensing collaborators initiated legal proceedings against a third party to enforce a patent covering our technology platforms or one of our product candidates, the defendant could counterclaim that one or more of the patents covering our technology platforms or product candidates, as applicable, is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, inter partes review, post grant review, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our technology platforms or product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our technology platforms or product candidates. Such a loss of patent protection could have a material adverse impact on our business.

The patent protection and patent prosecution for some of our product candidates may be dependent on third parties.

While we normally seek to obtain the right to control the prosecution and maintenance of the patents relating to our technology platforms, frequently the filing and prosecution activities for patents that relate to our product candidates are controlled by our development and commercialization collaborators. For example, we do not have the right to prosecute and maintain the patent rights licensed by us under agreements with each of Merck, BMS, Agensys, ZMC and Hisun, and our ability to have input into such filing and prosecution activities is limited. If these development and commercialization collaborators or any of our future collaborators fail to appropriately prosecute and maintain patent protection for patents covering any of our product candidates, the ability to develop and commercialize those product candidates may be adversely affected and competitors may not be prevented from making, using and selling competing products.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

Because we collaborate with various partners on the development and commercialization of one or more of our product candidates and because we rely on third parties to manufacture our product candidates, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such

 

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trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with in the future may be granted rights to publish data arising out of such collaboration, provided that we are notified in advance and given the opportunity to delay publication for a limited time period in order for us to secure patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. Our existing collaborative research and development programs may require us to share trade secrets under the terms of our research and development collaborations or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and foreign patent agencies in several stages over the lifetime of the patent. The U.S. PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We have systems in place to remind us to pay maintenance and annuity fees, and we rely on an outside annuity service and foreign patent counsel to pay the appropriate maintenance and annuity fees. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Other non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

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

We may also be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patents or other intellectual property. We may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging

 

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inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:

 

    Others may be able to make therapeutics that are similar to our product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed.

 

    We or our licensors or future collaborators might not have been the first to make the inventions covered by an issued patent or pending patent application that we own or have exclusively licensed.

 

    We or our licensors or future collaborators might not have been the first to file patent applications covering certain of our inventions.

 

    Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

 

    It is possible that our pending patent applications will not lead to issued patents.

 

    Issued patents that we own or have exclusively licensed may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

    Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

 

    We may not develop additional proprietary technologies that are patentable.

 

    The patents of third parties may have an adverse effect on our business.

Should any of these events occur, they could significantly harm our business, results of operations and prospects.

Risks Related to this Offering and Ownership of our Common Stock

We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no public market for shares of our common stock. Although we expect that our common stock will be approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in shares of our common stock is not active. The initial public offering price for our common stock will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

 

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The price of our stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

    the commencement, enrollment or results of our planned clinical trials of our product candidates or any future clinical trials we may conduct, or changes in the development status of our product candidates;

 

    any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

 

    adverse results or delays in clinical trials of our product candidates being conducted by us or our collaborators;

 

    the decision by us or our collaborators to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial of our product candidates;

 

    adverse regulatory decisions, including failure to receive regulatory approval for any of our product candidates;

 

    changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;

 

    adverse developments concerning our manufacturers;

 

    our inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;

 

    our inability to establish or maintain collaborations if needed;

 

    our failure or the failure of our collaborators to commercialize our product candidates;

 

    additions or departures of key scientific or management personnel;

 

    unanticipated serious safety concerns related to the use of our product candidates;

 

    introduction of new products or services offered by us or our competitors;

 

    announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

    our ability to effectively manage our growth;

 

    the size and growth, if any, of our targeted markets;

 

    our ability to successfully enter new markets;

 

    actual or anticipated variations in quarterly operating results;

 

    our cash position;

 

    our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

    publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

    changes in the market valuations of similar companies;

 

    overall performance of the equity markets;

 

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    sales of our common stock by us or our stockholders in the future;

 

    trading volume of our common stock;

 

    changes in accounting practices;

 

    ineffectiveness of our internal controls;

 

    disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

    significant lawsuits, including patent or stockholder litigation;

 

    general political and economic conditions; and

 

    other events or factors, many of which are beyond our control.

In addition, the stock market in general, and The NASDAQ Global Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Prior to this offering, our executive officers, directors, 5% stockholders and their affiliates owned approximately 73% of our voting stock and, upon the closing of this offering, that same group will hold approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ option to purchase additional shares) in each case assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus). Therefore, even after this offering, these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially

 

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exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $         per share, based upon an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus). Further, investors purchasing common stock in this offering will contribute approximately     % of the total amount invested by stockholders since our inception, but will own only approximately     % of the shares of common stock outstanding after giving effect to this offering.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less when they purchased their shares than the price offered to the public in this offering and the exercise of stock options granted to our employees. In addition, as of March 31, 2014, options to purchase 14,563,256 shares of our common stock at a weighted-average exercise price of $0.58 per share were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.

 

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We will incur significant 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.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which will require, among other things, that we file with the Securities and Exchange Commission, or the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the Securities and Exchange Commission, or SEC, and The NASDAQ Global Market to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Recent legislation permits emerging growth companies to implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares of common stock outstanding as of March 31, 2014, upon the closing of this offering we will have outstanding a total of          shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options. Of these shares, only the shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable without restriction in the public market immediately following this offering. Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities, LLC, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, up to an additional              shares of common stock will be eligible for sale in the public market, of which              shares are held by directors, executive officers and other

 

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affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

After this offering, the holders of              shares of our common stock, or     % of our total outstanding common stock as of March 31, 2014, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We expect that significant additional capital may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock, including shares of common stock sold in this offering.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

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, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering to fund research and development activities of our product candidates, to expand and enhance our technology platforms and for working capital and general corporate purposes. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

 

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Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective at or prior to the closing of this offering, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

    a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

    a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;

 

    a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the president or by a majority of the total number of authorized directors;

 

    advance notice requirements for stockholder proposals and nominations for election to our board of directors;

 

    a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than 66-2/3% of all outstanding shares of our voting stock then entitled to vote in the election of directors;

 

    a requirement of approval of not less than 66-2/3% of all outstanding shares of our voting stock to amend any bylaws by stockholder action or to amend specific provisions of our certificate of incorporation; and

 

    the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, current and prospective product candidates, planned clinical trials and preclinical activities, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management for future operations, and future results of anticipated product candidates, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended.

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the common stock that we are offering will be approximately $         million (or $         million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $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 the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $         million, assuming the assumed initial public offering price stays the same.

We currently expect to use our net proceeds from this offering as follows:

 

    approximately $         million to expand the clinical trials of ARX201;

 

    approximately $         million to advance ARX328 through the completion of a Phase 1b clinical trial in patients with HIV-associated lipodystrophy;

 

    approximately $         million to advance one of PSMA ADC, CD70 ADC, bi-specific anti-CD3 X Folate or CD184-FK506 ADC through preclinical development to the end of the first clinical safety trial; and

 

    the remainder for research and development, working capital and general corporate purposes.

We do not currently anticipate applying any portion of the net proceeds towards the development of ARX788 as ZMC is responsible, at its sole expense, to fund the development of ARX788 through Phase 1b clinical trials.

We may also use a portion of the net proceeds to in-license, acquire or invest in complementary businesses or products. However, we have no current commitments or obligations to do so.

We believe that such proceeds together with our existing cash and cash equivalents will be sufficient to fund our operations through at least the next 18 months.

The amounts and timing of our actual expenditures will depend on numerous factors, including the progress of our clinical trials and other development and commercialization efforts and other factors described under “Risk Factors” in this prospectus, as well as the amount of cash used in our operations. We therefore cannot estimate the amount of net proceeds to be used for all of the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending the uses described above, we intend to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the growth and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, contractual restrictions, business prospects and other factors the board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and our capitalization as of March 31, 2014 as follows:

 

    on an actual basis;

 

    on a pro forma basis to reflect (a) the automatic conversion of all outstanding shares of our convertible preferred stock into 61,428,152 shares of our common stock immediately prior to the completion of this offering and (b) the filing of our amended and restated certificate of incorporation immediately prior to the completion of this offering. We have based our assumption regarding the conversion of preferred stock into common stock immediately prior to the completion of this offering on stockholder consents we have obtained approving the conversion; and

 

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

The pro forma and pro forma as adjusted information below is illustrative only, and our cash and cash equivalents and capitalization following the completion 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 information in conjunction with our financial statements and the related notes included in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of March 31, 2014  
     Actual     Pro Forma     Pro Forma As
Adjusted(1)
 
    

  (unaudited, in thousands, except

share and per share data)  

 

Cash and cash equivalents

   $ 61,555      $ 61,555      $                    
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, $0.001 par value; 63,923,189 shares authorized, 61,428,152 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

   $ 102,503      $ —       

Stockholders’ equity (deficit):

      

Preferred stock, $0.001 par value per share; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted

     —          —       

Common stock, $0.001 par value per share; 85,000,000 shares authorized, 9,500,743 shares issued and 9,200,743 shares outstanding, actual; 200,000,000 shares authorized, 70,928,895 shares issued and 70,628,895 shares outstanding, pro forma; 200,000,000 shares authorized,              shares issued and              shares outstanding, pro forma as adjusted

     10        71     

Additional paid-in capital

     4,395        106,837     

Accumulated deficit

     (80,069     (80,069  

Less cost of treasury stock; 300,000 shares

     (216     (216  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (75,880     26,623     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 26,623      $ 26,623      $     
  

 

 

   

 

 

   

 

 

 

 

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(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (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 and cash equivalents, additional paid-in capital, total capitalization and total stockholders’ (deficit) equity by approximately $        , 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. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share of $         (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total capitalization and total stockholders’ equity (deficit) by approximately $        , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of common stock shown as issued and outstanding in the table excludes:

 

    14,563,256 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014 at a weighted average exercise price of $0.58 per share; and

 

    1,007,502 shares of our common stock reserved for future issuance under our 2013 equity incentive plan.

 

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DILUTION

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

As of March 31, 2014, we had a historical net tangible book value (deficit) of $(75.9) million, or $(8.25) per share of common stock, based on 9,200,743 shares of common stock outstanding at March 31, 2014. Our historical net tangible book value per share represents the amount of our total tangible assets less total liabilities and convertible preferred stock, which is not included within stockholders’ equity (deficit), divided by the total number of shares of common stock outstanding at March 31, 2014.

On a pro forma basis, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 61,428,152 shares of our common stock immediately prior to the completion of this offering, our pro forma net tangible book value as of March 31, 2014 would have been approximately $26.6 million, or approximately $0.38 per share of our common stock.

After giving further effect to the sale of              shares of common stock that we are offering at the initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2014 would have been approximately $         million, or approximately $         per share. This amount represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $         per share to new investors participating 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 (without giving effect to any exercise by the underwriters of their option to purchase additional shares):

 

Assumed initial public offering price per share

     $                    

Historical net tangible book value (deficit) per share at March 31, 2014, before giving effect to this offering

   $ (8.25  

Pro forma increase in historical net tangible book value per share attributable to conversion of all outstanding shares of convertible preferred stock

     8.63     
  

 

 

   

Pro forma net tangible book value per share at March 31, 2014, before giving effect to this offering

   $ 0.38     

Increase in pro forma net tangible book value per share attributable to investors participating in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution per share to new investors participating in this offering

     $                    
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $        , and dilution in pro forma net tangible book value per share to 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 and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

 

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We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by approximately $         and decrease the dilution to investors participating in this offering by approximately $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. Similarly, a decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by approximately $         and increase the dilution to investors participating in this offering by approximately $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

If the underwriters exercise their option to purchase              additional shares of our common stock in full in this offering, the pro forma as adjusted net tangible book value after the offering would be $         per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $         per share and the dilution per share to new investors would be $         per share, in each case assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus).

The following table summarizes on the pro forma as adjusted basis described above, as of March 31, 2014, the differences between the number of shares of common stock purchased from us, the total consideration paid to us in cash and the average price per share paid by existing stockholders for shares issued prior to this offering and the price to be paid by new investors in this offering. The calculation below is based on the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

Existing stockholders

                      $                      $     

Investors participating in this offering

               
  

 

  

 

 

   

 

  

 

 

    

 

 

   

Total

        100.0      $           100.0  
  

 

  

 

 

   

 

  

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $         million, $         million and $        , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The foregoing tables and calculations exclude:

 

    14,563,256 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014 at a weighted average exercise price of $0.58 per share; and

 

    1,007,502 shares of our common stock reserved for future issuance under our 2013 equity incentive plan.

To the extent any of these outstanding options is exercised, there will be further dilution to new investors. If all of such outstanding options had been exercised as of March 31, 2014, the pro forma as adjusted net tangible book value per share after this offering would be $        , and total dilution per share to new investors would be $        .

 

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If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering:

 

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

 

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SELECTED FINANCIAL DATA

The following tables set forth a summary of our historical financial data as of, and for the periods ended on, the dates indicated. We have derived the statements of operations data for the years ended December 31, 2012 and 2013 and the balance sheet data as of December 31, 2012 and 2013 from our audited financial statements included elsewhere in this prospectus. We have derived the summary statements of operations data for the three months ended March 31, 2013 and 2014 and balance sheet data as of March 31, 2014 from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements included in this prospectus and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position as of March 31, 2014 and results of operations for the three months ended March 31, 2013 and 2014. You should read this data together with our financial statements and the related notes thereto appearing elsewhere in this prospectus and in the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of our future results.

 

     Years Ended December 31,     Three Months
Ended March 31,
 
     2012      2013          2013              2014      
           (unaudited)  
     (in thousands, except share and per share data)  

Statements of Operations Data:

         

Collaboration revenues

   $ 44,461       $ 17,034      $ 2,432      $ 5,032   

Operating expenses:

         

Research and development

     16,262         27,540        3,661        8,509   

General and administrative

     5,735         6,853        1,509        1,944   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,997         34,393        5,170        10,453   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     22,464         (17,359     (2,738     (5,421

Total other income (expense)

     343         368        222        40   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     22,807         (16,991     (2,516     (5,381

Provision for income taxes

     242         53        —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 22,565       $ (17,044   $ (2,516   $ (5,381
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders (1):

         

Basic

   $ 0.20       $ (1.90   $ (0.28   $ (0.60
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.19       $ (1.90   $ (0.28   $ (0.60
  

 

 

    

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per share attributable to common stockholders (1):

         

Basic

     8,870,946         8,970,927        8,959,804        9,017,233   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

     9,587,848         8,970,927        8,959,804        9,017,233   
  

 

 

    

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders, basic and diluted (unaudited) (1)

      $ (0.24     $ (0.08
     

 

 

     

 

 

 

Shares used to compute pro forma net income (loss) per share attributable to common stockholders, basic and diluted (unaudited) (1)

        70,399,079          70,445,385   
     

 

 

     

 

 

 

 

(1) See Note 1 to our audited financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the historical and pro forma net income (loss) per share, basic and diluted, and the number of shares used in the computation of the per share amounts.

 

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     As of December 31,     As of March 31,
2014
 
     2012     2013    
                 (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 68,125      $ 71,843      $ 61,555   

Working capital

     58,774        51,462        41,026   

Total assets

     71,529        77,583        70,018   

Convertible preferred stock

     102,503        102,503        102,503   

Accumulated deficit

     (57,644     (74,688     (80,069

Total stockholders’ deficit

     (54,345     (70,872     (75,880

 

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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 financial statements and the related notes and other financial information included elsewhere in this prospectus. 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, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause our 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

Ambrx is a clinical stage biotechnology company focused on discovering and developing first-in-class and best-in-class optimized protein therapeutics known as bio-conjugates. Our proprietary technology platforms enable us to attach pharmaceutically active molecules to specific sites within proteins, a process known as site-specific conjugation, and to design biologics with precision that is similar to that used to design modern small molecule drugs. We refer to this as protein medicinal chemistry. We believe our ability to target specific sites of conjugation more precisely than prior generations of bio-conjugates and produce homogeneous therapeutics allows us to discover new protein drugs and design safer, more effective versions of current therapeutics. We can create proteins in both bacterial and mammalian cell systems, enabling us to create bio-conjugates in the system most appropriate for that product candidate. Our bacterial platform, ReCODE, has generated our most mature programs and includes several collaboration programs and several internal programs focused on long-acting therapeutic proteins. We apply our mammalian platform, EuCODE, to generate the majority of our ADC product candidates. Utilizing our ReCODE and EuCODE platforms, we have developed a pipeline of novel product candidates that include ADCs, bi- and multi-specific drug conjugates and long-acting therapeutic proteins. Our most advanced ADC program is ARX788, an ADC for cancers expressing HER2, for which we intend to begin clinical trials in early 2015 and which we are collaborating with ZMC to develop. Our most advanced long-acting proteins are ARX201, a once-weekly hGH that has successfully completed a Phase 2b clinical trial, and ARX328, a long-acting leptin for lipodystrophy and weight management, for which we intend to submit an IND to the FDA in mid-2014. Our most advanced collaboration program in human health is ARX618, a long-acting FGF21 for type 2 diabetes, which our collaborator BMS has advanced through Phase 1 clinical trials and expects to begin Phase 2 clinical trials for in the second half of 2014.

We are also completing preclinical assessments of other internally developed ADC and bi-specific product candidates, including those listed below. We expect that the preclinical datasets for these candidates will become available during 2014. Assuming positive preclinical results, we anticipate taking one or more of these molecules into preclinical development beginning in 2015.

 

    PSMA ADC for the treatment of metastatic castration-resistant prostate cancer and glioblastoma multiforme;

 

    CD70 ADC for the treatment of renal and nasopharyngeal cancers;

 

    Bi-Specific Anti-CD3 X Folate for the treatment of ovarian cancer; and

 

    CD184-FK506 ADC for the treatment of immunological diseases.

In addition to our internal pipeline, we collaborate with leading pharmaceutical companies, including BMS, Merck, Eli Lilly, Agensys, ZMC and Hisun. Our active collaborations consist of the following:

BMS FGF21 Collaboration. In September 2011, we entered into a collaboration and license agreement with BMS. This collaboration is focused on the development and commercialization of one or more compounds

 

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containing human FGF21 molecules having one or more non-naturally occurring amino acids incorporated using our ReCODE technology. Under the terms of the agreement, BMS receives research, development, manufacturing, and worldwide commercialization rights for our lead human FGF21 product candidate, ARX618, and alternative or backup compounds to ARX618. We received an initial upfront payment of $17.5 million and a milestone payment for the initiation of Phase 1 clinical trials of $10.0 million. We have the potential to receive additional research and development funding under this agreement. We are also eligible to receive clinical and regulatory milestone payments based on the successful development of products, as well as royalties on the net sales of such products. We may receive up to $255.0 million upon achievement of certain clinical and regulatory events and up to $198.8 million in the aggregate for any subsequent products covered by our intellectual property. In addition, we have the potential to receive payments totaling up to $150.0 million in the aggregate upon achievement by BMS of specified sales milestones for the covered products. We are also entitled to receive tiered royalties on a product-by-product basis ranging from the high single digit to the low double digit percentages of aggregate worldwide net sales of each product. BMS may terminate the agreement (1) upon three months’ written notice if regulatory approval has not yet been obtained for an applicable product in the U.S. or the European Union, or (2) upon six months’ written notice if regulatory approval has been obtained for an applicable product in either the U.S. or the European Union. We or BMS may terminate the agreement for cause for safety reasons or upon other party’s material breach that remains uncured for 90 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings. We may also terminate the agreement for cause due to BMS’ failure to use commercially reasonable efforts in the development and commercialization of products.

BMS Relaxin Collaboration. In September 2011, we entered into a collaboration and license agreement with BMS focused on the development and commercialization of one or more compounds containing human Relaxin molecules having one or more non-naturally occurring amino acids incorporated using our ReCODE technology. Under the terms of the agreement, BMS receives research, development, manufacturing, and worldwide commercialization rights for our lead human Relaxin compound, ARX720, and alternative or backup compounds to ARX720. We received an initial upfront payment of $5.0 million and receive research and development funding under this agreement. We are also eligible to receive clinical and regulatory milestone payments based on the successful development of products, as well as royalties on the net sales of such products. We may receive up to $112.0 million upon the achievement of certain clinical and regulatory events and up to $56.0 million in the aggregate for any subsequent products covered by our intellectual property. We are also entitled to receive tiered royalties on a product-by-product basis in the mid-single digit percentages of aggregate worldwide net sales of each product. BMS may terminate the agreement (1) upon three months’ written notice if regulatory approval has not yet been obtained for an applicable product in the U.S. or the European Union, or (2) upon six months’ written notice if regulatory approval has been obtained for an applicable product in either the U.S. or the European Union. We or BMS may terminate the agreement for cause for safety reasons or upon other party’s material breach that remains uncured for 90 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings. We may also terminate the agreement for cause due to BMS’ failure to use commercially reasonable efforts in the development and commercialization of products.

BMS Oncology ADC Collaboration. In May 2013, we entered into a collaboration and exclusive license agreement with BMS for the discovery, development and commercialization of novel compounds incorporating our ReCODE or EuCODE technology suitable for clinical development. Under the terms of the agreement, we received an upfront payment of $15.0 million and receive research and development funding. We are also eligible to receive clinical, regulatory and sales milestone payments, as well as royalties on net sales of such products. For each target within the collaboration, we may receive future milestone payments of up to $97.0 million, of which $62.0 million would be due upon the achievement of certain clinical and regulatory based milestones and $35.0 million would be due upon the achievement of certain commercial sales thresholds. We are also entitled to receive tiered royalties on a product-by-product basis in the mid-single digit percentages of aggregate worldwide net sales of each product. BMS may terminate the agreement upon three months’ written notice. We or BMS may terminate the agreement for cause for safety reasons or upon other party’s material breach that remains uncured for 90 days after receipt of notice thereof, or upon certain bankruptcy or insolvency

 

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proceedings. We may also terminate the agreement for cause due to BMS’ failure to use commercially reasonable efforts in the development and commercialization of products.

Merck Collaboration. In June 2012, we entered into a research collaboration, option and exclusive license agreement with Merck for the research and development of novel bio-conjugates for both oncology and non-oncology therapeutic targets. Under the terms of the agreement, we received an upfront payment of $15.0 million and are eligible to receive research and development funding. We are also eligible to receive preclinical, clinical, regulatory and sales-based milestone payments, as well as tiered royalties on net sales of licensed products. Merck may exercise an option to acquire an exclusive license by paying us an option exercise fee in the mid-single digit millions of dollars. For each target within the collaboration, we may receive future milestone payments of up to an additional $98.0 million, of which $68.0 million would be due upon the achievement of certain preclinical, clinical and regulatory based milestones and $30.0 million would be due upon the achievement of certain commercial sales thresholds. We will also be entitled to receive tiered royalties in the single digit percentages of aggregate worldwide net sales of each licensed product. We or Merck may terminate the agreement for cause for the other party’s uncured material breach (including our failure to conduct a given research program in accordance with the terms of the collaboration agreement), and Merck may terminate the agreement without cause for convenience, in each case upon 90 days’ notice. Additionally, Merck may terminate the agreement with respect to a given product immediately upon written notice to us in the event that Merck has a safety or efficacy concern with respect to the product. On a target-by-target basis, Merck has the right to discontinue a given research program or extend any research program term for an additional year at any time on 90 days’ notice.

Eli Lilly Collaboration. In January 2007, we entered into a collaborative research, license and commercialization agreement pursuant to which we work with Eli Lilly’s Elanco Animal Health division to discover, develop and commercialize a broad portfolio of Ambrx-enabled bio-conjugates in animal health. The agreement was most recently amended in February 2011. Under the terms of the February 2011 amendment, Eli Lilly paid us $8.0 million for an exclusive worldwide license to develop and commercialize products in the entire field of animal health. We are eligible to receive research and development funding and reimbursement of certain intellectual property expenses. We are also eligible to receive preclinical and regulatory milestone payments, as well as royalties on net sales of such products. For each product candidate within the collaboration, we may receive future milestone payments of up to $1.0 million upon achievement of certain preclinical and regulatory based milestones. We are also eligible to receive tiered royalties, with percentages ranging from the low to mid-single digits, based on cumulative net sales of each product. Either party may terminate the agreement without cause upon 90 days’ notice. We may terminate the agreement for cause if Eli Lilly fails to make any payments required by the agreement, and either we or Eli Lilly may terminate the agreement for cause for the other party’s material breach that remains uncured for 60 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings.

Agensys Collaboration. In April 2013, we entered into a research collaboration and exclusive license agreement with Agensys, which applies our platform technology to specific antibodies that bind to targets within the Agensys pipeline, with the objective of creating ADCs based on Ambrx enabled antibodies and additional Agensys technology. Under the terms of the agreement, we received an upfront payment of $15.0 million, which included research and development funding for the first year of the agreement, and are eligible to receive additional research and development funding. We are also eligible to receive preclinical, clinical, regulatory and sales milestone payments, as well as royalties on net sales of licensed products. For each target within the collaboration, we may receive future milestone payments of up to $95.0 million, of which $55.0 million would be due upon the achievement of certain preclinical, clinical and regulatory based milestones and $40.0 million upon the achievement of certain commercial sales thresholds. We are entitled to receive tiered royalties in the high single digit percentages of aggregate worldwide net sales of each licensed product. Agensys may terminate the agreement without cause upon 90 days’ notice. We or Agensys may terminate the agreement for cause for the other party’s material breach that remains uncured for 90 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings. We may terminate the agreement for cause in the event that Agensys or any of its affiliates challenges the validity, scope or enforceability of the licensed patent rights.

 

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ZMC Collaboration. In June 2013, we entered into a co-development and license agreement with ZMC for the development and commercialization of ARX788 and other HER2 ADC products covered by our intellectual property rights. Under the terms of the agreement, ZMC received an exclusive license to any HER2-ADC products within the territory of China, while we retain commercial rights outside of China and will be eligible to receive royalties on sales of the products in China. ZMC will be responsible, at its sole expense, to use commercially reasonable efforts to develop and commercialize the licensed products in China and fund the development of the product outside of China to the end of Phase 1 clinical trials. In consideration of technical assistance provided by us, ZMC will provide research and development funding to us during the first three years period following the effective date. We are entitled to receive tiered royalties in the low double digit percentages of aggregate net sales of licensed products in China. In addition, we are obligated to pay ZMC a mid-single digit or low double digit percentage of any sublicensing profit we may receive outside of China, depending on what phase of clinical development has been completed at the time of transfer, or a low single digit royalty on any net sales that we or our successors may receive from selling licensed products outside of China, if the market authorization of such product is based on Phase 1 clinical data. ZMC may terminate the agreement without cause upon six months’ notice. We or ZMC may terminate the agreement for cause if the other party materially defaults with respect to any of its material obligations, and such default is not cured within 60 days after receipt of notice thereof, or in the case of certain voluntary or involuntary insolvency proceedings.

Hisun Collaboration. In April 2014, we entered into a co-development and license agreement with Hisun for the research, development and commercialization of certain bi-specific product candidates and products for the treatment of cancer. Pursuant to the agreement, we granted Hisun an exclusive license to use certain of our patents and know-how to develop, use, manufacture and sell certain licensed products in China. We and Hisun are each responsible for using commercially reasonable efforts to develop licensed products during the research term. Hisun is responsible, at its sole expense, to use commercially reasonable efforts to develop, commercialize and manufacture licensed products in China. As consideration for technical assistance we provide to Hisun under the agreement, we are entitled to receive a payment in the low single digit millions of dollars each year during the initial three-year research term. We are also entitled to receive tiered royalties in the mid to high single digit percentages of net sales of licensed products in China until the later of the expiration of the applicable patent rights or 12 years after the first commercial sale of the product in China. In addition, during such period, we are obligated to pay Hisun certain low single digit percentages of any sublicensing or net sales profit that we may receive outside of China, depending on what phase of clinical development has been completed at the time of transfer or whether the product has been commercialized. Hisun may terminate the agreement without cause upon six months’ notice. We or Hisun may terminate the agreement for cause if the other party materially defaults with respect to any of its material obligations, and such default is not cured within 60 days after receipt of notice thereof, or in the case of certain voluntary or involuntary insolvency proceedings.

Since our inception in 2003, we have devoted substantially all of our resources to the development of our ReCODE and EuCODE platforms, identifying potential product candidates using those platforms, the clinical and preclinical advancement of our product candidates, the creation, licensing and protection of related intellectual property and the provision of 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 our collaboration and license agreements, including upfront payments, research and development funding, reimbursement of patent costs and milestone payments, and the private placement of convertible preferred stock. Since our inception through March 31, 2014, we have received a total of $106.0 million from the sale of convertible preferred stock and separately over $200 million from our collaborators in connection with our collaboration and licensing agreements.

Although it is difficult to predict our liquidity requirements, based upon our current operating plan, we anticipate that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund the clinical development of ARX788, ARX201, and ARX328 and continued development of our preclinical programs and technology platforms through at least the next 18 months. As a result of our collaboration activities we have had periods with net income, but have primarily incurred net losses since our

 

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inception. Our net loss was $17.0 million and $5.4 million for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively, and as of March 31, 2014 we had an accumulated deficit of $80.1 million. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development of our internal product candidates and technology platforms and incur additional costs associated with being a public company.

Financial Operations Overview

Revenues

To date, we have not generated any revenues from product sales. Our revenues have been derived from our collaboration and license agreements, including amounts recognized relating to upfront payments, research and development funding, reimbursement of patent costs and milestone payments.

In the future, we may generate revenue from a combination of license fees and other upfront payments, research and development payments, reimbursement of patent costs, milestone payments, product sales and royalties in connection with our collaborations. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing of any future achievement of preclinical, clinical, regulatory and commercialization milestones and the extent to which any of our products are approved and successfully commercialized by us or our collaborators. If our collaborators do not elect or otherwise agree to fund our development costs pursuant to our collaboration agreements, or if we or our collaborators fail to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenues, our results of operations and our financial position could be adversely affected.

Summary of Collaboration Revenue

The following table shows a comparison of revenue from our collaborations for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014:

 

     Years Ended December 31,      Three Months Ended March 31,  
     2012      2013      2013      2014  
     (in thousands)  

Bristol-Myers Squibb Company

   $ 32,438       $ 3,753       $ 248       $ 1,197   

Merck Sharp & Dohme Corp.

     1,849         5,530         1,233         1,751   

Agensys, Inc.

     —           2,669         —           942   

Eli Lilly and Company

     4,280         4,635         951         942   

Other

     5,894         447         —           200   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,461       $ 17,034       $ 2,432       $ 5,032   
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Research and development expenses consist of costs associated with our technology platforms and programs. These costs consist primarily of:

 

    salaries and related overhead expenses, including stock-based compensation and benefits for personnel in research and development functions;

 

    costs associated with conducting our preclinical, development and regulatory activities, including fees paid to third-party professional consultants and service providers;

 

    costs to develop and manufacture preclinical study and clinical trial materials;

 

    costs for laboratory supplies;

 

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    payments related to licensed technologies; and

 

    facilities, depreciation and other expenses, including allocated expenses for rent and maintenance of facilities.

Research and development costs, including third-party costs reimbursed by collaborators as part of our collaboration agreements, are expensed as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

The following table summarizes our research and development expenses by major programs for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014:

 

         Years Ended December 31,          Three Months Ended March 31,  
     2012      2013      2013      2014  
     (in thousands)  

ARX328

   $ 362       $ 7,732       $ 272       $ 2,509   

ARX201

     186         3,336         30         1,518   

Internal preclinical programs and technologies

     9,551         8,377         2,359         2,392   

Collaboration programs

     4,562         4,293         723         1,406   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allocated research and development expenses

     14,661         23,738         3,384         7,825   

Unallocated expenses

     1,601         3,802         277         684   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 16,262       $ 27,540       $ 3,661       $ 8,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Allocated expenses consist of direct costs associated with each program, including overhead. Unallocated expenses consist of certain research and development administration costs and sublicensing royalties paid to TSRI. Expenses related to our ARX328 and ARX201 internal programs reflect only expenses incurred subsequent to identification of the preclinical candidate. We did not track internal program costs on a separate basis prior to 2006.

Through March 31, 2014, we incurred research and development expenses related to ARX328 and ARX201 of $11.5 million and $23.4 million, respectively.

We plan to increase our current level of research and development expenses for the foreseeable future as we continue the development of ARX201, ARX328 and our preclinical programs and technologies. Currently, ZMC is responsible, at its sole expense, to fund the development of ARX788 through Phase 1b clinical trials. If, during the Phase 1b clinical trial, the safety, PK and activity of ARX788 supports further development, we may incur substantial manufacturing and related costs if we decide to initiate preparation for a Phase 2 clinical trial; this will be our sole financial responsibility.

We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur or the timelines we will require in the continued development of our product candidates. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation and travel expenses for our employees in executive, operational, finance and human

 

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resource functions. Other general and administrative expenses include facility-related costs and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the continued research and development of our product candidates. We also anticipate increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company.

Other Income (Expense)

Other income (expense) primarily consists of investment income related to our cash and cash equivalents, gains on investment securities and gains and losses on the sale of equipment.

Provision for Income Taxes

The provision for income taxes consists of our estimated federal and California alternative minimum taxes.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these 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. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. 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. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in the notes to our audited financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies related to revenue recognition and stock-based compensation are most critical to understanding and evaluating our reported financial results.

Revenue Recognition

Our revenues are derived from our collaboration and license agreements. We recognize revenues when all four of the following criteria are met: (1) there is persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectibility is reasonably assured.

Our collaboration and license agreements contain multiple deliverables, including technology licenses or options to obtain technology licenses, manufacturing licenses and research and development services. Our collaborations may provide for various types of payments including upfront payments, funding of research and development, milestone payments, and royalties on net product sales. We evaluate the deliverables in our collaboration agreements to determine whether they meet the criteria to be accounted for as separate units of accounting or whether they should be combined with other deliverables and accounted for as a single unit of accounting. When the delivered items in an arrangement have “stand-alone value” to our customer, we account for the deliverables as separate units of accounting and we allocate the consideration to each unit of accounting

 

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based on the relative selling price of each deliverable. Delivered items have stand-alone value if they are sold separately by any vendor or the customer could resell the delivered items on a standalone basis. We use the following hierarchy of values to estimate the selling price of each deliverable: (1) vendor-specific objective evidence of fair value; (2) third-party evidence of selling price; and (3) best estimate of selling price, or BESP. The BESP reflects our best estimate of what the selling price would be if we regularly sold the deliverable on a stand-alone basis. We recognize the revenue allocated to each unit of accounting as we deliver the related goods or services. If we determine that we should treat certain deliverables as a single unit of accounting, then we recognize the revenue over our estimated period of performance.

From time to time, we may enter into separate agreements at or near the same time with the same customer. We evaluate such agreements to determine whether they should be accounted for individually as distinct arrangements or whether the separate agreements are, in substance, a single multiple element arrangement. We evaluate whether the negotiations are conducted jointly as part of a single negotiation, whether the deliverables are interrelated or interdependent, whether fees in one arrangement are tied to performance in another arrangement, and whether elements in one arrangement are essential to another arrangement. Our evaluation involves significant judgment to determine whether a group of agreements might be so closely related that they are, in effect, part of a single arrangement. For example, we entered into three collaboration agreements with BMS, of which two were entered into in September 2011 and the third in May 2013. We have evaluated all three of the BMS agreements to determine whether we should account for them as separate agreements. Although negotiated at the same time, we determined that each of the deliverables under the 2011 agreements had stand-alone value. Each agreement focuses on different targets, there are no interrelated or interdependent deliverables, there are no provisions in any of these agreements that are essential to the other agreement, and the payment terms and fees under each agreement are independent of each other. The research and development services provided by us started and are expected to conclude at the same time. In addition, we determined that the 2013 agreement should be accounted for separately from the 2011 agreements because negotiations were conducted independently of one another, each agreement focuses on different targets, there are no interrelated or interdependent deliverables, there are no provisions in any of these agreements that are essential to the other agreement, and the payment terms and fees under each agreement are independent of each other.

Milestones

We use the milestone method of accounting and revenue is recognized when earned, as evidenced by written acknowledgement from the collaborator or other persuasive evidence that the milestone has been achieved and the payment is non-refundable, provided that the milestone event is substantive. A milestone event is defined as an event (1) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance; (2) for which there is substantive uncertainty at the inception of the arrangement that the event will be achieved; and (3) that would result in additional payments being due to us. Events for which the occurrence is either contingent solely upon the passage of time or the result of a counterparty’s performance are not considered to be milestone events. A milestone event is substantive if all of the following conditions are met: (1) the consideration is commensurate with either our performance to achieve the milestone, or the enhancement of the value to the delivered item(s) as a result of a specific outcome resulting from our performance to achieve the milestone; (2) the consideration relates solely to past performance; and (3) the consideration is reasonable relative to all the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

We assess whether a milestone is substantive at the inception of each arrangement. If a milestone is deemed non-substantive, we will account for that milestone payment in accordance with the multiple element arrangements guidance and recognize it consistent with the related units of accounting for the arrangement over the related performance period.

 

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Stock-Based Compensation

Stock-based compensation expense represents the grant date fair value of employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures. For stock option grants with performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable or the performance condition has been achieved. We estimate the fair value of stock option grants using the Black-Scholes option pricing model.

We account for stock options to non-employees using the fair value approach. Stock options to non-employees are subject to periodic revaluation over their vesting terms. For stock option grants with performance-based milestones, the expense is recorded over the remaining service period after the point when the performance condition has been achieved.

We estimate the fair value of our stock-based awards to employees and non-employees using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (1) the risk-free interest rate, (2) the expected volatility of our stock, (3) the expected term of the award and (4) the expected dividend yield. Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours, including risk profiles and position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected life of our employee stock options using the “simplified” method, whereby the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on the yields of zero-coupon U.S. Treasury securities with similar maturities.

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:

 

     Years Ended December 31,    Three Months Ended March 31,
     2012    2013    2013    2014

Risk-free interest rate

   0.82% –1.11%    1.12% –1.96%    1.12% –1.14%    1.88% –1.90%

Expected volatility

   82%    82%    82%    82%

Expected term (in years)

   6.1    6.1    6.1    6.1

Expected dividend yield

   0.0%    0.0%    0.0%    0.0%

The following table summarizes by grant date the number of shares of common stock underlying stock options granted from January 1, 2013 through March 31, 2014, as well as the associated per share exercise price and the estimated fair value per share of our common stock on the grant date:

 

Grant Date

   Number of
Common
Shares
Underlying
Options
Granted
     Exercise
Price per
Common
Share
     Estimated
Fair Value

per
Common
Share
 

January 25, 2013

     353,200       $ 0.53       $ 0.53   

February 5, 2013

     4,563,855         0.53         0.53   

June 18, 2013

     34,600         0.72         0.72   

August 19, 2013

     1,570,900         0.72         0.72   

September 25, 2013

     426,000         0.72         0.72   

February 21, 2014

     881,500         1.00         1.00   

March 12, 2014

     63,000         1.00         1.00   

 

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Total employee stock-based compensation expense related to unvested stock option grants not yet recognized as of December 31, 2013 was approximately $2.1 million and is expected to be recognized as expense over approximately 1.6 years. Total employee stock-based compensation expense related to unvested stock option grants not yet recognized as of March 31, 2014 was approximately $2.5 million and is expected to be recognized as expense over approximately 1.6 years.

Based on the initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), the intrinsic value of stock options outstanding as of March 31, 2014 would be $             million, of which $             million and $             million would have been related to stock options that were vested and unvested, respectively, at that date.

Determination of the Fair Value of Common Stock

We are required to estimate the fair value of the common stock underlying our stock-based awards when performing fair value calculations, which is the most subjective input into the Black-Scholes option pricing model. The fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, taking into account input from management and independent third-party valuation analysis. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for our common stock, on each grant date we develop an estimate of the fair value of our common stock in order to determine an exercise price for the option grants. Our determinations of the fair value of our common stock were made using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid.

Our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our common stock, including:

 

    contemporaneous valuations prepared by an independent third-party valuation specialist effective as of December 1, 2012, May 2, 2013, December 1, 2013 and March 31, 2014;

 

    our results of operations, financial position and the status of research and development efforts of our product candidates;

 

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

 

    the lack of marketability of our common stock as a private company;

 

    the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

    our stage of development and business strategy and the material risks related to our business and industry;

 

    market performance of comparable publicly traded companies;

 

    trends and developments in our industry;

 

    recent valuations of companies in the life sciences and biotechnology sectors at the time of their initial public offering, or IPO, as well as recently completed mergers and acquisitions of peer companies;

 

    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, such as an IPO or a sale of our company, given prevailing market conditions; and

 

    the state of the IPO market for similarly situated privately held biotechnology companies.

 

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There are significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event and the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net income (loss) and net income (loss) per common share could have been significantly different.

Common Stock Valuation Methodologies

Our valuations were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of the company’s future operations, discounting to the present value with an appropriate risk-adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. The following market approaches were utilized in our recent valuations:

 

    Guideline public company method. The guideline public company market approach estimates the value of a business by comparing a company to similar publicly traded companies.

 

    Guideline transaction method. The guideline transaction market approach estimates the value of a business based on valuations from selected mergers and acquisitions transactions for companies with similar characteristics.

Each methodology described above was considered in our valuations. We elected not to utilize the cost approach in any of our valuations since our value relates primarily to our intangible assets.

Methods Used to Allocate Our Enterprise Value to Classes of Securities

In accordance with the Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock at each valuation date. The methods we considered consisted of the following:

 

    Current value method. Under the current value method, once the fair value of the enterprise is established, the value is allocated to the various series of preferred and common stock based on their respective seniority, liquidation preferences or conversion values, whichever is greatest. This method was considered but not utilized in any of the valuations discussed below.

 

    Option pricing method. Under the option pricing method, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options.

 

    Probability-weighted expected return method, or PWERM. The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted 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.

January 2013 and February 2013 grants. On each of January 25, 2013 and February 5, 2013, our board of directors determined that the fair value of our common stock was $0.53 per share in connection with the grant of stock options. As part of each determination, our board of directors concluded that no significant internal or external value-generating events had taken place between December 1, 2012 (the date of the previous valuation prepared with input from a third-party valuation specialist) and the dates of these stock option grants. To determine our enterprise value as of December 1, 2012, we utilized both an income approach based on a

 

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discounted cash flow method and a guideline public company market approach. The option pricing method was utilized to allocate the enterprise value to our common stock. We believed that the option pricing method was the most appropriate given the expectation of various potential liquidity outcomes and the difficulty of selecting and supporting appropriate enterprise values given our early stage of development. We applied a discount for lack of marketability, or DLOM, of 37% based on the Black-Scholes Option Pricing Model and several empirical restricted stock studies for calculating illiquidity discounts. This methodology was applied on a consistent basis in the preparation of our May 2013 valuation.

May 2013 valuation. The common stock fair value was estimated to be $0.72 per share in May 2013, with input from both management and an independent third-party valuation specialist. The fair value per share of $0.72 represented an increase of $0.19 per share from the $0.53 per share utilized for the February 2013 option grants. The significant events between February 2013 and May 2013 that impacted our estimated enterprise value and contributed to our updated conclusions regarding the timing and nature of future cash flows were as follows:

 

    in April 2013, we entered into a research and collaboration and exclusive license agreement with Agensys that included a $15.0 million upfront payment; and

 

    in May 2013, we entered into a collaboration and exclusive license agreement with BMS that included a $15.0 million upfront payment.

June 2013, August 2013 and September 2013 grants. On each of June 18, 2013, August 19, 2013 and September 25, 2013, our board of directors determined that the fair value of our common stock was $0.72 per share in connection with the grant of stock options. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place between the May 2013 valuation analysis date and the dates of these stock option grants.

December 2013 valuation. The common stock fair value was estimated to be $1.00 per share in December 2013, with input from both management and an independent third-party valuation specialist. The fair value per share of $1.00 represented an increase of $0.28 per share from the $0.72 per share utilized for the September 2013 option grants.

The significant event between September 2013 and December 2013 that impacted our estimated enterprise value and contributed to our updated conclusions regarding the timing and nature of future liquidity events was the authorization by our board of directors, in the fourth quarter of 2013, to pursue an IPO. As a result, we switched from the option pricing method to the PWERM to allocate enterprise value across our classes and series of capital stock, because we believed that there was a higher probability of a liquidity event in the following 12 to 18 months. For each liquidity event scenario under the PWERM, the rights and preferences of each class of our capital stock were considered in order to determine the appropriate allocation of our enterprise value to the shares of our common stock. The PWERM utilized a 40% probability that we would complete an IPO as of June 30, 2014, a 20% probability that we would complete an IPO as of December 31, 2016, a 30% probability that we would complete a merger or sale transaction by June 30, 2017 and a 10% probability of an event, such as bankruptcy, that would result in no value to common stockholders.

For the IPO liquidity event scenarios, we used pre-money IPO valuations of recent IPOs of biotechnology companies, under the guideline public company market approach, to determine our estimated enterprise value. We then calculated the common stock value on a fully-diluted basis.

For the merger or sale liquidity event scenario, we used the guideline transaction market approach based on the enterprise price paid in recent pharmaceutical and biotechnology acquisitions to determine our estimated enterprise value. We allocated enterprise value based on the liquidation preferences and conversion terms of each equity class.

Finally, we utilized the no value to common scenario that contemplated circumstances resulting from a failure of our business model or from our inability to raise additional funding in order to sustain operations. This

 

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scenario would include a liquidation of the business in which our preferred stockholders would recover a portion of their original investment through a sale of our assets, but no value would remain available for distribution to holders of our common stock.

We discounted to present value using a cost of capital of 16%, applied the probabilities listed above to each liquidity event scenario and then applied a DLOM of 20% to the common stock.

February 2014 and March 2014 grants. On each of February 21, 2014 and March 12, 2014, our board of directors determined that the fair value of our common stock was $1.00 per share in connection with the grant of stock options. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place between the December 2013 valuation analysis date and the dates of these stock option grants.

March 31, 2014 valuation. The common stock fair value was estimated to be $1.36 per share on March 31, 2014, with input from both management and an independent third-party valuation specialist. The fair value per share of $1.36 represented an increase of $0.36 per share from the $1.00 per share utilized for the March 12, 2014 option grants.

The significant events between March 12, 2014 and March 31, 2014 that impacted our estimated enterprise value and contributed to our updated conclusions regarding the timing and nature of future liquidity events, and underlying market comparable transactions, included the filing of our draft registration statement with the SEC on March 28, 2014 and market conditions that indicated we might attain a higher than previously estimated equity value in a near-term IPO. As a result, we updated the inputs into our PWERM analysis such that we utilized a 60% probability that we would complete an IPO as of June 30, 2014, a 10% probability that we would complete an IPO as of December 31, 2016, a 25% probability that we would complete a merger or sale transaction by June 30, 2017 and a 5% probability of an event, such as bankruptcy, that would result in no value to common stockholders. In addition, the pre-money IPO valuations of recent IPOs of biotechnology companies, under the guideline public company market approach, indicated an increase to our estimated enterprise value.

As of March 31, 2014, we utilized the same valuation model as described above for our December 2013 valuation. For the March 31, 2014 valuation, we discounted to present value using a cost of capital of 16%, applied the probabilities listed above to each liquidity event scenario and then applied a DLOM of 20% to the common stock.

Other Company Information

Net Operating Loss and Research and Development Tax Credit Carryforwards

As of December 31, 2013, we had federal and California tax net operating loss carryforwards of $26.2 million and $28.8 million, respectively, which begin to expire in 2025 and 2019, respectively, unless previously utilized. As of December 31, 2013, we also had federal and California research and development tax credit carryforwards of $3.9 million and $3.1 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2026. The California research and development tax credit carryforwards are available indefinitely.

Pursuant to Sections 382 and 383 of the IRC, annual use of our net operating loss and research and development credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. As of December 31, 2011, we completed an analysis regarding the limitation of net operating loss and research and development credit carryforwards under IRC Sections 382 and 383, and determined that we experienced an ownership change in June 2006. As a result of this ownership change, our net operating losses and research and development credits generated prior to June 2006 are limited under IRC Sections 382 and 383. Additionally, we have removed from the deferred tax assets $3.7 million of

 

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federal net operating loss carryforwards and $18.3 million of California net operating loss carryforwards that will expire unused solely due to the ownership change in June 2006. If it is determined that we have in the past experienced one or more additional ownership changes, or if we experience one or more ownership changes as a result of this offering or future transactions in our stock, we may be further limited in our ability to use our net operating loss carryforwards and other tax attributes to reduce taxes owed on the net taxable income that we earn. For the three-year periods ending December 31, 2013 and March 31, 2014, we have not issued significant amounts of capital stock and do not anticipate that we have experienced a cumulative change in ownership of more than 50% during that period.

JOBS Act

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the JOBS Act enacted in April 2012. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different from what you might receive from other public reporting companies in which you hold equity interests.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2014

The following table summarizes our results of operations for the three months ended March 31, 2013 and 2014:

 

    

Three Months Ended March 31,

     Increase /
(Decrease)
 
     2013      2014     
     (in thousands)  

Collaboration revenues

   $ 2,432       $ 5,032       $ 2,600   

Research and development expenses

     3,661         8,509         4,848   

General and administrative expenses

     1,509         1,944         435   

Other income (expense)

     222         40         (182

 

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Collaboration Revenues. Collaboration revenues were $2.4 million and $5.0 million for the three months ended March 31, 2013 and 2014, respectively. The increase of $2.6 million was due primarily to the following:

 

    $1.0 million increase attributed to the portion of the upfront payment and research and development funding we recognized in connection with the BMS ADC collaboration we entered into in May 2013;

 

    $0.9 million increase attributed to the portion of the upfront payment and research and development funding we recognized in connection with the Agensys collaboration we entered into in April 2013;

 

    $0.5 million increase attributed to the portion of the upfront payment we recognized in 2014 in connection with the Merck collaboration, compared to the portion of the upfront payment we recognized in 2013; and

 

    $0.2 million increase attributed to the portion of the research and development funding we recognized in connection with the ZMC collaboration we entered into in June 2013.

Research and Development Expenses. Research and development expenses were $3.7 million and $8.5 million for the three months ended March 31, 2013 and 2014, respectively. The increase of $4.8 million was due primarily to the following:

 

    $2.2 million increase in expenses associated with the ARX328 program, primarily due to preclinical studies and manufacturing-related costs, which reflects the advancing state of development of the program from preclinical towards submission of an IND;

 

    $1.5 million increase in expenses associated with the ARX201 program, primarily due to manufacturing-related costs, which reflects the advancing state of development of the program from preclinical towards submission of an IND;

 

    $0.4 million increase in unallocated expenses related to research and development administration costs as we hired additional management personnel; and

 

    $0.7 million increase in expenses associated with collaboration programs, primarily due to a $0.5 million increase in expenses related to new collaborations with BMS, Agensys and ZMC and a $0.2 million increase in research activities associated with other collaboration programs.

General and Administrative Expenses. General and administrative expenses were $1.5 million and $1.9 million for the three months ended March 31, 2013 and 2014, respectively. The increase of $0.4 million was due primarily to the addition of personnel to our senior executive team and third-party consulting in support of finance and administration.

Other Income (Expense). Other income (expense) was $0.2 million and $40,000 for the three months ended March 31, 2013 and 2014, respectively. The other income for both periods consisted primarily of income related to our cash and cash equivalents and gains on investment securities.

Comparison of the Years Ended December 31, 2012 and 2013

The following table summarizes our results of operations for the years ended December 31, 2012 and December 31, 2013:

 

       Years Ended December 31,        Increase /
(Decrease)
 
       2012        2013       
       (in thousands)  

Collaboration revenues

     $ 44,461         $ 17,034         $ (27,427

Research and development expenses

       16,262           27,540           11,278   

General and administrative expenses

       5,735           6,853           1,118   

Other income (expense)

       343           368           25   

Provision for income taxes

       242           53           (189

 

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Collaboration Revenues. Collaboration revenues were $44.5 million and $17.0 million for the years ended December 31, 2012 and 2013, respectively. The decrease was due primarily to the following:

 

    $26.5 million decrease related to the recognition in 2012 of the $15.9 million deferred portion of the upfront payment attributed to ARX618 technology know-how that we transferred to BMS in 2012, a $10.0 million milestone payment in 2012 due to BMS’s initiation of a Phase 1 clinical trial for ARX618, and a $0.6 million decrease in research and development funding as we transferred research and development activities to BMS;

 

    $5.9 million decrease as a result of terminated collaborations in 2012;

 

    $5.2 million decrease related to the recognition in 2012 of the $4.8 million deferred portion of the upfront payment attributed to Relaxin technology know-how that we transferred to BMS in 2012 and a $0.4 million decrease in research and development funding as we transferred research and development activities to BMS;

 

    $3.7 million increase attributed to the full year amortization of the upfront payment and research and development funding we recognized in 2013 in connection with the Merck collaboration we entered into in June 2012, compared to revenue recognition reflecting a partial year of activity in 2012;

 

    $3.0 million increase attributed to the amortization of the upfront payment and research and development funding we recognized in connection with the BMS Oncology ADC collaboration we entered into in May 2013;

 

    $2.7 million increase attributed to the amortization of the upfront payment and research and development funding we recognized in connection with the Agensys collaboration we entered into in April 2013;

 

    $0.4 million increase attributed to the research and development funding we recognized in connection with the ZMC collaboration we entered into in June 2013; and

 

    $0.4 million increase related to $0.9 million of milestones achieved in 2013, offset by a $0.5 million reduction for the reimbursement of patent costs related to the Eli Lilly collaboration.

Research and Development Expenses. Research and development expenses were $16.3 million and $27.5 million for the years ended December 31, 2012 and 2013, respectively. The increase was due primarily to the following:

 

    $7.4 million increase in expenses associated with the ARX328 program, primarily due to preclinical studies and manufacturing-related costs, which reflects the advancing state of development of the program from preclinical towards submission of an IND;

 

    $3.2 million increase in expenses associated with the ARX201 program, primarily due to manufacturing-related costs, which reflects the advancing state of development of the program from preclinical towards submission of an IND;

 

    $2.2 million increase in unallocated expenses related to research and development administration costs as we hired additional management personnel, and sublicensing royalties paid to TSRI in connection with upfront payments received from new collaborations;

 

    $1.2 million decrease in expenses associated with our preclinical programs and technologies as we shifted our resources to our ARX201 and ARX328 programs and reallocation of personnel to support our new collaborations in 2013; and

 

    $0.3 million decrease in expenses associated with collaboration programs, primarily due to a $2.1 million decrease in research and development funding upon the transfer of certain research and development activities to BMS in connection with the FGF21 and Relaxin collaborations, a $0.4 million decrease in research activities with Eli Lilly, and a $0.2 million decrease in research activities associated with other collaboration programs, offset by a $1.9 million increase in expenses related to collaborations with BMS, Agensys, and ZMC in 2013 and a $0.5 million increase in research and development activities related to the Merck collaboration we entered into in June 2012.

 

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General and Administrative Expenses. General and administrative expenses were $5.7 million and $6.9 million for the years ended December 31, 2012 and 2013, respectively. The increase was due primarily to the addition of personnel to our senior executive team.

Other Income (Expense). Other income (expense) was $0.3 million and $0.4 million for the years ended December 31, 2012 and 2013, respectively. The other income for both periods consisted primarily of income related to our cash and cash equivalents, gains on investment securities and gains and losses on the sale of equipment.

Provision for Income Taxes. Provision for income taxes was $0.2 million and $0.1 million for the years ended December 31, 2012 and 2013, respectively. The provision for income taxes for both periods consists of our estimated federal and California alternative minimum taxes.

Liquidity and Capital Resources

As a result of our collaboration activities we have had periods with net income, but have primarily incurred net losses since our inception. As of March 31, 2014, we had an accumulated deficit of $80.1 million. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development of our product candidates and incur additional costs associated with being a public company.

From our inception through March 31, 2014, we have funded our operations primarily through private placements of preferred stock and funding from our collaborations. As of March 31, 2014, we had cash and cash equivalents of $61.6 million. To fund further operations, we will need to raise additional capital. We may obtain additional financing in the future through the issuance of our common stock in this public offering, through other equity or debt financings or through collaborations or partnerships. We estimate that our net proceeds from this offering will be approximately $             million, based upon an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table sets forth a summary of the net cash flow activity for each of the periods set forth below:

 

    

Years Ended December 31,

    

 

Three Months

Ended March 31,

 
     2012     2013      2013     2014  
     (in thousands)  

Net cash provided by (used in) operating activities

   $ 7,928      $ 5,008       $ (4,129   $ (9,174

Net cash used in investing activities

     (802     (1,189      (21     (450

Net cash provided by (used in) financing activities

     42        (101      3        (664
  

 

 

   

 

 

    

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 7,168      $ 3,718       $ (4,147   $ (10,288
  

 

 

   

 

 

    

 

 

   

 

 

 

Net cash provided by operating activities was $7.9 million and $5.0 million for the years ended December 31, 2012 and 2013, respectively. Net cash provided by operating activities during the year ended December 31, 2012 was primarily a result of our net income of $22.6 million, offset by the $14.6 million decrease in our deferred revenue. Net cash provided by operating activities during the year ended December 31, 2013 was primarily a result of our net loss of $17.0 million, offset by the increase of $19.1 million in our deferred revenue, a $1.8 million change in our working capital accounts which was primarily attributable to the growth in accrued expenses related to our increased research and development spending, $0.9 million of depreciation expense and $0.5 million of stock-based compensation. Net cash used in operating activities during the three months ended March 31, 2013 was primarily a result of our net loss of $2.5 million, a $1.2 million decrease in our deferred revenue and a $0.6 million change in our working capital accounts. Net cash used in operating activities during the three months ended March 31, 2014 was primarily a result of our net loss of $5.4 million, a $4.0 million

 

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decrease in our deferred revenue and a $0.3 million change in our working capital accounts, offset by $0.3 million of stock-based compensation and $0.3 million of depreciation and amortization.

Net cash used in investing activities was $0.8 million, $1.2 million, $21,000 and $0.5 million for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014, respectively. Net cash used in investing activities during these periods consisted primarily of the purchase of lab equipment and or tenant improvements for our laboratory. During the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013, we received net proceeds of $0.1 million, $0.2 million and $0.2 million, respectively, from the sale of investments.

Net cash provided by (used in) financing activities was $42,000, $(0.1) million, $3,000 and $(0.7) million for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014, respectively. Net cash provided by financing activities during these periods consisted primarily of the proceeds from the exercise of stock options. During the year ended December 31, 2013 and the three months ended March 31, 2014, we paid $0.1 million and $0.8 million, respectively, of IPO costs.

We believe that our existing cash and cash equivalents and the estimated net proceeds from this offering, together with interest thereon, will be sufficient to meet our anticipated cash requirements through at least the next 18 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

    our collaboration agreements remaining in effect, our ability to achieve milestone payments under these agreements, our collaborators exercising their options under these agreements and our entering into additional collaboration agreements;

 

    our ability to initiate, and the progress and results of, our planned clinical trials of ARX788, ARX201 and ARX328; as well as the progress and results of clinical trials of our product candidates that are being developed by our collaborators;

 

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

 

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

 

    the revenue, if any, received from commercial sales of our product candidates for which we or our collaborators receive marketing approval;

 

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

 

    the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval and do not collaborate for commercialization; and

 

    the extent to which we acquire or in-license other products and technologies.

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, collaborations, strategic partnerships and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. 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

 

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expenditures or declaring dividends. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our other technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2013 (in thousands):

 

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

Operating lease obligations (1)

   $ 5,500       $ 1,345       $ 2,811       $ 1,344       $ —     

Calibr collaborative license agreement

     2,716         2,400         316         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,216       $ 3,745       $ 3,127       $ 1,344       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Our commitments for operating leases relate primarily to our corporate headquarters in La Jolla, California. We lease 36,172 square feet for office and laboratory space in La Jolla, California under an operating lease that expires in November 2017.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by applicable regulations of the SEC) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Related Person Transactions

For a description of our related person transactions, see “Certain Relationships and Related Person Transactions.”

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term duration of our investment portfolio and the low-risk profile of our investments, 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 investment portfolio. A 10% change in interest rates on March 31, 2014 would not have had a material effect on the fair market value of our portfolio.

We do not believe that our cash, cash equivalents and investments have significant risk of default or illiquidity. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market 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.

Foreign Currency

We incur significant expenses, including for manufacturing of clinical trial materials, outside the United States based on contractual obligations denominated in currencies other than the U.S. dollar, including Euros and

 

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Pounds Sterling. At the end of each reporting period, these liabilities are converted to U.S. dollars at the then-applicable foreign exchange rate. As a result, our business is affected by fluctuations in exchange rates between the U.S. dollar and foreign currencies. We do not enter into foreign currency hedging transactions to mitigate our exposure to foreign currency exchange risks. Exchange rate fluctuations may adversely affect our expenses, results of operations, financial position and cash flows. However, to date, these fluctuations have not been significant. Based on our open purchase commitments at March 31, 2014, a movement of 10% in U.S. dollar to Euro or U.S. dollar to Pounds Sterling exchange rates would not have a material effect on our results of operations.

Effects of Inflation

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the periods presented.

 

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BUSINESS

Overview

Ambrx is a clinical stage biotechnology company focused on discovering and developing first-in-class and best-in-class optimized protein therapeutics known as bio-conjugates. Our proprietary technology platforms enable us to attach pharmaceutically active molecules to specific sites within proteins, a process known as site-specific conjugation, and to design biologics with precision that is similar to that used to design modern small molecule drugs. We refer to this as protein medicinal chemistry. We believe our ability to target specific sites of conjugation more precisely than prior generations of bio-conjugates and produce homogeneous therapeutics allows us to discover new protein drugs and design safer, more effective versions of current therapeutics. We have developed a pipeline of novel product candidates that include antibody drug conjugates, or ADCs, bi- and multi-specific drug conjugates and long-acting therapeutic proteins. Our most advanced ADC program is ARX788, an ADC for cancers expressing human epidermal growth factor 2, or HER2, for which we intend to begin clinical trials in early 2015. Our most advanced long-acting proteins are ARX201, a once-weekly human growth hormone, or hGH, that has successfully completed a Phase 2b clinical trial, and ARX328, a long-acting leptin for lipodystrophy and weight management, for which we intend to submit an investigational new drug application, or IND, to the U.S. Food and Drug Administration, or FDA, in mid-2014. In addition to our internal pipeline, we collaborate with leading pharmaceutical companies, including Bristol-Myers Squibb Company, or BMS, Merck Sharp & Dohme Corp., or Merck, Eli Lilly and Company, or Eli Lilly, Agensys, Inc., or Agensys, Zhejiang Medicine Co., Ltd., or ZMC, and Zhejiang Hisun Pharmaceutical Co., Ltd., or Hisun. Our most advanced collaboration product candidate in human health is ARX618, a long-acting Fibroblast Growth Factor 21, or FGF21, for type 2 diabetes, which our collaborator BMS has advanced through Phase 1 clinical trials and expects to begin Phase 2 clinical trials for in the second half of 2014. To date, our collaborations have provided us with over $200 million in non-dilutive funding and have the potential to provide over $1.5 billion in potential milestone payments, plus royalties on the sale of collaboration products.

According to data from the IMS Institute for Healthcare Informatics, global sales of biologic drugs, defined as proteins, antibodies and vaccines, were approximately $157 billion in 2011. Over the past 30 years, biologic drugs have had a dramatic impact on disease therapy. Genetically engineered, or recombinant, proteins such as insulin and interferon have become mainstay therapies in the treatment of a broad range of diseases. Similarly, antibodies such as Herceptin and Humira have had a significant impact on the treatment of certain diseases, most notably cancer and autoimmune diseases. Despite their success, many biologics have limitations, including short half-life, a measure of duration of action in the body, for therapeutic proteins, and limited potency for naked antibodies. Bio-conjugate technologies have been designed to address these limitations by attaching molecules to proteins of interest. For example, for therapeutic proteins, molecules such as polyethylene glycol, or PEG, have been attached to extend their half-life, and cell killing, or cytotoxic, molecules have been attached to antibodies to increase their potency. Although an improvement on prior biologics, earlier generation bio-conjugate technologies generally conjugate to an amino acid that is present at multiple sites in the protein and therefore do not allow for conjugation at a specific site. As a result, drug product from the same production run may consist of proteins that are conjugated at different sites and with a different number of conjugated molecules, which is known as heterogeneity.

We believe our technology platforms enable us to overcome the limitations of earlier generation bio-conjugates by applying our protein medicinal chemistry to consistently attach our proprietary linkers, payloads and half-life extenders to proteins at specific sites and create a homogeneous drug product. We test this drug product for pharmaceutical characteristics and physiological effects to develop a more precise understanding of how conjugating in different locations affects the activity of a drug. This enables us to eliminate variants that are unstable, inactive or toxic and allows us to select the optimal combination of conjugation site, linker and payload to create bio-conjugates which have the potential for increased efficacy and improved safety, resulting in a wider therapeutic index. A wider therapeutic index allows a higher dosage to increase the pharmacological effect with a similar safety profile or a lower dosage that achieves the same pharmacological effect with an improved safety

 

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profile. We can create proteins in both bacterial and mammalian cell systems, enabling us to create bio-conjugates in the system most appropriate for a given product candidate. Our bacterial platform, ReCODE, has generated our most mature programs, including several collaboration programs and several internal programs focused on long-acting therapeutic proteins. We apply our mammalian platform, EuCODE, to generate the majority of our ADC product candidates. Our technology and products are protected by an extensive intellectual property estate, which includes over 100 issued U.S. patents and pending U.S. patent applications and over 500 issued patents and pending patent applications in other jurisdictions.

Our lead ADC program is ARX788, which is a HER2 antibody conjugated with our proprietary linker and cytotoxic drug payload, Amberstatin, or AS269. ARX788 is currently in preclinical development for the treatment of breast cancer and other solid tumors that express and overexpress HER2. While significant advances have been achieved in the treatment of cancers with HER2-targeted therapies, in many cases the cancer still progresses after multiple lines of treatment. In addition, existing HER2-targeted therapies, such as Kadcyla, are not approved for the treatment of cancers that express, but do not overexpress, HER2. Preclinical studies suggest that ARX788 may demonstrate increased potency and tolerability relative to current therapies, including Kadcyla, and therefore we believe ARX788, if approved, may have the potential to benefit a broader spectrum of cancer patients, including those whose tumors express less HER2 than those that can be treated with the currently available HER2-targeted therapies, while also improving outcomes for those patients that are eligible for current HER2-targeted therapies. We expect to submit a regulatory dossier for ARX788 in Australia by the end of 2014 and initiate clinical trials thereafter in collaboration with ZMC.

ARX201 is a long-acting form of hGH, which has successfully completed a Phase 2b clinical trial in Europe in young adults with growth hormone deficiency, or GHD, a medical condition that results when the pituitary gland does not produce enough hGH. Global annual sales from currently marketed hGH products, which are used for the treatment of GHD as well as other related indications, were over $3 billion in 2012. We believe ARX201, which is designed to be administered once weekly, may provide considerable improvement in terms of convenience and compliance over currently available hGH products, which require once-daily dosing. We expect to submit an IND to the FDA in mid-2014 for ARX201 in order to expand clinical trials of ARX201 into the United States. With one or more collaborators, we plan to initiate a Phase 3 clinical trial of ARX201 for the treatment of GHD in young adults in late 2014 or early 2015 and a Phase 2a clinical trial of ARX201 for the treatment of GHD in children in the first half of 2015.

ARX328 is a long-acting form of leptin that is currently in preclinical development as a leptin-replacement therapy in patients with lipodystrophy, a group of conditions that arise due to the defective metabolism of fat and for weight management through the maintenance of weight loss in obese individuals. We have used our proprietary technology to incorporate a novel, non-native amino acid at a specified site in leptin that allows for the precise placement of PEG so as to retain leptin activity while prolonging the time of pharmacological activity. ARX328 has been shown to be tolerable and successful in stimulating and maintaining a reduction of body weight in multiple animal models, and we believe it will be able to be administered once weekly. If approved, we expect that ARX328 would be the first long-acting leptin with once-weekly, subcutaneous dosing. We expect to submit an IND for ARX328 to the FDA in mid-2014 in order to initiate Phase 1 clinical trials.

We are also completing preclinical assessments of other internally developed ADC and bi-specific product candidates, including those listed below. We expect that the preclinical datasets for these candidates will become available during 2014. Assuming positive preclinical results, we anticipate taking one or more of these molecules into preclinical development beginning in 2015.

 

    PSMA ADC for the treatment of metastatic castration-resistant prostate cancer and glioblastoma multiforme;

 

    CD70 ADC for the treatment of renal and nasopharyngeal cancers;

 

    Bi-specific Anti-CD3 X Folate for the treatment of ovarian cancer; and

 

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    CD184-FK506 ADC for the treatment of immunological diseases.

In addition to our internal pipeline, collaborations are an important element of furthering our technologies. Our collaborations increase the number of Ambrx-enabled products in development, help validate and expand our technology platforms and provide non-dilutive funding. Our collaboration product candidate that is closest to commercialization is a long-acting protein for animal health that is partnered with Eli Lilly’s Elanco Animal Health division and is expected to reach the U.S. market by 2015.

Our Strategy

We have developed proprietary platforms, and an extensive intellectual property estate, that we believe allow us to design and develop first-in-class and best-in-class bio-conjugates. We are committed to using our site-specific conjugation expertise and protein medicinal chemistry approach to identify and develop next generation bio-conjugates to fulfill unmet medical needs. We recognize the following elements as being critical to this mission:

 

    Rapidly advance the development of our proprietary product candidates. We are using our technology platforms to develop novel and differentiated proprietary product candidates. By optimizing the safety and efficacy profiles of our product candidates, we believe we will be able to expedite their development and address unmet medical needs. We anticipate submitting an IND for ARX328 in mid-2014 and a regulatory dossier for ARX788 in Australia by the end of 2014. Our goal is to submit at least one IND every 12 to 18 months beginning in 2016. In addition, we have successfully completed a Phase 2b clinical trial with ARX201, a once-weekly hGH, and we anticipate progressing ARX201 into a Phase 3 development program with one or more collaborators in late 2014 or early 2015.

 

    Create new product candidates that combine the therapeutic benefits of biological molecules with the precise design of small molecules. Our goal is to create novel, next-generation, targeted therapeutics using our ReCODE and EuCODE platforms. These platforms allow the integrated optimization of conjugation site, linker and payload. We have a comprehensive suite of linkers, conjugation chemistries and payloads which allow us to design targeted therapeutics with the optimal profile in terms of efficacy, safety and stability. Our current discovery focus is on targeted bio-therapeutics, such as ADCs and bi- and multi-specific drug conjugates. We are currently evaluating three ADCs, PSMA, CD70 and CD184-FK506, and one bi-specific therapeutic, anti-CD3 X Folate, for preclinical development. We anticipate taking one or more of these candidates into preclinical development in early 2015.

 

    Leverage our technology to advance existing collaborations and selectively establish new collaborations. An important part of our strategy is to form collaborations to maximize the value of our product candidates and advance our technology. We have three different frameworks for our collaborations. Product-focused collaborations are agreements under which we grant our collaborators rights to develop and commercialize our proprietary product candidates in markets where we otherwise would not participate or where our partners’ capabilities position them to maximize the value of these candidates. Technology-focused collaborations are agreements under which we apply our proprietary technology to enable our partners to optimize their product candidates. Finally, platform expansion collaborations include agreements with research institutes and biotechnology companies that have complementary technologies. To date, our collaborations have provided us with over $200 million in non-dilutive funding and have the potential to provide over $1.5 billion in milestone payments, plus royalties on the sale of collaboration products.

 

   

Strengthen our leadership position in the discovery and optimization of site-specific bio-conjugates. We intend to build on our technology platforms, methods and know-how through internal and collaborative efforts. For example, we are exploring multi-specific targeting modalities that should result in the improved delivery of payloads with greater specificity to target cells. We believe that, in the future, the ability to deliver drugs more effectively and more specifically to diseased tissues through the engagement of multiple antigens, rather than a single antigen, will enable us to develop novel bio-conjugates for use outside oncology and thus treat a broader range of diseases. We are also working to discover multi-payload ADCs

 

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and novel linker chemistries and to expand our platform technology. We believe that by adding complementary technologies to our current platform base, we will maintain our leadership position in bio-conjugates. In order to effectively advance bio-conjugates into development, we will expand and strengthen our product development capabilities. We plan to continue to evolve our capabilities through our internal efforts and by accessing complementary technologies.

 

    Commercialize our product candidates independently and with collaborators. Our technology enables us to create product candidates for a wide range of diseases. We intend to develop and opportunistically commercialize our product candidates in the United States in disease areas where the majority of prescribing physicians are specialists that can be reached with a targeted sales force. We also intend to seek collaborators to co-develop and commercialize our product candidates in the United States for disease areas where the majority of prescribing physicians are general practitioners. In addition, we intend to seek collaborators to develop and commercialize our product candidates outside of the United States.

 

    Expand our intellectual property position. We own or have rights to over 100 issued U.S. patents and pending U.S. patent applications and over 500 issued patents and pending patent applications in various other jurisdictions relating to various aspects of our technology platforms and our product candidates, as well as their manufacture and use. We intend to continue to expand our intellectual property protections by seeking and maintaining domestic and international patents on inventions that are commercially important to our business. We will also rely on know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Background

The Evolution Of Biologic Therapeutics

Proteins are large biological molecules that carry out an array of functions within the human body. Proteins are created from the genetic instructions stored in a person’s DNA. Each protein is made up of a specific sequence of native amino acids, of which there are 20, with this sequence defining the protein. There are different types of proteins, including full-length proteins, peptides and antibodies. Full-length proteins are biologically stable proteins made by the body. Peptides are generally shorter sequences of amino acids that typically degrade more quickly than full-length proteins in the body. Antibodies are produced by the B-cells of the human immune system to target and neutralize foreign substances known as antigens. A monoclonal antibody, or mAb, is a single antibody species that, through the particular variable regions on the molecule, specifically targets a single site, or epitope, on a target antigen.

As the biological function of proteins became better understood in the twentieth century, scientists began searching for methods to produce proteins that could be used therapeutically. Genetic engineering with bacterial production systems enabled the cloning, expression and production of many small, simple biological proteins, such as human insulin and hGH. While bacterial production systems effectively produce simple proteins, they lack sophisticated mechanisms for performing subsequent biochemical changes in the proteins and are therefore not able to produce more complex proteins. These subsequent changes are known as post-translational modifications and are often required for physiological activity. More complicated proteins require the development of eukaryotic, such as mammalian or yeast, systems. In particular, mammalian production systems are usually needed to develop therapeutic mAbs.

Over the last 30 years, due to innovations in genetic engineering, recombinant biologic therapeutic drugs, including mAbs, have had a transformative impact on disease therapy. The efficacy and safety of biologic drugs and the ability to engineer these bio-therapeutics to further enhance their activities have driven significant market growth. According to BCC Research, the worldwide sales of biologics were estimated to be $163 billion in 2012 and to grow to $242 billion in 2017. Within this total market for biologics, the sales of therapeutic proteins were estimated to be $78.8 billion in 2012 and to grow to $113.4 billion in 2017. The sales of mAbs were estimated to be $51.5 billion in 2012 and to grow to $89.9 billion in 2017.

 

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Evolution of Bio-Conjugates

The first recombinant protein therapeutics had limitations that reduced the effectiveness of these molecules in the treatment of human diseases. These limitations included short duration of action, instability and poor pharmaceutical properties that resulted in lack of efficacy and narrow safety margins. To mitigate these limitations, the proteins were modified by adding effector molecules in attempts to increase their circulating half-life or enhance their pharmacological activity. This process of modifying the protein is called bio-conjugation. One prominent example of bio-conjugation is the chemical addition of polymers such as PEG to the protein therapeutic to inhibit rapid clearance from the bloodstream and to improve solubility and stability. The process of conjugating PEG to a protein is referred to as PEGylation. There are multiple commercially available products created through bio-conjugation, including Neulasta (PEGylated granulocyte colony-stimulating factor), Pegasys (PEGylated Interferon-alpha) and Levemir (acylated insulin).

Unconjugated therapeutic mAbs (including Herceptin and Rituxan) have been developed and approved for the treatment of certain cancers and have resulted in improvement of the overall survival of patients with these cancers. Similarly, in other diseases, including certain autoimmune and inflammatory diseases, unconjugated therapeutic mAbs, such as Humira and Stelara, have demonstrated efficacy and become important treatments for patients. Although antibody therapeutics have been highly successful in treating some cancers, in other cancers, they have little or no effect. In those tumors where antibodies have had an effect, that effect is often transient. In order to increase the efficacy of antibody therapeutics, several companies have developed ADCs. In oncology, ADCs are typically created by attaching a tumor-killing, or cytotoxic, drug to a tumor-targeting antibody. The goal is to use the antibody to target the specific antigen and deliver the drug “payload” directly into the target cell. Adcetris and Kadcyla are approved ADCs in the United States for the treatment of certain cancers and are based on an earlier generation of ADC technology. Adcetris comprises a mAb that recognizes the CD30 antigen on the surface of some human lymphoid tumors, and a cytotoxic payload which has been conjugated to the cysteine residues in the antibody. Kadcyla comprises a mAb that recognizes the HER2 antigen on the surface of some solid human tumors, and a cytotoxic payload which has been conjugated to the lysine residues in the antibody. Multiple other ADCs are in preclinical and clinical development.

Limitations of Conventional Conjugation Technologies

Bio-conjugates are comprised of three components: the protein, the payload and the linker, which is the molecular connection between the protein and the payload. Existing conjugation techniques historically have been limited to the 20 native amino acids that are the building blocks for proteins. In a normal protein, the most common sites for conjugation are on the cysteine or lysine amino acids. However, proteins contain multiple cysteine or lysine amino acids, and typically it is not possible to chemically distinguish among their various positions throughout the protein. Based on their location in the protein, cysteine and lysine amino acids can play different biological roles in the native protein structure and function. Conventional conjugation results in random attachment of the payload to different cysteine or lysine sites on the protein. This creates a heterogeneous mixture of protein bio-conjugates that are conjugated to different extents and at many different sites, which can negatively affect protein structure and function. This precludes optimization of the three components of the bio-conjugate.

Heterogeneity can have a significant impact on the therapeutic effect of a bio-conjugate, as conjugation to the same amino acid at different sites can result in markedly different biological effects. For example, conjugating at one site may allow the protein to retain its full biological function while conjugating at another site may eliminate it. Thus, conjugation at one site may allow the protein to be pharmacologically active, while conjugation at another site may eliminate the same activity or result in toxicity. Furthermore, some sites in the protein may be critical for its overall stability and pharmacokinetics, or PK, whereas others may not. Consequently, heterogeneous mixtures of bio-conjugates often are suboptimal in terms of efficacy, safety, in vivo time-of-action, protein and linker stability and ease of manufacture. Current production methods do not allow for the cost-effective separation of heterogeneous mixtures into homogeneous populations at a commercial scale.

 

 

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Independently published data shown in Figure 1 below shows that the random conjugation of PEG to hGH gives rise to multiple PEGylated variants of different sizes that, when separated, exhibit variable PK and physiological properties. Panel A below shows multiple composite populations of PEGylated molecules of different sizes, all of which are contained within the conjugated drug product, separated by size exclusion chromatography, or SEC. Panel B below shows the PK profile for the PEGylated variants and that the time in circulation for these variants differs significantly depending on the site of PEGylation. Some molecules have only marginally increased time in circulation, while others resulted in significantly longer time in circulation, as compared to un-PEGylated hGH. Panel C shows the varying pharmacologic effects of these PEGylated variants with widely differing drug-induced weight gain in rats depending on the site of PEGylation.

Figure 1: Effects of random PEGylation of hGH.

 

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This issue of heterogeneity is also found in the current generation of approved ADCs. For both Adcetris and Kadcyla, the conjugation of the drug payloads to the mAbs has been adapted to yield average drug payload to antibody ratios, or DARs, of approximately four-to-one. However, because the technique for conjugating the drug payload to the antibody involves a random conjugation process, the drug produced by the process contains molecules with a range of DARs and which contain the drug payload at a variety of positions within the protein. This occurs whether the conjugation is to cysteine or lysine amino acids.

This heterogeneity likely limits patients’ exposure to truly efficacious conjugates, increases the exposure to non-efficacious but potentially toxic conjugates, and decreases the half-life of the conjugate. The heterogeneous nature of the resulting drugs is shown in the following figures. In Figure 2 below, independently published research using mass spectroscopy shows that the cytotoxic payload DM1 conjugated to the available lysine residues of a mAb using conventional conjugation techniques results in a drug product in which some of the antibodies contain no DM1 molecules while others contain up to eight DM1 molecules.

 

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Figure 2: Mass spectral analysis of a conventional lysine-conjugated ADC.

 

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Furthermore, in the ADC T-DM1 (Kadcyla), the random conjugation of the cytotoxic payload to lysine residues on trastuzumab gives rise to a heterogeneous mixture of conjugate that has a PK that is significantly less than trastuzumab alone. In Figure 3 below, trastuzumab-DM1, or T-DM1 (which is comprised of the antibody trastuzumab conjugated with the cytotoxic payload DM1), has a lower concentration in the blood than the trastuzumab alone. It also shows that some of the DM1 has separated from the T-DM1 and is circulating in the blood alone, rather than being directed to the target by the antibody.

 

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Figure 3: Mean levels of T-DM1, total trastuzumab, and DM1 over time are shown for patients after the first dose of T-DM1 administered at the maximum-tolerated dose of 3.6 mg/kg. Standard deviation is shown in error bars.

 

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The random conjugation of a cytotoxic drug to cysteine residues on a mAb also gives rise to a heterogeneous mixture of ADC with a variety of levels of drug, resulting in a DAR that ranges from zero to eight. Data published by Seattle Genetics, Inc. shows three potential manufacturing techniques that were explored for a cysteine conjugated ADC, as illustrated in Figure 4 below. The left panel shows that regardless of the manufacturing technique used, less than 50% of the drug product actually had the target DAR of four (represented by E4). The heterogeneity is further illustrated by approximately 10% of molecules having zero drug loading (represented by E0) and approximately 5% to 10% having eight drug molecules per antibody (represented by E8). The right panel of Figure 4 shows the composition of an ADC made using our site-specific approach. Here, 95% or more of the ADC has a DAR of two with the drug attached at a single specified site in both of the heavy chains. The remaining ADC (5% or less) has the drug attached to the same site of the heavy chain but present on only one of the two heavy chains.

Figure 4: Heterogeneous DAR values in a conventional cysteine-conjugated ADC and specific DAR values in a site-specifically conjugated ADC.

 

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ADCs with a DAR of zero represent antibodies to which no drug payload is attached, which are suboptimal in terms of potency, and also compete for precious tumor-specific epitopes. Molecules with DARs greater than four are suboptimal in terms of safety because they are biophysically less stable, more prone to rapid clearance and have increased non-specific toxicity, which decreases the therapeutic index of the ADC. In a heterogeneous mixture with an average DAR within the optimal range of two to four, ADCs will exist that are either above or below this range.

 

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In addition, the DAR itself does not give an indication of the location of the conjugation within the antibody, so even two ADC molecules with identical DARs may be conjugated at different sites on the antibody and have different PK and pharmacodynamic, or PD, properties. Preclinical data suggest that a homogeneous ADC with a defined DAR of two and with the payload attached at an appropriate position could be more efficacious and less toxic systemically than a heterogeneous ADC with an average DAR of four.

Our Site-Specific Approach to Create Better Bio-Conjugates for Better Bio-Therapeutics

We have developed technology that allows us to build homogeneous, proprietary bio-conjugates that we believe have the potential to be both first-in-class and best-in-class therapeutics. We have overcome the inherent limitations of conventional random conjugation approaches through technology platforms that enable us to incorporate novel, non-native amino acids, which we refer to as Ambrx amino acids, into recombinant proteins specifically at precise and predetermined positions. The incorporation of an Ambrx amino acid, as a single site of attachment for conjugation, allows us to use chemistries that are novel for bio-conjugates. The resulting linkage is more stable in physiological conditions than those created using conventional conjugation chemistries.

We believe our proprietary technology represents a fundamental advance in recombinant DNA technology whereby the genetic code of the appropriate host organism (bacterial, yeast or mammalian) is expanded to allow the directed incorporation of novel Ambrx amino acids into any specified position in a protein, antibody or antibody fragment. This site-specific conjugation process starts at the DNA level. We expand the genetic code of the host organism by inserting a novel sequence of nucleotides into the DNA sequence that encodes specifically for the Ambrx amino acid. We also modify the cell host so as to contain the necessary proprietary system components, including Ambrx tRNA and synthetase, which then allow the protein-building machinery within the cell to incorporate the novel Ambrx amino acid into the protein of interest at a site that is dictated by the position of the unique selector sequence in the gene of interest. Figure 5 below demonstrates our technology’s approach.

 

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Figure 5: Representation of cell process for the incorporation of Ambrx amino acids into proteins in either E. coli or Chinese hamster ovary, or CHO, cells.

 

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We have optimized our core technology in two different production systems, which we refer to as ReCODE and EuCODE. ReCODE is a bacterial (E. coli) expression system typically used for smaller, simpler proteins that do not require extensive post-translational modification to produce a physiological active species. We have used ReCODE in multiple collaborative programs and for several of our internal therapeutic and bi-specific programs. The most advanced product candidate from our ReCODE platform has been commercially validated at a scale of 50,000 liters. Our EuCODE production system, which utilizes CHO and yeast cells, is typically used for more complex proteins such as mAbs and larger macromolecules where post-translational modification is important for the overall function and biophysical stability of the product. We are using our EuCODE system to develop ADCs for both our internal and collaborative programs. Several of the product candidates from our EuCODE platform have been scaled to 200 liters and we expect will ultimately be scaled to 15,000 liters. Both systems have been successfully transferred to multiple collaboration partners and contract manufacturers to support the research and development of product candidates.

Our site-specific approach enables us to preserve the native structure and function of proteins, antibodies and antibody fragments while enhancing their performance as bio-conjugates. We achieve this by rapidly generating a panel of homogeneous recombinant proteins that have an Ambrx amino acid inserted at different defined sites. We then use linker chemistries that are distinct from those used for traditional chemical conjugations to enable us to create a highly stable linkage to a range of payloads which do not degrade as quickly as traditional bio-conjugates, either in serum or in animals. These can then be evaluated for activity, function and other pharmaceutical parameters to identify the optimal development candidate. This allows us to develop a detailed understanding of how specific sites of conjugation impact the structure activity relationship of the subject protein, antibody or antibody fragment we are conjugating. We analyze molecules for multiple criteria of therapeutic performance, including pharmacology, potency, safety, solubility and biophysical stability. Our ability to optimize a specific site of conjugation, the linker and the payload allows us to design biologics with a precision similar to that used to design modern small molecule drugs.

 

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Site-Specific Long-Acting Therapeutic Proteins

We use our site-specific bio-conjugation technology to create more effective, long-acting therapeutic proteins. For most proteins of therapeutic interest, there is readily available information about the structure of the protein and the function of the different amino acids within the protein. This information can be used to rationally identify the best sites for bio-conjugation. We choose sites that should preserve the native structure and function of the resulting bio-conjugate while creating an optimized long-acting therapeutic. After inserting the Ambrx amino acid into the protein at the site we have determined to be optimal, we then use our linker chemistry to conjugate a macromolecule, which might include PEG, lipids or other bio-compatible polymers to extend the half-life of the protein and achieve the desired target product profile in terms of safety, efficacy and bio-physical properties.

Figure 6 below is an illustration of ARX201 (PEGylated-hGH) bound to its receptor. The figure shows where the Ambrx amino acid is encoded in the hGH as well as the site of attachment of the linker and the PEG molecule so as to minimize interference of the binding of hGH to its receptor.

Figure 6: Representation of ARX201 bound to the growth hormone receptor.

 

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Site-Specific Antibody Drug Conjugates

Our EuCODE platform enables us to create ADCs that are homogeneous both in the site of attachment and in the precise number of drug payloads attached. Our ability to rapidly create antibodies with the Ambrx amino acid inserted at a range of specified sites, and then evaluate multiple linkers and payloads attached at the specific sites, enables us to select the optimal conjugation site, linker and payload to create what we believe could be best-in-class optimized ADCs, with increased efficacy and improved safety, resulting in a wider therapeutic index. In oncology, we and our partners have demonstrated improved performance of our ADCs over conventionally conjugated ADCs in preclinical models of PK, efficacy and safety. Based on our ability to widen the therapeutic index, we are currently developing ADCs for chronic, non-oncology indications using different payloads.

 

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Figure 7 below illustrates a typical mAb with a pair of heavy and light chains together with the regions of the antibody that are responsible for effector function, or Fc, and antigen binding, or Fab. The mAb contains an Ambrx amino acid at a single site on each of the heavy chains at a position determined not to interfere with either antigen binding or effector function. The linker is chemically attached to the Ambrx amino acid and the drug payload is covalently attached to the linker.

Figure 7: Representation of an Ambrx site-specific ADC with a single site attachment of a payload on each of the heavy chains.

 

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Site-Specific Bi-Specific and Multi-Specific Bio-Therapeutics

We use site-specific bio-conjugation to create proprietary bi-specific molecules that contain both an antibody (or antibody fragment) that recognizes an antigen on immune cells, such as T-cells, and a non-native molecule, or ligand, that is able to bind specifically to a diseased cell or tissue. When this bi-specific molecule engages both the immune cells and the target cells, the immune cells are specifically activated to kill the target cells or tissue. This process is called ligand-mediated re-directed immune-cell killing. Our technology enables us to engineer the antibody fragment so as to optimally conjugate to the tumor-specific ligands while still retaining the ability to bind and activate the T-cell. Our ligand-mediated bi-specific approach can leverage the innate power of the immune system to find and destroy tumor cells. Older, conventional approaches to generating bi-specifics have generally been limited to genetic fusions, where only natural biological ligands can be used. In contrast, our bi-specifics overcome this limitation by enabling conjugation to synthetic ligands. There are multiple synthetic ligand molecules available, providing us with expanded target opportunities. We are advancing multiple programs in oncology using this bi-specific approach. Additionally, we are extending this paradigm in order to simultaneously target multiple antigens, which we refer to as a multi-specific approach. We believe our technology is well-suited to creating first-in-class, bi- and multi-specific targeted therapeutics that have the potential for improved performance and greater specificity.

Figure 8 below illustrates a bi-specific molecule that comprises the Fab region of an anti-CD3 mAb chemically linked to a small molecule ligand, folate. The Fab contains an Ambrx amino acid at a single site on the heavy chain at a position determined not to interfere with antigen binding. The linker and the small molecule ligand are chemically attached to the Ambrx amino acid.

 

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Figure 8: Representation of a bi-specific anti-CD3 X folate Fab.

 

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Product Pipeline

The following chart depicts our internal and collaboration product candidates in development, as well as development programs under which discovery or preclinical development activities are being conducted. Our pipeline includes potential first-in-class as well as potential best-in-class bio-conjugate product candidates developed using our EuCODE and ReCODE platforms and includes ADCs, bi- and multi-specific drug conjugates and long-acting proteins.

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ARX788 for the Treatment of HER2+ Breast Cancer and Other Solid Tumors

Understanding HER2

The HER2 gene and the HER2 receptor protein it encodes play important roles in normal cell growth and differentiation. When the HER2 gene has multiple copies, which is referred to as gene amplification, it usually results in increased protein production, or overexpression, of HER2. This causes cells to grow and multiply more rapidly than normal cells, which contributes to the formation and progression of cancer.

HER2 gene amplification and protein overexpression occurs in approximately 25% of women with breast cancer, and two different procedures are commonly used to assess these changes in HER2. Fluorescence in situ hybridization, or FISH, testing is a method used to determine the number of HER2 gene copies that are in a tumor cell in order to measure HER2 gene amplification, and can be either positive or negative. The level of HER2 protein expression on tumors can be detected by immunohistochemistry, or IHC, and is scored as 0, 1+, 2+ or 3+, where 3+ indicates the highest expression of the HER2 protein. Breast cancer patients with HER2 gene amplification and protein overexpression have a more aggressive disease, greater likelihood of tumor recurrence, poorer prognosis, and decreased survival compared to patients with HER2-negative breast cancer. Currently, anti-HER2 therapies are only approved for treating those breast cancer patients whose tumors overexpress HER2 at the 3+ level or at the 2+ level when accompanied by HER2 gene amplification. This represents approximately 25% of all breast cancer patients and 60.5% of the 42% of all patients who are HER2 positive, or HER2+, as illustrated by Figure 9 below.

Figure 9: U.S. breast cancer patients by HER2 status.

 

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Other solid tumors, such as gastric, colon, pancreatic and ovarian cancers, also express the HER2 protein and gene, but the correlation between FISH test and IHC status and sensitivity to current agents that target HER2 is less understood in these other cancers.

Breast Cancer Overview

Breast cancer is the most common cancer among women. Multiple lines of therapy are currently utilized for the management of breast cancer based on type, stage, grade and hormone receptor status. Approved treatment options include surgery, radiation therapy and the administration of orally bioavailable and intravenous drugs. Even with the advances that have been made with targeted drug therapies, surgical removal of the primary tumor mass remains the first line of treatment. In order to prevent recurrence of the cancer after surgery, patients are often treated with drugs, which is known as adjuvant therapy. Treatment with radiation or drugs to shrink the

 

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tumors prior to surgery is known as neoadjuvant therapy. In the case of metastatic disease, where complete surgical removal of the tumors is not feasible, systemic administration of chemotherapeutic agents that are highly cytotoxic, meaning they function by killing dividing cells, remains a primary option, irrespective of type, hormone receptor and HER2 amplification or expression status. According to the American Cancer Society, there are approximately 230,000 new cases of breast cancer each year in the United States.

As described above, breast cancer that is designated as HER2+ represents approximately 25% of all breast cancer cases and tends to be more aggressive than other types of breast cancer. HER2-targeted therapies such as Herceptin and Kadcyla were initially clinically tested and approved in patients with metastatic cancer. Recent clinical data support the use of HER2-targeted therapies earlier in the treatment paradigm to benefit patients in the adjuvant and neoadjuvant settings. Additionally, approximately 20% of patients with breast cancer have tumors that express HER2 at the 1+ or 2+ level by IHC score but do not have detectable gene amplification under FISH testing, so these patients are not eligible for current HER2-directed antibody therapeutics.

Other HER2+ Solid Tumors Overview

HER2 protein is also expressed and overexpressed in subsets of a variety of solid tumors other than breast cancer, including gastric, colon, pancreatic and ovarian cancers, though the extent to which these other solid tumors are HER2 IHC 3+ or 1+/2+ is less clear. According to the World Cancer Research Fund International, worldwide in 2012 there were approximately 950,000 new cases of gastric cancer, of which 4% to 53% express some level of HER2, such that they are 1+ to 3+ by IHC score; 1.4 million new cases of colon cancer, of which 5% to 30% express some level of HER2; 338,000 new cases of pancreatic cancer, of which 29% to 83% express some level of HER2; and 240,000 new cases of ovarian cancer, of which 9% to 66% express some level of HER2. With the exception of gastric cancer, the current bio-therapeutics that are directed towards HER2 have not been approved for treatment of these solid tumors. Thus, upon diagnosis, the first line of treatment is radical surgery to remove the tumor. Chemotherapeutic agents and radiation therapy are utilized when surgical removal is not possible, when the tumor has metastasized or upon recurrence.

Limitations of Current Therapies

While significant advances have been achieved in the treatment of HER2+ cancers, in many cases the disease still progresses after multiple lines of treatment. For most patients that overexpress HER2 protein and are treated with existing HER2 therapies, the cancer will either fail to respond or become resistant to continued treatment. In addition, existing HER2 therapies, such as Herceptin, Perjeta, and the HER2 ADC Kadcyla, are not indicated for the treatment of tumors in patients that express, but do not overexpress, HER2 (i.e., patients whose HER2 tumor status is FISH negative and only IHC 2+). A more efficacious and potent, but less toxic, HER2 ADC might have significant potential to better treat the disease in these patient populations.

Our Solution: ARX788

We engineered ARX788, an optimized, novel HER2 ADC, utilizing our proprietary site-specific technology so as to precisely incorporate a cytotoxic payload at the appropriate place on an anti-HER2 mAb. This involves conjugating a HER2-specific mAb with AS269, our potent, proprietary cytotoxic payload, to the Ambrx amino acid using a highly stable linker. The AS269 payload is a tubulin inhibitor that is highly potent against tumor cells, and which data from preclinical models suggest may be as effective as the other tubulin inhibitors of the dolastatin class. Our site-specific conjugation technology enables control over the precise site and ratio of payload attachment. In the case of ARX788, we determined empirically the optimal site for AS269 by testing more than a dozen different positional variants for the efficiency of conjugation of the payload to the mAb, potency in vitro and in vivo, and biophysical stability of the resulting ADC. This preliminary work allowed us to move ARX788 forward into preclinical development.

 

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We believe ARX788 has the potential to improve outcomes for those patients that are eligible for current HER2-targeted therapies, including patients with metastatic disease and patients in the earlier stages of adjuvant and neoadjuvent treatment. Furthermore, we believe ARX788, if approved, could benefit a broader spectrum of HER2+ cancer patients than those currently treated with the existing HER2-targeted therapies, including those patients with HER2 IHC 1+/2+ breast cancer and those patients with gastric, colon, ovarian or pancreatic cancers.

ARX788 Development

ARX788 has demonstrated potent activity in several xenograft tumor models of efficacy. Data from preclinical xenograft tumor models, when compared to published data for Kadcyla, suggest that ARX788 could have three- to five-fold increased potency. Based on these data, we believe ARX788 may have the potential to demonstrate increased potency relative to Kadcyla in patients with HER2+ cancers, subject to further clinical evaluation.

The left panel of Figure 10 below compares published data from Kadcyla with our ARX788 data and shows the anti-tumor activity of a dose response to T-DM1, or Kadcyla, and ARX788 in human tumor xenografts of a breast cancer cell line following treatment with various doses of each ADC. All dosages of ARX788 show reduced tumor volume as compared to the same dosages of T-DM1. The right panel of Figure 10 shows the difference in the anti-tumor activity of ARX788 compared to a conventional (random) cysteine conjugated HER2 ADC where the antibody and drug are the same in each conjugate. Each ADC was dosed at 1 mg/kg every five days for a total of four doses.

Figure 10: Activity of site-specific and conventional ADCs in BT474-EEI breast tumor cell xenograft studies.

 

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We have also evaluated the safety of ARX788 in animal models. Figure 11 below shows that ARX788 was well-tolerated in rats at doses up to 90 mg/kg. As compared with a conventional cysteine conjugated HER2 ADC, ARX788 had lower overall toxicity. At the higher doses of ARX788, the safety signals observed were similar to those that have been reported for other ADCs created with payloads that have a mechanism of action based on the inhibition of tubulin. The ADC was also well-tolerated in non-human primates at doses up to 10 mg/kg.

 

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Figure 11: Comparison of safety observations in rats between ARX788 and a conventional cysteine conjugated ADC.

 

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Future Clinical Development Plans

We, in collaboration with ZMC, plan to make the necessary regulatory filings for ARX788 in Australia by the end of 2014 and plan to initiate Phase 1 clinical trials in Australia thereafter to evaluate the safety of ARX788 in patients with HER2+ breast cancer (FISH positive and 3+ by IHC score). Furthermore, we and ZMC plan to make the necessary regulatory filings to initiate clinical trials in the People’s Republic of China, or China, in the second half of 2015. Given the current standard of care, we anticipate enrolling patients that have failed multiple lines of prior treatment, such as surgery and chemotherapy. Based on its preclinical potency and therapeutic index, we believe that ARX788, if approved, may also benefit patients with tumors that are FISH negative and 2+ by IHC score who are not currently eligible for treatment with the approved HER2-targeted therapies. The anticipated design for these clinical trials is described below, but is subject to input from regulatory authorities and any key opinion leader we might engage. We plan to explore that opportunity in a Phase 1b trial once we have established both the safety and PK properties of the drug in a Phase 1a trial. If the Phase 1b trial is successful, we plan to submit a U.S. IND and continue development into Phase 2.

Phase 1a Clinical Trial

This clinical trial is designed to establish safety and PK parameters for ARX788 and to determine the maximum tolerated dose, or MTD, for the drug. We will conduct the trial using a standard dose escalation design in which patients are enrolled into dose cohorts of three patients each and treated in a staggered timeframe. After the first low dose cohort is dosed and observed, and provided that there are no dose-limiting toxicities, or DLTs, the next higher dose cohort is treated and again observed. This staggered dose escalation is repeated until a DLT is observed. If one patient of the three in a dose cohort has a DLT, an additional three patients are treated at the same dose level. If there are no further DLTs in this second group of three patients, the dose escalation resumes. If a second DLT is observed, that dosage level is considered to be the MTD.

We plan to enroll breast cancer patients with metastatic disease and whose tumors are designated as HER2 IHC 3+ or IHC 2+ with a positive FISH test into the trial. These will be patients who have been treated previously with trastuzumab and a chemotherapeutic agent, either paclitaxel or docetaxel, and failed, or who

 

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have already been treated for metastatic breast cancer and failed, or who have developed tumor recurrence within six months of adjuvant therapy. As outlined above, the patients will be dosed with ARX788 every three weeks for a total of five doses in a staggered fashion until an MTD is established. We expect this trial to require four or five dose cohorts, representing about 15 to 18 patients. After establishing the MTD for ARX788, we plan to initiate a Phase 1b clinical trial.

Phase 1b Clinical Trial

The primary purpose of the Phase 1b clinical trial will be to obtain further data on the safety and tolerability of ARX788. In addition, we will look for indications of drug activity in the patient populations using standard Response Evaluation Criteria in Solid Tumors criteria.

We plan to set up three arms for the Phase 1b clinical trial, consisting of:

 

    Breast cancer patients with tumors that are HER2 IHC 3+ or IHC 2+ with a positive FISH test;

 

    Breast cancer patients with tumors that are HER2 IHC 1+ or 2+ with a negative FISH test; and

 

    Patients with other solid tumors, including gastric, ovarian, pancreatic and colon tumors, that are HER2 IHC 1+, 2+ or 3+.

Each arm will consist of up to 20 patients who will be dosed every three weeks with the MTD that has been established in the Phase 1a clinical trial for six months, for a total of nine doses. If responses are not observed in patients, treatment may be extended until the patient progresses.

ARX201 for the Treatment of Growth Hormone Deficiency

ARX201 is an optimized, once-weekly hGH therapy which has successfully completed a Phase 2b clinical trial in young adults with Growth Hormone Deficiency, or GHD. We are preparing for Phase 3 clinical trials in adults with GHD and Phase 2 clinical trials in pediatrics with GHD. We have worldwide rights to this product and are currently exploring collaboration opportunities with other pharmaceutical companies. We plan to advance ARX201 to pivotal clinical trials upon entering into one or more collaborations. We plan to apply for orphan drug designation for ARX201 in pediatric populations.

Growth Hormone Deficiency Overview

GHD is a medical condition that occurs when the pituitary gland does not produce enough hGH. GHD affects both adults and children and can have significant health consequences for both populations. Children with GHD typically have pathologic degrees of short stature, a tendency toward obesity, delayed and deficient bone mineralization, impaired growth of skeletal muscle and development of a high-risk lipid profile. GHD in adults manifests as alterations in body composition, such as decreased lean and increased fat mass with bone demineralization, and causes adverse changes in cardiovascular outcome markers. Patients with untreated GHD also face increased mortality. The current standard of care for both children and adults with GHD is daily hGH injections.

It is estimated that approximately 18,000 to 20,000 children in the United States with GHD are currently prescribed daily hGH replacement therapy. The goal of hGH supplementation in these children is to achieve full growth and metabolic normalcy. hGH is also medically indicated for pediatric populations such as those with Turner syndrome, a chromosomal condition that results in short stature and affects approximately 50,000 girls in the United States, and with idiopathic short stature, which is generally classified as extreme short stature with no known cause and affects approximately 400,000 children in the United States. The worldwide incidence of pediatric GHD has been estimated to be at least 1 in 10,000 live births, and some countries have reported an

 

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incidence as high as 1 in 4,000 live births. Data show that when long-term hGH treatment is initiated at an early age, the final height attained is close to target height and within the normal range in pediatric patients.

The adult GHD population includes the pediatric hGH-deficient patients as they mature and patients with adult onset GHD, most commonly as a result of pituitary tumor, cancer or vascular insufficiency. Adult onset GHD has an estimated incidence of 1.2 in 100,000 people per year and is defined biochemically by a low peak serum hGH level. The total number of adults in the United States with GHD is estimated to be 50,000. Much of the growth projected in the adult GHD population represents the maturation of pediatric GHD patients, among whom 30% to 70% may continue to have GHD and require therapy after attaining adulthood. In adults, GHD has widespread unfavorable effects on body composition, lipid metabolism, bone mass and quality of life. It is associated with significant morbidity and increased mortality. hGH replacement therapy can improve lipid profiles and decrease cardiovascular complications, improve exercise and cardiac performance, increase lean body mass, improve bone mineralization and remodeling and substantially improve quality of life.

Global sales from currently marketed hGH products, which are used for the treatment of GHD as well as other related indications, were approximately $2.9 billion in 2012. Based on market research, we believe that the market for hGH products is likely to grow to over $4 billion by 2018. We believe that once-weekly ARX201, if approved, could not only take significant market share from current daily hGH products, but could further expand the overall hGH market due to its greater convenience of administration with resulting improvements in compliance.

Limitations of Current Therapies

There is general consensus in the medical community that currently available hGH products provide satisfactory efficacy with an adequate safety profile. However, all of the currently FDA-approved hGH therapies require daily injections for full effect. This requirement for daily injections may cause a significant burden on and interruption of normal daily life to children and their guardians and may result in compliance issues for both children and adults. Studies from different geographic areas have shown that full compliance with daily hGH therapy presents challenges to patients and caregivers and doses are often missed. A recent study reported that of 110 children with GHD, 73% missed two or more doses per week. Furthermore, as shown in Figure 12 below, this resulted in a statistically significant reduction in their change in height velocity standard deviation score, or HVSDS, compared to patients that missed one or fewer doses per week on average.

 

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Figure 12: Effect of compliance on change in HVSDS in children with GHD.

 

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We believe a product with less frequent dosing, comparable efficacy and an adequate safety profile could alleviate some of these compliance issues and provide considerable improvement over currently available hGH replacement therapy regimens.

We believe that previous attempts by others to develop and commercialize a long-acting hGH have not succeeded due to regulatory, safety, efficacy or manufacturing issues, or a combination of those factors. To our knowledge, the first FDA-approved long-acting hGH, Nutropin Depot, was developed by Genentech, Inc. and approved in 1999. Nutropin Depot was dosed semi-monthly or monthly; within 48 hours of administration up to 50% of the hGH was released. The injections were done with a large gauge needle and gave rise to significant injection site reactions and pain. In addition, there was an approximately 12% incidence of lipoatrophy, which is a localized loss of fat tissue that is stimulated by a sustained exposure of subcutaneous tissue to hGH and can cause undesirable skin deformations. Ultimately, the product was withdrawn. Genentech, Inc. and Alkermes plc said in a statement that production was discontinued because of “the significant resources required by both companies to continue manufacturing and commercializing the product.” Additional attempts to develop sustained release formulations have not yet led to marketed products in the United States.

Attempts have also been made by others to PEGylate hGH. Pfizer was one of the first to attempt PEGylation of hGH to achieve a weekly-dosed product. However, the PEGylated hGH was not readily absorbed at the injection site and caused lipoatrophy in some patients with GHD, resulting in a discontinuation of development. An attempt to PEGylate hGH by Novo Nordisk also failed in children with GHD because a weekly profile was not achieved. We believe that both of these attempts failed because, using conventional conjugation technology, it was not possible to site-specifically attach the PEG in order to optimize efficacy, half-life and biophysical properties of the bio-conjugate.

Our Solution: ARX201

We have used our proprietary technology to create, optimize and manufacture ARX201, a novel, stable, long-acting hGH molecule that was shown to be tolerable, without severe adverse events, or SAEs, when administered once weekly in a Phase 2b clinical trial in young adults. The incorporation of an Ambrx amino acid at a specified position in hGH allows the precise placement of PEG to retain hGH activity while prolonging the time of

 

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pharmacological activity. ARX201 is non-viscous and can be administered using a fine needle (gauge 31), which we believe is particularly important in the pediatric population.

In developing ARX201, we carried out a systematic evaluation of multiple linkage sites throughout the protein sequence of hGH for the incorporation of the Ambrx amino acid. The top six variants were PEGylated and then evaluated in animal models for PK and PD responses. This has allowed us to choose the optimal site that retains hGH binding activity and the appropriate PK and PD properties.

Figure 13 below shows the PK analysis and pharmacological activity of various site-specific PEG-hGH variants in an animal model. ARX201 was chosen based on its extended PK and its ability to stimulate a pharmacological response.

Figure 13: Analysis of PK and pharmacological activity of site-specific PEGylation variants of hGH.

 

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ARX201 Phase 2b Clinical Trial in Young Adults

We conducted a randomized, open-label, fixed-escalation, 26-week, multi-center Phase 2b clinical trial in 43 young adults with childhood onset GHD in Europe. As planned and carried out, the primary objective of this study was to evaluate the safety, tolerability and PD response of three different ARX201 dosages when administered as repeated doses to young adult patients with childhood onset GHD. The data obtained from this trial will be used to support the safety and tolerability of ARX201 and to provide support for and information on the dose level for future pivotal Phase 3 clinical trials. Although the Phase 2b trial was not a pivotal efficacy trial, it is highly likely that safety and efficacy data will be reviewed by the FDA or other agencies.

The trial was designed with two periods and three patient-cohort assignments. The primary measure of efficacy was the temporal profiling of circulating plasma concentrations of insulin-like growth factor-1, or IGF-1, that were assayed and compared to laboratory reference standards. IGF-1 is a well-established PD surrogate endpoint of hGH activity. Furthermore, the results were also expressed as standard deviations, or SDS, from the values for normal, age-matched controls. In addition, there were multiple secondary biochemical and clinical endpoints. Patients were randomly assigned to receive a final dosage of 2.5 mg, 5 mg and 10 mg weekly in cohorts 1, 2 and 3, respectively. Period 1 of the trial was a dose escalation period in which dosages were escalated as follows: in cohort 1, consisting of 15 patients, all subjects were randomized to receive 2.5 mg weekly for 14 weeks; in cohort 2, consisting of 15 patients, all subjects were randomized to receive 2.5 mg for four weeks and 5 mg for 10 weeks; and in cohort 3, consisting of 13 patients, all subjects were randomized to receive 2.5 mg for four weeks, 5 mg for four weeks and 10 mg for six weeks. During period 2 of the trial, which followed the dose escalation period, patients were maintained on their cohort-assigned dosage of 2.5 mg, 5 mg or 10 mg weekly for 12 weeks.

 

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Of the 43 patients who received ARX201 in the trial, a total of 27 patients completed the full 26-week treatment period. Of the 16 patients who did not receive treatment for the full 26 weeks, 11 were female patients that were removed in accordance with a protocol amendment due to concerns in preclinical safety findings that became available after the trial started and indicated an increased risk for female patients. However, approximately five months later, the protocol was further amended, stating that the preclinical findings had been reassessed and did not indicate any increased risk for female patients. Of the other five patients who did not receive treatment for the full 26 weeks, one patient from each cohort withdrew consent and one patient from each of cohorts 2 and 3 was withdrawn due to noncompliance. No patients withdrew due to adverse events, or AEs. The total exposure was 927 weekly doses, corresponding to approximately 18 patient-years of exposure.

Analysis of the primary efficacy endpoint, which was temporal profiles of IGF-1, demonstrated a sustained effect of ARX201 during weekly administration at all dosages. Peak IGF-1 response was observed between 48 and 72 hours after dosing, with levels remaining above baseline after seven days. Higher ARX201 dosages resulted in higher IGF-1 peaks, occurring at the same time following each administration. The changes in the plasma IGF-1 levels over the course of six months, and compared to the values for the normal, age-matched controls, are shown in Figure 14 below.

Figure 14: Time course for the pharmacological responses and SDS levels from the three dose cohorts of young adults with GHD in the Phase 2b clinical trial of ARX201.

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Analyses of secondary efficacy endpoints consisting of total and low-density lipoprotein, cholesterol, triglycerides, body composition and quality of life showed a favorable response in all cohorts. Absolute values of mean IGF-1 were significantly changed with respect to baseline for all cohorts. Statistically significant differences in IGF-1 were observed in comparisons of cohorts 2 and 3 versus cohort 1. For insulin-like growth factor binding protein 3, or IGFBP-3, which is used as a biomarker for blood levels of hGH, statistical significance was observed for absolute change for cohort 1 versus cohort 2, and IGFBP-3 SDS for cohort 1 versus cohort 3; however, statistical significance was not reached for other measures. Statistically significant differences in lean body mass

 

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were observed in a comparison of cohort 3 versus cohort 1. For serum lipid and fat mass parameters, the changes did not reach statistical significance, though lean body mass was significantly increased in cohort 3 and overall. In summary, the results were consistent with the known effects of hGH therapy in adults with GHD.

A total of 55 treatment emergent AEs were reported by 17 of our 43 patients. No AEs led to treatment discontinuation. Four AEs led to dose-reduction due to edema, one in cohort 2 and three in cohort 3, and an additional two dose reductions, both in cohort 3, due to predefined criteria of increased IGF-1 levels above three SDS for more than 48 hours. Neutralizing antibodies were observed in one patient in cohort 2, but these were transient in nature; low levels (a titer of 1:4) were detected at weeks seven and nine but not during the rest of the trial through week 30 despite continued drug treatment.

The most common AEs were edema and changes in thyroid hormones. Laboratory findings confirmed the effect of growth hormone replacement on the requirement to monitor and potentially modify thyroid and steroid hormone replacement. Glucose metabolism was not adversely affected in the long-term. Edema and requirements for adjustment of hormonal replacement therapy have been previously described as AEs following daily growth hormone replacement therapy. No concerns were identified for local tolerability, vital signs, physical examinations, electrocardiography, echocardiography or fundoscopy. Overall, the results of this trial indicated no significant clinical safety concerns.

ARX201 Phase 1/2 Clinical Trial in Adults

Prior to our Phase 2b clinical trial, a randomized, open-label, dose-ranging, 26-week, multi-center Phase 1/2 clinical trial in 22 adults with GHD was conducted in Europe. Dosages of 2.5 mg, 5 mg and 10 mg of ARX201 were administered once weekly via subcutaneous injection of 0.2 mL, 0.4 mL and 0.8 mL, respectively. The primary objective of the trial was to evaluate the safety, PK and PD properties of ARX201 using three different repeat doses. Administration of ARX201 induced the rapid normalization of IGF-1 levels. One subject was removed from the trial at the investigator’s discretion due to elevated insulin levels, and there was one unrelated accidental death. There were 33 treatment emergent AEs in 16 of the subjects. The most common AE was arthralgia (four patients), followed by hyperthyroidism, increased glycosylated hemoglobin, hyperinsulinemia, headache (two patients each) and tachycardia and peripheral edema (one patient each). No neutralizing antibodies to either ARX201 or native hGH were detected at any time throughout the trial.

Future Clinical Development Plans

We plan to submit an application for an IND to the FDA for ARX201 in the second half of 2014 in order to expand clinical trials of ARX201 into the United States. We plan to work with one or more collaborators to develop ARX201. Assuming we are able to identify and engage one or more collaborators, and subject to the agreement of such collaborator or collaborators, we would plan to initiate a Phase 3 clinical trial of ARX201 for the treatment of GHD in young adults. We believe we would also be required to conduct a second Phase 3 confirmatory clinical trial in adults with GHD in order to receive regulatory approval. We would also plan to conduct a Phase 2a clinical trial of ARX201 for the treatment of GHD in children in the United States, Europe and other selected countries. We believe the Phase 3 clinical trial in adults could begin in late 2014 or early 2015 and the Phase 2a clinical trial in children could begin in 2015. The anticipated design for these clinical trials is described below, but is subject to input from regulatory authorities and any collaborator we might engage. In preparation for these clinical trials, we have generated a new producing cell line and changed the manufacturer for ARX201. This change was made subsequent to the Phase 2b clinical trial in young adults described above. Accordingly, we plan to carry out a bridging study in healthy adults to confirm safety and PK parameters, prior to initiating additional planned clinical trials.

Bridging Study in Adults

The bridging study would be up to a three-week study to demonstrate the safety and bio-equivalence of PK and PD responses to our current drug product, manufactured in compliance with the FDA’s current good manufacturing practices, or cGMPs, to historical data from previous lots used in the completed Phase 2b and

 

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Phase 1/2 clinical trials. We expect to be ready to initiate this study in the third quarter of 2014 in 16 adults with GHD in Europe and the United States. If the bridging study is completed successfully, we would be able to move into the two trials described below.

Phase 3 Clinical Trial in Adults

This trial is designed as a randomized, double-blind, placebo-controlled, six-month, multi-center Phase 3 clinical trial of ARX201 in up to 150 adults with GHD in the United States and other selected countries. Patients will be randomized to receive 5 mg of ARX201 or placebo in a 2:1 ratio weekly for 6 months. The primary objective of the trial will be to evaluate the efficacy of ARX201 in inducing changes in body composition, with a secondary endpoint of restoring levels of IGF-1 to within the normal range (-1 to +1 SDS) and safety versus placebo. An additional six-month extension study is planned to extend safety monitoring.

Phase 2a Clinical Trial in Children

This trial is designed as an open-label, 26-week, multi-center Phase 2a adaptive clinical trial of ARX201 in children with GHD in the United States. We plan to enroll 50 patients who are receiving daily hGH and are considered adequate responders, and who have IGF-1 SDS levels between -1 and +1. Patients will be placed on an initial weekly dose of subcutaneous ARX201 with monitoring for safety and IGF-1 levels for a period of four weeks. Those patients with IGF-1 SDS remaining less than -1 will be moved to a higher dose of ARX201 for another four-week period. This process will continue for a total of four dose levels.

Patients whose IGF-1 levels remain suboptimal after four weeks on the highest dose will enter an eight-week titration period with an increased dose based on their response to the previous doses. Those patients whose IGF-1 SDS levels rise above +1 will also enter an eight-week titration period of dose reduction with the intent being to normalize values between -1 and +1. All patients who have normalized IGF-1 SDS levels between -1 and +1 will remain on that dose for a period of 12 weeks.

The primary goals of the trial are to establish effective doses of ARX201 sufficient to support normal IGF-1 levels and to assess early safety data in this pediatric population. In addition, exploratory parameters will include growth and growth velocity. The effective doses identified in this trial will inform dosing regimens for subsequent pediatric pivotal clinical trials. After completion of this trial, eligible patients will be invited to join a 12-month follow-up trial, with observation of longer-term IGF-1 levels, growth parameters and safety measures.

Other Indications

We believe ARX201 could also be developed for one or more of the additional indications for which daily hGH products are currently approved, including Turner syndrome and idiopathic short stature.

ARX328 for the Maintenance of Weight Loss in Obese Individuals and Treatment of Lipodystrophy

Lipodystrophy Overview

Lipodystrophy refers to a group of conditions that arise due to the defective metabolism of fat, which may be congenital or acquired, and partial or total. In these disorders, the absence or reduction of fat tissue results in a deficit of leptin, a protein produced by fatty tissue that is believed to regulate fat storage and signal the brain to reduce food intake. This deficit of leptin can give rise to serious co-morbidities, such as chronic excessive eating, obesity, infertility and diabetes. Early studies have indicated that leptin-replacement therapy can improve many of these morbidities.

HIV-associated lipodystrophy is a type of acquired lipodystrophy that usually occurs after exposure to antiretroviral therapy for one year or more. It is estimated to be present in many of the approximately 425,000

 

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patients on antiretroviral therapy in the United States, however, it is often not diagnosed by physicians. About 22% to 25% of these patients are actually recognized as having lipodystrophy. The syndrome usually manifests itself as peripheral wasting of fat over various parts of the body. Most lipodystrophy patients have hypertriglyceridemia, or elevated levels of triglycerides in the blood, and can be associated with plaque buildup in the arteries, heart disease, increased risk of pancreatitis and, in the more severe cases, abnormal glucose tolerance and clinical evidence of insulin resistance. The underlying pathogenesis of HIV-associated lipodystrophy is complex, but in many patients there is evidence of reduced levels of leptin and adiponectin, a protein involved in regulating glucose levels and fatty acid breakdown. Often, the levels of leptin are inversely linked to abnormal amounts of lipids in the blood, or dyslipidemia, and insulin resistance. Several clinical trials with drug candidates in development have shown that leptin replacement can improve metabolic parameters and result in significant weight loss, improved insulin sensitivity and improved glucose tolerance.

There are also rare genetic forms of lipodystrophy, such as congenital generalized lipodystrophy and partial congenital lipodystrophy. These conditions are characterized by reduced levels of circulating leptin and the display or development of a lack or asymmetric distribution of fat. Importantly, many patients display a profound metabolic syndrome that is characterized by the development of insulin-resistant diabetes, hypertriglyceridemia, kidney disease and fatty acid liver disease. Current options for treatment have been largely limited to managing metabolic abnormalities with drugs for treatment of hypertension, diabetes and dyslipidemia. However, targeted interventions are emerging, including metreleptin, or Myalept, a recombinant form of leptin, which has been approved for the treatment of congenital lipodystrophy in Japan and for the treatment of generalized congenital lipodystrophy in the United States.

Obesity Overview

Obesity is generally defined as a range of weight that is greater than what is considered healthy for a given height. Obesity-related conditions include heart disease, stroke, type 2 diabetes and certain types of cancer. A 5% to 10% permanent reduction in body weight in overweight and obese individuals has been shown to improve several risk factors for heart disease, including elevated blood glucose, blood pressure and plasma triglyceride concentrations. We estimate that there are more than 20 million patients who would benefit from a weight management therapy that would help them maintain weight loss.

Limitations of Current Therapies

Pharmacological approaches to treat lipodystrophy and obesity have been hampered by limited efficacy or considerable adverse effects. In lipodystrophy, we are aware of only one product, tesamorelin, or Egrifta, that is indicated for acquired HIV-associated lipodystrophy; however, it has limitations due to its effect on glucose tolerance. In congenital lipodystrophy, Myalept, a recombinant form of leptin, has been recently approved in the United States and Japan. Myalept has to be given several times each day, has significant solubility issues at physiological pH and is highly immunogenic, such that 97% of patients receiving treatment developed anti-drug antibodies. The use of Myalept outside genetic lipodystrophies is precluded due to its safety profile. Current pharmacological treatments for obesity are relatively ineffective, showing average reductions in weight of 3% to 5% compared to baseline in the long-term, often have significant side effects, and are indicated only in conjunction with modification of diet and exercise. Clinical trials evaluating the effect of short-acting leptin as a monotherapy in obesity showed insufficient efficacy in reducing food intake and inducing weight loss. The more recent understanding of the pharmacology of leptin suggests that it may be more appropriate for maintaining weight loss, rather than to directly induce weight loss as a single agent. Independently published data indicates that obese patients have lost sensitivity to leptin and that this sensitivity is restored upon weight loss. We believe that exogeneous supplementation of leptin in these leptin-sensitive patients will maintain that weight loss.

There have been previous unsuccessful attempts to generate a long-acting leptin by coupling large molecules of PEG to the protein. One of these, PEG-OB, entered clinical trials in obese patients with weekly dosing as a single agent but did not progress beyond initial clinical trials. We believe this lack of success may have been

 

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because the conventional conjugation techniques that were used to generate the PEGylated leptin resulted in the random placement of PEG on the leptin molecule, causing a loss of potency.

Our Solution: ARX328

ARX328 is a novel, optimized, long-acting leptin molecule that we are developing as a leptin-replacement therapy in patients with lipodystrophy and for the maintenance of weight loss in obese individuals. We have used our proprietary technology to generate a stable, long-acting leptin molecule that has been shown to be tolerable and successful in stimulating and maintaining a reduction of body weight in multiple animal models and we believe will be able to be administered once weekly. The incorporation of an Ambrx amino acid at a specified position in leptin allows for the precise placement of PEG so as to retain leptin activity while prolonging the time of pharmacological activity. If approved, we expect that ARX328 would be the first long-acting leptin with once-weekly, subcutaneous dosing. A short acting leptin molecule has shown clinical proof of concept and activity in congenital lipodystrophy, however, its approval has been limited to this narrow indication primarily due to concerns with respect to immunogenicity. Due to its biophysical properties, we believe ARX328 has low potential for immunogenicity in contrast to the currently available treatment.

The high level of immunogenicity (greater than 95%) that was observed in patients administered metreleptin has been attributed to the aggregation and precipitation of the drug at the injection site as it transitions from a low pH formulation and encounters a neutral pH environment. We have replicated this behavior in vitro and shown that a molecule of the same sequence as metreleptin undergoes extensive aggregation and precipitation from solution as the pH is raised from pH 4 to pH 7. In contrast, ARX328 shows no evidence of aggregation and precipitation when subjected to the same conditions, and we therefore believe that it will have a lower level of immunogenicity in humans than is seen with metreleptin.

Figure 15 below illustrates the structure of ARX328. We have encoded an Ambrx amino acid at a specific site in the leptin molecule so that it will not prevent receptor binding (represented by the darker shading) and pharmacological activity. PEG is then specifically conjugated to this site via a highly stable bond to the Ambrx amino acid.

Figure 15: Representation of the structure of ARX328.

 

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ARX328 Development

Using our proprietary technology, we generated a series of leptin variants in which a single molecule of PEG was placed on the protein in selected positions. We assessed these to determine which sites are able to preserve potency and stability while also enhancing PK in several animal models. Using this approach, we generated

 

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ARX328, a novel, optimized, long-acting leptin molecule that we believe will be able to be administered once weekly.

Figure 16 below shows the data supporting the selection of ARX328 from PEG variants based on PD responses in animal models using obese mice. Mice were treated subcutaneously with a single injection of various leptin variants, including ARX328 and recombinant human leptin at 0.5 mg/kg. The change in the body weight of the animals was followed over the next eight days. Among the different variants, ARX328 was most effective at stimulating reduction of body weight in these animals.

Figure 16: Loss of body weight in mice following treatment with different leptin variants.

 

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The dose dependence of this weight loss is shown in Figure 17 below, where obese mice (ob/ob mice) were treated subcutaneously with a single injection of various dosages of ARX328, and the resultant change in weight was evaluated.

Figure 17: Dose effect of a single treatment of ARX328 on weight loss in mice.

 

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Data from multiple preclinical animal models suggest that ARX328 could potentially be as or more effective for weight loss than recombinant human leptin. Furthermore, our preclinical studies suggest that ARX328 may potentially improve the performance of other weight loss therapies when used in combination with such therapies and is able to subsequently maintain weight loss when used as a single agent in therapy.

 

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Figure 18 below shows weight loss in diet-induced obese, or DIO, mice following treatment with a vehicle or Exendin-4, or EX4, together with ARX328 for 18 days, followed by a switch in treatment to ARX328 alone or a vehicle alone, and the resulting off-drug rebound when ARX328 is discontinued.

Figure 18: Effect of ARX328 on DIO mice in combination with Exendin-4 or alone in inducing weight loss and subsequent maintenance of the weight loss.

 

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DIO mice were treated with PEG-Leptin and Exendin-4 along with a switch from high fat diet to standard diet at study initiation. After achieving a body weight loss of 30%, mice were treated with PEG-Leptin alone or a vehicle control to follow maintenance of the weight loss.

Similarly, we show in Figure 19 below that in DIO rats, following a change to standard diet at study initiation, the combination of ARX328 and EX4 induced rapid weight loss. At day 18, the animals were either switched to single agent therapy or remained on the combination therapy. As a single agent, EX4 was not as effective as ARX328 in maintaining this weight loss.

Figure 19: Weight loss in DIO rats following combination or single agent therapy.

 

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In non-human primates, ARX328 has shown a terminal half-life of 41 to 50 hours and a time to maximum serum concentration of drug of 40 to 80 hours. Allometric scaling among several species indicates that a weekly dosing schedule is achievable in humans, predicting that a dose of 2.5 mcg/kg/wk should yield systemic circulating PEG-Leptin concentrations of 50 ng/mL. Furthermore, a canine version of ARX328 (with the PEG conjugated to the non-native amino acid at the same position, but comprising the canine leptin amino acid sequence) showed pharmacology that indicated that it was highly efficacious upon weekly dosing. Therefore, we believe that ARX328 will be able to be administered once weekly.

Future Clinical Development Plans

We plan to complete additional preclinical studies with respect to the chemistry, manufacturing and controls process, toxicity and pharmacology of ARX328 and to submit an IND to the FDA for ARX328 in mid-2014. We also plan to initiate Phase 1 clinical trials of ARX328 in the second half of 2014. The anticipated design for these clinical trials is described below but is subject to input from regulatory authorities.

Phase 1a Clinical Trial in Healthy Volunteers and Overweight or Obesity Class 1 Subjects

We expect to initiate a randomized, double-blind, placebo-controlled single- and multiple- ascending dose clinical trial to determine the safety, tolerability, PK and PD of ARX328 in healthy volunteers and overweight or obesity class 1 subjects, which are subjects who have a body mass index of 30.0 to 34.9. The primary objective of this clinical trial is to assess the safety, PK and tolerability of single ascending doses, or SAD, of ARX328 following subcutaneous administration in healthy male or female volunteers, and multiple ascending doses, or MAD, in overweight or obesity class 1 subjects. The secondary objective is to measure circulating leptin in all subjects. The trial will be divided into two parts: SAD cohorts and MAD cohorts. In the SAD cohorts, healthy subjects will be given a single dose of ARX328, starting at a lower dose in cohort 1 and increasing three-fold, cohort by cohort, to cohort 5, with dosing guided by current good laboratory practice, or cGLP, toxicity studies in non-human primates. In the MAD cohorts, overweight or obesity class 1 subjects will be given a total of five doses of ARX328. The first dose will be followed by a two-week safety follow-up period, and the second through fifth doses will be administered one dose per week for the following four weeks. The ARX328 doses for the MAD cohorts will be finalized in response to analyzed safety, tolerability and PK data from the SAD cohorts. Each dose cohort will include eight subjects randomized to receive ARX328 or placebo in a 3:1 ratio, such that six subjects will receive ARX328 and two subjects will receive placebo.

Phase 1b Clinical Trial in Overweight or Obesity Class 1 Subjects

Subsequent to the completion of the Phase 1a clinical trial and discussion with the FDA, we plan to conduct a randomized, double-blind, MAD Phase 1b clinical trial in overweight or obesity class 1 subjects. Sixteen overweight or obesity class 1 subjects who are currently on stable treatment with a glucagon-like peptide-1, or GLP-1, agonist will receive four weekly, subcutaneous injections of ARX328 or placebo. The primary objectives of the trial will be to evaluate the safety, tolerability, and PK for multiple doses of ARX328 in overweight or obesity class 1 subjects who are also being treated with a GLP-1 agonist. The goal of this dual pharmacotherapy is to induce weight loss and restore leptin sensitivity. Patients achieving this will then be treated for a further three months of weekly dosing with ARX328 as a monotherapy. This will provide data on the safety and effect of ARX328 monotherapy on the maintenance of weight loss.

Phase 1b Clinical Trial in Patients with HIV-Associated Lipodystrophy

We are also planning a randomized, double-blind MAD Phase 1b clinical trial in patients with HIV-associated lipodystrophy to initiate in early 2015. We will initiate this trial if the Phase 1a clinical trials in overweight or obesity class 1 subjects is successful. Subjects with HIV-associated lipodystrophy and with endogenous leptin levels below 10 ng/ml will receive a total of five doses of ARX328. The first dose will be followed by a two-week safety follow-up period, and the second through fifth doses will be administered one dose per week for the

 

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following four weeks. The primary objectives of the trial will be to evaluate the safety, tolerability and PK of multiple doses of ARX328 in patients with HIV-associated lipodystrophy. The secondary objective of the trial will be to measure circulating leptin levels, serum lipids and triglycerides in patients. Each dose cohort will include eight subjects randomized to receive ARX328 or placebo in a 3:1 ratio, such that six subjects will receive ARX328 and two subjects will receive placebo.

Additional Preclinical Programs

PSMA ADC

Prostate specific membrane antigen, or PSMA, is a protein that is highly expressed on most of the tumor cells in prostate cancer. It is also expressed on the blood vessels that supply blood to many other tumors. We have developed a site-specific PSMA ADC that uses our proprietary drug payload, and we are currently evaluating its efficacy, overall toxicity and therapeutic index compared to conventional ADCs generated using a conventional random conjugation approach. We are developing the PSMA ADC for the treatment of metastatic castration-resistant prostate cancer, or CRPC, as well as glioblastoma multiforme, or GBM, one of the most common and aggressive primary brain tumors in humans, and expect to obtain proof of activity in the second half of 2014.

Prostate Cancer

It is estimated that over 230,000 cases of prostate cancer are diagnosed each year in the United States. Of these, it is estimated that approximately 24,000 to 47,000 patients have CRPC, with five-year survival rates of approximately 28%. While there are many ADC and non-ADC therapies available to treat metastatic CRPC, we believe that with our proprietary technology, we have developed a PSMA ADC that may show better overall activity compared to other treatment options.

Figure 20 below shows anti-tumor activity of a single dose of 1 mg/kg, 3 mg/kg or 10 mg/kg of our PSMA ADC, a single dose of 10 mg/kg of an unconjugated anti-PSMA and vehicle, in a mouse xenograft model of an LNCaP cell, a common prostate cancer cell line. The data show that all three dosages of our PSMA ADC reduce tumor volume after a single administration by a greater amount than vehicle or an unconjugated anti-PSMA, with substantial anti-tumor activity observed at the 3 mg/kg and 10 mg/kg dosages.

Figure 20: Anti-tumor activity and dose response of an Ambrx site-specific PSMA ADC.

 

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Glioblastoma Multiforme

It is estimated that approximately 11,800 patients in the United States have GBM that expresses PSMA either on or in the environment of the tumor. Current treatments include surgery, radiation therapy and chemotherapy, but these are largely ineffective, with five-year survival rates of approximately 10%. We believe our site-specific

 

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PSMA ADC may enable us to achieve a more effective therapy in humans. We are currently evaluating the pharmacological activity of our molecules in animal models of this tumor.

CD70 ADC

CD70 is an antigen that has limited expression on normal cells but is found to be overexpressed in a broad range of hematologic tumors and also on solid tumors such as renal and nasopharyngeal cancers. We have developed site-specific ADCs that use our proprietary drug payloads, which we believe will be able to achieve enhanced potency in human patients when compared to conventional ADCs generated using a random conjugation approach. We are exploring the development of CD70 ADCs with different payloads for the treatment of renal and nasopharyngeal cancers.

Figure 21 below shows the anti-tumor activity of a single dose of 3 mg/kg of three different site-specific CD70 ADCs and vehicle in a mouse xenograft model of a 786-O cell, a common kidney cancer cell line. The data show that all three CD70 ADCs are highly effective at reducing tumor volume after a single administration by a greater amount than vehicle. In addition, two of the ADCs showed substantial anti-tumor activity over 160 days.

Figure 21: Anti-tumor activity and dose response of an Ambrx site-specific CD70 ADC.

 

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Renal Cell Carcinoma

It is estimated that approximately 65,000 patients in the United States are diagnosed with renal cell carcinoma each year. Approximately 11,000 of these patients have advanced renal cell carcinoma with abnormal CD70 expression. Five-year survival rates are approximately 37% for advanced cases. Current therapies have relatively low response rates in renal cell carcinoma. However, we believe one of our CD70 ADCs may be able to be administered at higher dose levels, thereby enabling increased potency without increased toxicity as compared to other anti-CD70 therapies. We have shown in mouse xenograft models of cancer that several variants of site-specific CD70 ADC have potent activity against tumors that express CD70. We are currently optimizing the activity of the CD70 ADC variants.

Nasopharyngeal Cancer

It is estimated that approximately 80,000 patients worldwide are diagnosed annually with nasopharyngeal cancer. A study of 20 patients indicated that expression of CD70 was seen in 80% of these patients. The patient population is focused in China and other parts of Asia, with only about 2,900 new cases per year in the United States. Current treatments include surgery, radiation therapy and chemotherapy, but these are largely ineffective, with five-year survival rates of approximately 40% for advanced cases. We believe one of our CD70 ADCs could

 

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be more potent without increasing toxicity. If approved, we believe our CD70 ADC would be the first biologic product indicated to specifically treat nasopharyngeal cancer.

Bi-Specific Anti-CD3 X Folate

Published data has clinically validated the bi-specific approach to redirected T-cell killing of tumor cells, in which bi-specific engagement of an activated T-cell in close proximity to a tumor cell directs the T-cell to destroy the tumor cell. Several bi-specific molecules that are at various stages in the clinic have shown that local activation of T-cells at the site of a tumor can be highly effective at killing the tumor cells. To our knowledge, the most advanced molecule is blinotumomab, or AMG103, a bi-specific molecule being developed by Amgen Inc., that targets the CD19 antigen on tumor cells and the CD3 antigen on T-cells. AMG103 is in pivotal trials and has shown potent anti-tumor activity through the activation of the patient’s own T-cells in a variety of leukemias and lymphomas.

We use site-specific bio-conjugation to create proprietary bi-specific molecules that are designed to locally activate a patient’s own T-cells at the site of tumors. In contrast to other bi-specific approaches, our technology allows us to attach synthetic ligands at specific sites on antibody fragments while retaining the ability to engage both the tumor and the T-cell. Our ability to conjugate and optimize synthetic ligand bi-specifics expands the libraries of molecules that can be employed to redirect T-cells to kill the tumor. Furthermore, this enables us to use ligands that could not be used with prior technologies to target multiple different tumors. Our lead molecule using this approach is anti-CD3 X folate. This bi-specific bio-conjugate is comprised of folate, which targets the folate receptor that is overexpressed on many tumor cells, which is site-specifically conjugated to an antibody fragment that engages and activates T-cells through CD3, an antigen that is expressed on T-cells.

In preclinical studies of human ovarian tumor xenografts, our bi-specific anti-CD3 X folate inhibited tumor growth when administered together with human peripheral blood mononuclear cells, or PBMC, which contain human T-cells. Tumor cells were mixed with human PBMC and implanted in animals. The animals were then treated with unconjugated drug product, conjugated drug product or control once a day for four days. Figure 22 below shows the activity of 0.05 mg/kg, 0.5 mg/kg or 5 mg/kg of our bi-specific anti-CD3 X folate, 5 mg/kg of an unconjugated anti-CD3 and vehicle in a mouse xenograft model of an Ov-90 cell, a common ovarian cancer cell. Dosages of 0.5 mg/kg and 5 mg/kg of our bi-specific conjugate demonstrated reduced tumor volume following a single dose, as compared to unconjugated CD3 and vehicle.

Figure 22: Inhibition of ovarian tumor growth by a site-specific anti-CD3 X folate bi-specific conjugate.

 

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We are currently optimizing our anti-CD3 antibody, and when optimized we plan to move into preclinical development. We expect to obtain proof of activity with at least one lead candidate by the fourth quarter of 2014, which will allow us to assess the molecule as a potential preclinical candidate.

Ovarian Cancer

It is estimated that there are approximately 22,000 patients diagnosed with ovarian cancer each year in the United States. Approximately 75% of these patients overexpress the folate receptor. Five-year survival rates for advanced cases are approximately 27%. While there are many ADC and non-ADC therapies available and in development to treat ovarian cancer, we believe that our bi-specific anti-CD3 X folate may achieve higher response rates with greater safety margins due to its ability to selectively target the overexpressed folate receptors on tumor cells and subsequently locally activate T-cells to kill tumor cells.

Non-Oncology ADCs

Our ability to widen the therapeutic index by precisely attaching a drug at an optimal site on an antibody through a very stable linkage has allowed us to develop ADCs for use in chronic diseases such as inflammation. In our most advanced non-oncology ADC, we have site-specifically attached a potent immunomodulatory drug to an antibody that targets an antigen on activated T-cell subsets. We are evaluating this candidate in animal models of inflammatory diseases. Our initial focus has been to create ADCs that have an FK506 payload. FK506, also known as tacrolimus, is an approved immuno-suppressant that we selected due to its proven efficacy. Despite its approval, FK506 has limitations, particularly renal toxicity, which limits its therapeutic application. By targeting this proven medicine to activated T-cells, we believe we may be able to achieve the desired immunomodulatory activity with lower systemic exposure and therefore less toxicity. We have chosen the CD184 receptor as the target. This receptor is upregulated on activated human lymphocytes and metastatic tumor cells but is only expressed at low levels on normal cells. Figure 23 below shows the change in CD71 expression, a marker of T-cell activation, at day seven in a mixed lymphocyte response, or MLR, assay from a single dose of CD184-FK506 ADC, unconjugated anti-CD184, HER2-FK506 ADC, a control with no ADC and FK506 alone. The data show that anti-CD184-FK506 inhibits T-cell proliferation, whereas a control ADC, HER2-FK506, cannot deliver the FK506 to the cells and therefore has minimal inhibitory activity.

Figure 23: Selective inhibition of T-cell proliferation in an in vitro MLR assay by a site-specific CD184-FK506 ADC.

 

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These data show that a CD184-FK506 ADC inhibits T-cell activation, proliferation and cytokine production in in vitro assays. We plan to evaluate ADCs in in vivo preclinical models of inflammatory disease and to optimize the mAbs to be able to select and progress a candidate into preclinical development. We believe a potent, specific ADC that targets only activated T-cells may have potential in patients who receive an organ transplant and those with autoimmune and inflammatory diseases, such as rheumatoid arthritis, Crohn’s disease, ulcerative colitis, multiple sclerosis and psoriasis. We expect proof of activity in autoimmune and inflammatory diseases for CD184-FK506 ADC in the fourth quarter of 2014. Given these diverse indications, we plan to develop an ADC in a disease setting where we can quickly assess the safety profile and obtain early proof of mechanism.

Collaborations

Establishing and maintaining collaborations with leading pharmaceutical companies and research institutions is a key component of our operations, strategy and finances. We have entered into numerous collaborations that have provided us with over $200 million in non-dilutive funding. In addition to the substantial investment that our collaborators make in the preclinical and clinical development of collaboration products, we are eligible to receive more than $1.5 billion in potential milestone payments under these collaborations as well as royalties on the sale of collaboration products, if approved. We expect to begin receiving royalty payments from our most advanced product candidate in 2015 from Eli Lilly. In addition to providing significant financial resources and potential future payments, these collaborations increase the number of Ambrx-enabled products in development, help validate and expand our technology platforms, and provide non-dilutive research and development funding.

We employ three broad collaboration frameworks—product-focused, technology-focused and platform expansion—to help advance our overall corporate strategy and capabilities and meet the needs of our partners. Our product-focused collaborations are based on internal product candidates that we have advanced to a point of value inflection before licensing to collaborators in certain geographies. Examples of this type of collaboration include our collaborations with respect to FGF21 and Relaxin, which are global, and ARX788, which is exclusive to China. We plan to selectively partner additional internal product candidates. We are currently evaluating whether to license ARX201 to a single pharmaceutical company on a global basis or to regional companies under a unified global development plan, where we may retain U.S. commercialization rights.

Technology-focused collaborations, such as our ADC collaborations with BMS, Merck and Agensys, an affiliate of Astellas Pharma, Inc., enable our partners to apply our technology to their own products and targets. Unlike product-focused collaborations, technology-focused collaborations are typically formed when our collaborators approach us with a clear vision of the products and targets they wish to optimize and develop using our proprietary technology and know-how. We believe these collaborations validate our proprietary technology, enable us to develop a larger number of diverse products and address more targets than would be possible if we worked independently. We also benefit from the significant expertise and resources invested by our partners when identifying novel targets and developing novel antibodies, therapeutic peptides and payloads that are incorporated into next generation bio-conjugates using our technology.

Platform expansion collaborations have the potential to enhance our platforms, processes and products. We are currently evaluating opportunities such as alternative payloads and multi-specific antibodies for our ADC programs, alternative PK extenders for our long-acting therapeutic protein programs and novel binders for our bi-specific programs. We anticipate securing additional licenses to third-party technologies to advance our platforms and product candidates. In addition, academic collaborations focused on early-stage discovery offer the potential to improve our technology platforms, enable new applications, and deliver future product candidates. For example, under our collaboration with The California Institute for Biomedical Research, or Calibr, we provide funding to direct discovery efforts for which we gain exclusive commercial rights.

 

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BMS Collaborations

Overview

We have entered into three collaboration and license agreements with BMS. The first two collaboration agreements, which are product focused collaborations, were entered into in September 2011. We refer to these as the FGF21 Collaboration, and the Relaxin Collaboration. Pursuant to these collaboration agreements, we granted to BMS exclusive, worldwide licenses to develop and commercialize two product candidates from our own pipeline, ARX618 for the treatment of type 2 diabetes, which is the lead product candidate under the FGF21 Collaboration and ARX720 for the treatment of heart failure, which is the lead product candidate under the Relaxin Collaboration. We had discovered and advanced ARX618 into preclinical development prior to licensing it to BMS, while ARX720 was selected after collaborative work was initiated. The third collaboration agreement is a technology-focused collaboration agreement, which we entered into in May 2013 and refer to as the BMS Oncology ADC Collaboration. Pursuant to this collaboration agreement, we granted to BMS an exclusive, worldwide license to use Ambrx technology to develop and commercialize ADCs incorporating BMS’ antibodies, payloads and targets.

The objectives of the research programs under each of these agreements are as follows:

 

    FGF21 Collaboration – to continue and complete IND-enabling preclinical studies for ARX618, conduct a Phase 1 clinical trial for ARX618 and prepare for the initiation of a Phase 2 clinical trial for ARX618. In addition, the research program may include activities directed toward the discovery and preclinical development of one or more other compounds containing human FGF21 molecules, having one or more non-naturally occurring amino acids incorporated using our ReCODE technology, that are backups or alternatives to ARX618. The license covers worldwide rights to patents and technology relating to any human FGF21 molecule having one or more non-naturally occurring amino acids incorporated using our ReCODE technology, including any conjugate thereof, including any PEG conjugate.

 

    Relaxin Collaboration – to identify one or more human Relaxin molecules incorporating our ReCODE technology for BMS to advance to human clinical trials and to ultimately commercialize as products. The license covers worldwide rights to patents and technology relating to any human Relaxin molecule having one or more non-naturally occurring amino acids incorporated using our ReCODE technology, including any conjugate thereof, including any PEG conjugate.

 

    BMS Oncology ADC Collaboration – to identify one or more ADC compounds incorporating our ReCODE or EuCODE technology suitable for clinical development. BMS may designate certain collaboration targets for this research program. The license covers worldwide rights to patents and technology relating to antibodies raised or engineered to bind primarily to a collaboration target, and which have one or more non-naturally occurring amino acids incorporated using our ReCODE or EuCODE technology, including any conjugate thereof, including any ADC thereof.

The FGF21 Collaboration and Relaxin Collaboration had initial research terms ending in September 2013. Under each agreement, BMS has the option to extend the research term for three additional one-year periods following the initial research term. In June 2013, we and BMS agreed to extend the research terms of the FGF21 Collaboration and the Relaxin Collaboration for an additional year through September 2014. The research program for the BMS Oncology ADC Collaboration has an initial term of four years ending in May 2017.

Under the FGF21 Collaboration, we received an upfront payment of $17.5 million and a milestone payment for the initiation of Phase 1 clinical trials of $10.0 million. We have the potential to receive additional payments totaling up to $255.0 million in the aggregate for ARX618, and up to $198.8 million in the aggregate for any subsequent products covered by our intellectual property, upon achievement by BMS of specified clinical and regulatory milestones. In addition, we have the potential to receive payments totaling up to $150.0 million in the aggregate upon achievement by BMS of specified sales milestones for the covered products. We are also eligible

 

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to receive research and development funding. Furthermore, we are entitled to receive tiered royalties on a product-by-product basis ranging from the high single digit to the low double digit percentages of aggregate worldwide net sales of each product. Royalty rates for products containing ARX618 are higher than royalty rates for products not containing ARX618, and all royalty rates are subject to reduction. We are entitled to receive tiered royalties on a country-by-country basis until the later of the expiration of the applicable patent rights or ten years after the first commercial sale of such licensed product in such country.

Under the Relaxin Collaboration, we received an upfront payment of $5.0 million and have the potential to receive payments totaling up to $112.0 million in the aggregate for the first product, and up to $56.0 million in the aggregate for any subsequent products covered by our intellectual property, upon achievement by BMS of specified clinical and regulatory milestones. In addition, we are eligible to receive research and development funding. We are also entitled to receive tiered royalties on a product-by-product basis in the mid-single digit percentages of aggregate worldwide net sales of each product. All royalty rates are subject to reduction. We are entitled to receive royalties on a country-by-country basis until the later of the expiration of the applicable patent rights or ten years after the first commercial sale of such licensed product in such country.

Under the BMS Oncology ADC Collaboration, we received an upfront payment of $15.0 million. For each target within the collaboration, we have the potential to receive up to $97.0 million in clinical, regulatory and sales milestone payments, of which $62.0 million would be due upon the achievement of certain clinical and regulatory based milestones and $35.0 million would be due upon the achievement of certain commercial sales thresholds. In addition, we are eligible to receive research and development funding. We are also entitled to receive tiered royalties on a product-by-product basis in the mid-single digit percentages of aggregate worldwide net sales of each product, subject to reduction. We are entitled to receive royalties on a country-by-country basis until the later of the expiration of the applicable patent rights or ten years after the first commercial sale of such licensed product in such country.

Development and Commercialization Obligations

Under each of these agreements, BMS is responsible for the development and commercialization of compounds and products, including all funding, resourcing and decision-making with respect to regulatory matters. In addition, under the BMS Oncology ADC Collaboration, BMS is responsible for selecting and providing to us the target antibody sequences to be used for compounds to be made and tested in the course of the research program. BMS is obligated under each agreement to use commercially reasonable efforts to develop a compound or product for the purpose of obtaining regulatory approval in each major market, consisting of the United States, France, Germany, Italy, Spain, the United Kingdom and Japan. BMS has the sole right to commercialize the products covered by each agreement at its cost and expense and will be solely responsible for the manufacture of all compounds and products. None of the targets currently being pursued by BMS under the BMS Oncology ADC Collaboration are competitive to any of our current internal programs. In the future, we can prohibit BMS from using our proprietary technology to develop and commercialize ADCs that would compete against our internal programs by placing our internal program targets on an excluded target list. BMS is prohibited from pursuing any new targets under the BMS Oncology ADC Collaboration that are on the excluded target list.

We are obligated to supply a certain number of full time equivalent employees, or FTEs, for which we are reimbursed at a fixed annual rate under the FGF21 Collaboration and the Relaxin Collaboration and at a graduated rate under the BMS Oncology ADC Collaboration, and perform certain other activities in support of each of these collaborations. We are also obligated under each agreement to supply certain raw materials or coordinate with our third-party manufacturers to convey such raw materials upon request by BMS at BMS’ cost. Otherwise, we bear our own costs and expenses under each research program. BMS has the first right to prosecute certain product-specific Ambrx patents licensed under the agreement, though we retain the first right to prosecute other licensed Ambrx patents and the sole right to prosecute certain Ambrx patents we control.

 

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Term and Termination

Each of the FGF21 and Relaxin Collaborations will remain in effect, on a product-by-product and country-by-country basis, until neither we nor BMS has any obligation to the other party in such country and with respect to such product. BMS may terminate either agreement at will as a whole or on a country-by-country and/or product-by-product basis (1) upon three months’ written notice if regulatory approval has not yet been obtained for an applicable product in the United States or the European Union, or (2) upon six months’ written notice following receipt of regulatory approval for a licensed product in either the United States or the European Union. BMS may also terminate either agreement for cause due to safety reasons on a product-by-product or country-by-country basis upon written notice. We or BMS may terminate either agreement for cause on a product-by-product basis worldwide or on a country-by-country basis, for the other party’s material breach that remains uncured for 90 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings. We may also terminate either agreement for cause due to BMS’ failure to use commercially reasonable efforts in the development and commercialization of products.

The term and termination provisions of BMS Oncology ADC Collaboration are substantially similar to those of the FGF21 and Relaxin Collaborations, provided that BMS may terminate the BMS Oncology ADC Collaboration at will as a whole, or on a country-by-country, target-by-target and/or product-by-product basis upon three months’ written notice, regardless of whether regulatory approval for an applicable product has been obtained in the United States or the European Union.

Merck Collaboration

Overview

In June 2012, we entered into a research collaboration, option and exclusive license agreement with Merck. Our collaboration with Merck focuses primarily on the research and development of novel bio-conjugates for both oncology and non-oncology therapeutic targets. Pursuant to the agreement, we granted to Merck an exclusive, worldwide research license to utilize our specified drug technology, patent rights and know-how, including our ReCODE and EuCODE platforms, to discover, identify and optimize polypeptide drug conjugates in a number of collaboration targets selected by Merck. In addition, we granted to Merck the exclusive rights and options, at Merck’s sole discretion, to obtain exclusive licenses to the patent rights and know-how to develop and commercialize conjugates discovered in each of the collaboration targets. Merck may exercise each of its options during a period of approximately three months from the start of each respective research program by paying us an option exercise fee in the mid-single digit millions of dollars. Merck has selected all collaboration targets and commenced research programs on each target. None of the options have been exercised to date.

The first research program is expected to continue until the earlier of June 2015 or upon completion of the activities under the program. The remaining research programs are expected to continue into 2016 or upon completion of the activities under the respective program. Merck has the right to discontinue a given research program or extend any research program term for an additional year at any time on 90 days’ notice.

Under our agreement with Merck, we received an upfront payment of $15.0 million. For each target within the collaboration, if Merck exercises its option for an exclusive license, we have the potential to receive up to an additional $98.0 million in preclinical, clinical, regulatory and sales-based milestones. In addition, we are eligible to receive research and development funding. We will also be entitled to receive tiered royalties in the single digit percentages of aggregate worldwide net sales of each licensed product. We will be entitled to receive these royalties on a country-by-country and licensed product-by-licensed product basis until the later of the expiration of the applicable Ambrx or joint patent rights or ten years after the first commercial sale of such licensed product in such country.

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option, the rights to develop or commercialize product candidates under the program will revert to us. In the event we subsequently pursue the development and/or commercialization of an applicable product candidate, we will be required to pay to Merck a percentage of the milestones and royalty payments that would otherwise have been payable by Merck to us if Merck had continued to develop and/or commercialize the product candidate.

Development and Commercialization Obligations

We and Merck are each responsible for using commercially reasonable efforts to develop licensed products under a development plan with respect to each of the programs. We are solely responsible for manufacturing research quantities of licensed compounds and utilizing certain of our drug technology involved in the design, creation, modification and/or generation of licensed compounds until Merck exercises its option in the applicable program. The agreement contains a list of targets for which Merck may not develop product candidates, including targets that may compete with our internal programs in development. Except with respect to FTE support, we and Merck each bear our own costs in connection with performing activities under each research program. We have agreed to provide up to 16 FTEs, the cost of which Merck will reimburse us for at a graduated annual rate, to work toward the development of such licensed products. If Merck exercises any option, Merck will be solely responsible for all further research, development, manufacturing, regulatory and commercialization activities with respect to the licensed products covered by that option and will be obligated to use commercially reasonable efforts to develop and commercialize at least one product containing a compound developed under such research program in at least one major market country, which consist of the United States, Japan, the United Kingdom, France, Germany, Italy and Spain. Upon the exercise of a given option, we must disclose to Merck all relevant collaboration information and inventions, transfer relevant research materials to Merck and assist Merck in effecting an orderly transition for the development of applicable compounds. We retain the rights to prosecute and maintain the licensed Ambrx patents in consultation with Merck, and Merck has the first right to prosecute and maintain any joint collaboration inventions.

Term and Termination

The agreement will remain in effect, on a country-by-country and product-by-product basis, until Merck’s obligation to pay us royalties ends. We or Merck may terminate the agreement for cause for the other party’s uncured material breach including our failure to conduct a given research program in accordance with the terms of the collaboration agreement, and Merck may terminate the agreement without cause for convenience, in each case upon 90 days’ notice. Additionally, Merck may terminate the agreement with respect to a given product immediately upon written notice to us in the event that Merck has a safety or efficacy concern with respect to the product.

Eli Lilly Collaboration

Overview

In January 2007, we entered into a collaborative research, license and commercialization agreement with Eli Lilly, pursuant to which we work with Eli Lilly’s Elanco Animal Health division to discover, develop and commercialize a broad portfolio of Ambrx-enabled bio-conjugates for animal health. This agreement was most recently amended in February 2011. Under this agreement, as amended to date, we granted Eli Lilly an exclusive, worldwide license to utilize certain of our drug technology, trade secrets, know-how, patent rights and inventions to develop and commercialize certain product candidates in the field of animal health, as well as human and non-human food safety applications.

Under the terms of the agreement, we have received approximately $8.0 million in upfront payments and are eligible to earn up to $1.0 million per product candidate upon achievement of specified preclinical and regulatory milestones. In addition, we are eligible to receive research and development funding and reimbursement of certain intellectual property expenses. We are also eligible to receive tiered royalties, with percentages ranging

 

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from the low to mid-single digits, based on cumulative net sales of each product, subject to Eli Lilly’s obligation to pay us minimum annual royalty payments, starting at the low single digit millions of dollars in 2015 and increasing incrementally to the low double digit millions of dollars in 2021 and after. One product developed under the agreement has received regulatory approval in Mexico, and we expect to begin receiving royalties in the low single digit percentages of cumulative net sales of the product following its anticipated commercial launch in Mexico in May 2014.

Development and Commercialization Obligations

We and Eli Lilly are obligated to use reasonable commercial efforts to collaboratively develop the product candidates, subject to Eli Lilly’s ability to cease development activities on a product candidate if it reasonably determines that marketing such product candidate is not commercially viable. However, Eli Lilly is solely responsible for all commercialization activities and the manufacture and supply of commercial quantities of product. All of Eli Lilly’s product development and commercialization activities shall be conducted at its own expense, including the preparation and submission of required regulatory documents.

We are entitled to reimbursement by Eli Lilly for all research and development costs incurred by us and for associated out-of-pocket expenses that are payable by us to third parties. We have agreed to provide up to four FTEs through December 2014, funded by Eli Lilly at a set annual rate, to work toward the development of licensed products. Upon mutual written agreement, we and Eli Lilly may extend the research and development term. We retain the rights to prosecute the licensed Ambrx patents, and Eli Lilly will reimburse us for our costs for doing so, subject to an annual cap. Eli Lilly has the first right to prosecute and maintain any joint product patent rights under the collaboration in each country or region where we and Eli Lilly mutually determine that it is commercially reasonable to do so, and the expenses of prosecuting and maintaining these joint patent rights are shared equally between us and Eli Lilly.

Term and Termination

The agreement will expire on the later of five years after the expiration of the last remaining valid claim of a patent covering a licensed product or, if no such patent exists at the time of the first commercial sale, the five-year anniversary of the first commercial sale of such product. Prior to the first product launch, either party may terminate the agreement without cause upon 90 days’ notice to the other party. We may terminate the agreement for cause if Eli Lilly fails to make any payments required by the agreement, and either we or Eli Lilly may terminate the agreement for cause for the other party’s material breach that remains uncured for 60 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings. The license related to certain products and/or indications will revert to us in certain circumstances, including for Eli Lilly’s failure to pay us applicable milestone payments, or its failure to spend a minimum annual amount, on a product-by-product basis, on developing such product.

Agensys Collaboration

Overview

In April 2013, we entered into a research collaboration and exclusive license agreement with Agensys, a wholly owned subsidiary of Astellas, that applies our platform technology to specific antibodies that bind to targets within the Agensys pipeline with the objective of creating ADCs based on Ambrx-enabled antibodies and additional Agensys technology. Under this agreement, we granted Agensys an exclusive, worldwide license to utilize certain of our drug technology, patent rights and know-how, including our ReCODE and EuCODE technology, to discover and develop ADCs to certain targets for the treatment of cancer in humans.

Under our agreement with Agensys, we received an upfront payment of $15.0 million. For each target within the collaboration we have the potential to receive $95.0 million in preclinical, clinical, regulatory and sales-based

 

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milestones. In addition, we are eligible to receive research and development funding. Additionally, we are entitled to receive tiered royalties for licensed products on a target-by-target basis in the high single digit percentages of aggregate worldwide net sales. We will be entitled to receive these royalties on a country-by-country basis until the later of the expiration of the applicable patent rights or ten years after the first commercial sale of such licensed product in such country.

Development and Commercialization Obligations

We and Agensys are each responsible for using commercially reasonable efforts to develop licensed products under a development plan. We are solely responsible for manufacturing research quantities of licensed compounds and utilizing certain of our technology platforms involved in the design, creation, modification and/or generation of licensed compounds. We are obligated to use commercially reasonable efforts to provide the number of FTEs set forth in the research program, subject to reimbursement by Agensys for any FTEs we provide in excess of four FTEs during the first year of the research term and for each FTE we provide after the first year. Agensys has the sole right to research, develop, manufacture, register and commercialize compounds and products derived under the agreement. Agensys is obligated to use commercially reasonable efforts to develop and commercialize at least one product for the treatment of cancer in each major market country, consisting of the United States, Japan, the United Kingdom, France, Germany, Italy and Spain. Through our representative on the joint project team established under the agreement, we can prevent Agensys from developing product candidates for new targets for which we have an active internal development program.

The research term ends in April 2017, provided that Agensys may discontinue the research program at any time after April 2014 upon 90 days’ notice. We retain the first right to prosecute the licensed Ambrx patents following notice to and consultation with Agensys.

Term and Termination

The agreement will remain in effect, on a product-by-product and country-by-country basis, until Agensys’ obligation to pay us royalties ends with respect to such product in such country. Agensys may terminate the agreement without cause, in its entirety or on a target-by-target and/or country-by-country basis, upon 90 days’ notice. We or Agensys may terminate the agreement for cause in its entirety, or on a product-by-product and country-by-country basis, for the other party’s material breach that remains uncured for 90 days after receipt of notice thereof, or upon certain bankruptcy or insolvency proceedings. We may terminate the agreement for cause in the event that Agensys or any of its affiliates challenges the validity, scope or enforceability of the licensed patent rights, while Agensys may terminate the agreement upon our change of control, as further set forth in the agreement.

ZMC Collaboration

Overview

In June 2013, we entered into a co-development and license agreement with ZMC for ARX788 and other HER2 ADC products covered by our intellectual property rights, pursuant to which we granted to ZMC an exclusive license to use certain of our patents and know-how to develop, manufacture and sell these licensed products in China. Ambrx has retained the rights to develop and commercialize licensed products outside of China. However, we have granted to ZMC a non-exclusive license for conducting activities in certain other mutually approved jurisdictions, including Australia, to support regulatory approval in China.

Under our agreement with ZMC, we are entitled to receive low double digit tiered royalties percentages based on aggregate net sales of licensed products in China. We will be entitled to receive these royalties until the later of the expiration of the applicable patent rights or 20 years after the first commercial sale of the product in China. In addition, we are obligated to pay ZMC a mid-single digit or low double digit percentage of any sublicensing

 

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profit that we may receive outside of China, depending on what phase of clinical development has been completed at the time of transfer, or a low single digit royalty on any net sales that we or our successors may receive from selling licensed products outside of China, if the market authorization of such product is based on Phase 1 clinical data obtained during our collaboration with ZMC.

Development and Commercialization Obligations

ZMC is responsible, at its sole expense, to use commercially reasonable efforts to develop and commercialize the licensed products in China and fund the development of the product outside of China through Phase 1 clinical trials. This includes the development, preclinical and clinical activities undertaken to develop a HER2 ADC product from candidates controlled by us and provided to ZMC for further evaluation and development. ZMC is required to pursue these trial evaluations under the China Food and Drug Administration, or CFDA, and, similarly, to use commercially reasonable efforts to pursue preclinical and clinical trials for licensed products under a regulatory authority in Australia, or such other country as the parties may mutually agree. We are required to use commercially reasonable efforts to provide technical and consulting assistance or other services requested by ZMC, at ZMC’s expense. This includes assisting ZMC to secure arrangements with third-party contract research organizations and/or consultants. In consideration of technical assistance provided by us, ZMC will provide us with R&D funding during the first three year period following June 2013. ZMC has the first right to prosecute the licensed Ambrx patents in China, and we may prosecute such patents in the event that ZMC elects not to do so.

Term and Termination

The agreement will remain in effect until the later of the expiration of the applicable patent rights or 20 years after the first commercial sale of the product in China. ZMC may terminate the agreement without cause upon six months’ notice. We or ZMC may terminate the agreement for cause if the other party materially defaults with respect to any of its material obligations, and such default is not cured within 60 days after receipt of notice thereof, or in the case of certain voluntary or involuntary insolvency proceedings.

Hisun Collaboration

Overview

In April 2014, we entered into a co-development and license agreement with Zhejiang Hisun Pharmaceutical Co., Ltd., or Hisun, for the research, development and commercialization of certain bi-specific product candidates and products for the treatment of cancer. Pursuant to the agreement, we granted Hisun an exclusive license to use certain of our patents and know-how to develop, use, manufacture and sell certain licensed products in China. The agreement contemplates two collaboration programs with designated targets, which may be replaced at any time during the research term by a unanimous decision of the joint steering committee.

As consideration for technical assistance we provide to Hisun under the agreement, we are entitled to receive a payment in the low single digit millions of dollars each year during the initial three-year research term. We are also entitled to receive tiered royalties in the mid to high single digit percentages of net sales of licensed products in China until the later of the expiration of the applicable patent rights or 12 years after the first commercial sale of the product in China. In addition, during such period, we are obligated to pay Hisun certain low single digit percentages of any sublicensing or net sales profit that we may receive outside of China, depending on what phase of clinical development has been completed at the time of transfer or whether the product has been commercialized.

 

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Development and Commercialization Obligations

We and Hisun are each responsible for using commercially reasonable efforts to develop licensed products during the research term. Hisun is responsible, at its sole expense, to use commercially reasonable efforts to develop, commercialize and manufacture licensed products in China. This includes preclinical and clinical activities undertaken to develop bi-specific product candidates under the CFDA. Any manufacturing facility that Hisun establishes for the manufacture of a bi-specific product must meet CFDA and cGMP regulatory requirements. We are obligated to use commercially reasonable efforts to provide technical and consulting assistance or other services as requested by Hisun in the course of developing and manufacturing licensed products. This includes assisting Hisun to secure arrangements with third-party contract research organizations and/or consultants and communicate with the FDA. For as long as Hisun makes the annual payments to us in the low single digit millions of dollars as described above, our assistance is provided at no additional cost, provided that we are not asked to provide more than three FTEs per year. Once Hisun no longer makes such annual payments to us, our assistance will be provided to Hisun on an at-cost basis.

The research term ends in April 2017, provided that we and Hisun may agree to continue the research collaboration beyond the initial three-year period. Hisun has the first right to prosecute the licensed Ambrx patents in China, and we may prosecute such patents in the event that Hisun elects not to do so.

Term and Termination

The agreement will remain in effect until the later of the expiration of the last-to-expire applicable patent rights for any licensed product or 12 years after the first commercial sale of such licensed product in China. Hisun may terminate the agreement without cause upon six months’ notice. We or Hisun may terminate the agreement for cause if the other party materially defaults with respect to any of its material obligations, and such default is not cured within 60 days after receipt of notice thereof, or in the case of certain voluntary or involuntary insolvency proceedings.

Calibr Collaboration

Overview

In August 2013, we entered into a collaborative license agreement with Calibr, pursuant to which we granted Calibr a non-exclusive research license to certain of our patents, know-how and materials, and Calibr granted us a perpetual, irrevocable, worldwide, non-exclusive license, for internal research purposes only, to certain inventions, patents and technology controlled by Calibr and associated with a research plan approved by a joint steering committee. In addition, Calibr granted us an exclusive option to acquire a perpetual, irrevocable, worldwide license to certain potential inventions, patents and other intellectual property associated with a research plan approved by a joint steering committee. The collaboration focuses on projects related to novel molecular targets, polypeptide conjugates and enabling technologies. Our license grant to Calibr lasts through February 2015, subject to extension or earlier termination.

The agreement was amended in April 2014. Under the agreement, as amended to date, we made an upfront payment to Calibr of approximately $0.3 million and are obligated to make quarterly payments of $0.6 million during the term of the license grant. We are also obligated to pay Calibr a percentage in the mid-single digits of any net sublicense revenue resulting from sublicenses we may execute, and Calibr is obligated to pay us a percentage in the low double digits of any net sublicense revenue resulting from sublicenses it may execute, with adjustments depending on receipt of funding by certain third parties for certain research projects. If we commercialize a licensed product without a sublicensee, we are obligated to pay Calibr royalties in the low single digit percentages of net sales, on a licensed product-by-licensed product and country-by-country basis, until the later of 10 years after the first commercial sale of such product in such country and the expiration of the applicable patent rights in such country.

 

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Development and Commercialization Obligations

We and Calibr are each responsible for developing licensed products under a research plan outlining details, including the target disease and compound profile, which of our technologies are to be used in the project, and how many FTEs will be allocated by Calibr. Following exercise of the option with respect to a particular invention, we have exclusive control over the research, development and/or commercialization activities associated with such patent, either by ourselves or pursuant to a sublicensee, though our license to the information associated with such patent will remain non-exclusive. We are obligated to consider and/or validate no more than three invention data packages from Calibr in each calendar year. Calibr retains the rights to maintain and prosecute Calibr patents licensed to us at its own cost unless and until we exercise our option, after which we shall bear such costs. We also have certain rights to information and consultation regarding patent prosecution and maintenance by Calibr.

Term and Termination

The agreement terminates upon the expiration of the last payment obligations under the agreement. We or Calibr may terminate the agreement for cause for the other party’s uncured event of default, while Calibr may terminate the agreement upon our change of control, as further set forth in the agreement. Upon the expiration or termination of the agreement, any licenses in effect as a result of the exercise of options will remain in full force and effect, and our right to license any inventions and related information continues in perpetuity.

Other License Agreements

The Scripps Research Institute

Overview

In August 2003, we entered into a license agreement with The Scripps Research Institute, or TSRI, pursuant to which TSRI granted us a sole, exclusive, worldwide right and license for the use, sale, and importation of certain products, processes, services, biological materials and technology arising out of designated patent rights related to the in vivo incorporation of amino acids, protein arrays and glycoprotein synthesis, among others. Under the agreement, which was amended in December 2005, we have the right to grant sublicenses to any party that agrees to be bound by the terms of the license agreement. We are required to provide TSRI with written annual reports on our product development progress or efforts to commercialize in the human therapeutic, human diagnostic, human imaging reagent and research tool fields of use, as well as any other fields of use.

Pursuant to our agreement with TSRI, as amended to date, we issued to TSRI shares of common stock representing a low single digit percentage of our ownership on a fully-diluted basis upon raising a specified amount of equity funding in the low double digit millions of dollars. In addition, we have agreed to pay TSRI earned royalties on net sales of licensed products, processes and services on a country-by-country basis. These royalties are in the low single digits as a percentage of annual net sales for use in the therapeutic, diagnostic and imaging reagent fields. For other uses, such as applications relating to industrial enzymes, agricultural uses or environmental uses, we determine the royalty payments in good faith negotiations. We are also obligated to pay to TSRI earned royalties on sublicensing revenues, on a country-by-country basis, in the mid-single digit percentages. All royalty obligations are subject to adjustment for combination products.

Development and Commercialization Obligations

We are subject to reasonable commercialization obligations and, together with TSRI, have established benchmarks to measure progress. In certain circumstances, TSRI can reduce the scope of the fields of use or render the license non-exclusive upon written notice. TSRI retains the rights to prosecute the patents we have licensed, though we have a right to be timely informed and consulted with regarding patent prosecution and

 

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maintenance, and we are obligated to pay for all expenses incurred in connection with such patent prosecution and maintenance. In December 2010, we notified TSRI of our intent to discontinue payment for the filing, prosecution and maintenance of certain licensed patent rights under the agreement.

Term and Termination

The agreement terminates upon the expiration of our royalty obligations to TSRI. Our royalty obligations terminate on a country-by-country basis for licensed products, processes and services upon the expiration of the last to expire of a valid claim within the applicable patent rights that covers such product, process, or service, or, if no such patent rights exist but such product, process, or service utilizes or incorporates a licensed biological material, then our royalty obligations terminate 15 years after the date of the first commercial sale of such licensed product, process or service. Our royalty obligations for licensed biological materials terminate 15 years after the date of the first commercial sale. We and TSRI may terminate the agreement without cause upon mutual written consent, and we may terminate the agreement unilaterally without cause upon 90 days’ written notice. TSRI may terminate the agreement for cause for our uncured breach of certain enumerated obligations.

Intellectual Property

Overview

We strive to protect our technology platforms and our product candidates through a variety of approaches, including seeking and maintaining patents intended to cover our technology platforms, our product candidates, their methods of use and processes for their manufacture, and any other inventions that are commercially important to our business. We have entered into an exclusive license agreement with TSRI to obtain certain rights that permit us to develop and commercialize our product candidates. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We seek to obtain domestic and international patent protection and endeavor to promptly file patent applications for new commercially valuable inventions to expand our intellectual property portfolio.

We believe that we have a significant global intellectual property position and substantial know-how relating to the incorporation of non-natively encoded amino acids into proteins. Our intellectual property portfolio currently contains over 50 issued U.S. patents and over 40 pending U.S. patent applications that we own. In addition, we have exclusively licensed certain patent rights from TSRI, including over 20 issued U.S. patents and two pending U.S. patent applications. Collectively, these patent rights relate to various aspects of our technology platforms, our proprietary reagents and linkage chemistries, our product candidates and our collaborators’ product candidates.

We continually assess and refine our intellectual property strategy as we develop new platform technologies and product candidates. To that end, we are prepared to file additional patent applications if our intellectual property strategy requires such filings, or where we seek to adapt to competition or seize business opportunities. Further, we are prepared to file patent applications, as we consider appropriate under the circumstances, relating to the new technologies that we develop.

In addition to filing and prosecuting patent applications in the United States, we often file counterpart patent applications in additional countries where we believe such foreign filing is likely to be beneficial, including Australia, Canada, China, Europe, India, Israel, Japan, Mexico and South Korea.

We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications we may own or license in the future, nor can we be sure that any of our existing patents or any patents we may own or license in the future will be useful in protecting our technology. Please see “Risk Factors—Risks Related to Our Intellectual Property” for additional information on the risks associated with our intellectual property strategy and portfolio.

 

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Intellectual Property Relating to Our ReCODE and EuCODE Platforms

We own 12 families of U.S. and foreign patents and patent applications relating to our ReCODE and EuCODE platforms. These families include over 20 issued U.S. patents relating to key components of our ReCODE and EuCODE platforms and methods of producing the polypeptides that contain a non-naturally occurring amino acid. Our patents and patent applications contain claims covering orthogonal tRNA synthetases, or RSs; orthogonal tRNAs; cells that contain the orthogonal RS and tRNA; and methods of producing polypeptides comprising a non-naturally occurring amino acid. The issued U.S. patents and any U.S. patents issuing from our pending U.S. patent applications will expire between 2024 and 2033.

We also have an exclusive license to a patent portfolio containing four families of U.S. and foreign patents and patent applications owned by TSRI or co-owned by TSRI and The Regents of the University of California. Through this exclusive license, we currently have exclusive rights to over 20 issued U.S. patents, over 50 foreign patents and over 20 pending patent applications in the United States and worldwide relating to methods and reagents for making proteins containing a non-naturally occurring amino acid. Any patents within this portfolio that have issued or may issue in the future will expire between 2022 and 2026.

Intellectual Property Relating to Our ARX788 Product Candidate

With regard to our ARX788 product candidate, we own one pending U.S. patent application and have over 30 patent applications pending in various countries and regions, including Australia, Canada, China, Europe, India, Israel, Japan, Mexico and South Korea. These applications relate to the ARX788 composition of matter and methods for making ARX788. Any patents issued from these applications will expire in 2032; however, a patent term extension may be available for one of the issued U.S. patents.

Intellectual Property Relating to Our ARX201 Product Candidate

With regard to our ARX201 product candidate, we own nine issued U.S. patents, one pending U.S. patent application and over 45 granted and pending patent applications in various countries and regions including Australia, Canada, China, Europe, India, Israel, Japan, Mexico and South Korea. These patent rights relate to the ARX201 composition of matter, formulations containing ARX201, methods of expressing, conjugating and purifying ARX201, and methods of administering ARX201. The issued U.S. patents will expire between 2025 and 2026. However, a patent term extension may be available for one of the issued U.S. patents.

Intellectual Property Relating to Our ARX328 Product Candidate

With regard to our ARX328 product candidate, we own one pending U.S. patent application, five patents granted in Australia, China, Mexico, New Zealand and Singapore, and over ten pending patent applications in various countries and regions including Australia, Canada, China, Europe, India, Israel, Japan and Mexico. These patent rights relate to the ARX328 composition of matter, pharmaceutical compositions containing ARX328, and methods of treating disorders using ARX328. If issued, the U.S. patent would expire in 2029; however, a patent term extension may be available for one of the issued U.S. patents.

U.S. Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration, and specifics of the FDA approval of the use of our product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. Patent term restoration can compensate for time lost during product development and the regulatory review process by returning up to five years of patent life for a patent that covers a new product or its use. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The period of patent term restoration is generally one-half the time between the effective date of an IND

 

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(falling after issuance of the patent) and the submission date of a BLA, plus the time between the submission date of the BLA and the approval of that application, provided the sponsor acted with diligence. Only one patent applicable to an approved biological product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The application for patent term extension is subject to approval by the U.S. Patent and Trademark Office, or U.S. PTO, in consultation with the FDA.

A patent term extension is only available when the FDA approves a biological product for the first time. We believe that ARX788, ARX201 and ARX328 have not been previously approved by the FDA and each may be eligible for a patent term extension. However, we cannot be certain that the U.S. PTO and the FDA will agree with our analysis or the U.S. PTO will grant a patent term extension for any of our product candidates.

A biological product may also be eligible to obtain certain marketing exclusivities granted by the FDA. See “Government Regulation” below.

Manufacturing

We utilize both bacterial (ReCODE) and mammalian (EuCODE) expression platforms employing standard manufacturing equipment and facilities. We have analytical and process development capabilities and can manufacture 40 liter (bacterial fermentation) and 200 liter (mammalian culture) non-cGMP batches in our own facility. We generally perform cell line, analytical and process development for our product candidates internally and manufacture the drugs necessary to conduct the non-GLP preclinical studies of our investigational product candidates. We occasionally outsource the production of research and development material. We do not have, and we do not currently plan to, acquire or develop the facilities or capabilities to manufacture bulk drug substance or filled drug product for use in human clinical trials. We rely on third-party manufacturers to produce the bulk drug substances required for our clinical trials and expect to continue to rely on third parties to manufacture and test clinical trial drug supplies for the foreseeable future. With a collaborator, we have successfully scaled bacterial fermentation of the most advanced product candidate from our ReCODE platform to the commercial scale of 50,000 liters. In 2014 we expect to scale our EuCODE production of antibodies to multi-hundreds of liters. We also contract with additional third parties for the filling, labeling, packaging, testing, storage and distribution of our investigational drug products. We employ personnel with the significant scientific, technical, production, quality and project management experience required to oversee our network of third-party suppliers and to manage manufacturing, quality data and information for regulatory compliance purposes.

Our contract suppliers manufacture drug substance and product for clinical trial use in compliance with cGMP and applicable local regulations. cGMP regulations include requirements relating to organization of personnel; buildings and facilities; equipment; control of components and drug product containers and closures; production and process controls; packaging and labeling controls; holding and distribution; laboratory controls; records and reports; and returned or salvaged products. The manufacturing facilities for our products must be in compliance with cGMP requirements before any product is approved. We ensure cGMP compliance of our suppliers through regular quality inspections performed by our Quality Assurance group. Our third-party manufacturers are also subject to periodic inspections of facilities by the FDA and other authorities, including reviews of procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable regulations. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including warning letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties. These actions could have a material impact on the availability of our products. In addition, contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.

Competition

The biotechnology and pharmaceutical industries are characterized by continuing technological advancement and significant competition. While we believe that our technology platforms, product candidates, know-how,

 

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experience and scientific resources provide us with competitive advantages, we face competition from major pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions, among others. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. Key product features that would affect our ability to effectively compete with other therapeutics include the efficacy, safety and convenience of our products. The level of generic competition and the availability of reimbursement from government and other third-party payers will also significantly impact the pricing and competitiveness of our products. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

Many of the companies against which we may compete 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. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Potential Competing Products

In the United States, Herceptin, Kadcyla and Perjeta (all Genentech, Inc.) are approved biologic therapies for HER2+ breast cancer. In addition, there are multiple biologics and small molecules in development for use against HER2 expressing tumors, both in breast cancer and other solid tumors. Without the results from pivotal clinical trials, it is difficult to assess whether these product candidates will have the appropriate therapeutic index to provide a meaningful therapy for these various cancers.

In the United States, there are a variety of currently marketed hGH therapies administered by daily subcutaneous injection and used for the treatment of GHD, including Norditropin (Novo Nordisk), Humatrope (Eli Lilly), Nutropin-AQ (Genentech, Inc.), Genotropin (Pfizer Inc.), Saizen (Merck Serono), Tev-tropin (Teva Pharmaceuticals Industries Ltd.) and Omnitrope (Sandoz GmbH). These drugs are well-established therapies and are widely accepted by physicians, patients, caregivers and third-party payors as the standard of care for the treatment of GHD. In addition, we are aware of several companies, including Versartis, Inc., OPKO Health, Inc. and Ascendis Pharma GmbH, that have long-acting versions of hGH in various stages of clinical development.

To our knowledge, in the United States and Japan there is one approved leptin treatment, Myalept (AstraZeneca), that is administered daily. The use of this drug is restricted to forms of lipodystrophy that are not HIV-associated. Egrifta (Merck Serono), a growth hormone releasing factor, is approved in the United States for HIV-associated lipodystrophy patients. The drug is taken once daily as a subcutaneous injection with a fine needle. To our knowledge, there are no long-acting leptin analogs in clinical development in the United States.

Site-Specific Modification of Proteins

There are three major approaches to address site-specific modification of proteins. The first is to include a natural amino acid, usually a cysteine or lysine, at a position that enhances its reactivity relative to other amino acids. Multiple companies, including Seattle Genetics, Inc., Genentech, Inc. and Sorrento Therapeutics, Inc., have taken this approach. A related approach is to use an enzyme, transglutaminase, to modify the amino acids glutamine or lysine when they are contained in a defined sequence of about six amino acids. Companies using this approach include Pfizer Inc. and Innate Pharma S.A.

A second approach is to modify the sugar residues that are attached to certain amino acids in proteins. We are aware of several companies that are attempting to conjugate drugs to proteins through these sugar residues.

 

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However, we believe that the ability to do this precisely is not well determined and the value of this approach is not clear.

The third approach is to encode a non-natural amino acid at a predetermined position within the proteins, which is the approach we use. We are aware of two other companies, Sutro Biopharma, Inc. and Allozyne, Inc., that use a similar approach. Allozyne uses a cell-based process, which can be either bacterial or mammalian, to encode a non-specific amino acid to replace either a methionine codon in bacteria or a stop codon in mammalian cells. The ability to scale these processes for clinical and commercial production is not clear. Sutro Biopharma’s technology is built around a cell-free bacterial system that allows the incorporation of a non-natural amino acid into the protein. The process is limited to proteins that do not require glycosylation for activity, and the ability to scale these processes for clinical and commercial production is not clear.

Government Regulation

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture, marketing and distribution of biological products, or biologics. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, marketing, sale, advertising and promotion, and import and export of our product candidates. Failure to comply with applicable FDA or other requirements may result in civil or criminal penalties, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.

In the United States, the FDA regulates biologics pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and the Public Health Service Act, or PHSA, and their implementing regulations. Our product candidates are subject to regulation by the FDA as biologics. Biologics require the submission of a Biologics License Application, or BLA, and approval by the FDA before they may be marketed in the United States. The process required by the FDA before our biologic product candidates may be marketed in the United States generally involves the following:

 

    completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies all performed in accordance with the FDA’s GLP regulations;

 

    submission to the FDA of an IND which must become effective before human clinical trials in the United States may begin;

 

    performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacy of the product candidate for each proposed indication;

 

    submission to the FDA of a BLA;

 

    satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP regulations; and

 

    FDA review and approval of the BLA.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Once a product candidate is identified for development, it enters the preclinical testing stage. Preclinical studies include laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the

 

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conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an IND may result in the FDA not allowing the clinical trials to commence or not allowing the clinical trials to commence on the terms originally specified in the IND. A separate submission to an existing IND must also be made for each successive clinical trial conducted during drug development, and the FDA must grant permission, either explicitly or implicitly by not objecting, before each clinical trial can begin. An independent institutional review board, or IRB, for each medical institution proposing to conduct a clinical trial must also review and approve a plan for any clinical trial before it can begin at that center and the IRB must monitor the clinical trial until it is completed.

Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be used. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive GCP requirements, including the requirement for obtaining informed consent from subjects.

For purposes of BLA submission and approval, clinical trials are typically conducted in three sequential phases, which may overlap or be combined.

 

    Phase 1 clinical trials are initially conducted in a limited population of subjects to test the product candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients with severe problems or life-threatening diseases to gain an early indication of its effectiveness.

 

    Phase 2 clinical trials are generally conducted in a limited patient population to evaluate preliminarily the efficacy of the product candidate for specific targeted indications in patients with the disease or condition under study; evaluate dosage tolerance and appropriate dosage; and identify possible adverse effects and safety risks.

 

    Phase 3 clinical trials are commonly definitive efficacy studies of the experimental medication. Phase 3 clinical trials are typically conducted when Phase 2 clinical trials demonstrate that a dose range of the product candidate is effective and has an acceptable safety profile. Phase 3 clinical trials are generally undertaken with large numbers of patients, such as groups of several hundred to several thousand, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple, geographically-dispersed clinical trial sites.

In some cases, the FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials to further assess the biologic’s safety and effectiveness after BLA approval. Such post-approval clinical trials are typically referred to as Phase 4 clinical trials.

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

 

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Biologics License Applications

The results of preclinical studies and of the clinical trials, together with other detailed information, including extensive manufacturing information and information on the composition of the biologic, are submitted to the FDA in the form of a BLA seeking approval to market the biologic for one or more specified indications. The FDA reviews a BLA to determine, among other things, whether a biologic is safe and effective for its intended use.

Once a BLA has been accepted for filing, the FDA’s goal is to review BLAs within ten months of the filing date for standard review or six months of the filing date for priority review, if the application is for a product intended for a serious or life-threatening disease or condition and the product, if approved, would provide a significant improvement in safety or effectiveness. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.

Before approving an application, the FDA will inspect the facility or the facilities at which the biologic product is manufactured, and will not approve the product unless the facility is cGMP compliant. The FDA may also inspect the sites at which the clinical trials were conducted to assess their compliance, and will not approve the biologic unless compliance with GCP requirements are met. BLAs must contain data (or a proposal for post-marketing activity) to assess the safety and effectiveness of an investigational new drug product for the claimed indications in all relevant pediatric populations in order to support dosing and administration for each pediatric subpopulation for which the biologic 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 if certain criteria are met. The requirements for pediatric data do not apply to any biologic for an indication for which orphan designation has been granted.

After the FDA reviews the BLA and conducts inspections of the manufacturing facilities where the product is manufactured, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the biologic with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter will be issued if the applicable statutory and regulatory criteria are not satisfied, or if FDA requires additional clinical data, such as additional Phase 3 clinical trials, and/or other significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Even if such additional data or information are submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret data.

Even if the FDA approves a BLA, the FDA may require testing, including Phase 4 clinical trials and surveillance programs to monitor the effect of approved biologics which have been commercialized. The FDA has the authority to prevent or limit further marketing of a biologic based on the results of these post-marketing programs. The FDA could also approve the BLA with a Risk Evaluation and Mitigation Strategy to ensure that the benefits of the biologic outweigh its risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling, development of adequate controls and specifications, or a commitment to conduct surveillance programs.

Biologics may be marketed only for the FDA-approved indications and in accordance with the provisions of the approved labeling. Further, if there are any modifications to the biologic, including changes in indications, labeling, or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new BLA or BLA supplement, which may require us to develop additional data or conduct additional preclinical studies and clinical trials.

 

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Other Regulatory Requirements

Any biologics manufactured or distributed by us or our collaborators pursuant to FDA approvals would be subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the product. Manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic announced and unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution or withdraw approval of the BLA for that product.

The FDA closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising, and potential civil and criminal penalties. Physicians may prescribe approved biologics for uses that are not described in the product’s labeling, which is referred to as “off-label” use. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use. Thus, although physicians may prescribe approved products for uses outside of their approved labeling, manufacturers are prohibited from promoting their approved products for such uses.

Expedited Review and Accelerated Approval Programs

A sponsor may also seek approval of its product candidates under programs designed to accelerate FDA review and approval of BLAs. For instance, a sponsor may seek FDA designation of a product candidate as a “fast track product.” Fast track products are those products intended for the treatment of a serious or life-threatening disease or condition and which demonstrates the potential to address unmet medical needs for such disease or condition. If fast track designation is obtained, the FDA may initiate review of sections of a BLA before the application is complete. This “rolling review” is available if the applicant provides and the FDA approves a schedule for the remaining information. In some cases, a fast track product may also be eligible for other types of FDA programs intended to expedite development and review, such as accelerated approval, if it can provide meaningful therapeutic benefit over existing treatments. A product eligible for accelerated approval may be approved on the basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Accelerated approval typically includes requirements for appropriate post-approval Phase 4 clinical trials to validate the surrogate endpoint or otherwise confirm the effect of the clinical endpoint.

Biosimilars, Interchangeable Biologics and Exclusivity

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the PPACA, signed into law on March 23, 2010, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 which created an abbreviated approval pathway for biological

 

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products shown to be biosimilar to, or interchangeable with, an FDA-licensed reference biological product. This amendment to the PHSA attempts to minimize duplicative testing. Biosimilarity, which requires that the product be “highly similar” to the reference product notwithstanding minor differences in clinically inactive components and that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. However, complexities associated with the larger, and often more complex, structure of biological products, as well as the process by which such products are manufactured, pose significant hurdles to implementation that are still being worked out by the FDA.

A reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product. In addition, the first biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with, not just biosimilar to, the reference product has exclusivity against other biologics submitting under the abbreviated approval pathway for the lesser of (1) one year after the first commercial marketing, (2) 18 months after approval if there is no legal challenge, (3) 18 months after the resolution in the applicant’s favor of a lawsuit challenging the biologics’ patents if an application has been submitted, or (4) 42 months after the application has been approved if a lawsuit is ongoing within the 42-month period.

In addition, product candidates may be eligible for “priority review,” or review within a six month timeframe from the date a complete BLA is accepted for filing, if a sponsor shows that its product candidate provides a significant improvement compared to marketed products. Lastly, the Food and Drug Administration Safety and Innovation Act, which was enacted and signed into law in 2012, established a new breakthrough therapy designation. A sponsor may seek FDA designation of its product candidate as a breakthrough therapy if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The benefits of breakthrough therapy designation includes the same benefits as fast track designation, plus intensive guidance from FDA to ensure an efficient drug development program.

Orphan Designation and Exclusivity

The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making the drug for this type of disease or condition will be recovered from sales in the United States.

Orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. In addition, if a product receives FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity.

Pediatric Exclusivity

A product may be eligible for pediatric exclusivity, which, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or

 

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patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.

International Regulation

To obtain a marketing authorization of a biologic in the European Union, we may submit marketing authorization applications either under the so-called centralized or national authorization procedures.

Centralized procedure

The centralized procedure provides for the grant of a single marketing authorization following a favorable opinion by the European Medicines Agency, or EMA, that is valid in all European Union member states, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for medicines produced by certain specified biotechnological processes (such as recombinant DNA technology, controlled expression of genes coding for biologically active proteins in prokaryotes and eukaryotes including transformed mammalian cells, and hybridoma and mAb methods), products designated as orphan medicinal products, products with a new active substance indicated for the treatment of specified diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, and advanced therapy medicinal products. The centralized procedure is optional for products that represent a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interest of public health.

National authorization procedures

There are also two other possible routes to authorize medicinal products in several European Union countries, which are available for investigational medicinal products that fall outside the scope of the centralized procedure:

 

    Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one European Union country of medicinal products that have not yet been authorized in any European Union country and that do not fall within the mandatory scope of the centralized procedure.

 

    Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one European Union Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other European Union countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.

In the European Union, new products authorized for marketing (i.e., reference products) qualify for eight years of data exclusivity and an additional two years of market exclusivity upon marketing authorization. The data exclusivity period prevents biosimilar applicants from relying on the preclinical and clinical trial data contained in the dossier of the reference product when applying for a marketing authorization in the EU during a period of eight years from the data on which the reference product was first authorized in the EU. The market exclusivity period prevents a successful biosimilar applicant from commercializing its product in the EU until ten years have elapsed from the initial authorization of the reference product in the EU. The ten-year market exclusivity period can be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies.

Fraud and Abuse and Data Privacy and Security Laws and Regulations

In addition to FDA restrictions on marketing of pharmaceutical products, federal and state fraud and abuse laws restrict business practices in the biopharmaceutical industry. These laws include anti-kickback and false claims laws and regulations as well as data privacy and security laws and regulations.

 

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The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease, or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exemptions and safe harbors are drawn narrowly. To qualify for a safe harbor, the activity must fit squarely within the safe harbor. The failure to meet a safe harbor does not render the activity illegal; however, the activity may be subject to increased scrutiny by the government and will be assessed on a case-by-case based on its specific facts and circumstances. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not meet the requirements of a statutory or regulatory exception or safe harbor. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated.

The federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved, and thus non-covered, uses. In addition, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created new federal criminal statutes that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. The PPACA broadened the reach of both the Anti-Kickback Statute and the criminal health care fraud statute by amending the intent requirement such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other health care providers. PPACA created new federal requirements for reporting, by applicable manufacturers of covered drugs, payments and other transfers of value to physicians and teaching hospitals. Certain states also require implementation of commercial compliance programs and compliance with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing practices, and/or tracking and reporting of gifts, compensation and other remuneration or items of value provided to physicians and other health care professionals and entities.

We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology and Clinical

 

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Health Act, or HITECH, and its implementing regulations, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same requirements, thus complicating compliance efforts.

To the extent that any of our product candidates, once approved, are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.

Coverage and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on the availability of coverage and reimbursement from third-party payors. Third-party payors include government authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. A decision by a third-party payor not to cover our product candidates could reduce physician utilization of our products once approved and have a material adverse effect on our sales, results of operations and financial condition. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on coverage and reimbursement and requirements for substitution of generic products. By way of example, in the United States, the PPACA contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to managed care plans, addressed new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs that are line extension products, mandatory discounts for certain Medicare Part D beneficiaries, and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

Other Regulations

We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.

 

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Legal Proceedings

From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, operating results or financial condition.

Research and Development

We have invested $16.3 million, $27.5 million, $3.7 million and $8.5 million in research and development for the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014, respectively.

Employees

As of March 31, 2014, we employed 74 full-time employees, 30 of whom hold Ph.D., M.D. or D.V.M. (or equivalent) degrees. Of the full-time employees, 61 were engaged in research and development and 13 were engaged in general and administrative activities (including business and corporate development). We plan to continue to expand our product development programs. To support this growth, we will need to expand managerial, operations, development, regulatory, sales, marketing, finance and other functions. None of our employees are subject to a collective bargaining agreement, and we consider our employee relations to be good.

Facilities

We occupy approximately 36,172 square feet of office and laboratory space in La Jolla, California under a lease which expires in November 2017.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information about our executive officers and directors as of May 1, 2014:

 

Name

   Age   

Position

Executive Officers      

Lawson Macartney, Ph.D., B.V.M.S.

   56    President, Chief Executive Officer and Director

Peter Kiener, D.Phil.

   62    Chief Science Officer

Simon Allen

   46    Chief Business Officer

Crispina Calsada

   44    Vice President of Finance

John W. Wallen III, Ph.D., J.D.

   56    Vice President, Intellectual Property
Non-Employee Directors      

John D. Diekman, Ph.D.

   71    Chairman of the Board of Directors

Christopher Fuglesang, Ph.D., J.D.

   45    Director

Barry Greene

   50    Director

Sheila Gujrathi, M.D.

   43    Director

Allan Marchington, Ph.D.

   47    Director

David B. Singer

   51    Director

Executive Officers

Lawson Macartney, Ph.D., B.V.M.S. has served as our President and Chief Executive Officer and as a member of our board of directors since February 2013. Prior to joining us, Dr. Macartney served at Shire AG, a specialty biopharmaceutical company, as Senior Vice President of the Emerging Business Unit from 2011 to 2013, where he was responsible for discovery initiatives through Phase 3 development of Shire’s Specialty Pharmaceutical portfolio. Prior to joining Shire AG, he served at GlaxoSmithKline, or GSK, a pharmaceutical company, from 1999 to 2011, serving as Senior Vice President of Global Product Strategy and Project/Portfolio Management from 2007 to 2011, as Senior Vice President, Cardiovascular and Metabolic Medicine Development Center from 2004 to 2007, and as Vice President, Global Head of Cardiovascular, Metabolic and Urology Therapeutic Areas from 1999 to 2004. Prior to joining GSK, Dr. Macartney was employed at Astra Pharmaceuticals from 1998 to 1999 in leadership roles in operations, marketing and sales, and served as Executive Director, Commercial Operations at AstraMerck, Inc., a pharmaceutical company, from 1996 to 1998. Dr. Macartney also currently serves as a member of the board of directors of Viking Therapeutics, Inc. Dr. Macartney received his Ph.D. from Glasgow University in Scotland in 1982, where he was a Royal Society Research Fellow, and his B.V.M.S. (equivalent to a D.V.M.) in 1979 from Glasgow University Veterinary School. He is also trained in diagnostic pathology and is a Fellow of the Royal College of Pathologists. We believe that Dr. Macartney’s extensive experience in leadership positions at numerous pharmaceutical companies qualifies him to serve on our board of directors.

Peter Kiener, D.Phil. has served as our Chief Science Officer since August 2013. From May 2013 to August 2013, Dr. Kiener was an Entrepreneur In Residence at New Enterprise Associates. Prior to New Enterprise Associates, Dr. Kiener was President, Chief Executive Officer and Co-Founder of Zyngenia, Inc., a company focused on developing the next generation of multi-specific, mAb-based biologics, where he worked from 2009 to 2013. Prior to Zyngenia, Dr. Kiener was Executive Vice President and Global Head of Biologics R&D at AstraZeneca PLC/MedImmune from 2001 to 2009, where he helped build industry-leading protein and antibody engineering capabilities and oversaw the submission of multiple INDs and new drug applications. Before leading R&D at MedImmune, he worked in various positions as a scientist and then as a manager at Bristol-Myers Squibb from 1983 to 2001, ten years of which were spent working on biological therapeutics. Dr. Kiener received his B.A. in Chemistry from the University of Lancaster, UK, and his D. Phil. in Biochemistry from Oxford University, UK.

 

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Dr. Kiener has published more than 120 papers in peer-reviewed journals and is an inventor on more than 30 patents and patent applications.

Simon Allen has served as our Chief Business Officer since March 2011. Prior to joining us in his current role, Mr. Allen was an advisor and consultant to us from September 2010 to February 2011 and to Somaxon Pharmaceuticals, Inc. from June 2010 to September 2010. From April 2008 to June 2010, he served in a variety of senior positions at Kalypsys, Inc., culminating in his role as Chief Executive Officer. Mr. Allen previously served as the Chief Commercial Officer of CovX from 2006 to 2008 and as the Vice President, Business and Corporate Development of Nuvelo Inc. from 2004 to 2006. He previously held business development and analyst roles at SkyePharma PLC, Corixa Corporation (formerly Coulter Pharmaceuticals) and Burdett, Buckeridge and Young. Mr. Allen graduated from the University of Sydney with a B.S. in Biochemistry, Microbiology and Genetics and earned his M.B.A. from the Australian Graduate School of Management.

Crispina Calsada has served as our Vice President of Finance since December 2006, and joined us as Director of Finance in April 2004. From 1999 to 2004, Ms. Calsada served as Executive Director of Finance at Sony Online Entertainment. Prior to that, she worked for six years in public accounting and private industry. Ms. Calsada is a certified public accountant and holds an M.B.A. from the University of Southern California Marshall School of Business and a B.S. in Business Administration with an emphasis in Accounting from San Diego State University.

John W. Wallen III, Ph.D., J.D. has served as our Vice President, Intellectual Property since February 2004. From March 2003 to February 2004, Dr. Wallen served as a Partner in the Technology/Intellectual Property, Life Sciences, and Patent Litigation groups of the law firm Preston Gates & Ellis LLP in San Diego. From September 1995 to May 2002, Dr. Wallen served as a patent attorney in the law department of Johnson & Johnson. From December 1985 to September 1995, he worked for Merck & Co., Inc., serving as a scientist in the Cancer Research Department from December 1985 to August 1989, then serving as a Patent Agent while attending law school from August 1989 to July 1993, and then serving as a patent attorney in the Patent Department from July 1993 to September 1995. Dr. Wallen is a patent attorney registered with the U.S. PTO and holds a Ph.D. from The University of Pennsylvania in Molecular Biology, a J.D. from Seton Hall Law School, an M.S. in Clinical Microbiology from Long Island University (Brooklyn) and a B.S. in Biology from SUNY Oswego.

Non-Employee Directors

John D. Diekman, Ph.D. has served as Chairman of our board of directors since August 2003. Dr. Diekman is a founder and Managing Partner of 5AM Ventures, where he has served since 2002. Dr. Diekman has also been a Director of Aravis Ventures, an international early-stage life science fund, since 2001. Prior to founding 5AM Ventures, from 1997 to 2002, Dr. Diekman founded and served as Managing Director of Bay City Capital, a life sciences investment firm. From 1995 to 2002, Dr. Diekman served as Chairman of Affymetrix, Inc., for which he also served as Chief Executive Officer from 1995 to 1997. Dr. Diekman currently also serves on the board of directors of each of Cellular Research, Inc., Calibrium Biotech, Igenica, Inc., PhaseRx Pharmaceuticals, Inc. and Wildcat Discovery Technologies, Inc. He previously served on the board of directors of each of Aravis Ventures, Affymetrix, Inc., BioOne Capital Pte Ltd., Envoy Therapeutics, Inc., InGenuity Systems, Inc. and Kalypsys, Inc. He is a Trustee of Princeton University, a former Director of The California Institute of Technology, and a former Chairman of the Board of The Scripps Research Institute. Dr. Diekman holds an A.B. in Organic Chemistry from Princeton University and a Ph.D. in Chemistry from Stanford University. We believe that Dr. Diekman’s experience as a venture capital investor in the life sciences industry, as well as his experience as a director for numerous biotechnology companies, qualifies him to serve on our board of directors.

Christopher Fuglesang, Ph.D., J.D. has served as a member of our board of directors since March 2012. Dr. Fuglesang has worked at Tavistock Life Sciences since 2005, where he co-manages venture capital and private equity investments in life sciences companies. Dr. Fuglesang is also the co-founder of Boxer Capital LLC, the primary vehicle in which Tavistock Group invests in public healthcare companies. Earlier in his career

 

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with Tavistock Life Sciences, Dr. Fuglesang handled and supervised a variety of transactions, including mergers and acquisitions, joint ventures and other strategic collaborations in the healthcare space. He also has experience in intellectual property management, licensing and corporate development. Dr. Fuglesang is currently also a member of the board of directors of Eidogen-Sertany. Dr. Fuglesang holds a Ph.D. in chemical physics from the University of California, Los Angeles, a J.D. from the Boston University School of Law and a B.S. in each of chemistry and physics from the University of California, Los Angeles. We believe that Dr. Fuglesang’s experience developing life science companies and managing venture capital and private equity investments in life sciences companies qualifies him to serve on our board of directors.

Barry Greene has served as a member of our board of directors since January 2014. Mr. Greene has served as the President and Chief Operating Officer of Alnylam Pharmaceuticals, Inc., or Alnylam, a public biopharmaceutical company, since December 2007. Mr. Greene has served as Chief Operating Officer of Alnylam since October 2003, and served as Treasurer from February 2004 through December 2005. From February 2001 to September 2003, Mr. Greene served as General Manager of Oncology at Millennium Pharmaceuticals, Inc., or Millennium, a biopharmaceutical company. He focused on global strategy and execution for Millennium’s oncology business to guide near- and long-term research, development and commercialization and was involved in the successful approval and launch of VELCADE (bortezomib). Earlier, he was Vice President of Strategic Integration with responsibility for the AstraZeneca North America post-merger integration and Vice President of Marketing and Customer Services for AstraZeneca. Prior to his work with AstraZeneca, he was a partner with Andersen Consulting, where he was responsible for the pharmaceutical and biotechnology marketing and sales practice. Mr. Greene serves as a member of the board of directors of each of Acorda Therapeutics, Inc., a public biotechnology company, and Karyopharm Therapeutics, Inc., a private pharmaceutical company. He previously served on the board of directors of each of Regulus Therapeutics, Inc. and Intercept Pharmaceuticals, Inc. Mr. Greene holds a B.S. in Industrial Engineering from the University of Pittsburgh. We believe that Mr. Greene’s more than 20 years of experience in the healthcare, pharmaceutical and biotechnology industries, including as an executive and as a director, qualifies him to serve on our board of directors.

Sheila Gujrathi, M.D. has been a member of our board of directors since February 2014. She is currently the Chief Medical Officer of Receptos, Inc., a position she has held since June 2011. She joined Receptos from Bristol-Myers Squibb, where she was Vice President of the Global Clinical Research Group in Immunology from 2008 to 2011. Prior to joining Bristol-Myers Squibb, Dr. Gujrathi worked at Genentech, where she held roles of increasing responsibility in the Immunology, Tissue Growth and Repair clinical development group from 2002 to 2008. From 1999 to 2002, Dr. Gujrathi was a management consultant at McKinsey & Company in the healthcare practice, where she provided strategic advice on a variety of projects in the healthcare and pharmaceutical industry. Dr. Gujrathi received her B.S. with highest distinction in Biomedical Engineering and M.D. from Northwestern University in their accelerated honors program in Medical Education. She completed her internal medicine internship and residency at Brigham and Women’s Hospital, Harvard Medical School and is board certified in internal medicine. She received additional training at the University of California, San Francisco and Stanford University in their Allergy and Immunology Fellowship Program. We believe that Dr. Gujrathi’s experience in the biopharmaceutical industry, as well as her medical background and training, qualifies her to serve on our board of directors.

Allan Marchington, Ph.D. has served as a member of our board of directors since June 2006. Dr. Marchington has served as a Partner of Apposite Capital LLP since 2006. He also currently sits on the board of directors of each of Ambit Biosciences Corp., RuiYi Inc., Convergence Pharmaceutical Holdings Ltd., Calchan Holdings Ltd., The BioIndustry Association, Apposite CP1 LP and Central Garage (1958) Ltd.. He previously served on the board of directors of each of Millennium Pharmaceuticals (Europe) Ltd., Cambridge Combinatorial Ltd., Cambridge Discovery Chemistry Ltd. and Oxford Molecular PLC. From 2000 to 2003, Dr. Marchington served as Senior Vice President, Productivity of Millennium Pharmaceuticals, where he was responsible for Millennium’s European activities and a majority of the company’s technology investments. From 1997 to 2000, Dr. Marchington served as the founder and Chief Executive Officer of Cambridge Discovery Chemistry. From 1990 to 1996, Dr. Marchington was a medicinal chemist at Pfizer Central Research in Sandwich, UK. Dr. Marchington holds a Ph.D. in Organic

 

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Synthetic Chemistry and B.Sc. in Chemistry from the University of Liverpool. We believe that Dr. Marchington’s experience in medicinal chemistry, company operations and strategic planning, as well as his experience as a venture capital investor in the biopharmaceutical industry, qualifies him to serve on our board of directors.

David B. Singer has served as a member of our board of directors since March 2005. Since 2004, Mr. Singer has been an employee or Limited Partner at Maverick Capital, Ltd., a private investment firm, or an affiliate thereof. Mr. Singer is responsible for the firm’s private investments globally. Previously, Mr. Singer served as the founding President and Chief Executive Officer of three healthcare companies. He served on the board of directors of each of Pacific Biosciences of California, Inc. from December 2006 to May 2013, Affymetrix, Inc. from 1993 to 2008, Corcept Therapeutics Inc. from 1998 to 2008 and Oscient Pharmaceuticals Corporation from 2004 to 2006. Mr. Singer has also served as the Senior Financial Officer of two publicly traded companies. Mr. Singer received an M.B.A. from Stanford University and a B.A. in History from Yale University. We believe that Mr. Singer’s experience as a venture capital investor in the biopharmaceutical industry, along with his experience as a director of several biopharmaceutical companies, qualifies him to serve on our board of directors.

Board Composition and Election of Directors

Director Independence

Our board of directors currently consists of seven members. Our board of directors has determined that all of our directors, other than Dr. Macartney, are independent directors in accordance with the listing requirements of The NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, including that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. In addition, as required by NASDAQ rules, our board of directors has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with his or her exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships among any of our directors or executive officers.

Classified Board of Directors

In accordance with the terms of our amended and restated certificate of incorporation that will go into effect immediately prior to the completion of this offering, our board of directors will be divided into three classes with staggered, three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Effective upon the completion of this offering, our directors will be divided among the three classes as follows:

 

    the Class I directors will be                      and                     , and their terms will expire at our first annual meeting of stockholders following this offering;

 

    the Class II directors will be                      and                     , and their terms will expire at our second annual meeting of stockholders following this offering; and

 

    the Class III directors will be                     ,                      and                     , and their terms will expire at our third annual meeting of stockholders following this offering.

Our amended and restated certificate of incorporation that will go into effect immediately prior to the completion of this offering will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-

 

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third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control of our company. Our directors may be removed only for cause by the affirmative vote of the holders of at least 66-2/3% of our outstanding voting stock then entitled to vote in the election of directors.

Board Leadership Structure

Our board of directors is currently led by its chairman, John D. Diekman, Ph.D. Our board of directors recognizes that it is important to determine an optimal board leadership structure to ensure the independent oversight of management as the company continues to grow. We separate the roles of Chief Executive Officer and chairman of the board in recognition of the differences between the two roles. The Chief Executive Officer is responsible for setting the strategic direction for the company and the day-to-day leadership and performance of the company, while the chairman of the board of directors provides guidance to the Chief Executive Officer and presides over meetings of the full board of directors. We believe that this separation of responsibilities provides a balanced approach to managing the board of directors and overseeing the company.

Our board of directors has concluded that our current leadership structure is appropriate at this time. However, our board of directors will continue to periodically review our leadership structure and may make such changes in the future as it deems appropriate.

Role of Board in Risk Oversight Process

Our board of directors has responsibility for the oversight of the company’s risk management processes and, either as a whole or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business and the steps we take to manage them. The risk oversight process includes receiving regular reports from board committees and members of senior management to enable our board to understand the company’s risk identification, risk management and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk.

The audit committee reviews information regarding liquidity and operations and oversees our management of financial risks. Periodically, the audit committee reviews our policies with respect to risk assessment, risk management, loss prevention and regulatory compliance. Oversight by the audit committee includes direct communication with our external auditors and discussions with management regarding significant risk exposures and the actions management has taken to limit, monitor or control such exposures. The compensation committee is responsible for assessing whether any of our compensation policies or programs has the potential to encourage excessive risk-taking. The nominating and corporate governance committee manages risks associated with the independence of the board, corporate disclosure practices, and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire board is regularly informed through committee reports about such risks. Matters of significant strategic risk are considered by our board as a whole.

Board Committees and Independence

Our board of directors has established three standing committees—audit, compensation and nominating and corporate governance—each of which operates under a charter that has been approved by our board of directors.

Our board of directors has determined that all of the members of each of the board’s three standing committees are independent as defined under the rules of The NASDAQ Global Market. In addition, all members of the audit committee meet the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act of 1934, or the Exchange Act.

 

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Audit Committee

The audit committee’s main function is to oversee our accounting and financial reporting processes and the audits of our financial statements. This committee’s responsibilities include, among other things:

 

    appointing our independent registered public accounting firm;

 

    evaluating the qualifications, independence and performance of our independent registered public accounting firm;

 

    approving the audit and non-audit services to be performed by our independent registered public accounting firm;

 

    reviewing the design, implementation, adequacy and effectiveness of our internal accounting controls and our critical accounting policies;

 

    discussing with management and the independent registered public accounting firm the results of our annual audit and the review of our quarterly unaudited financial statements;

 

    reviewing, overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

    reviewing on a periodic basis, or as appropriate, any investment policy and recommending to our board any changes to such investment policy;

 

    reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations;

 

    preparing the report that the SEC requires in our annual proxy statement;

 

    reviewing and approving any related person transactions and reviewing and monitoring compliance with our code of business conduct and ethics; and

 

    reviewing and evaluating, at least annually, the performance of the audit committee and its members, including compliance of the audit committee with its charter.

                                         ,                      and                      will serve as members of our audit committee after the completion of this offering.                      will serve as the chairperson of the committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and The NASDAQ Global Market. Our board of directors has determined that                      is an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication as defined under the applicable NASDAQ rules and regulations. Our board of directors has determined that each of                     ,                     and                     is independent under the applicable rules of the SEC and The NASDAQ Global Market. Upon the listing of our common stock on The NASDAQ Global Market, the audit committee will operate under a written charter that satisfies the applicable standards of the SEC and The NASDAQ Global Market.

Compensation Committee

The compensation committee reviews and approves policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives and approves the compensation of these officers based on such evaluations. The compensation committee also reviews and approves the issuance of stock options and other awards under our equity incentive plan. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance by the compensation committee with its charter.

                                         ,                      and                      will serve as members of our compensation committee after the completion of this offering.                  will serve as the chairperson of the committee. Our board has

 

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determined that each of                     ,                      and                      is independent under the applicable rules and regulations of The NASDAQ Global Market, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and is an “outside director” as that term is defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. Upon the listing of our common stock on The NASDAQ Global Market, the compensation committee will operate under a written charter, which the compensation committee will review and evaluate at least annually.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and reporting and making recommendations to our board of directors concerning governance matters.

                                         ,                      and                      will serve as members of our nominating and corporate governance committee after the completion of this offering.                      will serve as the chairman of the committee. Our board has determined that each of                     ,                      and                      is independent under the applicable rules and regulations of The NASDAQ Global Market relating to nominating and corporate governance committee independence. Upon the listing of our common stock on The NASDAQ Global Market, the nominating and corporate governance committee will operate under a written charter, which the nominating and corporate governance committee will review and evaluate at least annually.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has ever been one of our officers or employees. None of our executive officers currently serves, or has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Board Diversity

Upon consummation of this offering, our nominating and corporate governance committee will be responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing) such candidates, will take into account many factors, including the following:

 

    personal and professional integrity, ethics and values;

 

    experience in corporate management, such as serving as an officer or former officer of a publicly-held company;

 

    experience as a board member or executive officer of another publicly-held company;

 

    strong finance experience;

 

    diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;

 

    diversity of background and perspective, including, but not limited to, with respect to age, gender, race, place of residence and specialized experience;

 

    experience relevant to our business industry and with relevant social policy concerns; and

 

    relevant academic expertise or other proficiency in an area of our business operations.

 

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Currently, our board of directors evaluates, and following the consummation of this offering will evaluate, each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

Code of Business Conduct and Ethics

Prior to the completion of this offering, we will adopt a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Upon completion of this offering, our code of business conduct and ethics will be available under the Investor Relations—Corporate Governance section of our website at www.ambrx.com. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of The NASDAQ Global Market concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this prospectus.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

This section discusses the material components of the executive compensation program for our executive officers who are named in the “2013 Summary Compensation Table” below. In 2013, our principal executive officer and our two other most highly paid executive officers, or our “named executive officers,” and their positions were as follows:

 

    Lawson Macartney, Ph.D., B.V.M.S., President and Chief Executive Officer;

 

    Peter Kiener, D.Phil., Chief Science Officer; and

 

    Simon Allen, Chief Business Officer.

This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion.

2013 Summary Compensation Table

The following table sets forth information concerning the compensation of our named executive officers for the year ended December 31, 2013.

 

Name and Principal Position

   Salary ($)(1)      Option
Awards ($)(2)
    Non-Equity Incentive
Plan Compensation ($)
     All Other
Compensation ($)(3)
     Total ($)  

Lawson Macartney

     411,923         1,228,091 (4)      166,500         138,729         1,945,243   

President and Chief Executive Officer

             

Peter Kiener

     143,635         759,849        42,500         70,000         1,015,984   

Chief Science Officer

             

Simon Allen

     311,192         —          91,800         —           402,992   

Chief Business Officer

             

 

(1) Drs. Macartney’s and Kiener’s initial base salaries were $450,000 and $385,000, respectively. The amounts shown are prorated from their start dates.
(2) Amounts reflect the full grant date fair value of stock options granted during 2013 computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of all option awards made to executive officers in Note 6 to the financial statements incl