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As filed with the Securities and Exchange Commission on March 5, 2013.

Registration No. 333-186574

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

TETRAPHASE PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2834   20-5276217
(State or Other Jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
Incorporation or Organization)   Classification Code No.)   Identification No.)

480 Arsenal Street, Suite 110

Watertown, MA 02472

(617) 715-3600

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

 

 

Guy Macdonald

President and Chief Executive Officer

480 Arsenal Street, Suite 110

Watertown, MA 02472

(617) 715-3600

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

 

 

Copies to:

 

Stuart M. Falber, Esq.

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, MA 02109

(617) 526-6663

 

Peter N. Handrinos, Esq.

Gregory P. Rodgers, Esq.

Latham & Watkins LLP

John Hancock Tower, 20th Floor

200 Clarendon Street

Boston, MA 02116

(617) 948-6060

 

 

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, as amended (the “Securities Act”) please 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, please 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, please 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, please 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 12b2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

 
Title of each class of securities to be registered   Amount to be
registered (1)
   

Estimated

maximum
offering price
per share (2)

   

Proposed

maximum
aggregate
offering price (2)

    Amount of
registration
fee (3)(4)
 

Common Stock, par value $0.001 per share

    7,840,908      $ 12.00      $ 94,090,896      $ 1,069.50   

 

 

 

 
(1) Includes 1,022,727 shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(a) under the Securities Act.
(3) Calculated pursuant to Rule 457(a) based on a bona fide estimate of the maximum aggregate offering price.
(4) A registration fee of $11,764.50, at the rate of $136.40 per $1,000,000, was previously paid in connection with this Registration Statement, based on a proposed maximum aggregate offering price of $86,250,000. Accordingly, the Registrant has paid an additional registration fee of $1,069.50, at the rate of $136.40 per $1,000,000, based on the $7,840,896 difference between the bona fide estimate of the maximum aggregate offering price of $94,090,896 and the previous proposed maximum aggregate offering price of $86,250,000.

 

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

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

 

Subject to Completion, dated March 5, 2013

PROSPECTUS

 

 

6,818,181 Shares

 

LOGO

Tetraphase Pharmaceuticals, Inc.

Common Stock

 

 

This is the initial public offering of the common stock of Tetraphase Pharmaceuticals, Inc. We are offering 6,818,181 shares of our common stock. No public market currently exists for our common stock.

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

We anticipate that the initial public offering price will be between $10.00 and $12.00 per share.

As an “emerging growth company,” we are eligible for reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

     Per share      Total  

Price to the public

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds to us (before expenses)

   $         $     

 

 

(1) We refer you to “Underwriting” beginning on page 150 of this prospectus for additional information regarding total underwriter compensation.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $25 million of shares of common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing principal stockholders and any of these existing principal stockholders could determine to purchase more, less or no shares in this offering.

We have granted the underwriters the option to purchase 1,022,727 additional shares of common stock on the same terms and conditions set forth above if the underwriters sell more than 6,818,181 shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                 , 2013.

 

 

 

Barclays   BMO Capital Markets

 

 

 

Stifel   JMP Securities   Needham & Company

Prospectus dated                , 2013.


Table of Contents

Table of Contents

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     13   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     46   

USE OF PROCEEDS

     47   

DIVIDEND POLICY

     48   

CAPITALIZATION

     49   

DILUTION

     51   

SELECTED CONSOLIDATED FINANCIAL DATA

     53   

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

     55   

BUSINESS

     77   

MANAGEMENT

     116   

EXECUTIVE COMPENSATION

     125   

RELATED PERSON TRANSACTIONS

     132   

PRINCIPAL STOCKHOLDERS

     135   

DESCRIPTION OF CAPITAL STOCK

     139   

SHARES ELIGIBLE FOR FUTURE SALE

     143   

CERTAIN MATERIAL U.S. FEDERAL TAX CONSIDERATIONS

     146   

UNDERWRITING

     150   

LEGAL MATTERS

     156   

EXPERTS

     156   

WHERE YOU CAN FIND MORE INFORMATION

     156   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

Until                , 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and the risk factors beginning on page 12 before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “Tetraphase,” “our company,” we,” “us” and “our” in this prospectus to refer to Tetraphase Pharmaceuticals, Inc. and its subsidiaries.

Company Overview

We are a clinical stage biopharmaceutical company using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multi-drug resistant infections. Our lead product candidate, eravacycline, is a fully synthetic tetracycline derivative that we are developing as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections, including multi-drug resistant Gram-negative infections. We recently completed a successful Phase 2 clinical trial of eravacycline with intravenous administration for the treatment of patients with complicated intra-abdominal infections, or cIAI, and are currently finalizing our pivotal Phase 3 program for eravacycline. Consistent with recent draft guidance issued by the Food and Drug Administration, or FDA, with respect to the development of antibiotics for cIAI and our discussions with the FDA at our end-of-Phase 2 meeting in January 2013, we expect to conduct two global Phase 3 clinical trials of eravacycline, one for the treatment of cIAI and one for the treatment of complicated urinary tract infections, or cUTI. We expect to have top-line data from both of these clinical trials in the first quarter of 2015.

In our Phase 2 clinical trial, intravenous eravacycline dosed once or twice per day as a monotherapy demonstrated a favorable safety and tolerability profile and a high cure rate, including against multi-drug resistant Gram-negative, Gram-positive and anaerobic bacteria. In in vitro experiments, eravacycline has demonstrated the ability to cover a wide variety of multi-drug resistant Gram-negative, Gram-positive, anaerobic and atypical bacteria, including multi-drug resistant Klebsiella pneumoniae, the species of Gram-negative bacteria that killed seven patients at the Clinical Center of the National Institutes of Health in 2012. Gram-negative bacteria that are resistant to all available antibiotics are increasingly common and a growing threat to public health. We believe that the ability of eravacycline to cover multi-drug resistant Gram-negative bacteria, as well as multi-drug resistant Gram-positive, anaerobic and atypical bacteria, and its potential for intravenous to oral step-down therapy, will enable eravacycline to become the drug of choice for first-line empiric treatment of a wide variety of serious and life-threatening infections.

The tetracycline class of antibiotics has been used successfully for more than 50 years. Unlike our tetracycline compounds, all tetracyclines on the market and under development of which we are aware are produced semi-synthetically, first in bacteria and then modified in a limited number of ways by available chemistry. These conventional methods have only been able to produce tetracycline antibiotics with limited chemical diversity, making it difficult for conventional technology to create tetracycline antibiotics that address a wide variety of multi-drug resistant bacteria. In part, because of the challenges in creating novel tetracycline molecules, only one tetracycline antibiotic has been developed and approved by the FDA for sale in the United States in the past 30 years.

We believe that our proprietary chemistry technology, licensed from Harvard University on an exclusive worldwide basis and enhanced by us, represents a significant innovation in the creation of tetracycline drugs that has the potential to reinvigorate the clinical and market potential of the class. Our proprietary chemistry technology makes it possible to create novel tetracycline antibiotics using a practical, fully synthetic process for what we believe is the first time. This fully synthetic process avoids the limitations of bacterially derived tetracyclines and allows us to chemically modify many positions in the tetracycline scaffold, including most of the positions that we believe could not practically be modified by any previous method. Using our proprietary chemistry technology, we can create a wider variety of tetracycline-based compounds than was previously

 

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possible, enabling us to pursue novel tetracycline derivatives for the treatment of multi-drug resistant bacteria that are resistant to existing tetracyclines and other classes of antibiotic products. To date, we have used our proprietary chemistry technology to create more than 2,800 new tetracycline derivatives that we believe could not be practically created with conventional methods. We own exclusive worldwide rights to these compounds and our technology.

We are currently finalizing our pivotal Phase 3 program for eravacycline. We are designing the program to enable us to position eravacycline as a first-line empiric monotherapy for the treatment of cIAI and cUTI due to eravacycline’s broad-spectrum coverage of multi-drug resistant infections, including multi-drug resistant Gram-negative infections. We expect that our pivotal Phase 3 program will be consistent with the draft guidance recently issued by the FDA for drug development for cIAI and cUTI. The cIAI guidance indicates that, for companies developing a drug for cIAI and an additional indication caused by similar bacterial pathogens, such as cUTI, a single trial in cIAI and a single trial in that additional indication could be sufficient to provide evidence of effectiveness in both indications.

In January 2013, we discussed our pivotal Phase 3 program with the FDA at an end-of-Phase 2 meeting. Following these discussions, we are now moving ahead with our plans to conduct two global Phase 3 clinical trials of the intravenous formulation of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect to have top-line data from both of these clinical trials in the first quarter of 2015. If we complete the Phase 3 clinical trials of eravacycline when we anticipate and the trials are successful, we expect to submit a new drug application, or NDA, to the FDA in the second half of 2015 and a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in the first half of 2016.

In addition to developing an intravenous formulation of eravacycline, we are also developing an oral formulation. A number of previous tetracyclines have been available in both intravenous and oral dosage forms. Infections that are resistant to existing oral drugs are increasingly common, and we believe that an intravenous-to-oral step-down therapy in which patients are started on the intravenous formulation of eravacycline and then stepped down to an oral formulation of eravacycline could reduce the length of a patient’s hospital stay or help avoid hospital admission altogether, lowering the overall cost of care for these patients. We have completed multiple Phase 1 clinical trials of oral formulations of eravacycline. Based on these trials, as well as data from our Phase 2 clinical trial of the intravenous formulation of eravacycline, we believe that eravacycline can be well enough absorbed as an oral medication to achieve the drug levels necessary to be effective in treating patients. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. We expect to complete this program by mid-2013. If the data from this program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI.

In 2011 and 2012, the U.S. government awarded contracts for potential funding of over $100 million for the development of our antibiotic compounds. These awards include a contract for up to $67 million from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services, for the development of eravacycline for the treatment of disease caused by bacterial biothreat pathogens, which we refer to as the BARDA Contract. These awards also include a contract for up to $36 million from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, for the development of TP-271, a preclinical compound that we are developing for respiratory diseases caused by bacterial biothreat pathogens, which we refer to as the NIAID Contract. These awards were made to CUBRC, Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts, with which we are collaborating. CUBRC serves as the prime contractor under these awards, primarily carrying out a program management and administrative role with

 

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additional responsibility for the management of preclinical studies. We serve as lead technical expert on all aspects of these awards and also serve as a subcontractor of CUBRC responsible for management of chemistry, manufacturing and control activities and clinical studies. Under our subcontracts with CUBRC, we may receive funding of up to approximately $39.8 million reflecting the portion of the BARDA Contract funding that may be paid to us for our activities, and up to approximately $13.3 million reflecting the portion of the NIAID Contract funding that may be paid to us for our activities. The BARDA Contract includes funding for some of the activities that we would otherwise be required to fund on our own in connection with any NDA filing for eravacycline.

In addition to eravacycline and TP-271, we are pursuing the discovery and development of additional antibiotics to target unmet medical needs, including compounds that might for the first time provide coverage with tetracycline-derived antibiotics of Pseudomonas bacteria, as well as other multi-drug resistant Gram-negative bacteria. Any efforts by us with respect to these programs will be subject to the availability of resources not allocated to our development of eravacycline.

Drug Resistant Antibiotic Market

According to IMS Health, in 2011, approximately $41 billion was spent on antibiotic drugs worldwide, of which almost $9 billion was spent in the United States. The widespread use of antibiotics has resulted in a rapid increase in bacterial infections that are resistant to multiple antibacterial agents. As a result of the increasing prevalence of such multi-drug resistant bacteria, some antibiotics targeting these bacteria have been highly successful commercially. These include:

 

   

linezolid, an intravenously and orally administered antibiotic marketed by Pfizer as Zyvox, which had worldwide sales in 2011 of $1.3 billion;

 

   

levofloxacin, an intravenously and orally administered antibiotic marketed by Ortho-McNeil and Johnson & Johnson as Levaquin, which had worldwide sales in 2011 of $623 million, down from worldwide sales of $1.4 billion in 2010 after losing U.S. market exclusivity in June 2011;

 

   

meropenem, an intravenously administered antibiotic marketed by AstraZeneca as Merrem, which had worldwide sales in 2011 of $583 million, down from worldwide sales of $817 million in 2010 after losing U.S. market exclusivity in June 2010; and

 

   

daptomycin, an intravenously administered antibiotic marketed by Cubist Pharmaceuticals, Inc. as Cubicin, which had worldwide sales in 2011 of $736 million.

Antibiotics that treat bacterial infections can be classified as broad-spectrum or narrow-spectrum. Antibiotics that are active against a mixture of Gram-positive, Gram-negative and anaerobic bacteria are referred to as broad-spectrum. Antibiotics that are active only against a select subset of bacteria are referred to as narrow-spectrum. Because it usually takes from 24 to 72 hours from the time a specimen is received in the laboratory to definitively diagnose a particular bacterial infection, physicians may be required to prescribe antibiotics for serious infections without having identified the bacteria. As such, effective first-line treatment of serious infections requires the use of broad-spectrum antibiotics with activity against a broad range of bacteria at least until the bacterial infection can be diagnosed.

Many strains of bacteria have mutated over time and have developed resistance to existing drugs, resulting in infections that are increasingly serious or more difficult to treat. These drug-resistant pathogens have become a growing menace to all people, regardless of age, gender or socioeconomic background. They endanger people in affluent, industrial societies like the United States, as well as in less-developed nations.

Reducing methicillin-resistant Staph aureus, or MRSA, a Gram-positive bacterium, in both the healthcare and community settings continues to be a high priority for the Centers for Disease Control and Prevention, or CDC. However, encouraging results from a CDC study published in the Journal of the American Medical

 

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Association and other reports such as the March 2011 CDC Vital Signs article provide evidence that rates of invasive MRSA infections in the United States are being controlled by Gram-positive drugs and falling.

As such, at present, the more acute need is for new drugs to treat multi-drug resistant Gram-negative bacteria. Currently approved products, such as Merrem and Levaquin, are becoming increasingly ineffective against Gram-negative bacteria due to increasing resistance, limiting patients’ treatment options, particularly for patients with multi-drug resistant infections, and few new therapeutic agents are in clinical development. A survey of infectious disease specialists published in the June 2012 edition of Clinical Infectious Disease rated multi-drug resistant Gram-negative infections as the most important unmet clinical need in current practice, significantly outranking infections caused by MRSA and multi-drug resistant Mycobacterium tuberculosis. In the survey, 63% of physicians reported treating a patient in the past year whose Gram-negative infection was resistant to all available antibacterial agents.

As a further example of the seriousness of the threat of Gram-negative bacteria resistant to all available antibacterial agents, in 2012, the national media including The New York Times, The Wall Street Journal and The Washington Post reported that the Clinical Center of the National Institutes of Health had an outbreak of Gram-negative Klebsiella pneumoniae bacteria strains that were resistant to all available antibiotics that resulted in seven deaths. In addition, there have been numerous reports recently that physicians have resorted to prescribing colistin for Gram-negative bacteria resistant to all other drugs. Colistin was discovered in 1949 and has not been widely used for decades because of serious toxicities, including nephrotoxicity. In our Phase 2 intravenous clinical trial, eravacycline dosed once or twice per day as a monotherapy was effective against multi-drug resistant Klebsiella pneumoniae.

The growing issue of antibiotic-resistant bacterial infections has been widely recognized as an increasingly urgent public health threat, including by the World Health Organization, the CDC, and the Infectious Disease Society of America, or IDSA. In April 2011, IDSA issued a report warning that unless significant measures are taken to increase the pipeline of new antibiotics active against drug resistant bacteria, people will start to die from common, formerly treatable infections, and medical interventions such as surgery, chemotherapy, organ transplantation and care of premature infants will become increasingly risky. In the pre-antibiotic era before penicillin began to be available in 1942, patients frequently died from what subsequently became easily cured infections. The important need for new treatment options for serious bacterial infections was further highlighted by the passage in July 2012 of the Generating Antibiotic Incentives Now Act, which provides regulatory incentives for the development of new antibacterial or antifungal drugs intended to treat serious or life-threatening infections that are resistant to existing treatment. In September 2012, the FDA announced the formation of an internal task force to support the development of new antibacterial drugs, which they called “a critical public healthcare goal and a priority for the agency.”

Limitations of Available Treatment Options

When confronted with a new patient suffering from a serious infection caused by an unknown pathogen, a physician may be required to quickly initiate first-line empiric antibiotic treatment to stabilize the patient prior to definitively diagnosing the particular bacterial infection. However, current antibiotics for first-line empiric treatment of serious bacterial infections suffer from significant limitations, including one or more of the following:

Insufficient Coverage of Multi-Drug Resistant Bacteria. Frequently used products, such as Zyvox and Cubicin, are limited to Gram-positive bacteria and thus are rarely used as a first-line empiric monotherapy if broad bacterial coverage is required. In addition, other popular antibiotics that have been used as first-line empiric monotherapies, such as Levaquin, piperacillin/tazobactam, which is marketed by Pfizer as Zosyn, carbapenems, such as Merrem, and imipenem/cilastatin, which is marketed by Merck as Primaxin, have seen their utility as first-line empiric monotherapies diminished as the number of bacterial strains resistant to these therapies has increased.

 

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Complicated and Expensive Multi-Drug Cocktails and Multi-Dose Regimens. Due to gaps in the spectrum of coverage of antibiotics, physicians are often confronted with the need to design complicated multi-drug cocktails for the first-line empiric treatment of patients with serious infections. The clinical situation is further complicated when each drug in the multi-drug cocktail has a different dosing regimen, such as two, three or four times a day, resulting in an added burden on the pharmacy and nursing staff, higher costs due to multiple drug administrations and an increased potential for medical errors or drug-drug interactions. We believe that, with the exception of eravacycline, most of the antibiotics that are in clinical trials and are being developed to cover a broad spectrum of bacteria, including Gram-negative bacteria, or solely to address Gram-negative bacteria, are being developed to be used in combination with one or more other antibiotics, and require the addition of a third drug such as metronidazole to address the presence of anaerobes.

Safety and Tolerability Concerns. Concerns about antibiotic safety and tolerability are among the leading reasons why patients stop treatment and fail therapy. Antibiotics on the market have been associated with adverse effects such as myelosuppression, seizures, nephrotoxicity and gastrointestinal disorders.

Lack of Oral Dosage Forms to Permit Step-Down Therapy. When a patient comes to the emergency room or hospital for treatment of a serious infection, the patient initially receives intravenous treatment, which allows the drug to be delivered more rapidly and in a larger dose than oral treatment. Once the infection begins to respond to treatment and the patient is stabilized, depending on the infection, hospitals and physicians generally seek to manage in-hospital treatment and, if possible, discharge patients from the hospital in order to reduce costs, avoid hospital acquired infections, and improve the patients’ quality of life. Upon discharge, physicians typically prefer to prescribe step-down treatment with an oral formulation of the same antibiotic. A step-down to oral treatment allows for more convenient and cost-effective out-patient treatment, with the oral antibiotic providing enhanced patient comfort and mobility and avoiding the risk of infection from the intravenous catheter. In addition, the use of the same antibiotic allows the physician to avoid switching the patient from the antibiotic that has proven effective during intravenous administration to a different antibiotic that may be less effective and carries the risk of new or different side effects. Many of the antibiotics that are most commonly used as first-line empiric monotherapies are only available in an intravenous formulation. Very few of the antibiotics that cover or are focused on the treatment of Gram-negative bacteria have oral dosage forms.

Eravacycline

Our lead product candidate, eravacycline, is a fully synthetic tetracycline derivative that we are developing as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections, including multi-drug Gram-negative infections. We developed eravacycline using our proprietary chemistry technology. We believe our fully synthetic process will enable us to have a cost of manufacturing that is sufficiently low to enable us to sell eravacycline, when and if approved, for a cost that is similar to other hospital-based antibiotics. Our patent strategy to broadly protect eravacycline includes the filing of patent applications directed towards the composition of matter of eravacycline as well as our proprietary chemistry technology, which we used to create eravacycline. We own exclusive worldwide rights for the development and commercialization of eravacycline.

We recently completed a Phase 2 clinical trial to evaluate the efficacy, safety and pharmacokinetics of eravacycline with intravenous administration compared to ertapenem for the treatment of patients with cIAI. In our Phase 2 clinical trial:

 

   

patients in the eravacycline arms experienced infection cure rates that were 93% and higher, similar to patients in the ertapenem arm;

 

   

eravacycline demonstrated efficacy against confirmed drug-resistant Gram-negative pathogens; and

 

   

eravacycline was well-tolerated with patients in the eravacycline arms experiencing no serious adverse events found to be related to eravacycline.

 

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We expect to conduct two global Phase 3 clinical trials of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect to have top-line data from both of these clinical trials in the first quarter of 2015. If we complete the Phase 3 clinical trials of eravacycline when we anticipate and the trials are successful, we expect to submit an NDA to the FDA in the second half of 2015 and an MAA to the EMA in the first half of 2016.

We believe that the following key attributes of eravacycline, observed in clinical trials and preclinical studies of eravacycline, differentiate eravacycline from other antibiotics targeting multi-drug resistant infections, including multi-drug resistant Gram-negative infections, and address the limitations of these antibiotics that have created the unmet medical need:

 

   

Potency and effectiveness against a broad spectrum of bacteria, including multi-drug resistant Gram-negative, Gram-positive, atypical and anaerobic bacteria. In our clinical and in vitro studies, eravacycline has demonstrated the ability to cover a wide variety of these bacteria.

 

   

Capability of being used as a monotherapy in the majority of patients in the hospital with cIAI, cUTI and other multi-drug resistant infections. We are developing eravacycline as a monotherapy because of the broad-spectrum coverage it has demonstrated in our clinical and in vitro studies.

 

   

A convenient dosing regimen, such as once or twice daily. In our recently completed Phase 2 clinical trial we dosed eravacycline once or twice a day as a monotherapy. We believe that eravacycline will be able to be administered as a first-line empiric monotherapy with once- or twice-daily dosing.

 

   

A favorable safety and tolerability profile. In our recent Phase 2 clinical, eravacycline demonstrated a favorable safety and tolerability profile. In the clinical trial, no patients suffered any serious adverse events that were found to be related to eravacycline, and safety and tolerability were comparable to ertapenem, the control therapy in the trial.

 

   

Potential availability in both intravenous dosage and oral dosage form. In addition to the intravenous formulation of eravacycline, we are also developing an oral formulation of eravacycline. We believe that eravacycline has the potential for use in intravenous-oral step-down therapy.

Based on our belief that eravacycline has each of these characteristics, our goal is to develop eravacycline to be the drug of choice for first-line empiric treatment of a wide variety of serious and life-threatening infections. We believe eravacycline’s attributes will make it a safe and effective treatment for cIAI, cUTI and other serious and life-threatening infections for which we may develop eravacycline, such as acute bacterial skin and skin structure infections, or ABSSSI, and acute bacterial pneumonias.

Strategy

Our goal is to become a fully integrated biopharmaceutical company that discovers, develops and commercializes novel antibiotics for use in areas of unmet medical need. In order to achieve this goal, we intend to:

 

   

Complete clinical development of eravacycline for the treatment of cIAI and cUTI and seek regulatory approval.

 

   

Develop an oral formulation of eravacycline for use in intravenous-to-oral step-down therapy for cUTI.

 

   

Directly commercialize eravacycline in the United States with a targeted hospital sales force.

 

   

Establish a collaboration for the development and commercialization of eravacycline outside the United States.

 

   

Pursue development of eravacycline for other serious and life-threatening infections, such as ABSSSI and acute bacterial pneumonias.

 

   

Opportunistically advance development of other product candidates created using our proprietary chemistry technology.

 

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Risks Associated with Our Business

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

 

   

We are dependent on the success of our lead product candidate, eravacycline. Our ability to generate product revenues, which we do not expect will occur before 2016, is substantially dependent on our ability to obtain marketing approval for and commercialize eravacycline.

 

   

We may not be successful in our efforts to develop an oral formulation of eravacycline or may be delayed in doing so. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. The results of this program will be critical to our determination as to whether and how to move forward with the development of the oral formulation.

 

   

Our clinical trials of eravacycline or of any other product candidate that we advance to clinical trials may fail to demonstrate safety and efficacy to the satisfaction of the FDA or comparable regulatory authorities outside the United States or may not otherwise produce positive results. In such event, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization or eravacycline or any other product candidate.

 

   

We expect that we will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

   

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, we may not be successful in commercializing eravacycline if and when eravacycline is approved.

 

   

We have incurred significant losses since inception and expect to incur losses for at least the next several years.

Corporate Information

We were incorporated under the laws of the State of Delaware on July 7, 2006 under the name Tetraphase Pharmaceuticals, Inc. Our principal executive offices are located at 480 Arsenal Street, Suite 110, Watertown, Massachusetts 02472, and our telephone number is (617) 715-3600. Our website address is www.tphase.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

The trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

Implications of Being an Emerging Growth Company

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

   

reduced disclosure about our executive compensation arrangements;

 

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no non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

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

 

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The Offering

 

Common stock offered by Tetraphase

6,818,181 shares

 

Common stock to be outstanding after this offering

15,971,862 shares (16,994,589 shares in the event the underwriters elect to exercise their over-allotment option to purchase additional shares from us in full)

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $67.3 million, or approximately $77.8 million if the underwriters exercise their over-allotment option to purchase additional shares from us in full, assuming an initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. We plan to use the net proceeds from this offering to fund our planned pivotal Phase 3 program for eravacycline for the treatment of complicated intra-abdominal infections and complicated urinary tract infections and for working capital and other general corporate purposes. See “Use of Proceeds.”

 

Risk Factors

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

 

Proposed NASDAQ Global Market symbol

“TTPH”

The number of shares of our common stock to be outstanding after this offering is based on the 325,243 shares of our common stock outstanding as of December 31, 2012, and gives effect to the conversion of all outstanding shares of our preferred stock into 8,828,438 shares of common stock upon the closing of this offering.

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

 

   

88,013 shares of common stock issuable upon the exercise of preferred stock warrants outstanding as of December 31, 2012, at a weighted average exercise price of $7.73 per share;

 

   

1,442,810 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2012, at a weighted average exercise price of $1.67 per share;

 

   

257,579 shares of common stock available for future issuance under our equity compensation plans as of December 31, 2012; and

 

   

an additional 1,357,608 shares of our common stock that will be made available for future issuance under our equity compensation plans upon the closing of this offering.

Except as otherwise noted, all information in this prospectus:

 

   

gives effect to a 1-for-29 reverse split of our common stock effected on March 5, 2013;

 

   

assumes no exercise of outstanding options or warrants described above;

 

   

assumes no exercise by the underwriters of their over-allotment option to purchase 1,022,727 additional shares of common stock from us;

 

   

gives effect to the automatic conversion of all outstanding shares of our preferred stock into 8,828,438 shares of our common stock upon the closing of this offering; and

 

   

gives effect to the restatement of our certificate of incorporation and bylaws upon the closing of this offering.

 

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Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $25 million of shares of common stock in this offering at the initial public offering price. Assuming an initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, these stockholders would purchase an aggregate of up to approximately 2,272,727 of the 6,818,181 shares in this offering based on these indications of interest. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing principal stockholders and any of these existing principal stockholders could determine to purchase more, less or no shares in this offering.

 

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Summary Consolidated Financial Data

The following table summarizes our consolidated financial data. We have derived the following summary of our statement of operations data for the years ended December 31, 2011 and 2012 and the period from July 7, 2006 (inception) to December 31, 2012 and the balance sheet data as of December 31, 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.

 

     Years Ended December 31,     The Period
from July 7,
2006
(inception) to
December 31,
 
  

 

 

   

 

 

 
     2011      2012     2012  
  

 

 

   

 

 

 

Statement of Operations Data:

       

Contract and grant revenue:

   $ 185       $ 7,600      $ 7,785   

Operating expenses:

       

Research and development

     17,737         17,294        74,930   

General and administrative

     3,874         4,309        17,480   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     21,611         21,603        92,410   
  

 

 

    

 

 

   

 

 

 

Loss from operations

     (21,426      (14,003     (84,625

Other income (expense):

       

Interest income

     1         —          608   

Interest expense

     (161      (1,021     (1,438

Other income (expense)

     22         (63     (4,630
  

 

 

    

 

 

   

 

 

 

Total other income (expense)

     (138      (1,084     (5,460
  

 

 

    

 

 

   

 

 

 

Net loss

   $ (21,564    $ (15,087   $ (90,085
  

 

 

    

 

 

   

 

 

 

Net loss per share applicable to common stockholders-basic and diluted (1)

   $ (73.34    $ (47.54   $ (390.04
  

 

 

    

 

 

   

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders-basic and diluted

     294,031         317,340        230,965   
  

 

 

    

 

 

   

 

 

 

Pro forma net loss per share applicable to common stockholders-basic and diluted (unaudited) (1)

   $ (2.36    $ (1.65  
  

 

 

    

 

 

   

Weighted-average number of common shares used in pro forma net loss per share applicable to common stockholders-basic and diluted (unaudited)

     9,122,476         9,145,785     
  

 

 

    

 

 

   

Comprehensive loss

   $ (21,564    $ (15,087   $ (90,085
  

 

 

    

 

 

   

 

 

 

 

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     As of December 31, 2012  
     Actual     Pro Forma (2)     Pro Forma
As Adjusted (3)(4)
 
           (Unaudited)     (Unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 9,079      $ 9,079        76,429   

Working capital

     3,720        3,720        71,070   

Total assets

     14,072        14,072        81,422   

Current liabilities

     8,661        8,661        8,661   

Long-term obligations

     8,619        8,009        8,009   

Convertible preferred stock

     79,841        —          —     

Total stockholders’ (deficit) equity

   $ (83,049   $ (2,598     64,752   

 

(1) See Note 2 within the notes to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share applicable to common stockholders and pro forma basic and diluted net loss per share applicable to common stockholders.

 

(2) Pro forma to reflect the automatic conversion of all outstanding shares of our preferred stock into 8,828,438 shares of common stock, and the resulting adjustment in the shares issuable upon exercise of our outstanding warrants from preferred stock to common stock, upon the closing of this offering. Pro forma does not reflect the borrowing of $3.0 million under our term loan facility with Silicon Valley Bank and Oxford Finance and the issuance of associated warrants on February 28, 2013. For further information on this borrowing and these warrants, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Notes 6, 7 and 13 within the notes to our consolidated financial statements appearing elsewhere in this prospectus.

 

(3) Pro forma as adjusted to further reflect the sale of 6,818,181 shares of our common stock offered in this offering, assuming an initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(4) A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $6.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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RISK FACTORS

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

Risks Relating to Our Financial Position and Need for Additional Capital

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

We have incurred annual net operating losses in every year since our inception. Our net loss was $21.6 million for the year ended December 31, 2011 and $15.1 million for the year ended December 31, 2012. As of December 31, 2012, we had a deficit accumulated during the development stage of $90.1 million. We have not generated any product revenues and have financed our operations primarily through private placements of our preferred stock, debt financings and funding from the United States government. We have not completed development of any product candidate and have devoted substantially all of our financial resources and efforts to research and development, including preclinical and clinical development. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We expect that our expenses will increase substantially as we commence our Phase 3 clinical trials of our lead product candidate, eravacycline, for the treatment of patients with complicated intra-abdominal infections, or cIAI, and complicated urinary tract infections, or cUTI, pursue development of an oral formulation of eravacycline, seek marketing approval for eravacycline, pursue development of eravacycline for additional indications, including acute bacterial skin and skin structure infections, or ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections, advance our other product candidates and satisfy our obligations under our license agreement with Harvard University. If we obtain marketing approval of eravacycline, we also expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses. Our expenses also will increase if and as we:

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

in-license or acquire other products and technologies;

 

   

hire additional clinical, quality control and scientific personnel; and

 

   

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

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we obtain marketing approval for, and commercialize, eravacycline, which will require us to be successful in a range of challenging activities, including:

 

   

commencing and successfully completing Phase 3 clinical trials of eravacycline;

 

   

applying for and obtaining marketing approval for eravacycline;

 

   

protecting and maintaining our rights to our intellectual property portfolio related to eravacycline;

 

   

contracting for the manufacture of commercial quantities of eravacycline; and

 

   

establishing sales, marketing and distribution capabilities to effectively market and sell eravacycline.

 

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Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses could increase if we are required by the United States Food and Drug Administration, or FDA, or the European Medicines Agency, or EMA, to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates.

We may be unable to develop and commercialize eravacycline or any other product candidate and, even if we do, may never achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

We expect that we will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete. We expect that our expenses will increase substantially as we commence our Phase 3 clinical trials of eravacycline, pursue development of an oral formulation of eravacycline, seek marketing approval for eravacycline, pursue development of eravacycline for additional indications, including ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections, advance our other product candidates and satisfy our obligations under our agreement with Harvard. We expect that the total external costs of our planned Phase 3 clinical trials of eravacycline will be approximately $50.0 million, including approximately $13.8 million in 2013. In addition, in connection with our license agreement with Harvard, we are obligated to pay Harvard a milestone payment of $2.0 million upon commencing our first Phase 3 clinical trial of eravacycline. If we obtain marketing approval for eravacycline or any other product candidate that we develop, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing.

We believe that our available funds following this offering will be sufficient to enable us to obtain top-line data from both of our planned Phase 3 clinical trials of eravacycline. We expect that these funds will not be sufficient to enable us to seek marketing approval for eravacycline or commercially launch eravacycline. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements through the first quarter of 2015. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could 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. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

   

the timing and costs of our planned Phase 3 clinical trials of eravacycline;

 

   

the progress, timing and costs of developing an oral formulation of eravacycline for intravenous-to-oral step-down therapy, including planned clinical trials;

 

   

the timing and costs of developing eravacycline for additional indications, including ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections;

 

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the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our other product candidates and potential product candidates;

 

   

the amount of funding that we receive under our subcontracts awarded to us by our collaborator CUBRC, Inc., or CUBRC, under its government contracts with the Biomedical Advanced Research and Development Authority, or BARDA, and with the National Institutes of Health’s, or NIH’s, National Institute of Allergy and Infectious Diseases, or NIAID, and under our subaward from CUBRC under its grant from NIAID, and the activities funded under these contracts;

 

   

the number and characteristics of product candidates that we pursue;

 

   

the outcome, timing and costs of seeking regulatory approvals;

 

   

the costs of commercialization activities for eravacycline and other product candidates if we receive marketing approval, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

   

subject to receipt of marketing approval, revenue received from commercial sales of eravacycline;

 

   

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

 

   

the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay to Harvard pursuant to our license agreement;

 

   

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

 

   

the costs of operating as a public company; and

 

   

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

Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Upon completion of this offering, our only external source of funds will be funding under subcontracts and a subaward awarded to us by CUBRC pursuant to government contracts from BARDA and NIAID and a grant from NIAID. However, the BARDA and NIAID contracts and the NIAID grant are subject to termination for convenience at any time by BARDA and NIAID. BARDA is not obligated to provide funding under its contract with CUBRC beyond current-year amounts from Congressionally approved annual appropriations, and NIAID is not obligated to provide funding under its contract with, and grant to, CUBRC beyond an initial 25-month base period. To the extent that BARDA or NIAID ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us under the applicable subcontract. For the 12-month base period from February 1, 2012 through January 31, 2013, committed funding from CUBRC under our BARDA subcontract was $6.3 million. As of December 31, 2012, we had received $3.4 million of this $6.3 million. In January 2013, BARDA committed to provide funding of $13.9 million to CUBRC for the eravacycline program for the 12-month period from February 1, 2013 to January 31, 2014. Committed funding from CUBRC to us under our BARDA subcontract for the 12-month period from February 1, 2013 to January 31, 2014 is $6.4 million. For the 25-month base period from October 1, 2011 through October 31, 2013, committed funding from CUBRC under our NIAID subcontract is $5.9 million. As of December 31, 2012, we had received $2.4 million of this $5.9 million. For the base period from June 15, 2011 to May 31, 2013, committed funding from CUBRC under our NIAID subaward is $0.6 million. As of December 31, 2012, we had received $0.2 million of this $0.6 million.

As a result, unless and until we can generate a substantial amount of revenue from our product candidates, we expect to finance our future cash needs through public or private equity offerings, debt financings or collaborations and licensing arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans.

 

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To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, your ownership interest may be materially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. For example, our debt facility with Silicon Valley Bank and Oxford Finance contains restrictive covenants that, subject to certain exceptions, prohibit us from transferring all or any part of our business or property, changing our business, liquidating or dissolving, merging with or acquiring another entity, entering into a transaction that will result in a change of control, incurring additional indebtedness, creating any lien on our property, paying dividends, entering into material transactions with affiliates, changing key management or adding new offices or business locations. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. In addition, securing additional financing would require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.

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

We began operations in the third quarter of 2006. Our operations to date have been limited to financing and staffing our company, developing our technology and developing eravacycline and other product candidates. We have not yet demonstrated an ability to successfully complete a large-scale, pivotal clinical trial, obtain marketing approval, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

Risks Related to Product Development and Commercialization

We are dependent on the success of our lead product candidate, eravacycline, and our ability to develop, obtain marketing approval for and successfully commercialize eravacycline. If we are unable to develop, obtain marketing approval for and successfully commercialize eravacycline or experience significant delays in doing so, our business could be materially harmed.

We currently have no products approved for sale and have invested a significant portion of our efforts and financial resources in the development of eravacycline for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections. Our prospects are substantially dependent on our ability to develop, obtain marketing approval for and successfully commercialize eravacycline. The success of eravacycline will depend on several factors, including the following:

 

   

successful completion of clinical trials;

 

   

development of an oral formulation of eravacycline to be used with the intravenous formulation of eravacycline in intravenous-to-oral step-down therapy;

 

   

receipt of marketing approvals from applicable regulatory authorities;

 

   

establishment of arrangements with third-party manufacturers to obtain manufacturing supply;

 

   

obtainment and maintenance of patent and trade secret protection and regulatory exclusivity;

 

   

protection of our rights in our intellectual property portfolio;

 

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launch of commercial sales of eravacycline, if and when approved, whether alone or in collaboration with others;

 

   

acceptance of eravacycline, if and when approved, by patients, the medical community and third-party payors;

 

   

competition with other therapies; and

 

   

a continued acceptable safety profile of eravacycline following approval.

Successful development of eravacycline for additional indications, including ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections, will be subject to these same risks.

If we are unable to develop, receive marketing approval for, or successfully commercialize eravacycline, or experience delays as a result of any of these matters or otherwise, our business could be materially harmed.

If we do not develop an oral formulation of eravacycline, or we are delayed in developing an oral formulation of eravacycline, our business may be harmed.

Optimal development of eravacycline includes the development of an oral formulation of eravacycline to be used with the intravenous formulation of eravacycline in intravenous-to-oral step-down therapy. Our ability to successfully develop an oral formulation of eravacycline is uncertain. While we have completed multiple Phase 1 clinical trials of oral formulations of eravacycline, we have not yet selected a formulation for advancement in clinical trials and have not demonstrated in clinical trials that the necessary doses of oral eravacycline to achieve the necessary drug exposure levels can be administered with the required safety and tolerability. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. If the data from our Phase 1 clinical program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI. However, if the data from the Phase 1 clinical program is unfavorable or does not otherwise warrant proceeding with a Phase 3 clinical trial, we may need to conduct additional development, which could involve reformulating the compound and conducting additional clinical trials of the oral formulation, which could cause us to incur additional expenses in the development of the oral formulation of eravacycline. In addition, in such event we may be forced to delay our planned Phase 3 clinical trial in cUTI or, if we choose to proceed with the Phase 3 clinical trial in cUTI with only the intravenous formulation, we would need to conduct at least one additional Phase 3 clinical trial of the oral formulation, all of which would take time and be expensive. If we are unable to develop an oral formulation of eravacycline to be used in intravenous-to-oral step-down therapy, it could lower the market opportunity for eravacycline and the potential value we could receive from eravacycline, and our business may be harmed.

If clinical trials of eravacycline or of any other product candidate that we advance to clinical trials fail to demonstrate safety and efficacy to the satisfaction of the FDA or comparable foreign regulatory authorities or do not otherwise produce favorable results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization or eravacycline or any other product candidate.

We are not permitted to commercialize, market, promote, or sell any product candidate in the United States without obtaining marketing approval from the FDA or in other countries without obtaining approvals from comparable foreign regulatory authorities, such as the EMA, and we may never receive such approvals. We must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we will be able to obtain these approvals. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have not previously submitted an NDA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates.

 

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The clinical development of eravacycline and other product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to achieve efficacy in a trial or across a broad population of patients, the occurrence of severe adverse events, failure to comply with protocols or applicable regulatory requirements, and determination by the FDA or any comparable foreign regulatory authority that a drug product is not approvable. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. For example, although eravacycline achieved favorable results in our Phase 2 intravenous efficacy trial, we may nonetheless fail to achieve success in Phase 3 clinical trials of the intravenous formulation of eravacycline or in clinical trials of an oral formulation of eravacycline. Moreover, the primary endpoint that we anticipate using for our planned Phase 3 clinical trial of the intravenous formulation of eravacycline for cIAI differs from the primary endpoint we successfully achieved in our Phase 2 intravenous efficacy trial. In the FDA’s recent draft guidance for drug development for cIAI, the FDA suggested that the primary efficacy endpoint for a trial for cIAI should be complete resolution of baseline signs and symptoms attributable to cIAI in the microbiological intent-to-treat patient population 28 days after randomization and the absence of clinical failure including death and unplanned surgical procedures through the period ending 28 days following randomization. Our Phase 2 primary endpoint was clinical response at the test of cure visit that took place ten to 14 days after the last dose of the drug was administered (approximately 16 to 21 days after randomization) in microbiologically evaluable patients, a narrower patient population. Clinical response was defined as complete resolution or significant improvement of signs or symptoms of infection with no further systemic antibiotic treatment required.

In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we believe that the results of our clinical trials warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. In the case of our clinical trials, results may differ on the basis of the type of bacteria with which patients are infected. We cannot assure you that any Phase 2, Phase 3 or other clinical trials that we may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent us from obtaining regulatory approval for eravacycline or any of our other product candidates, including:

 

   

clinical trials of our product candidates may produce unfavorable or inconclusive results;

 

   

we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

   

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

 

   

our third-party contractors, including those manufacturing our product candidates or conducting clinical trials on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

   

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

 

   

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

 

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we may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;

 

   

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;

 

   

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we enter into agreement for clinical and commercial supplies;

 

   

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

If we are required to conduct additional clinical trials or other testing of eravacycline, either in an intravenous or oral dosage form, or any other product candidate that we develop beyond the trials and testing that we contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are unfavorable or are only modestly favorable or if there are safety concerns associated with eravacycline or our other product candidates, we may:

 

   

be delayed in obtaining marketing approval for our product candidates;

 

   

not obtain marketing approval at all;

 

   

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

 

   

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

 

   

be subject to additional post-marketing testing or other requirements; or

 

   

remove the product from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or marketing approvals and we may be required to obtain additional funds to complete clinical trials. We cannot assure you that our clinical trials will begin as planned or be completed on schedule, if at all, or that we will not need to restructure our trials after they have begun. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates, which may harm our business and results of operations. In addition, many of the factors that cause, or lead to, clinical trial delays may ultimately lead to the denial of regulatory approval of eravacycline or any other product candidate.

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

We may not be able to initiate or continue clinical trials for eravacycline or any other product candidate that we develop if we are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials for eravacycline or other product candidate as required by the FDA or comparable foreign regulatory authorities, such as the EMA. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

 

   

the size and nature of the patient population;

 

   

the severity of the disease under investigation;

 

   

the proximity of patients to clinical sites;

 

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the eligibility criteria for the trial;

 

   

the design of the clinical trial; and

 

   

competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

The inclusion and exclusion criteria for our contemplated Phase 3 clinical trials of eravacycline may adversely affect our enrollment rates for patients in these trials. In addition, many of our competitors also have ongoing clinical trials for product candidates that treat the same indications as eravacycline, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.

Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, slow down or halt our product development and approval process and jeopardize our ability to commence product sales and generate revenues, which would cause the value of our company to decline and limit our ability to obtain additional financing if needed.

Serious adverse events or undesirable side effects or other unexpected properties of eravacycline or any other product candidate may be identified during development or after approval, if obtained, that could delay, prevent or cause the withdrawal of the product candidates’ regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if obtained.

Serious adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, an institutional review board, or regulatory authorities to interrupt, delay or halt our clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. If eravacycline or any of our other product candidates are associated with serious adverse events or undesirable side effects or have properties that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.

In our clinical trials of eravacycline, some treatment-related adverse events have been reported. The most common treatment-related adverse events observed in clinical trials of eravacycline have been nausea and vomiting. Additional adverse events, undesirable side effects or other unexpected properties of eravacycline or any of our other product candidates could arise or become known either during clinical development or, if approved, after the approved product has been marketed. If such an event occurs during development, 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, eravacycline or our other product candidates. If such an event occurs after eravacycline or such other product candidates are approved, a number of potentially significant negative consequences may result, including:

 

   

regulatory authorities may withdraw the approval 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.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate, if approved, or could substantially increase commercialization costs and expenses, which could delay or prevent us from generating revenues from the sale of our products and harm our business and results of operations.

 

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Even if eravacycline or any other product candidate that we develop receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for eravacycline or other product candidates may be smaller than we estimate.

We have never commercialized a product candidate for any indication. Even if eravacycline or any other product candidates that we develop are approved by the appropriate regulatory authorities for marketing and sale, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If physicians, rightly or wrongly, associate our product candidates with the resistance issues of other products of the same class, physicians might not prescribe our product candidates for treating a broad range of infections. If eravacycline or any other product candidate that we develop does not achieve an adequate level of market acceptance, we may not generate significant product revenues and, therefore, we may not become profitable. The degree of market acceptance of eravacycline, if approved, or any other product candidate that is approved for commercial sale, will depend on a number of factors, including:

 

   

the efficacy and safety of the product;

 

   

the potential advantages of the product compared to alternative treatments;

 

   

the prevalence and severity of any side effects;

 

   

the clinical indications for which the product is approved;

 

   

limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;

 

   

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

 

   

the product’s convenience and ease of administration compared to alternative treatments, including, in the case of eravacycline, the availability of an oral formulation for use in intravenous-to-oral step-down therapy;

 

   

the willingness of the target patient population to try, and of physicians to prescribe, the product;

 

   

whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular infections;

 

   

the strength of marketing and distribution support;

 

   

the approval of other new products for the same indications;

 

   

the timing of market introduction of our approved products as well as competitive products;

 

   

the cost of treatment in relation to alternative treatments;

 

   

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

 

   

the effectiveness of our sales and marketing efforts;

 

   

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

 

   

the development of resistance by bacterial strains to the product.

In addition, the potential market opportunity for eravacycline is difficult to precisely estimate. Our estimates of the potential market opportunity are predicated on several key assumptions such as industry knowledge and publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, then the actual market for eravacycline could be smaller than our

 

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estimates of the potential market opportunity. If the actual market for eravacycline is smaller than we expect, or if the product fails to achieve an adequate level of acceptance by physicians, health care payors and patients, our product revenue may be limited and it may be more difficult for us to achieve or maintain profitability.

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, we may not be successful in commercializing eravacycline or such other product candidates that we develop if and when eravacycline or any other product candidates are approved.

We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We intend to build a commercial organization in the United States and recruit experienced sales, marketing and distribution professionals. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target. If we are unable to establish a sales force and marketing and distribution capabilities, our operating results may be adversely affected.

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

 

   

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

 

   

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

 

   

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

 

   

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

We plan to commercialize eravacycline outside the United States with the assistance of collaborators. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively.

If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

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

The development and commercialization of new drug products is highly competitive. We face competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to eravacycline and our other product candidates that we may seek to develop or commercialize in the future. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of multi-drug resistant infections. Potential competitors also include academic institutions, government agencies and other public and private research organizations. Our competitors may succeed in developing, acquiring or

 

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licensing technologies and drug products that are more effective or less costly than eravacycline or any other product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

There are a variety of available therapies marketed for the treatment of multi-drug resistant infections that we would expect would compete with eravacycline, including meropenem, which is marketed by AstraZeneca as Merrem, imipenem/cilastatin, which is marketed by Merck as Primaxin, tigecycline, which is marketed by Pfizer as Tygacil, levofloxacin, which is marketed by Ortho-McNeil and Johnson & Johnson as Levaquin, and piperacillin/tazobactam, which is marketed by Pfizer as Zosyn. Many of the available therapies are well-established and widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. If eravacycline is approved, it may be priced at a significant premium over other competitive products. This may make it difficult for eravacycline to compete with these products.

There are also a number of products in clinical development by third parties to treat multi-drug resistant infections, including ceftazidime/avibactam and ceftaroline/avibactam, which are being developed by AstraZeneca, and cefalozine/tazobactam, which is being developed by Cubist. If our competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than us, it could result in our competitors establishing a strong market position before we are able to enter the market.

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

In July 2012, the Food and Drug Administration Safety and Innovation Act was passed, which included the Generating Antibiotics Incentives Now Act, or the GAIN Act. The GAIN Act is intended to provide incentives for the development of new, qualified infectious disease products. These incentives may result in more competition in the market for new antibiotics, and may cause pharmaceutical and biotechnology companies with more resources than we have to shift their efforts towards the development of products that could be competitive with eravacycline and our other product candidates.

Even if we are able to commercialize eravacycline or any other product candidate that we develop, the product may become subject to unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives that could harm our business.

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

Our ability to commercialize eravacycline or any other product candidate will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from

 

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government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability to sell our product candidates profitably.

There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.

In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. We cannot be sure that coverage will be available for eravacycline or any other product candidate that we commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

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

We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants. We will face an even greater risk if we commercially sell eravacycline or any other product candidate that we develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

reduced resources of our management to pursue our business strategy;

 

   

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

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial participants;

 

   

initiation of investigations by regulators;

 

   

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

 

   

significant costs to defend resulting litigation;

 

   

substantial monetary awards to trial participants or patients;

 

   

loss of revenue; and

 

   

the inability to commercialize any products that we may develop.

 

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Although we maintain general liability insurance of $5 million in the aggregate and clinical trial liability insurance of $3 million in the aggregate for eravacycline, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling eravacycline or any other product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.

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

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

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

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

Risks Related to Our Dependence on Third Parties

We expect to depend on collaborations with third parties for the development and commercialization of some of our product candidates. Our prospects with respect to those product candidates will depend in part on the success of those collaborations.

Although we expect to commercialize eravacycline ourselves in the United States, we intend to seek to commercialize eravacycline outside the United States through collaboration arrangements. In addition, we may seek third-party collaborators for development and commercialization of other product candidates. Our likely collaborators for any marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. We are not currently party to any such arrangements.

We may derive revenue from research and development fees, license fees, milestone payments and royalties under any collaborative arrangement into which we enter. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, our collaborators may have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms. As a result, we can expect to relinquish some or all of the control over the future success of a product candidate that we license to a third party.

 

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Collaborations involving our product candidates may pose a number of risks, including the following:

 

   

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

 

   

collaborators may not perform their obligations as expected;

 

   

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the 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;

 

   

product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;

 

   

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

 

   

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, might lead to additional responsibilities for us with respect to product candidates, or might 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 invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;

 

   

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

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to it by us.

We may have to alter our development and commercialization plans if we are not able to establish collaborations.

We will require additional funds to complete the development and potential commercialization of eravacycline and our other product candidates. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates. For example, we intend to utilize a variety of types of collaboration arrangements for commercialization outside the United States.

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

 

   

the design or results of clinical trials;

 

   

the likelihood of approval by the FDA or comparable foreign regulatory authorities;

 

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the potential market for the subject product candidate;

 

   

the costs and complexities of manufacturing and delivering such product candidate to patients;

 

   

the potential for competing products;

 

   

our patent position protecting the product candidate, including any uncertainty with respect to our ownership of our technology or our licensor’s ownership of technology we license from them, which can exist if there is a challenge to such ownership without regard to the merits of the challenge;

 

   

the need to seek licenses or sub-licenses to third-party intellectual property; and

 

   

industry and market conditions generally.

The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under future license agreements from entering into agreements on certain terms with potential collaborators. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

If 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. 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 and our business may be materially and adversely affected.

We rely on third parties to conduct our clinical trials. If they do not perform satisfactorily, our business may be materially harmed.

We do not independently conduct clinical trials of eravacycline. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct our clinical trials for eravacycline and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. Any of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it would delay our product development activities.

Our reliance on these third parties for clinical development activities limits our control over these activities but we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as current Good Clinical Practices, or cGCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third party contractors fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the regulatory approval process. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

 

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Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time and resources to our ongoing development programs. These contractors 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 impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for eravacycline or any other product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be delayed, impaired or foreclosed.

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

We contract with third parties for the manufacture of eravacycline for clinical trials and expect to continue to do so in connection with the commercialization of eravacycline and for clinical trials and commercialization of any other product candidates that we develop. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We do not currently have nor do we plan to build the internal infrastructure or capability to manufacture eravacycline or our other product candidates for use in the conduct of our clinical trials or for commercial supply. We currently rely on and expect to continue to rely on third-party contract manufacturers to manufacture clinical supplies of eravacycline and our other product candidates, and we expect to rely on third party contract manufacturers to manufacture commercial quantities of any product candidate that we commercialize following approval for marketing by applicable regulatory authorities. Reliance on third-party manufacturers entails risks, including:

 

   

manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreement between us

 

   

the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us;

 

   

the possible breach of the manufacturing agreement by the third party;

 

   

the failure of the third-party manufacturer to comply with applicable regulatory requirements; and

 

   

the possible misappropriation of our proprietary information, including our trade secrets and know-how.

We currently rely on a small number of third-party contract manufacturers for all of our required raw materials, drug substance and finished product for our preclinical research and clinical trials. We do not have long-term agreements with any of these third parties. We also do not have any current contractual relationships for the manufacture of commercial supplies of any of our other product candidates. If any of our existing manufacturers should become unavailable to us for any reason, we may incur some delay in identifying or qualifying replacements.

If any of our product candidates are approved by any regulatory agency, we intend to enter into agreements with third-party contract manufacturers for the commercial production of those products. This process is difficult

 

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and time consuming and we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under cGMPs that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization.

Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by our third-party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate. In addition, our manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and have a material adverse impact on our business, financial condition and results of operations.

Our current and anticipated future dependence upon others for the manufacture of eravacycline and any other product candidate that we develop may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

If we fail to comply with our obligations in the agreements under which we in-license or acquire development or commercialization rights to products or technology from third parties, we could lose commercial rights that are important to our business.

We are a party to a license agreement with Harvard that imposes, and we may enter into additional agreements, including license agreements, with other parties in the future that impose, diligence, development and commercialization timelines, milestone payment, royalty, insurance and other obligations on us. For instance, under our license agreement with Harvard, we are obligated to satisfy diligence requirements, including using commercially reasonable efforts to develop and commercialize licensed compounds and to implement a specified development plan, meeting specified development milestones and providing an update on progress on an annual basis. If we fail to comply with these obligations, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any product that is covered by these agreements, which could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.

Our reliance on government funding for certain of our programs adds uncertainty to our research and commercialization efforts with respect to those programs and may impose requirements that increase the costs of commercialization and production of product candidates developed under those government-funded programs.

Our development of eravacycline for the treatment of disease caused by bacterial biothreat pathogens is currently being funded through a subcontract with funding from BARDA. In addition, our development of TP-271 is being funded through a subcontract and grant subaward with funding from the NIH’s NIAID division.

 

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Contracts and grants funded by the U.S. government and its agencies, including our agreements funded by BARDA and NIAID, include provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to:

 

   

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

 

   

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

 

   

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

 

   

audit contract-related costs and fees, including allocated indirect costs;

 

   

suspend the contractor or grantee from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;

 

   

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

 

   

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

 

   

control and potentially prohibit the export of products;

 

   

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

 

   

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

We may not have the right to prohibit the U.S. government from using certain technologies developed by us, and we may not be able to prohibit third party companies, including our competitors, from using those technologies in providing products and services to the U.S. government. The U.S. government generally takes the position that it has the right to royalty-free use of technologies that are developed under U.S. government contracts.

In addition, government contracts and grants, and subcontracts and subawards awarded in the performance of those contracts and grants, normally contain additional requirements that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These requirements include, for example:

 

   

specialized accounting systems unique to government contracts and grants;

 

   

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

 

   

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

 

   

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

As an organization, we are relatively new to government contracting and new to the regulatory compliance obligations that such contracting entails. If we fail to maintain compliance with those obligations, we may be subject to potential liability and to termination of our contracts.

As a U.S. government contractor, we are subject to financial audits and other reviews by the U.S. government of our costs and performance on their contracts, as well as our accounting and general business practices related to these contracts. Based on the results of its audits, the government may adjust our contract-

 

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related costs and fees, including allocated indirect costs. Although adjustments arising from government audits and reviews have not had a material adverse effect on our financial condition or results of operations in the past, we cannot assure you that future audits and reviews will not have those effects.

Risks Related to Our Intellectual Property

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

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary chemistry technology and product candidates. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United States and abroad related to our novel technologies and product candidates that are important to our business. The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection.

Under our license agreement with Harvard, Harvard retains the right to prosecute and maintain specified Harvard patents and patent applications in the field of tetracycline chemistry, which are exclusively licensed to us under the agreement. Moreover, if we license technology or product candidates from third parties in the future, those licensors may retain the right to prosecute, maintain and enforce the patent rights that they license to us with or without our involvement. Because control of prosecution and maintenance rests with Harvard, and prosecution, maintenance and enforcement could rest with future licensors, we cannot be certain that these in-licensed patents and applications will be prosecuted, maintained and enforced in a manner consistent with the best interests of our business. If Harvard fails to prosecute or maintain, or future licensors fail to prosecute, maintain or enforce, those patents necessary for any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making and selling competing products.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds and technologies commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Furthermore, recent changes in patent laws in the United States, including the America Invents Act of 2011, may affect the scope, strength and enforceability of our patent rights or the nature of proceedings which may be brought by us related to our patent rights.

Our pending and future patent applications may not result in patents being issued which protect our technology or product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

The laws of foreign countries may not protect our rights to the same extent or in the same manner as the laws of the United States. For example, even assuming the other requirements for patentability are met, currently, in the United States, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we

 

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cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result of the America Invents Act of 2011, the United States will transition to a first-inventor-to-file system in March 2013, under which, assuming the other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent. However, as a result of the lag in the publication of patent applications following filing in the United States, we still will not be able to be certain upon filing that we are the first to file for patent protection for any invention. Moreover, we may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation, reexamination, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may seek to market generic versions of any approved products by submitting Abbreviated New Drug Applications to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable and/or not infringed. Alternatively, our competitors may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid and/or unenforceable. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.

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

Competitors may infringe our patents, trademarks, copyrights or other intellectual property, or those of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patents do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we

 

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assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

In any infringement litigation, any award of monetary damages we receive may not be commercially valuable. 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 litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.

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

Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates and use our proprietary chemistry technology without infringing the intellectual property and other proprietary rights of third parties. Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the area of antibacterial treatment, including compounds, formulations, treatment methods and synthetic processes that may be applied towards the synthesis of antibiotics. If any of their patents or patent applications cover our product candidates or technologies, we may not be free to manufacture or market our product candidates as planned.

There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our technology or products candidates, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing product candidate or product. Alternatively, we may be required to obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

 

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We may be subject to claims that we or our employees have misappropriated the intellectual property of a third party, or claiming ownership of what we regard as our own intellectual property.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the intellectual property and other proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed such intellectual property or other proprietary information. Litigation may be necessary to defend against these claims.

In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Moreover, because we have licensed intellectual property from Harvard, we must rely on Harvard’s practices with regard to the assignment of intellectual property to it. To the extent we or Harvard have failed to obtain such assignments or such assignments are breached, we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our management and scientific personnel.

If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, in seeking to develop and maintain a competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our consultants, independent contractors, advisors, corporate collaborators, outside scientific collaborators, contract manufacturers, suppliers and other third parties. We, as well as our licensors, also enter into confidentiality and invention or patent assignment agreements with employees and certain consultants. Any party with whom we or Harvard have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our business and competitive position could be harmed.

We have not yet registered our trademarks. Failure to secure those registrations could adversely affect our business.

We have not yet registered our trademarks in the United States or other countries. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would, which could adversely affect our business. We have also not yet registered trademarks for any of our product candidates in any jurisdiction. When we file trademark applications for our product candidates those applications may not be allowed for registration, and registered trademarks may not be obtained, maintained or enforced. During trademark registration proceedings in the United States and foreign jurisdictions, we may receive rejections. We are given an opportunity to respond to those rejections, but we may not be able to overcome such rejections. In addition, in the United States Patent and Trademark Office and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings.

 

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In addition, any proprietary name we propose to use with eravacycline or any other product candidate in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

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

Our product candidates, including eravacycline, and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable foreign regulatory authorities, with regulations differing from country to country. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We currently do not have any products approved for sale in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third-party contract research organizations to assist us in this process.

We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. We have not submitted an NDA for any of our product candidates. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and efficacy for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product candidate. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. The FDA review process typically takes years to complete. The FDA has substantial discretion in the approval process and may refuse to accept for filing any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. Foreign regulatory authorities have differing requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining marketing approval for marketing of a product candidate in one country does not ensure that we will be able to obtain marketing approval in other countries, but the failure to obtain marketing approval in one jurisdiction could negatively impact our ability to obtain marketing approval in other jurisdictions. Delays in approvals or rejections of marketing applications in the United States or foreign countries may be based upon many factors, including regulatory requests for additional analyses, reports, data and studies, regulatory questions regarding, or different interpretations of, data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding product candidates. The FDA or other regulatory authorities may determine that eravacycline or any other product candidate that we develop is not effective, or is only moderately effective, or has undesirable or unintended side effects, toxicities, safety profile or other characteristics that preclude marketing approval or prevent or limit commercial use. In addition, any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable. If we experience delays in obtaining approval or if we fail to obtain approval of eravacycline or any other product candidate that we develop, the commercial prospects for eravacycline or such other product candidate may be harmed and our ability to generate revenues will be materially impaired.

If we are unable to obtain marketing approval in international jurisdictions, we will not be able to market our product candidates abroad.

In order to market and sell eravacycline and any other product candidate that we develop in the European Union and many other jurisdictions, we must obtain separate marketing approvals and comply with numerous

 

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and varying regulatory requirements. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. The approval procedure varies among countries and can involve additional testing. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis or at all.

If we receive regulatory approval for any product candidates, including eravacycline, we will be subject to ongoing obligations and continuing regulatory review, which may result in significant additional expense. Our product candidates, including eravacycline, if approved, could be subject to restrictions or withdrawal from the market, and we may be subject to penalties, if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if approved.

Any product candidate, including eravacycline, for which we obtain marketing approval, will also be subject to ongoing regulatory requirements for labeling, packaging, storage, distribution, advertising, promotion, record-keeping and submission of safety and other post-market information. For example, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs. As such, we and our contract manufacturers will be subject to continual review and periodic inspections to assess compliance with cGMPs. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and to comply with requirements concerning advertising and promotion for our products.

In addition, even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed, may be subject to significant conditions of approval or may impose requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling and regulatory requirements. The FDA also imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not restrict the marketing of our products only to their approved indications, we may be subject to enforcement action for off-label marketing.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose restrictions on that product or us. In addition, if any product fails to comply with applicable regulatory requirements, a regulatory agency may:

 

   

issue warning or untitled letters;

 

   

mandate modifications to promotional materials or require provision of corrective information to healthcare practitioners;

 

   

impose restrictions on the products or its manufacturers or manufacturing processes;

 

   

impose restrictions on the labeling or marketing of the product;

 

   

impose restrictions on product distribution or use;

 

   

require post-marketing clinical trials;

 

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require withdrawal of the product from the market;

 

   

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

 

   

require recall of the products;

 

   

require entry into a consent decree, which can include imposition of various fines (including restitution or disgorgement of profits or revenue), reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

   

suspend or withdraw marketing approvals;

 

   

refuse to permit the import or export of the products;

 

   

seize or detain supplies of the product; or

 

   

issue injunctions or impose civil or criminal penalties.

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

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates, including eravacycline, for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. These laws and regulations include, for example, the false claims and anti-kickback statutes and regulations. At such time as we market, sell and distribute any products for which we obtain marketing approval, it is possible that our business activities could be subject to challenge under one or more of these laws and regulations. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

   

the federal healthcare anti-kickback statute, among other things, prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federally funded healthcare programs such as Medicare and Medicaid;

 

   

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

 

   

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

 

   

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

 

   

the federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, the ACA, requires manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

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analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to implement compliance programs and to track and report gifts, compensation and other remuneration provided to physicians.

We will be required to spend substantial time and money to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations. Even then, governmental authorities may conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If governmental authorities find that our operations violate any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and we may be required to curtail or restructure our operations.

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

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures in connection with the sale of any products that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

In March 2010, the ACA became law in the United States with the goals of broadening access to health insurance, reducing or constraining the growth of healthcare spending, enhancing remedies against fraud and abuse, adding new transparency requirements for health care and health insurance industries, imposing new taxes and fees on the health industry and imposing additional health policy reforms. Further, the new law includes annual fees to be paid by manufacturers for certain branded prescription drugs, requires manufacturers to participate in a discount program for certain outpatient drugs under Medicare Part D, increases manufacturer rebate responsibilities under the Medicaid Drug Rebate Program for outpatient drugs dispensed to Medicaid recipients and expands oversight and support for the federal government’s comparative effectiveness research of services and products. Despite initiatives to invalidate the ACA, the United States Supreme Court has upheld certain key aspects of the legislation, including the requirement that all individuals maintain health insurance coverage or pay a penalty, referred to as the individual mandate. Although it is too early to determine its full effect, if efforts to repeal or amend the legislation are unsuccessful, the ACA appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs. In addition, we cannot predict whether other legislative changes will be adopted, if any, or how such changes would affect our business.

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

 

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Risks Related to Employee Matters and Managing Growth

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

Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization and business development expertise of Guy Macdonald, our President and Chief Executive Officer, Patrick Horn, our Chief Medical Officer, David C. Lubner, our Senior Vice President and Chief Financial Officer, and Joyce Sutcliffe, our Senior Vice President, Biology, as well as the other principal members of our management, scientific and clinical team. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time.

We do not have formal employment agreements with any of our other employees. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize drug candidates will be limited.

We expect to grow our organization, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs and sales, marketing and distribution. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities to devote time to managing these growth activities. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Our inability to effectively manage the expansion of our operations may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be able to implement our business strategy.

If foreign approvals are obtained, we will be subject to additional risks in conducting business in international markets.

Even if we are able to obtain approval for commercialization of a product candidate in a foreign country, we will be subject to additional risks related to international business operations, including:

 

   

potentially reduced protection for intellectual property rights;

 

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

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

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

 

   

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

 

   

production shortages resulting from any events affecting a product candidate and/or finished drug product supply or manufacturing capabilities abroad;

 

   

business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, hurricanes, typhoons, floods and fires; and

 

   

failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act.

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

Risks Related to Our Common Stock and This Offering

In making your investment decision, you should not rely on information about us and our business that was included in a recent article about developments in the regulatory environment for antibiotics. The article should not be considered in isolation and you should make your investment decision only after reading this entire prospectus carefully.

Information about us and our business was included in an article appearing in the February 2013 issue of the publication Start-Up and entitled “The Regulatory Pendulum Swings In Favor Of Antibiotics, But Will Investments Follow?”. The article includes statements of our President and Chief Executive Officer and presents certain statements about our Company without the more complete information described in this prospectus, including the discussion of various risks and uncertainties in this Risk Factors section and elsewhere in this prospectus. As a result, the article should not be considered in isolation, and you should make your investment decision only after reading this entire prospectus carefully. You should rely only on the information contained in this prospectus in determining whether to purchase our shares.

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

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on the assumed initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $6.98 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. Purchasers of common stock in this offering will have contributed approximately 48% of the aggregate price paid by all purchasers of our stock but will own only approximately 43% of our common stock outstanding after this offering, excluding any shares of our common stock that they may have acquired prior to this offering. Furthermore, if the underwriters exercise their over-allotment option or our previously issued options and warrants to acquire common stock at prices below the assumed initial public offering price are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

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

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This price will not

 

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necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. Although we have applied to list our common stock on The NASDAQ Global Market, an active trading market for our shares may never develop or, if developed, be maintained following this offering. If an active market for our common stock does not develop or is not maintained, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

Our stock price may be volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

   

the success of existing or new competitive products or technologies;

 

   

the timing of clinical trials of eravacycline and any other product candidate;

 

   

results of clinical trials of eravacycline and any other product candidate;

 

   

failure or discontinuation of any of our development programs;

 

   

results of clinical trials of product candidates of our competitors;

 

   

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

 

   

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

   

the recruitment or departure of key personnel;

 

   

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

 

   

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

 

   

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

 

   

announcement or expectation of additional financing efforts;

 

   

sales of our common stock by us, our insiders or other stockholders

 

   

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

 

   

changes in estimates or recommendations by securities analysts, if any, that cover our stock;

 

   

changes in the structure of healthcare payment systems;

 

   

market conditions in the pharmaceutical and biotechnology sectors;

 

   

general economic, industry and market conditions; and

 

   

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

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

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock

 

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or change their opinion of our stock, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

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

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

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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

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

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

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

 

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

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

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

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 15,971,862 shares of common stock outstanding based on the 325,243 shares outstanding as of December 31, 2012 and giving effect to the conversion of all outstanding shares of our preferred stock into 8,828,438 shares of our common stock upon the closing of this offering. Of these shares, the 6,818,181 shares sold by us in this offering may be resold in the public market immediately, unless purchased by our affiliates. The remaining 9,153,681 shares are currently restricted under securities laws or as a result of lock-up agreements, but will be able to be sold after this offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of 8,933,817 shares of our common stock, will have rights, subject to conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all 3,057,997 shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $25 million of shares of common stock in this offering at the initial public offering price. Any such shares purchased by these investors could not be resold in the public market immediately following this offering as a result of restrictions under securities laws and lock-up agreements, but would be able to be sold following the expiration of these restrictions as described in the “Shares Eligible for Future Sale” section of this prospectus. In addition, certain of these investors would have rights, subject to conditions, to require us to file registration statements with respect any such shares that they purchase or to include these shares in registration statements that we may file for ourselves or other stockholders. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing principal stockholders and any of these existing

 

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principal stockholders could determine to purchase more, less or no shares in this offering, and the foregoing discussion does not reflect any potential purchases by these existing principal stockholders or their affiliated entities.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, accordingly, stockholders must rely on capital appreciation, if any, for any return on their investment.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the operation, development and growth of our business. The terms of our debt facility with Silicon Valley Bank and Oxford Finance preclude us from paying dividends, and any future debt agreements may also preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval.

Upon the closing, our executive officers and directors, combined with our stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately 54.93% of our capital stock. However, certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $25 million of shares of common stock in this offering at the initial public offering price. If such existing stockholders purchase $25 million of shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, our executive officers, directors and 5% stockholders and their affiliates would, in the aggregate, beneficially own shares of our common stock representing approximately 68.65% of our capital stock upon the closing of this offering. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:

 

   

delay, defer or prevent a change in control;

 

   

entrench our management and/or the board of directors; or

 

   

impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.

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

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

 

   

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

 

   

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

 

   

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

 

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establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at stockholder meetings;

 

   

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

 

   

limit who may call a special meeting of stockholder meetings;

 

   

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

 

   

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

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

   

the anticipated timing, costs and conduct of our planned pivotal Phase 3 clinical trials for eravacycline for the treatment of complicated intra-abdominal infections, or cIAI, and complicated urinary tract infections, or cUTI;

 

   

our plans to develop an oral formulation of eravacycline for use in intravenous-to-oral step-down therapy for cUTI;

 

   

our anticipated timing for submitting applications for U.S. and foreign regulatory marketing approval for eravacycline;

 

   

our plans to develop and commercialize eravacycline for indications other than cIAI and cUTI;

 

   

our expectations regarding the clinical effectiveness of eravacycline;

 

   

our plans to develop and commercialize our other product candidates;

 

   

our commercialization, marketing and manufacturing capabilities and strategy;

 

   

our intellectual property position;

 

   

our competitive position;

 

   

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

 

   

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

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

You should read this prospectus, the documents that we reference in this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 6,818,181 shares of our common stock in this offering will be approximately $67.3 million, assuming an initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $77.8 million.

A $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or decrease the net proceeds from this offering by approximately $6.3 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 the estimated underwriting discounts and commissions.

We plan to use the net proceeds from this offering, together with our existing cash resources, as follows:

 

   

approximately $50.0 million to fund our planned pivotal Phase 3 program for eravacycline for the treatment of complicated intra-abdominal infections and complicated urinary tract infections; and

 

   

the remainder for working capital and other general corporate purposes.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the status of and results from clinical trials of eravacycline and whether regulatory authorities require us to perform additional clinical trials of eravacycline in order to obtain marketing approvals. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds.

We believe that our available funds following this offering will be sufficient to enable us to obtain top-line data from both of our planned Phase 3 clinical trials of eravacycline. We expect that these funds will not be sufficient to enable us to seek marketing approval for eravacycline or commercially launch eravacycline. It is also possible that we will not achieve the progress that we expect with respect to eravacycline because the actual costs and timing of clinical development activities are difficult to predict and are subject to substantial risks and delays. We have no external sources of funds other than our subcontracts with, and subaward from, CUBRC under awards from BARDA and NIAID. We expect that we will need to obtain additional funding in order to commercialize eravacycline.

To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of eravacycline or other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to eravacycline or other product candidates that we otherwise would seek to develop or commercialize ourselves.

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

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain earnings, if any, to finance the growth and development of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, provisions of applicable law and other factors the board deems relevant. Our ability to pay dividends on our common stock is limited by the covenants of our debt facility with Silicon Valley Bank and Oxford Finance and may be further restricted by the terms of any of our future indebtedness. See “Risk Factors—Risks Relating to Our Financial Position and Need for Additional Capital—Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates” and “Risk Factors—Risks Relating to Our Common Stock and This Offering—We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, accordingly, stockholders must rely on capital appreciation, if any, for any return on their investment.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2012 on:

 

   

an actual basis;

 

   

a pro forma basis giving effect to the conversion of all outstanding shares of our preferred stock into 8,828,438 shares of our common stock, and the resulting adjustment in the shares issuable upon exercise of our outstanding warrants from preferred stock to common stock, upon the closing of this offering; and

 

   

a pro forma as adjusted basis giving additional effect to the sale of 6,818,181 shares of our common stock offered in this offering, assuming an initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the filing and effectiveness of a restated certificate of incorporation upon the closing of this offering.

You should read the following table in conjunction with our consolidated financial statements and related notes, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

     As of December 31, 2012  
     Actual     Pro Forma(1)     Pro Forma As
Adjusted
 
           (Unaudited)     (Unaudited)  
     (In thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 9,079      $ 9,079      $ 76,429   
  

 

 

   

 

 

   

 

 

 

Preferred stock warrant liability

     610        —          —     

Term loan

     8,009        8,009        8,009   

Series A-1 convertible preferred stock, $0.001 par value:
10,072,000 shares authorized, 10,040,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     9,925        —          —     

Series A-2 convertible preferred stock, $0.001 par value:
13,095,646 shares authorized, 13,095,646 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     15,055        —          —     

Series B convertible preferred stock, $0.001 par value: 57,471,225 shares authorized, 57,471,225 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     9,946        —          —     

Series C convertible preferred stock, $0.001 par value:
178,405,286 shares authorized, 175,418,122 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     44,915        —          —     

Stockholders’ equity (deficit):

      

Common stock, $0.001 par value: 317,789,510 shares
authorized, 325,243 shares issued and outstanding, actual; 317,789,510 shares authorized, 9,153,681 shares issued and outstanding, pro forma; and 125,000,000 shares authorized, 15,971,862 shares issued and outstanding, pro forma as adjusted

     —          9        16   

Additional paid-in capital

     7,036        87,478        154,821   

Deficit accumulated during the development stage

     (90,085     (90,085     (90,085
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (83,049     (2,598     64,752   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 5,411      $ 5,411        72,761   
  

 

 

   

 

 

   

 

 

 

 

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(1) Pro forma does not reflect the borrowing of $3.0 million under our term loan facility and the issuance of associated warrants on February 28, 2013. For further information on this borrowing and these warrants, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Notes 6, 7 and 13 within the notes to our consolidated financial statements appearing elsewhere in this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $6.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value (deficit) per share of our common stock after this offering. Our pro forma historical net tangible book value (deficit) as of December 31, 2012 was $(3.2) million, or $(0.35) per share of common stock. Our pro forma net tangible book value (deficit) per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding on December 31, 2012, after giving effect to the automatic conversion of all of our outstanding shares of preferred stock into shares of our common stock upon the closing of this offering.

After giving effect to our issuance and sale of 6,818,181 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, which is 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, the pro forma as adjusted net tangible book value (deficit) as of December 31, 2012 would have been $64.1 million, or $4.02 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $4.37 per share. The initial public offering price per share will significantly exceed the pro forma as adjusted net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $6.98 per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering without giving effect to the over-allotment option granted to the underwriters:

 

Assumed initial public offering price per share

     $ 11.00   

Pro forma net tangible book value (deficit) per share as of December 31, 2012

   $ (0.35  

Increase per share attributable to sale of shares of common stock in this offering

     4.37     
  

 

 

   

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

     $ 4.02   
    

 

 

 

Dilution per share to new investors

     $ 6.98   
    

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or decrease the pro forma net tangible book value (deficit) by $6.3 million, the pro forma net tangible book value (deficit) per share after this offering by $0.40 per share and the dilution in pro forma net tangible book value (deficit) per share to investors in this offering by $0.60 per share, 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 discount and offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value (deficit) will increase to $4.39 per share, representing an immediate increase to existing stockholders of $4.74 per share and an immediate dilution of $6.26 per share to new investors. If any shares are issued upon exercise of outstanding options or warrants, you will experience further dilution.

 

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The following table summarizes, on a pro forma basis as of December 31, 2012, after giving effect to the conversion of all of our outstanding preferred stock into common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before the deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
 
     Number      %     Amount      %    

Existing stockholders

     9,153,681         57   $ 80,432,392         52   $ 8.79   

New investors

     6,818,181         43        75,000,000         48      $ 11.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     15,971,862         100   $ 155,432,392         100   $ 9.73   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The number of shares purchased from us by existing stockholders is based on 325,243 shares of our common stock outstanding as of December 31, 2012, after giving effect to the automatic conversion of all of our outstanding shares of preferred stock into 8,828,438 shares of common stock upon the closing of this offering, and excludes:

 

   

88,013 shares of common stock issuable upon the exercise of preferred stock warrants outstanding and exercisable as of December 31, 2012, at a weighted average exercise price of $7.73 per share;

 

   

1,442,810 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2012, at a weighted average exercise price of $1.67 per share;

 

   

257,579 shares of common stock available for future issuance under our equity compensation plans as of December 31, 2012; and

 

   

an additional 1,357,608 shares of our common stock that will be made available for future issuance under our equity compensation plans upon the closing of this offering.

If the underwriters exercise their option to purchase additional shares from us in full, the number of shares held by new investors will increase to 7,840,908, or 46% of the total number of shares of common stock outstanding after this offering and the percentage of shares held by existing stockholders will decrease to 48% of the total shares outstanding.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $25 million of shares of common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing principal stockholders and any of these existing principal stockholders could determine to purchase more, less or no shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these existing principal stockholders or their affiliated entities.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our financial statements and the related notes. Our historical results are not necessarily indicative of the results that may be expected in the future.

The selected consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the period from July 7, 2006 (inception) to December 31, 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus.

 

    Years Ended
December 31,
    The Period
from July 7,
2006
(inception) to
December 31,

2012
 
    2011     2012    

Statement of Operations Data:

     

Contract and grant revenue

  $ 185      $ 7,600      $ 7,785   

Operating expenses:

     

Research and development

    17,737        17,294        74,930   

General and administrative

    3,874        4,309        17,480   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    21,611        21,603        92,410   
 

 

 

   

 

 

   

 

 

 

Loss from operations

    (21,426     (14,003     (84,625

Other income (expense):

     

Interest income

    1        —          608   

Interest expense

    (161     (1,021     (1,438

Other income (expense)

    22        (63     (4,630
 

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (138     (1,084     (5,460
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (21,564   $ (15,087   $ (90,085
 

 

 

   

 

 

   

 

 

 

Net loss per share applicable to common stockholders-basic and diluted (1)

  $ (73.34   $ (47.54   $ (390.04
 

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders-basic and diluted

    294,031        317,340        230,965   
 

 

 

   

 

 

   

 

 

 

Pro forma net loss per share applicable to common stockholders-basic and diluted (unaudited) (1)

  $ (2.36   $ (1.65  
 

 

 

   

 

 

   

Weighted-average number of common shares used in pro forma net loss per share applicable to common stockholders-basic and diluted (unaudited)

    9,122,476        9,145,785     
 

 

 

   

 

 

   

 

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     As of December 31,  
     2011     2012  
     (in thousands)  
Balance Sheet Data:     

Cash and cash equivalents

   $ 22,454      $ 9,079   

Working capital

     16,400        3,720   

Total assets

     24,069        14,072   

Current liabilities

     6,974        8,661   

Long-term obligations

     5,857        8,619   

Convertible preferred stock

     79,841        79,841   

Deficit accumulated during the development stage

     (74,998     (90,085

Total stockholders’ deficit

   $ (68,603   $ (83,049

 

(1) See Note 2 within the notes to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share applicable to common stockholders and pro forma basic and diluted net loss per share applicable to common stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing 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 and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical stage biopharmaceutical company using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multi-drug resistant infections. Our lead product candidate, eravacycline, is a fully synthetic tetracycline derivative that we are developing as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections, including multi-drug Gram-negative infections. We recently completed a successful Phase 2 clinical trial of eravacycline with intravenous administration for the treatment of patients with complicated intra-abdominal infections, or cIAI, and are currently finalizing two global Phase 3 clinical trials of eravacycline, one for the treatment of cIAI and one for the treatment of complicated urinary tract infections, or cUTI. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. Subject to obtaining additional financing beyond this offering, we intend to pursue development of eravacycline for the treatment of additional indications, including acute bacterial skin and skin structure infections, or ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections. We are also pursuing the discovery and development of additional antibiotics to target unmet medical needs.

We commenced business operations in July 2006. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary chemistry technology, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we have not generated any product revenue and have primarily financed our operations through the private placement of our equity securities, debt financings and revenue from government awards. As of December 31, 2012, we had received an aggregate of $95.6 million in net proceeds from the issuance of equity securities and borrowings under debt facilities and an aggregate of $6.0 million from government grants. As of December 31, 2012, our principal source of liquidity was cash and cash equivalents, which totaled $9.1 million.

As of December 31, 2012, we had a deficit accumulated during the development stage of $90.1 million. Our net losses were $21.6 million and $15.1 million for the years ended December 31, 2011 and 2012, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our research and development expenses will increase as we continue the development and clinical trials of, and seek regulatory approval for, our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, following the closing of this offering, we expect to incur additional costs associated with operating as a public company and expect that our general and administrative costs will increase as we grow and operate as a public company. We will need to generate significant revenue to achieve profitability, and we may never do so.

We believe that our available funds following this offering will be sufficient to enable us to obtain top-line data from both of our planned Phase 3 clinical trials of eravacycline. We expect that these funds will not be sufficient to enable us to seek marketing approval for eravacycline or commercially launch eravacycline. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt

 

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financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

Financial overview

Contract and Grant Revenue

We have derived all of our revenue to date from funding provided under three U.S. government awards for the development of our compounds as potential counter measures for the treatment of disease caused by bacterial biothreat pathogens through our collaborator CUBRC Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts:

 

   

We have received funding for our lead product candidate, eravacycline, under an award from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services. In January 2012, BARDA awarded CUBRC a five-year contract that provides for up to a total of $67.0 million in funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens. We refer to this contract as the BARDA Contract.

 

   

We have received funding for our preclinical compound TP-271 under two awards from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of National Institutes of Health, for the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia:

 

   

a grant awarded to CUBRC in July 2011 that provides up to a total of approximately $2.8 million over five years, which we refer to as the NIAID Grant, and

 

   

a contract awarded to CUBRC in September 2011 that provides up to a total of approximately $35.8 million in funding over five years, which we refer to as the NIAID Contract.

We are collaborating with CUBRC because when we initially determined to seek government funding we recognized that we did not have any expertise in bidding for, or the administration and management of, government-funded contracts. CUBRC serves as the prime contractor under the BARDA Contract, the NIAID Grant and the NIAID Contract, primarily carrying out a program management and administrative role with additional responsibility for the management of preclinical studies. We serve as lead technical expert on all aspects of these awards and also serve as a subcontractor responsible for management of chemistry, manufacturing and control activities and clinical studies. We derive all of our revenue under these collaborations through subcontracts with, and a subaward from, CUBRC, with the flow of funds following the respective activities being conducted by us and by CUBRC.

 

   

In connection with the BARDA Contract, in February 2012, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $39.8 million, reflecting the portion of the BARDA Contract funding that may be paid to us for our activities.

 

   

In connection with the NIAID Contract, in October 2011, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $13.3 million, reflecting the portion of the NIAID Contract funding that may be paid to us for our activities.

 

   

In connection with the NIAID Grant, in November 2011, CUBRC awarded us a 55-month, no-fee subaward of approximately $980,000, reflecting the portion of the NIAID Grant funding that may be paid to us for our activities.

Although the BARDA Contract, and our subcontract with CUBRC under the BARDA Contract, have five-year terms, BARDA is entitled to terminate the project for convenience at any time, and is not obligated to

 

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provide funding beyond current-year amounts from Congressionally approved annual appropriations. To the extent BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us. For the 12-month base period from February 1, 2012 through January 31, 2013, committed funding from CUBRC under our BARDA subcontract was $6.3 million. As of December 31, 2012, we had received $3.4 million of this $6.3 million. In January 2013, BARDA committed to provide funding of $13.9 million to CUBRC for the eravacycline program for the 12-month period from February 1, 2013 to January 31, 2014. Committed funding from CUBRC to us under our BARDA subcontract for the 12-month period from February 1, 2013 to January 31, 2014 is $6.4 million. Similarly, although the NIAID Contract, the NIAID Grant and our subcontract with CUBRC under the NIAID Contract have terms of five years, and our subaward under the NIAID Grant has a term of 55 months, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond an initial 25-month base period. To the extent NIAID ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us. For the 25-month base period from October 1, 2011 through October 31, 2013, committed funding from our subcontract with CUBRC under the NIAID Contract is $5.9 million. As of December 31, 2012, we had received $2.4 million of this $5.9 million. For the base period from June 15, 2011 to May 31, 2013, committed funding from our subaward from CUBRC under the NIAID Grant is $0.6 million. As of December 31, 2012, we had received $0.2 million of this $0.6 million.

We have no products approved for sale. Other than the government funding described above, we do not expect to receive any revenue from any product candidates that we develop, including eravacycline, until we obtain regulatory approval and commercialize such products, which we do not expect will occur before 2016, or until we potentially enter into collaborative agreements with third parties for the development and commercialization of such product candidates. We continue to pursue government funding for other preclinical and clinical programs. If our development efforts for any of our product candidates result in clinical success and regulatory approval, or collaboration agreements with third parties, we may generate revenue from those product candidates.

We expect that our revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Even if we are able to generate revenue from the sale of one or more products, we may not become profitable.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, which include:

 

   

employee-related expenses, including salaries, benefits and stock-based compensation expense;

 

   

expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, and consultants that conduct our clinical trials and preclinical activities;

 

   

payments made under our license agreement with Harvard University;

 

   

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies; and

 

   

facility, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.

We expense research and development costs to operations as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

 

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The following table identifies research and development expenses on a program-specific basis for our product candidates for the years ended December 31, 2011 and 2012 and the period from July 7, 2006 (inception) to December 31, 2012. Expenses related to facilities, consulting, travel, conferences, stock-based compensation and depreciation are not allocated to a program and are separately classified as other research and development expenses in the table below.

 

     Years Ended
December 31,
     The Period
from July 7,
2006
(inception) to
December 31,

2012
 
     2011      2012     

Eravacycline

   $ 9,007       $ 6,932       $ 30,725   

BARDA Contract

     —           4,279         4,279   

NIAID Contract and NIAID Grant

     174         2,537         2,710   

Other development programs

     5,016         1,071         20,448   

Other research and development

     3,540         2,475         16,768   
  

 

 

    

 

 

    

 

 

 

Total research and development

   $ 17,737       $ 17,294       $ 74,930   
  

 

 

    

 

 

    

 

 

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

As of December 31, 2012, we had incurred an aggregate of $30.7 million in research and development expenses related to the development of eravacycline. We expect that our research and development expenses will increase as we plan for and commence our two planned Phase 3 clinical trials of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect that the total external costs of our planned Phase 3 clinical trials of eravacycline will be approximately $50.0 million, including approximately $13.8 million in 2013, exclusive of the $2.0 million milestone payment described below that would become due to Harvard University upon dosing of the first patient in the first of these Phase 3 clinical trials.

Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of these or other current or future clinical trials of eravacycline or our other product candidates. We may never succeed in achieving regulatory approval for eravacycline or any of our other product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.

We have licensed our proprietary chemistry technology from Harvard University on an exclusive worldwide basis under a license agreement that we entered into in August 2006. Under the license agreement, we have paid Harvard an aggregate of $1.7 million in upfront license fees and development milestone payments, and issued 31,379 shares of our common stock to Harvard. In addition, we have agreed to make payments to Harvard upon the achievement of specified future development and regulatory milestones totaling up to $15.2 million per licensed product and to pay tiered royalties in the single digits based on annual worldwide net sales, if any, of licensed products by us, our affiliates and our sublicensees. We are also obligated to pay Harvard a specified share of non-royalty sublicensing revenues that we receive from sublicensees for the grant of sublicenses under the license and to reimburse Harvard for specified patent prosecution and maintenance costs. The next milestone payment that we expect to make under the license agreement is a $2.0 million payment that will become due to Harvard upon dosing of the first patient in our first Phase 3 clinical trial of eravacycline.

 

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General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in executive and other administrative functions. Other general and administrative expenses include facility related costs, communication expenses and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expenses will increase in the future to support the continued research and development and potential commercialization of our product candidates and as we operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of our first product candidate appears likely, we anticipate that we will increase our payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of interest accrued on our outstanding indebtedness and non-cash interest related to the amortization of debt discount costs associated with our term loan. We expect that our interest expense will increase in future periods in connection with additional indebtedness of $6.2 million that we borrowed in December 2012 under an amendment to our loan and security agreement with Silicon Valley Bank and Oxford Finance and an additional $3.0 million of indebtedness we borrowed in February 2013 under this debt facility.

Other Income (Expense)

Other income (expense) consists of fair value adjustments on warrants for the purchase of our preferred stock.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We have derived all of our revenue to date from our subcontracts with CUBRC under the BARDA Contract and the NIAID Contract and our subaward under the NIAID Grant. We recognize revenue under these best-

 

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efforts, cost-reimbursable and cost-plus-fixed-fee subcontracts and subaward as we perform services under the subcontracts and subaward so long as a subcontract and subaward has been executed and the fees for these services are fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflect our partial performance under the subcontracts and subaward and equal direct and indirect costs incurred plus fixed fees, where applicable. We do not recognize revenue under these arrangements for amounts related to contract periods where funding is not yet committed as amounts above committed funding thresholds would not be considered fixed or determinable or reasonably assured of collection. Revenues and expenses under these arrangements are presented gross on our statements of operations and comprehensive loss as we have determined we are the primary obligor under these arrangements relative to the research and development services we perform as lead technical expert.

Revenue under our subcontracts under both the NIAID Contract and the BARDA Contract are earned under a cost-plus-fixed-fee arrangement in which we are reimbursed for direct costs incurred plus allowable indirect costs and a fixed-fee earned. Billings under these contracts are based on approved provisional indirect billing rates, which permit recovery of fringe benefits, allowable overhead and general and administrative expenses and a fixed fee.

Revenue under our subaward under the NIAID Grant is earned under a cost-reimbursable arrangement in which we are reimbursed for direct costs incurred plus allowable indirect costs. Billings under the NIAID Grant are based on approved provisional indirect billing rates, which permit recovery of fringe benefits and allowable general and administrative expenses.

Accrued Research and Development Expenses

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

 

   

CROs in connection with clinical trials;

 

   

CMOs with respect to clinical materials and intermediaries;

 

   

vendors in connection with preclinical development activities; and

 

   

vendors related to manufacturing, development and distribution of clinical supplies.

We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of subjects, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differs from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amount actually incurred.

 

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Stock-Based Compensation

Since our inception in July 2006, we have applied the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation-Stock Compensation, which we refer to as ASC 718, to account for all stock-based compensation. We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant. Stock compensation related to non-employee awards is remeasured at each reporting period until the awards are vested. Described below is the methodology we have utilized in measuring stock-based compensation expense. Following the consummation of this offering, stock option fair values will be determined based on the quoted market price of our common stock.

Determining the amount of stock-based compensation to be recorded requires us to develop estimates of the fair value of stock-based awards as of their grant date. We recognize stock-based compensation expense ratably over the requisite service period, which in most cases is the vesting period of the award. Calculating the fair value of stock-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the fair value of our common stock on the grant date, the expected term of our stock options, the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Because we are a privately held company with a limited operating history, we utilize data from a representative group of publicly traded companies to estimate expected stock price volatility. We selected representative companies from the biopharmaceutical industry with similar characteristics as us, including stage of product development and therapeutic focus. We use the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. For non-employee grants, we use an expected term equal to the remaining contractual term of the award. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention of paying cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

Under ASC 718, we are required to estimate the level of forfeitures expected to occur and record stock-based compensation expense only for those awards that we ultimately expect will vest. During the years ended December 31, 2011 and 2012, our estimated annual forfeiture rate was 0% and 3%, respectively.

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

 

     Year Ended
December 31,
     The Period
from July 7 ,
2006
(inception) to
December  31,

2012
 
     2011      2012     
     (in thousands)  

Research and development

   $ 175       $ 463       $ 996   

General and administrative

     137         149         550   
  

 

 

    

 

 

    

 

 

 

Total

   $ 312       $ 612       $ 1,546   
  

 

 

    

 

 

    

 

 

 

 

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We estimated the fair value of stock options at the grant date using the following assumptions:

 

    

Years Ended December 31,

    

2011

  

2012

Weighted average expected volatility

   64%    67%

Expected life (in years)

   6.0-6.1    6.0-6.1

Risk free interest rate

   1.21%-2.41%    0.85%-1.21%

Expected dividend yield

   0%    0%

The following table presents the grant dates and related exercise or purchase prices of stock options that we granted from January 1, 2011 through the date of this prospectus, along with the corresponding exercise price for each option grant and the fair value per share utilized to calculate stock-based compensation expense:

 

Date of Grant

   Number of shares
underlying options
granted
     Exercise price
per share
     Common stock fair
value per share on
grant date
 

1/3/2011

     97,689       $ 2.03       $ 2.03   

4/27/2011

     3,448       $ 2.03       $ 2.03   

12/9/2011

     54,544       $ 2.03       $ 2.03   

1/20/2012

     24,786       $ 2.03       $ 2.03   

1/26/2012

     11,206       $ 2.03       $ 2.03   

6/6/2012

     170,676       $ 2.03       $ 3.77   

11/19/2012

     5,171       $ 5.22       $ 5.22   

At December 31, 2012, options to purchase 1,442,810 shares of our common stock were outstanding. The aggregate intrinsic value of these options was $13,468,426 assuming an initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

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

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

 

   

the shares of common stock were illiquid securities in a private company;

 

   

the prices of shares of our preferred stock that we had sold to outside investors in arm’s length transactions, and the rights, preferences and privileges of that preferred stock relative to our common stock;

 

   

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

 

   

the material risks related to our business;

 

   

our business strategy;

 

   

our achievement of key milestones, including the results of clinical trials;

 

   

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

 

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

 

   

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

 

   

contemporaneous and retrospective valuations of our common stock.

Valuation of Common Stock as of June 18, 2010

Following our Series C preferred stock financing in May and June of 2010, we conducted a contemporaneous valuation of our common stock as of June 18, 2010. In conducting this valuation, we estimated the value of our common stock based on the price at which we sold shares of our Series C preferred stock in the financing. The lead investor in the financing was an unrelated investor and the price for the Series C preferred stock was determined through negotiations with the investors. We used the option-pricing back solve method, or OPM-BS, to estimate the equity value that corresponded to the pricing and terms of the Series C financing. We then allocated the equity value among our preferred and common stock using the OPM-BS. For our OPM-BS analysis, we estimated the time to liquidity as two years and assumed an annual volatility rate of 78%. Our estimate of volatility was based on historical share price trading data for a group of ten companies we considered comparable to ours. We applied a discount for lack of marketability of 15% to our common stock. Based on these factors, we concluded that our common stock had a fair value of $2.03 per share as of June 18, 2010.

Stock Option Grants Made January 3, 2011 and April 27, 2011

Our board of directors granted options to purchase common stock on January 3, 2011 and April 27, 2011, with each option having an exercise price of $2.03 per share. In establishing this exercise price, our board of directors considered input from management, including the valuation we conducted of our common stock as of June 18, 2010, as well as the objective and subjective factors outlined above.

In addition, on each of January 3, 2011 and April 27, 2011, our board of directors considered the decline in our financial position and significant cash burn since our Series C preferred stock financing, our projected financial results for the remainder of 2011 as well as the events and circumstances that occurred between June 18, 2010 and such date that our board of directors considered most likely to affect the value of our common stock, including the following:

 

   

the addition of a newly elected independent director to our board of directors;

 

   

the addition of our chief medical officer; and

 

   

the anticipated, or in the case of the April 27, 2011 meeting, actual, initiation of our Phase 1 multiple ascending dose clinical trial of an oral formulation of eravacycline.

On each of January 3, 2011 and April 27, 2011, our board of directors determined that these events and circumstances were not indicative of a significant change in fair value of our common stock since June 18, 2010.

Based on these factors, our board of directors determined that the fair value of our common stock at both January 3, 2011 and April 27, 2011 was $2.03 per share.

Valuation of Common Stock as of October 14, 2011

In October 2011, we conducted a contemporaneous valuation of our common stock as of October 14, 2011. In conducting this valuation, we used the market approach as described in the AICPA Practice Aid. We switched to this method from the OPM-BS used for our June 18, 2010 valuation as our Series C preferred stock financing had occurred more than sixteen months earlier. We estimated the value of our common stock based on the estimated market capitalization of guideline public companies that were selected based on their disease focus,

 

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stage of clinical trials, number of compounds in clinical trials and number of years since incorporation. We estimated the market capitalization of these companies based on factors including the amounts of paid-in capital and cash held by each company. We allocated this equity value among the outstanding shares of our preferred and common stock using the option-pricing method, or OPM. For our OPM analysis, we assumed a time to liquidity of 1.27 years and an annual volatility rate of 49% based on historical trading for the guideline public companies considered. We applied a discount for lack of marketability of 15% to our common stock. Based on these factors, we concluded that our common stock had a fair value of $2.03 per share as of October 14, 2011.

Stock Option Grants Made December 9, 2011 to January 26, 2012

Our board of directors granted options on December 9, 2011, January 20, 2012 and January 26, 2012, with each option having an exercise price of $2.03 per share. In establishing this exercise price, our board of directors considered input from management, including the valuation we conducted of our common stock as of October 14, 2011, as well as the objective and subjective factors outlined above.

In addition, on each of December 9, 2011, January 20, 2012 and January 26, 2012, our board of directors considered the decline in our financial position and significant cash burn since our Series C preferred stock financing, our projected financial results for 2012 as well as the events and circumstances that occurred between October 14, 2011 and such date that our board of directors considered most likely to affect the value of our common stock, including the following:

 

   

the addition of a newly elected independent chairman of our board of directors;

 

   

the initiation and progress of our Phase 2 clinical trial of the intravenous formulation of eravacylcine;

 

   

our impending, or, in the case of the January 20, 2012 and January 26, 2012 meetings, completed, borrowing of $6.5 million under our debt facility with Silicon Valley Bank and Oxford Finance in December 2011; and

 

   

the market performance of publicly traded companies in the life sciences and biotechnology industry sectors comparable to us.

On each of December 9, 2011, January 20, 2012 and January 26, 2012, our board of directors determined that these events and circumstances were not indicative of a significant change in fair value of our common stock since October 14, 2011.

Based on these factors, our board of directors determined that the fair value of our common stock at December 9, 2011, January 20, 2012 and January 26, 2012 was $2.03 per share.

Stock Option Grants Made June 6, 2012

Our board of directors granted options on June 6, 2012, with each option having an exercise price of $2.03 per share. In establishing this exercise price, our board of directors considered input from management, including the valuation we conducted of our common stock as of October 14, 2011, and the status of our ongoing Phase 2 clinical trial of the intravenous formulation of eravacycline. At June 6, 2012, all patient data remained blinded.

Retrospective Valuation of Common Stock as of June 6, 2012

In September 2012, we decided to pursue an initial public offering of our common stock, or IPO, in addition to exploring other strategic alternatives. As a result, in connection with the preparation of our consolidated financial statements for the nine-month period ended September 30, 2012 and in preparing for our proposed IPO, we reexamined for financial reporting purposes only the fair value of our common stock during 2012. In connection with that reexamination, we prepared a retrospective valuation of the fair value of our common stock

 

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for financial reporting purposes as of June 6, 2012 to assist our board of directors in re-evaluating the fair value of our common stock as of that date. We determined that a retrospective valuation of the fair value of our common stock as of June 6, 2012 was necessary due to acceleration of the timeframe to a liquidity event, including our potential IPO, since October 14, 2011, the date of our last contemporaneous valuation.

In reassessing the fair value of our common stock, our board of directors considered the events and circumstances that occurred since January 26, 2012 that were most likely to affect the value of our common stock, including the following:

 

   

our entry in February 2012 into a subcontract with CUBRC under the BARDA Contract;

 

   

the progress of our Phase 2 clinical trial of the intravenous formulation of eravacycline;

 

   

the Data Safety Monitoring Board concluding in April 2012 that the trial could continue; and

 

   

the market performance of publicly traded companies in the life sciences and biotechnology industry sectors comparable to us.

For the retrospective valuation, we used the market approach to estimate the aggregate future equity value of our company under an IPO scenario, high and low case sale scenarios and a remain private scenario, as described below.

 

   

For the IPO scenario, we used the Guideline Public Company Method as described in the AICPA Practice Aid. Under this method, we identified recent IPOs for similar biotechnology companies from 2010, 2011 and 2012, which we refer to as guideline companies, that were either focused on the development of anti-infective compounds or were developing a Phase 3 clinical trial drug candidate. We used the average of (1) the median of the guideline companies’ IPO pre-money valuations and (2) the valuation for our company implied by applying to our Series C post-money valuation the median step-up in value for the guidelines companies from the post-money valuations for their last preferred financings to their IPO pre-money valuations.

 

   

For the sale scenarios, we analyzed sale transactions of similar biotechnology companies that were focused on the development of anti-infective compounds and assumed for financial reporting purposes a sale in March 2013. We also analyzed published transaction values of companies with product candidates in similar stages of development as we estimated our lead product candidate, eravacycline, would be in March 2013.

 

   

For the remain private scenario, we estimated equity value using the Guideline Public Company Method and took into consideration twelve publicly traded companies that we considered comparable to ours.

In order to determine a valuation of our common stock based on the equity values determined under the IPO scenario, the two sale scenarios and the remain private scenario, we used the Probability Weighted Expected Return Method, or the PWERM, described in the AICPA Practice Aid. Under this method, we estimated the value of our common stock based on the probability-weighted present value of expected future investment returns considering each of these possible outcomes and the rights of each class and series of our equity. Three of the scenarios assumed a stockholder exit, either through an IPO or a sale of our company. The fourth scenario assumed we remained a private company. For the IPO and sale scenarios, we calculated the estimated values of our common stock using assumptions as to pre-money or sale valuations determined with respect to those scenarios as described above, and dates of those scenarios, and an appropriate risk-adjusted discount rate. Finally, we calculated a present value for our common stock based on our estimate of the relative likelihood of occurrence of each scenario. We assigned a 20% weighting to the IPO scenario, 50% weighting to the sale scenarios, split evenly between the high and low case scenarios, and 30% weighting to the remaining private scenario. We believed these weightings were appropriate because at the time of the retrospective valuation, we believed that there was the possibility of several liquidity events: the IPO scenario and sale scenarios. We

 

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believed it appropriate to include these potential scenarios when estimating the value of our common stock as this was a retrospective valuation that was performed at the time of our preparation for this proposed initial public offering.

The following table summarizes the significant assumptions for each of the valuation scenarios used in the PWERM analysis to determine the retrospectively reassessed fair value of our common stock as of June 6, 2012.

 

June 6, 2012 Retrospective Valuation

   IPO     Sale–High
Case
    Sale–Low
Case
    Remain
Private
 

Key Assumptions

        

Probability weighting

     20     25     25     30

Liquidity date

     2/28/13        3/31/13        3/31/13        —    

WACC

     13.7     13.7     13.7     N/A   

Volatility

     —         —         —         53

Discount for lack of marketability

     15     15     15     15

Based on the qualitative factors described above and the results of our retrospective valuation analysis, we determined that the retrospectively reassessed fair value of our common stock for financial reporting purposes at June 6, 2012 was $3.77 per share. The stock-based compensation expense with respect to the June 6, 2012 option grants reported in our statements of operations and comprehensive loss for the year ended December 31, 2012 reflects the retrospectively reassessed fair value.

Valuation of Common Stock as of October 14, 2012

As a result of the favorable results from the Phase 2 study we decided to pursue an IPO and explore other strategic alternatives and performed a contemporaneous valuation of our common stock as of October 14, 2012.

For the valuation, we used the market approach to estimate the aggregate future equity value of our company under an IPO scenario, high and low case sale scenarios and a remain private scenario, as described below.

 

   

For the IPO scenario, we used the Guideline Public Company Method as described in the AICPA Practice Aid. Under this method, we identified recent IPOs for similar biotechnology companies from 2010, 2011 and 2012, which we refer to as guideline companies, that were either focused on the development of anti-infective compounds or were currently developing a Phase 3 clinical trial drug candidate. We used the average of (1) the median of the guideline companies’ IPO pre-money valuations and (2) the valuation for our company implied by applying to our Series C post-money valuation the median step-up in value for the guideline companies from the post-money valuations for their last preferred financings to their IPO pre-money valuations.

 

   

For the sale scenarios, we analyzed sale transactions of similar biotechnology companies that were focused on the development of anti-infective compounds and assumed for financial reporting purposes a sale in March 2013. We also analyzed published transaction values of companies with product candidates in similar stages of development as we estimated our lead product candidate, eravacycline, would be in March 2013.

 

   

For the remain private scenario, we estimated our equity value using the Guideline Public Company Method and took into consideration twelve publicly traded companies that we considered comparable to ours.

In order to determine a valuation of our common stock based on the enterprise values determined under the IPO scenario, the two sale scenarios and the remain private scenario, we used the PWERM. Under this method, we estimated the value of our common stock based on the probability-weighted present value of expected future investment returns considering each of these possible outcomes and the rights of each class and series of our equity. Three of the scenarios assumed a stockholder exit, either through an IPO or a sale of our company. The

 

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fourth scenario assumed we remained a private company. For the IPO and sale scenarios, we calculated the estimated values of our common stock using assumptions as to pre-money or sale valuations determined with respect to those scenarios as described above, and dates of those scenarios, and an appropriate risk-adjusted discount rate. Finally, we calculated a present value for our common stock based on our estimate of the relative likelihood of occurrence of each scenario. We assigned a 40% weighting to the IPO scenario, 50% weighting to the sale scenarios, split evenly between the high and low case scenarios, and 10% weighting to the remain private scenario and calculated an estimated fair value of our common stock as of October 14, 2012 of $5.22 per share.

The following table summarizes the significant assumptions for each of the valuation scenarios used in the PWERM analysis to determine the fair value of our common stock as of October 14, 2012.

 

October 14, 2012 Contemporaneous Valuation

   IPO     Sale–High
Case
    Sale–Low
Case
    Remain
Private
 

Key Assumptions

        

Probability weighting

     40     25     25     10

Liquidity date

     2/28/13        3/31/13        3/31/13        —    

WACC

     13.8     13.8     13.8     N/A   

Volatility

     —         —         —         53

Discount for lack of marketability

     15     15     15     15

Stock Option Grants Made November 19, 2012

Our board of directors granted options on November 19, 2012, with each option having an exercise price of $5.22 per share. In establishing this exercise price, our board of directors considered input from management, including the valuation we conducted of our common stock as of October 14, 2012, and the status of our efforts to pursue an IPO and explore other strategic alternatives.

Based on these factors, our board of directors determined that the fair value of our common stock at November 19, 2012 was $5.22 per share.

Valuation of Common Stock as of December 31, 2012

In January 2013, we conducted a contemporaneous valuation of our common stock as of December 31, 2012, as we continued to pursue an IPO and explore other strategic alternatives.

For the valuation, we used the market approach to estimate the aggregate future equity value of our company under an IPO scenario, high and low case sale scenarios and a remain private scenario, as described below.

 

   

For the IPO scenario, we used the Guideline Public Company Method as described in the AICPA Practice Aid. Under this method, we identified recent IPOs for similar biotechnology companies from 2010, 2011 and 2012, which we refer to as guideline companies, that were either focused on the development of anti-infective compounds or were currently developing a Phase 3 clinical trial drug candidate. We used the average of (1) the median of the guideline companies’ IPO pre-money valuations and (2) the valuation for our company implied by applying to our Series C post-money valuation the median step-up in value for the guideline companies from the post-money valuations for their last preferred financings to their IPO pre-money valuations.

 

   

For the sale scenarios, we analyzed sale transactions of similar biotechnology companies that were focused on the development of anti-infective compounds and assumed for financial reporting purposes a sale in April 2013. We also analyzed published transaction values of companies with product candidates in similar stages of development as we estimated our lead product candidate, eravacycline, would be in April 2013.

 

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For the remain private scenario, we estimated our equity value using the Guideline Public Company Method and took into consideration twelve publicly traded companies that we considered comparable to ours.

In order to determine a valuation of our common stock based on the enterprise values determined under the IPO scenario, the two sale scenarios and the remain private scenario, we used the PWERM. Under this method, we estimated the value of our common stock based on the probability-weighted present value of expected future investment returns considering each of these possible outcomes and the rights of each class and series of our equity. Three of the scenarios assumed a stockholder exit, either through an IPO or a sale of our company. The fourth scenario assumed we remained a private company. For the IPO and sale scenarios, we calculated the estimated values of our common stock using assumptions as to pre-money or sale valuations determined with respect to those scenarios as described above, and dates of those scenarios, and an appropriate risk-adjusted discount rate. Finally, we calculated a present value for our common stock based on our estimate of the relative likelihood of occurrence of each scenario. We assigned a 60% weighting to the IPO scenario, 30% weighting to the sale scenarios, split evenly between the high and low case scenarios, and 10% weighting to the remain private scenario and calculated an estimated fair value of our common stock as of December 31, 2012 of $8.99 per share.

The following table summarizes the significant assumptions for each of the valuation scenarios used in the PWERM analysis to determine the fair value of our common stock as of December 31, 2012.

 

December 31, 2012 Contemporaneous Valuation

   IPO     Sale–High
Case
    Sale–Low
Case
    Remain
Private
 

Key Assumptions

        

Probability weighting

     60     15     15     10

Liquidity date

     3/31/13        4/30/13        4/30/13        —    

WACC

     14     14     14     N/A   

Volatility

     —         —         —         45

Discount for lack of marketability

     10     10     10     10

Based on these factors, we concluded that our common stock had a fair value of $8.99 per share at December 31, 2012.

Initial Public Offering Price

In consultation with the underwriters for this offering, we determined the price range for this offering, as set forth on the cover page of this prospectus. The midpoint of the price range is $11.00 per share. In comparison, our estimate of the fair value of our common stock was $8.99 per share as of December 31, 2012. We note that, as is typical in IPOs, the price range for this offering was not derived using a formal determination of fair value, but was determined by negotiation between us and the underwriters. Among the factors that were considered in setting this range were the following:

 

   

an analysis of the typical valuation ranges seen in initial public offerings for companies in our industry for the last two years;

 

   

the general condition of the securities markets and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies;

 

   

an assumption that there would be a receptive public trading market for pre-commercial biotechnology companies such as us; and

 

   

an assumption that there would be sufficient demand for our common stock to support an offering of the size contemplated by this prospectus.

The midpoint of the estimated price range for this offering reflects an increase of $2.01 per share over the estimated valuation as of December 31, 2012 of $8.99 per share. Investors should be aware of this difference and recognize that the price range for this offering is in excess of our prior valuations. Further, investors are

 

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cautioned not to place undue reliance on the valuation methodologies discussed above as an indicator of future stock prices. We believe the difference may be due to the following factors:

 

   

The retrospective and contemporaneous valuations prepared as of June 6, 2012 and October 14, 2012 contain multiple liquidity scenarios, including an assumed initial public offering in February 2013, two scenarios that assumed the sale of our company in March 2013 and one scenario that assumed the company remained private. The contemporaneous valuation prepared as of December 31, 2012 contains multiple liquidity scenarios, including an assumed initial public offering in March 2013, two scenarios that assumed the sale of our company in April 2013 and one scenario that assumed the company remained private.

 

   

In the public markets we believe there are investors who may apply more qualitative valuation criteria to certain of our clinical assets than the valuation methods applied in our valuations. We have been advised by the underwriters that different investors may place higher values on specific assets of ours than others.

 

   

The price that investors are willing to pay in this offering, for which the price range is intended to serve as an estimate, may take into account other things that have not been expressly considered in our prior valuations, are not objectively determinable and that valuation models are not able to quantify.

Investors should be cautioned that the mid-point of the price range set forth on the cover page of this prospectus does not necessarily represent the fair value of our common stock, but rather reflects an estimate of the offer price determined in consultation with the underwriters.

There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance, including the successful completion of our clinical trials as well as the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot make assurances as to any particular valuation for our common stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

Stock-based compensation expense related to awards granted to employees was $257,000 for the year ended December 31, 2011 and $305,000 for the year ended December 31, 2012. As of December 31, 2012, we had $753,000 of total unrecognized compensation expense, net of related forfeiture estimates, which we expect to recognize over a weighted-average remaining vesting period of approximately three years. While our stock-based compensation expense for stock options granted to employees to date has not been significant, we expect the impact to grow in future periods due to the potential increases in the value of our common stock and headcount.

During 2009, we granted options to non-employees to purchase 232,758 shares of common stock. These options vested with respect to one-third of the underlying shares on the date of grant, with the remaining shares vesting quarterly over four years from date of grant and have a life of ten years. During 2010, we granted options to non-employees to purchase 12,972 shares of common stock. These non-employee options vest quarterly through the fourth anniversary of the vesting date and have a contractual term of ten years. Stock options issued to non-employees are accounted for at fair value. We periodically revalue the options as they vest and recognize expense over the related service period. The total expense related to all non-employee options was $55,000, $307,000 and $581,000 for the years ended December 31, 2011 and 2012 and for the period from July 7, 2006 (inception) through December 31, 2012, respectively.

 

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Results of Operations

Comparison of the Years Ended December 31, 2011 and 2012

Contract and Grant Revenue

The following table summarizes our contract and grant revenue for the years ended December 31, 2011 and 2012:

 

     Years Ended
December 31,
     Increase
(Decrease)
     % Increase
(Decrease)
 
     2011      2012                
     ($ in thousands)  

Contract and grant revenue

   $ 185       $ 7,600       $ 7,415         4008

Contract and grant revenue increased by $7.4 million from the year ended December 31, 2011 to the year ended December 31, 2012. This increase was primarily due to the commencement of work under our subcontracts under the BARDA Contract and the NIAID Contract and our subaward under the NIAID Grant, which provided $4.9 million, $2.4 million and $0.3 million, respectively, of contract and grant revenue in the year ended December 31, 2012.

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2011 and 2012:

 

     Years Ended
December 31,
     Increase
(Decrease)
    % Increase
(Decrease)
 
     2011      2012               
            ($ in thousands)        

Research and development expenses

   $ 17,737       $ 17,294       $ (443     (2 )% 

Research and development expenses decreased by $0.4 million from the year ended December 31, 2011 to the year ended December 31, 2012. This decrease was primarily due to lower clinical costs of $1.2 million attributable to the completion of our Phase 2 clinical trial of eravacycline in the first half of 2012 and the completion of a Phase 1 clinical trial of another pipeline compound in the fourth quarter of 2011, a decrease in development milestone payments of $1.1 million under our license agreement with Harvard University reflecting various milestone payments made in 2011 primarily related to the initiation of the Phase 2 clinical trial for eravacycline and achievement of milestones for other preclinical compounds in development and a decrease of $0.8 million in preclinical expenses for an oral formulation of eravacycline and for other pipeline compounds. These decreases were partially offset by increases in process chemistry costs of $1.9 million, clinical costs of $0.5 million and preclinical costs of $0.2 million, in connection with our subcontracts under the NIAID Contract and the BARDA Contract and our subaward under the NIAID Grant.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2011 and 2012:

 

     Years Ended
December 31,
     Increase
(Decrease)
     % Increase
(Decrease)
 
     2011      2012                
            ($ in thousands)  

General and administrative expenses

   $ 3,874       $ 4,309       $ 435         11

General and administrative expenses increased by $0.4 million from the year ended December 31, 2011 to the year ended December 31, 2012. This increase was primarily due to additional overhead and personnel costs to support our increased activities related to the NIAID Contract, the BARDA Contract and the NIAID Grant.

 

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Interest Income

The following table summarizes our interest income for the years ended December 31, 2011 and 2012:

 

     Years Ended
December 31,
     Increase
(Decrease)
    % Increase
(Decrease)
 
     2011      2012               
            ($ in thousands)        

Interest income

   $ 1       $ —         $ (1     (100 )% 

Interest income for the years ended December 31, 2011 and December 31, 2012 was immaterial.

Interest Expense

The following table summarizes our interest expense for the years ended December 31, 2011 and 2012:

 

     Years Ended
December 31,
     Increase
(Decrease)
     % Increase
(Decrease)
 
     2011      2012                
            ($ in thousands)         

Interest expense

   $ 161       $ 1,021       $ 860         534

Interest expense increased $0.9 million from the year ended December 31, 2011 to the year ended December 31, 2012. The increase in interest expense was primarily attributable to an increase in debt under the term loan facility with Silicon Valley Bank and Oxford Finance that we entered into in May 2011, resulting primarily from borrowing $1.5 million under this term loan facility in May 2011 and an additional $6.5 million in December 2011.

Other Income (Expense)

The following table summarizes our other income (expense) for the years ended December 31, 2011 and 2012:

 

     Years Ended
December 31,
    Increase
(Decrease)
    % Increase
(Decrease)
 
     2011      2012              
            ($ in thousands)        

Other Income (expense)

   $ 22       $ (63   $ (85     (391 )% 

Other income (expense) consisted of the fair value adjustment of our preferred stock warrants issued in connection with various debt financings in October 2007, May 2011 and December 2012, which are described in Note 7 to our consolidated financial statements appearing elsewhere in this prospectus. The decrease in other income (expense) from the year ended December 31, 2011 to the year ended December 31, 2012 of $85,000 was due primarily to an increase in the fair value of the underlying preferred stock.

Liquidity and Capital Resources

We have incurred losses since our inception and anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may obtain from additional financings, research funding, collaborations, contract and grant revenue or other sources.

Since our inception, we have funded our operations principally through the receipt of funds from the placement of equity securities, debt financings and contract research funding and research grants from the United States federal government. As of December 31, 2012, we had cash and cash equivalents of approximately $9.1 million. We invest cash in excess of immediate requirements in accordance with our investment policy primarily with a view to liquidity and capital preservation. As of December 31, 2012, our funds were held in cash and money market funds.

 

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On December 20, 2012, we amended our existing term loan facility with Silicon Valley Bank and Oxford Finance to provide for up to an additional $9.2 million in funding, to be made available in two tranches. We borrowed the first tranche of $6.2 million of the $9.2 million term loan facility in December 2012. We borrowed the second tranche of $3.0 million in February 2013. Each tranche bears interest at 9% per annum.

We are only required to pay interest, and not principal, for the first six months of each tranche of the $9.2 million term loan facility. Each tranche is to be repaid in 33 equal monthly payments of principal, plus accrued interest, after the interest only period. An additional payment of 2.9% of the original principal amount of each tranche will be due at the same time as the last loan payment for the tranche. The first tranche of $6.2 million matures on March 1, 2016. In connection with the funding of the first tranche of $6.2 million, we issued to the lenders 10-year warrants to purchase an aggregate of 964,605 shares of Series C preferred stock with an exercise price of $0.2571 per share. The second tranche of $3.0 million matures on May 1, 2016. In connection with the funding of the second tranche of $3.0 million, the warrant we issued to Silicon Valley Bank automatically became exercisable for an additional 233,372 shares of Series C preferred stock. In addition, we issued to Oxford Finance a 10-year warrant to purchase an additional 233,372 shares of Series C preferred stock with an exercise price of $0.2571 per share. The $9.2 million term loan is collateralized by a blanket lien on all corporate assets, excluding our intellectual property, and by a negative pledge on our intellectual property.

The following table summarizes our sources and uses of cash:

 

     Years Ended December 31,  
     2011     2012  
     (in thousands)     (in thousands)  

Cash Flows from Continuing Operations:

    

Net cash used in operating activities

   $ (19,876   $ (16,007

Net cash used in investing activities

     (65     (54

Net cash provided by financing activities

     7,810        2,686   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (12,131   $ (13,375
  

 

 

   

 

 

 

During the years ended December 31, 2011 and 2012, our operating activities used net cash of $19.9 million and $16.0 million, respectively. The use of net cash in all periods primarily resulted from our net losses and changes in our working capital accounts. The decrease in net cash used in operations for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was due primarily to an increase in contract and grant revenue in connection with our subcontracts under the BARDA Contract and the NIAID Contract and our subaward under the NIAID Grant.

During the years ended December 31, 2011 and 2012, our investing activities used net cash of $65,000 and $54,000, respectively. The use of net cash in all periods primarily resulted from purchases of property, plant and equipment to facilitate our increased research and development activities and headcount. The decrease in net cash used in investing activities for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was due primarily to a decrease in laboratory equipment purchases in 2012.

During the years ended December 31, 2011 and 2012, our financing activities provided net cash of $7.8 million and $2.7 million, respectively. The net cash provided by financing activities during the year ended December 31, 2011 was due to $8.0 million in borrowings that we made in 2011 under our debt facility with Silicon Valley Bank and Oxford Finance. The net cash provided by financing activities during the year ended December 31, 2012 was primarily related to $6.2 million in borrowings that we made under our debt facility with Silicon Valley Bank and Oxford Finance, which amount was offset by $2.2 million in debt service and $1.3 million in deferred financing fees related to IPO costs.

 

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Operating Capital Requirements

We expect to incur increasing operating losses for at least the next several years as we commence our Phase 3 clinical trials of eravacycline for the treatment of patients with cIAI and cUTI, pursue development of an oral formulation of eravacycline, seek marketing approval for eravacycline, pursue development of eravacycline for additional indications, including ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections, advance our other product candidates and satisfy our obligations under our license agreement with Harvard University. We may not be able to complete the development and initiate commercialization of eravacycline or our other product candidates if, among other things, our preclinical research and clinical trials are not successful, the Food and Drug Administration or the European Medicines Agency does not approve eravacycline or our other product candidates when we expect, or at all, or funding under the NIAID Contract, the NIAID Grant or the BARDA Contract is discontinued.

We believe that the net proceeds of this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operations through the first quarter of 2015. Based on our planned use of the net proceeds of this offering and our existing cash resources, we believe that our available funds following this offering will be sufficient to enable us to obtain top-line data from both of our planned Phase 3 clinical trials of eravacycline. We expect that these funds will not be sufficient to enable us to seek marketing approval for eravacycline or to commercially launch eravacycline.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

 

   

the timing and costs of our planned Phase 3 clinical trials of eravacycline;

 

   

the progress, timing and costs of developing an oral formulation of eravacycline for intravenous-to-oral step-down therapy, including planned clinical trials;

 

   

the timing and costs of developing eravacycline for additional indications, including ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections;

 

   

the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our other product candidates and potential product candidates;

 

   

the amount of funding that we receive under our subcontracts under the BARDA Contract and the NIAID Contract and under our subaward under the NIAID Grant, and the activities funded under the BARDA Contract, the NIAID Contract and the NIAID Grant;

 

   

the number and characteristics of product candidates that we pursue;

 

   

the outcome, timing and costs of seeking regulatory approvals;

 

   

the costs of commercialization activities for eravacycline and other product candidates if we receive marketing approval, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

   

subject to receipt of marketing approval, revenue received from commercial sales of eravacycline;

 

   

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

 

   

the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay to Harvard pursuant to our license agreement;

 

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

 

   

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

We expect that we will need to obtain substantial additional funding in order to commercialize eravacycline. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of eravacycline or other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to eravacycline or other product candidates that we otherwise would seek to develop or commercialize ourselves.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Net Operating Loss Carryforwards

As of December 31, 2012, we had federal net operating loss carryforwards of $81.0 million available to offset future federal income taxes. We also had federal research and development tax credit carryforwards of $1.6 million available to offset future federal income taxes. The federal net operating loss carryforwards and research and development tax credit carryforwards expire at various times through 2031. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the United States Internal Revenue Code of 1986, as amended, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. On December 31, 2012, we recorded a 100% valuation allowance against our net operating loss and research and development tax credit carryforwards, as we believe it is more likely than not that the tax benefits will not be fully realized. In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period of determination.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of payment due date by period at December 31, 2012:

 

     Payment by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in thousands)  

Term loan (1)

   $ 14,055       $ 4,849       $ 9,206       $       $   

Operating leases (2)

     888         623         265                   

Harvard milestone payment (3)

     2,000                 2,000                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,943       $ 5,472       $ 11,471       $       $   

 

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(1) Consists of repayment obligations relating to principal and interest outstanding under our debt facility with Silicon Valley Bank and Oxford Finance as of December 31, 2012. Of the $12.0 million of principal outstanding as of December 31, 2012, $5.8 million of the outstanding principal, which we originally borrowed under the debt facility in 2011, bears interest at 10% per annum with an additional payment of 2.75% of the original principal due at the maturity date of November 1, 2014. Under the terms of the loan and security agreement governing the debt facility, we were required to pay interest only on the 2011 borrowing through February 28, 2012. We are now repaying this indebtedness in equal monthly payments of $0.3 million through November 1, 2014. The additional payment of 2.75% will be due at the same time as the last loan payment. The remaining $6.2 million of outstanding principal, which we borrowed under the debt facility in December 2012, bears interest at 9% per annum with an additional payment of 2.9% of the original principal due at the maturity date of March 1, 2016. We are required to pay interest only on this principal through June 1, 2013. Following June 1, 2013, we will be required to repay this principal amount in 33 equal monthly payments of principal, plus accrued interest, through March 1, 2016. The additional payment of 2.9% will be due at the same time as the last loan payment. The loans under the debt facility are collateralized by a blanket lien on all of our corporate assets, excluding intellectual property, and by a negative pledge on our intellectual property. The loan and security agreement contains customary default provisions that include material adverse events, as defined therein, that would entitle the lenders to declare all principal, interest and other amounts owed by us under the loan and security agreement immediately due and payable. On February 28, 2013, we borrowed an additional $3.0 million under the debt facility, which amount bears interest at 9% per annum with an additional payment of 2.9% of the original $3.0 million of principal due at the maturity date of May 1, 2016.
(2) On March 15, 2012 and September 18, 2012, we amended our existing operating lease which extended our lease term through May 31, 2014.
(3) Consists of a milestone payment of $2.0 million that we are required to pay to Harvard upon dosing of the first patient in our first Phase 3 clinical trial of eravacycline, which we expect will occur before the end of 2013.

In addition to the amounts shown in the above table, we are contractually obligated under our license agreement with Harvard University to make payments to Harvard upon the achievement of specified future development and regulatory milestones totaling up to $15.1 million per licensed product ($1.1 million of which has already been paid with respect to eravacycline), and to pay tiered royalties in the single digits based on annual worldwide net sales, if any, of licensed products by us, our affiliates and sublicensees. We are also obligated to pay Harvard a specified share of non-royalty sublicensing revenue that we receive from sublicensees for the grant of sublicenses under the license and to reimburse Harvard for specified patent prosecution and maintenance costs. Each of these potential payments is contingent upon the occurrence of certain future events and, given the nature of those events, it is unclear when, if ever, we may be required to pay such amounts or what the total amount of such payments will be. For these reasons, we have not included these contingent payment obligations in the table above.

We have employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control or termination without cause, occur.

In the course of normal business operations, we also have agreements with contract service providers to assist in the performance of our research and development and manufacturing activities. We can elect to discontinue the work under these agreements at any time. We could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require up front payments and even long-term commitments of cash.

Recent Accounting Pronouncements

Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board, or FASB, or other standard-setting bodies that we adopt by the effective date specified within the standard. Unless otherwise discussed, standards that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

 

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Qualitative and Quantitative Disclosures About Market Risk

Our cash equivalents are classified as available-for-sale and consisted of money market funds at December 31, 2011 and December 31, 2012. The investments in these financial instruments are made in accordance with an investment policy approved by our board of directors which specifies the categories, allocations and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments that we invest in could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will probably decline. To minimize this risk, we intend to maintain a portfolio which may include cash, cash equivalents and investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Based on our current investment portfolio, we do not believe that our results of operations or our financial condition would be materially impacted by an immediate change of 10% in interest rates.

We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash equivalents and investment securities have significant risk of default or illiquidity. We made this determination based on discussions with our investment advisors and a review of our holdings. While we believe our cash equivalents and investment securities 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. All of our investments are recorded at fair value.

 

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BUSINESS

Overview

We are a clinical stage biopharmaceutical company using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multi-drug resistant infections. Our lead product candidate, eravacycline, is a fully synthetic tetracycline derivative that we are developing as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections, including multi-drug resistant Gram-negative infections. We recently completed a successful Phase 2 clinical trial of eravacycline with intravenous administration for the treatment of patients with complicated intra-abdominal infections, or cIAI, and are currently finalizing our pivotal Phase 3 program for eravacycline. We expect to conduct two global Phase 3 clinical trials of eravacycline, one for the treatment of cIAI and one for the treatment of complicated urinary tract infections, or cUTI. We expect to have top-line data from both of these clinical trials in the first quarter of 2015.

In our Phase 2 clinical trial, intravenous eravacycline dosed once or twice per day as a monotherapy demonstrated a favorable safety and tolerability profile and a high cure rate, including against multi-drug resistant Gram-negative, Gram-positive and anaerobic bacteria. In in vitro experiments, eravacycline has demonstrated the ability to cover a wide variety of multi-drug resistant Gram-negative, Gram-positive, anaerobic and atypical bacteria, including multi-drug resistant Klebsiella pneumoniae, the species of Gram-negative bacteria that killed seven patients at the Clinical Center of the National Institutes of Health in 2012. Gram-negative bacteria that are resistant to all available antibiotics are increasingly common and a growing threat to public health. We believe that the ability of eravacycline to cover multi-drug resistant Gram-negative bacteria, as well as multi-drug resistant Gram-positive, anaerobic and atypical bacteria, and its potential for intravenous to oral step-down therapy, will enable eravacycline to become the drug of choice for first-line empiric treatment of a wide variety of serious and life-threatening infections.

The tetracycline class of antibiotics has been used successfully for more than 50 years. Unlike our tetracycline compounds, all tetracyclines on the market and under development of which we are aware are produced semi-synthetically, first in bacteria and then modified in a limited number of ways by available chemistry. These conventional methods have only been able to produce tetracycline antibiotics with limited chemical diversity, making it difficult for conventional technology to create tetracycline antibiotics that address a wide variety of multi-drug resistant bacteria. In part, because of the challenges in creating novel tetracycline molecules, only one tetracycline antibiotic has been developed and approved by the Food and Drug Administration, or FDA, for sale in the United States in the past 30 years.

We believe that our proprietary chemistry technology, licensed from Harvard on an exclusive worldwide basis and enhanced by us, represents a significant innovation in the creation of tetracycline drugs that has the potential to reinvigorate the clinical and market potential of the class. Our proprietary chemistry technology makes it possible to create novel tetracycline antibiotics using a practical, fully synthetic process for what we believe is the first time. This fully synthetic process avoids the limitations of bacterially derived tetracyclines and allows us to chemically modify many positions in the tetracycline scaffold, including most of the positions that we believe could not practically be modified by any previous method. Using our proprietary chemistry technology, we can create a wider variety of tetracycline-based compounds than was previously possible, enabling us to pursue novel tetracycline derivatives for the treatment of multi-drug resistant bacteria that are resistant to existing tetracyclines and other classes of antibiotic products. To date, we have used our proprietary chemistry technology to create more than 2,800 new tetracycline derivatives that we believe could not be practically created with conventional methods. We own exclusive worldwide rights to these compounds and our technology.

We are currently finalizing our pivotal Phase 3 program for eravacycline. We are designing the program to enable us to position eravacycline as a first-line empiric monotherapy for the treatment of cIAI and cUTI due to

 

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eravacycline’s broad-spectrum coverage of multi-drug resistant infections, including multi-drug resistant Gram-negative infections. We expect that our pivotal Phase 3 program will be consistent with the draft guidance recently issued by the FDA for drug development for cIAI and cUTI. The cIAI guidance indicates that, for companies developing a drug for cIAI and an additional indication caused by similar bacterial pathogens, such as cUTI, a single trial in cIAI and a single trial in that additional indication could be sufficient to provide evidence of effectiveness in both indications. In January 2013, we discussed our pivotal Phase 3 program with the FDA at an end-of-Phase 2 meeting. Following these discussions, we are now moving ahead with our plans to conduct two global Phase 3 clinical trials of the intravenous formulation of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013.

In addition to developing an intravenous formulation of eravacycline, we are also developing an oral formulation. A number of previous tetracyclines have been available in both intravenous and oral dosage forms. Infections that are resistant to existing oral drugs are increasingly common, and we believe that an intravenous-to-oral step-down therapy in which patients are started on the intravenous formulation of eravacycline and then stepped down to an oral formulation of eravacycline could reduce the length of a patient’s hospital stay or help avoid hospital admission altogether, lowering the overall cost of care for these patients. We have completed multiple Phase 1 clinical trials of oral formulations of eravacycline. Based on these trials, as well as data from our Phase 2 clinical trial of the intravenous formulation of eravacycline, we believe that eravacycline can be well enough absorbed as an oral medication to achieve the drug levels necessary to be effective in treating patients. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. We expect to complete this program by mid-2013. If the data from this program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI.

In 2011 and 2012, the U.S. government awarded contracts for potential funding of over $100 million for the development of our antibiotic compounds. These awards include a contract for up to $67 million from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services, for the development of eravacycline for the treatment of disease caused by bacterial biothreat pathogens, which we refer to as the BARDA Contract. These awards also include a contract for up to $36 million from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, for the development of TP-271, a preclinical compound that we are developing for respiratory diseases caused by bacterial biothreat pathogens, which we refer to as the NIAID Contract. These awards were made to CUBRC, Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts, with which we are collaborating. CUBRC serves as the prime contractor under these awards, primarily carrying out a program management and administrative role with additional responsibility for the management of preclinical studies. We serve as lead technical expert on all aspects of these awards and also serve as a subcontractor of CUBRC responsible for management of chemistry, manufacturing and control activities and clinical studies. Under our subcontracts with CUBRC, we may receive funding of up to approximately $39.8 million reflecting the portion of the BARDA Contract funding that may be paid to us for our activities, and up to approximately $13.3 million reflecting the portion of the NIAID Contract funding that may be paid to us for our activities. The funding under the BARDA Contract includes funding for some of the activities that we would otherwise be required to fund on our own in connection with any new drug application, or NDA, filing for eravacycline.

In addition to eravacycline and TP-271, we are pursuing the discovery and development of additional antibiotics to target unmet medical needs. For example, antibiotics that treat Pseudomonas bacteria have become increasingly rare as resistance has increased. We are seeking to develop compounds that might for the first time provide coverage with tetracycline-derived antibiotics of Pseudomonas bacteria, as well as other multi-drug resistant Gram-negative bacteria. Any efforts by us with respect to these programs will be subject to the availability of resources not allocated to our development of eravacycline.

 

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Strategy

Our goal is to become a fully integrated biopharmaceutical company that discovers, develops and commercializes novel antibiotics for use in areas of unmet medical need. Key elements of our strategy include:

 

   

Complete clinical development of eravacycline in its lead indications and seek regulatory approval. We have completed a Phase 2 clinical trial of the intravenous formulation of eravacycline in patients with cIAI. We plan to conduct two global Phase 3 clinical trials of the intravenous formulation of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect to have top-line data from both of these clinical trials in the first quarter of 2015. If we complete the Phase 3 clinical trials of eravacycline when we anticipate and the trials are successful, we expect to submit an NDA to the FDA in the second half of 2015 and a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, in the first half of 2016.

 

   

Develop an oral formulation of eravacycline for use in intravenous-to-oral step-down therapy for cUTI. We have completed multiple Phase 1 clinical trials of oral formulations of eravacycline. Based on these trials, as well as data from our Phase 2 clinical trial of the intravenous formulation of eravacycline, we believe that eravacycline can be well enough absorbed as an oral medication to achieve the drug levels necessary to be effective in treating patients. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in first quarter of 2013. We expect to complete this program by mid-2013. If the data from this program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI.

 

   

Establish a collaboration for the development and commercialization of eravacycline outside the United States. We intend to seek to enter into a collaboration for the development and commercialization of eravacycline outside the United States.

 

   

Maximize the commercial potential of eravacycline. If eravacycline is approved, we intend to directly commercialize eravacycline in the United States with a targeted hospital sales force and to commercialize eravacycline outside the United States through collaboration arrangements. We believe that eravacycline’s broad-spectrum coverage of multi-drug resistant Gram-negative bacteria and other multi-drug resistant bacteria, with the potential for intravenous-to-oral step-down, will allow it to be used to treat patients successfully in hospitals, emergency rooms and out-patient clinic settings.

 

   

Pursue development of eravacycline in additional indications. We are initially developing eravacycline for the treatment of cIAI and cUTI, and, subject to obtaining additional financing beyond this offering, intend to pursue development of eravacycline for the treatment of additional indications, including acute bacterial skin and skin structure infections, or ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections following our development of eravacycline for the treatment of cIAI and cUTI. We may pursue these development activities either by ourselves or with collaborators.

 

   

Opportunistically advance development of other product candidates created using our proprietary chemistry technology. We have used our proprietary chemistry technology to create more than 2,800 new tetracycline derivatives that we believe could not be practically created with conventional methods. We intend to advance our antibiotic product pipeline with differentiated product candidates created using our proprietary chemistry technology and targeting hospital and acute care markets. We may pursue these activities either by ourselves or with collaborators.

Drug Resistant Antibiotic Market

Physicians commonly prescribe antibiotics to treat patients with acute and chronic infectious diseases that are either known, or presumed, to be caused by bacteria. According to IMS Health, in 2011, approximately $41 billion was spent on antibiotic drugs worldwide, of which almost $9 billion was spent in the United States. The widespread use of antibiotics has resulted in a rapid increase in bacterial infections that are resistant to

 

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multiple antibacterial agents. For example, the bacterial pathogen Klebsiella pneumoniae is responsible for roughly 14% of Gram-negative infections in hospital intensive care units. Multi-drug resistant Klebsiella pneumoniae are typically treated with the carbapenem class of antibiotics. However, in recent years, strains resistant to carbapenem antibiotics have emerged and markedly increased the threat posed by Klebsiella pneumoniae, as infections caused by carbapenem-resistant strains have few treatment options.

As a result of the increasing prevalence of such multi-drug resistant bacteria, some antibiotics targeting these bacteria have been highly successful commercially. These include:

 

   

linezolid, an intravenously and orally administered antibiotic marketed by Pfizer as Zyvox, which had worldwide sales in 2011 of $1.3 billion;

 

   

levofloxacin, an intravenously and orally administered antibiotic marketed by Ortho-McNeil and Johnson & Johnson as Levaquin, which had worldwide sales in 2011 of $623 million down from worldwide sales of $1.4 billion in 2010 after losing U.S. market exclusivity in June 2011;

 

   

meropenem, an intravenously administered antibiotic marketed by AstraZeneca as Merrem, which had worldwide sales in 2011 of $583 million down from worldwide sales of $817 million in 2010 after losing U.S. market exclusivity in June 2010; and

 

   

daptomycin, an intravenously administered antibiotic marketed by Cubist Pharmaceuticals, Inc. as Cubicin, which had worldwide sales in 2011 of $736 million.

Bacterial infections are caused by a variety of different types of bacteria and the infections they cause can range from mild to serious, life threatening infections requiring immediate treatment. Bacteria are broadly categorized as Gram-positive, Gram-negative, atypical or anaerobic. Gram-positive bacteria possess a single membrane and a thick cell wall and turn dark-blue or violet when subjected to a laboratory staining method known as Gram’s method. Common causes of Gram-positive bacterial infections include species of Staphylococcus, such as methicillin-resistant Staph aureus, or MRSA, Streptococcus and Enterococcus. Gram-negative bacteria have two membranes with a thin cell wall and, when subjected to Gram’s method of staining, lose the stain or are decolorized. According to The New England Journal of Medicine, the most common cause of Gram-negative infection is Escherichia coli, or E. coli. Less prevalent Gram-negative bacteria strains include species of Acinetobacter, Klebsiella and Pseudomonas. Atypical bacteria, such as Mycoplasma species, have modified cell walls and are neither Gram-positive nor Gram-negative. Anaerobic bacteria, such as Bacteroides species, either cannot grow in the presence of oxygen or do not require oxygen to grow and are classified as either Gram-positive or Gram-negative.

Antibiotics that treat bacterial infections can be classified as broad-spectrum or narrow-spectrum. Antibiotics that are active against a mixture of Gram-positive, Gram-negative and anaerobic bacteria are referred to as broad-spectrum. Antibiotics that are active only against a select subset of bacteria are referred to as narrow-spectrum. Because it usually takes from 24 to 72 hours from the time a specimen is received in the laboratory to definitively diagnose a particular bacterial infection, physicians may be required to prescribe antibiotics for serious infections without having identified the bacteria. As such, effective first-line treatment of serious infections requires the use of broad-spectrum antibiotics with activity against a broad range of bacteria at least until the bacterial infection can be diagnosed.

Many strains of bacteria have mutated over time and have developed resistance to existing drugs, resulting in infections that are increasingly serious or more difficult to treat. These drug-resistant pathogens have become a growing menace to all people, regardless of age, gender or socioeconomic background. They endanger people in affluent, industrial societies like the United States, as well as in less-developed nations. Gram-positive bacteria that have developed resistance to existing drugs include:

 

   

Streptococcus pneumoniae that cause pneumonia, ear infections, bloodstream infections and meningitis;

 

   

Staphylococcus aureus that cause skin, bone, lung and bloodstream infections; and

 

   

Enterococci that are responsible for infections transmitted in healthcare settings.

 

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Gram-negative bacteria that have developed resistance to existing drugs include:

 

   

Escherichia coli that cause urinary tract, skin and bloodstream infections;

 

   

Salmonella and Escherichia coli that cause foodborne infections; and

 

   

Acinetobacter baumannii, Pseudomonas aeruginosa and Klebsiella spp. that are responsible for infections transmitted in healthcare settings.

Broad spectrum antibiotics are used to treat major hospital infections such as cIAI, cUTI, ABSSI and acute bacterial pneumonias. Based on an analysis of data from a variety of industry sources, we estimate that the number of patients treated with antibiotics in hospitals in the United States in a year include approximately 1.7 million cIAI patients, 4.0 million cUTI patients and 8.0 million ABSSI and acute bacterial pneumonia patients. Of these patients, we believe that approximately 45% of cIAI patients, 25% of cUTI patients and 15% of ABSSI and acute bacterial pneumonia patients have infections caused at least in part by multi-drug resistant Gram-negative bacteria.

Reducing MRSA, a Gram-positive bacterium, in both the healthcare and community settings continues to be a high priority for the Centers for Disease Control and Prevention, or CDC. However, encouraging results from a CDC study published in the Journal of the American Medical Association and other reports such as the March 2011 CDC Vital Signs article provide evidence that rates of invasive MRSA infections in the United States are being controlled by Gram-positive drugs and falling.

As such, at present, the more acute need is for new drugs to treat multi-drug resistant Gram-negative bacteria. Currently approved products, such as Merrem and Levaquin are becoming increasingly ineffective against Gram-negative bacteria due to increasing resistance, limiting patients’ treatment options, particularly for patients with multi-drug resistant infections, and few new therapeutic agents are in clinical development. A survey of infectious disease specialists published in the June 2012 edition of Clinical Infectious Disease rated multi-drug resistant Gram-negative infections as the most important unmet clinical need in current practice, significantly outranking infections caused by MRSA and multi-drug resistant Mycobacterium tuberculosis. In the survey, 63% of physicians reported treating a patient in the past year whose bacterial infection was resistant to all available antibacterial agents. This resistance was confirmed by the SENTRY Antimicrobial Surveillance Program which evaluated Enterobacteriaceae and Acinetobacter spp., two Gram-negative species of bacteria, from 31 U.S. medical centers from 2005 to 2009. Specifically, the SENTRY Program found that, with respect to the Enterobacteriaceae family of bacteria, 6.8% of the Escherichia coli strains studied and 15.4% of the Klebsiella spp. strains studied exhibited an extended-spectrum beta lactamase, or ESBL, phenotype, and that 22.2% of Enterobacter spp. strains studies were ceftazidime-resistant. ESBLs are enzymes present in certain multi-drug resistant bacteria that destroy classes of beta lactam antibiotics, such as penicillins, cephalosporins and carbapenems. In addition, Klebsiella pneumoniae carbapenemase, or KPC, producing bacteria have emerged as a highly drug resistant Gram-negative bacteria associated with mortality rates ranging from 32% to 48%, as compared to 9% to 17% for strains of Klebsiella pneumoniae that are not carbapenem-resistant.

As a further example of the seriousness of the threat of Gram-negative bacteria resistant to all available antibacterial agents, in 2012, the national media including The New York Times, The Wall Street Journal and The Washington Post reported that the Clinical Center of the National Institutes of Health had an outbreak of Gram-negative Klebsiella pneumoniae bacteria strains that were resistant to all available antibiotics that resulted in seven deaths. In addition, there have been numerous reports recently that physicians have resorted to prescribing colistin for Gram-negative bacteria resistant to all other drugs. Colistin was discovered in 1949 and has not been widely used for decades because of serious toxicities, including nephrotoxicity. In our Phase 2 intravenous clinical trial, eravacycline dosed once or twice per day as a monotherapy was effective against multi-drug resistant Klebsiella pneumoniae.

The growing issue of antibiotic-resistant bacterial infections has been widely recognized as an increasingly urgent public health threat, including by the World Health Organization, the CDC, and the Infectious Disease Society of America, or IDSA. In April 2011, IDSA issued a report warning that unless significant measures are taken to increase the pipeline of new antibiotics active against drug-resistant bacteria, people will start to die from common, formerly treatable infections, and medical interventions such as surgery, chemotherapy, organ transplantation and care of premature infants will become increasingly risky. In the pre-antibiotic era before

 

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penicillin began to be available in 1942, patients frequently died from what subsequently became easily cured infections. The important need for new treatment options for serious bacterial infections was further highlighted by the passage in July 2012 of the Generating Antibiotic Incentives Now Act, which provides incentives for the development of new antibacterial or antifungal drugs intended to treat serious or life-threatening infections that are resistant to existing treatment. In September 2012, the FDA announced the formation of an internal task force to support the development of new antibacterial drugs, which they called “a critical public healthcare goal and a priority for the agency.”

Limitations of Available Treatment Options

When confronted with a new patient suffering from a serious infection caused by an unknown pathogen, a physician may be required to quickly initiate first-line empiric antibiotic treatment to stabilize the patient prior to definitively diagnosing the particular bacterial infection. However, current antibiotics for first-line empiric treatment of serious bacterial infections suffer from significant limitations, including one or more of the following:

Insufficient Coverage of Multi-Drug Resistant Bacteria. A physician cannot afford to be too limited in the spectrum of bacteria covered by antibiotics when initially treating a patient for a serious infection that has not yet been definitively identified. Frequently used products, such as Zyvox and Cubicin, are limited to Gram-positive bacteria and thus are rarely used as a first-line empiric monotherapy if broad bacterial coverage is required. In addition, other popular antibiotics that have been used as first-line empiric monotherapies, such as Levaquin, piperacillin/tazobactam, which is marketed by Pfizer as Zosyn, carbapenems, such as Merrem, and imipenem/cilastatin, which is marketed by Merck as Primaxin, have seen their utility as first-line empiric monotherapies diminished as the number of bacterial strains resistant to these therapies has increased.

Complicated and Expensive Multi-Drug Cocktails and Multi-Dose Regimens. Due to gaps in the spectrum of coverage of antibiotics, physicians are often confronted with the need to design complicated multi-drug cocktails for the first-line empiric treatment of patients with serious infections. The clinical situation is further complicated when each drug in the multi-drug cocktail has a different dosing regimen, such as two, three or four times a day, resulting in an added burden on the pharmacy and nursing staff, higher costs due to multiple drug administrations and an increased potential for medical errors or drug-drug interactions. We believe that, with the exception of eravacycline, most of the antibiotics that are in clinical trials and are being developed to cover a broad spectrum of bacteria, including Gram-negative bacteria, or solely to address Gram-negative bacteria, are being developed to be used in combination with one or more other antibiotics, and require the addition of a third drug such as metronidazole to address the presence of anaerobes.

Safety and Tolerability Concerns. Concerns about antibiotic safety and tolerability are among the leading reasons why patients stop treatment and fail therapy. Antibiotics on the market have been associated with adverse effects such as myelosuppression, seizures, nephrotoxicity and gastrointestinal disorders.

Lack of Oral Dosage Forms to Permit Step-Down Therapy. When a patient comes to the emergency room or hospital for treatment of a serious infection, the patient initially receives intravenous treatment, which allows the drug to be delivered more rapidly and in a larger dose than oral treatment. Once the infection begins to respond to treatment and the patient is stabilized, depending on the infection, hospitals and physicians generally seek to manage in-hospital treatment and, if possible, discharge patients from the hospital in order to reduce costs, avoid hospital acquired infections, and improve the patients’ quality of life. Upon discharge, physicians typically prefer to prescribe step-down treatment with an oral formulation of the same antibiotic. A step-down to oral treatment allows for more convenient and cost-effective out-patient treatment, with the oral antibiotic providing enhanced patient comfort and mobility and avoiding the risk of infection from the intravenous catheter. In addition, the use of the same antibiotic allows the physician to avoid switching the patient from the antibiotic that has proven effective during intravenous administration to a different antibiotic that may be less effective and carries the risk of new or different side effects. Many of the antibiotics that are most commonly used as first-line empiric monotherapies are only available in an intravenous formulation. Very few of the antibiotics that cover or are focused on the treatment of Gram-negative bacteria have oral dosage forms.

 

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Given these limitations, there is an unmet medical need for a first-line empiric antibiotic treatment that has the following characteristics:

 

   

Potency and effectiveness against a broad spectrum of bacteria, including multi-drug resistant Gram-negative, Gram-positive, atypical and anaerobic bacteria;

 

   

Capability of being used as a monotherapy in the majority of patients in the hospital with cIAI, cUTI and other multi-drug resistant infections;

 

   

A convenient dosing regimen, such as once or twice daily;

 

   

A favorable safety and tolerability profile; and

 

   

Availability in both intravenous dosage and oral dosage form.

Based on our belief that eravacycline has, or potentially has, each of these characteristics, our goal is to develop eravacycline to be the drug of choice for first-line empiric treatment of a wide variety of serious and life-threatening infections.

Eravacycline

Overview

We are developing our lead product candidate, eravacycline, as a broad-spectrum intravenous and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multi-drug resistant infections, including multi-drug resistant Gram-negative bacteria. We developed eravacycline using our proprietary chemistry technology. We believe our fully synthetic process will enable us to have a cost of manufacturing that is sufficiently low to enable us to sell eravacycline, when and if approved, for a cost that is similar to other hospital-based antibiotics. Our patent strategy to broadly protect eravacycline includes the filing of patent applications directed towards the composition of matter of eravacycline as well as our proprietary chemistry technology, which we used to create eravacycline. We own exclusive worldwide rights for the development and commercialization of eravacycline.

We recently completed a successful Phase 2 clinical trial of eravacycline with intravenous administration for the treatment of patients with cIAI. In January 2013, we discussed our pivotal Phase 3 program for eravacycline with the FDA at an end-of-Phase 2 meeting. Following these discussions, we are now moving ahead with our plans to conduct two global Phase 3 clinical trials of the intravenous formulation of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect to have top-line data from both of these clinical trials in the first quarter of 2015. If we complete the Phase 3 clinical trials of eravacycline when we anticipate and the trials are successful, we expect to submit an NDA to the FDA in the second half of 2015 and an MAA to the EMA in the first half of 2016. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. We expect to complete this program by mid-2013. If the data from this program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI.

Tetracycline antibiotics have been in clinical use for over 50 years and have a demonstrated record of safety and effectiveness. However, as with most classes of antibiotics, a high incidence of resistance among many bacteria has limited their effectiveness and resulted in tetracyclines being relegated to second- or third-line therapy several decades after their introduction. Chemists have generally been unable to synthesize new tetracyclines that could overcome bacterial resistance mechanisms. We have used our proprietary chemistry technology to create more than 2,800 new tetracycline derivatives that we believe could not be practically created

 

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with conventional methods. Many of these new derivatives, including eravacycline, have been able to overcome bacterial resistance in in vitro studies.

Eravacycline is a novel, fully synthetic tetracycline antibiotic. We selected eravacycline for development from tetracycline derivatives that we generated using our proprietary chemistry technology on the basis of the following characteristics of the compound that we observed in in vitro studies of the compound:

 

   

potent antibacterial activity against a broad spectrum of susceptible and multi-drug resistant bacteria, including Gram-negative, Gram-positive, atypical and anaerobic bacteria;

 

   

potential to treat the majority of patients as a first-line empiric monotherapy with convenient dosing; and

 

   

potential for intravenous-to-oral step-down therapy.

In designing eravacycline, we inserted a fluorine atom into the tetracycline scaffold, which we call a fluorocycline, and modified the scaffold at another position. We believe that these modifications will enable eravacycline to not be subject to tetracycline-specific mechanisms of drug resistance. As a result, we believe that eravacycline can be active against multi-drug resistant bacteria against which tetracyclines currently on the market or in development are not.

In in vitro studies, eravacycline has been highly active against emerging multi-drug resistant pathogens like Acinetobacter baumannii as well as clinically important species of Enterobacteriaceae, including those isolates that produce ESBLs or are resistant to the carbapenem class of antibiotics, and anaerobes.

Based on in vitro studies we have completed, we believe that eravacycline shares a similar potency profile with carbapenems except that it more broadly covers Gram-positive pathogens like MRSA and enterococci, is active against carbapenem-resistant Gram-negative bacteria and unlike carbapenems like Primaxin and Merrem is not active against Pseudomanas aeruginosa. Eravacycline has demonstrated strong activity in vitro against Gram-positive pathogens, including both nosocomial and community-acquired methicillin susceptible or resistant Staphylococcus aureus strains, vancomycin susceptible or resistant Enterococcus faecium and Enterococcus faecalis, and penicillin susceptible or resistant strains of Streptococcus pneumoniae. In in vitro studies for cIAI, eravacycline consistently exhibited strong activity against enterococci and streptococci. One of the most frequently isolated anaerobic pathogens in cIAI, either as the sole pathogen or often in conjunction with another Gram-negative bacterium, is Bacteroides fragilis. In these studies eravacycline demonstrated activity against Bacteroides fragilis and a wide range of Gram-positive and Gram-negative anaerobes.

Key Differentiating Attributes of Eravacycline

We believe that the following key attributes of eravacycline, observed in clinical trials and preclinical studies of eravacycline, differentiate eravacycline from other antibiotics targeting multi-drug resistant infections, including multi-drug resistant Gram-negative infections. We believe these attributes will make eravacycline a safe and effective treatment for cIAI, cUTI and other serious and life-threatening infections for which we may develop eravacycline, such as ABSSSI and acute bacterial pneumonias.

 

   

Broad-spectrum activity against a wide variety of multi-drug resistant Gram-negative, Gram-positive and anaerobic bacteria. In our recently completed Phase 2 clinical trial of the intravenous formulation of eravacycline, eravacycline demonstrated a high cure rate against a wide variety of multi-drug resistant Gram-negative, Gram-positive and anaerobic bacteria. In addition, in in vitro studies eravacycline demonstrated potent antibacterial activity against Gram-negative bacteria, including E. coli; ESBL-producing Klebsiella pneumoniae; Acinetobacter baumannii; Gram-positive bacteria, including MSRA and vancomycin-resistant enterococcus, or VRE; and anaerobic pathogens. As a result of this broad-spectrum coverage, we believe that eravacycline has the potential to be used as a first-line empiric monotherapy for the treatment of cIAI, cUTI, ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections.

 

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Lower probability of drug resistance. To date, in the clinical trials and preclinical studies of eravacycline that we have conducted we have seen little decrease in susceptibility that would suggest increased resistance to eravacycline. We believe that, as a fluorocycline, eravacycline will not be subject to tetracycline-specific mechanisms of drug resistance.

 

   

Favorable safety and tolerability profile. Eravacycline has been evaluated in more than 250 subjects in the Phase 1 and Phase 2 clinical trials that we have conducted. In these trials, eravacycline demonstrated a favorable safety and tolerability profile. In our recent Phase 2 clinical trial of eravacycline, no patients suffered any serious adverse events, and safety and tolerability were comparable to ertapenem, the control therapy in the trial. In addition, in the Phase 2 clinical trial, the rate at which gastrointestinal adverse events such as nausea and vomiting that occurred in the eravacycline arms was comparable to the rate of such events in the ertapenem arm of the trial.

 

   

Convenient dosing regimen. In our recently completed Phase 2 clinical trial we dosed eravacycline once or twice a day as a monotherapy. We believe that eravacycline will be able to be administered as a first-line empiric monotherapy with once- or twice-daily dosing, avoiding the need for complicated dosing regimens typical of multi-drug cocktails and the increased risk of negative drug-drug interactions inherent to multi-drug cocktails.

 

   

Potential for convenient intravenous-to-oral step-down. In addition to the intravenous formulation of eravacycline, we are also developing an oral formulation of eravacycline. If successful, this oral formulation would enable patients who begin intravenous treatment with eravacycline in the hospital setting to transition to oral dosing of eravacycline either in hospital or upon patient discharge for convenient home-based care. We believe that the availability of both intravenous and oral administration and the oral step-down may reduce the length of a patient’s hospital stay and the overall cost of care.

Clinical Experience

We have studied intravenous and oral formulations of eravacycline in 244 subjects in five clinical trials from October 2009 to August 2012.

Phase 1 clinical trials of intravenous formulation

From 2009 to 2010, we studied the intravenous formulation of eravacycline in a Phase 1 single ascending dose, or SAD, clinical trial and a Phase 1 multiple ascending dose, or MAD, clinical trial. These trials were designed to evaluate the safety and tolerability of single escalating doses and multiple escalating doses of eravacycline. No serious adverse events were reported during the Phase 1 clinical trials and no clinically significant dose-related safety signals were reported. As expected in this class of antibiotics, transient gastrointestinal adverse events such as nausea and vomiting were observed at the higher dose levels in the Phase 1 clinical trials.

In 2009, we conducted the Phase 1 single ascending dose clinical trial of the intravenous formulation of eravacycline in 56 healthy subjects at a single clinical site in the United States. In the trial, subjects received a single 30-minute intravenous infusion of either placebo or eravacycline at doses of 0.10, 0.25, 0.50, 1.00, 1.50, 2.00 or 3.00 mg/kg. In each dose group of eight patients, six patients received eravacycline and two patients received placebo. The most common adverse events reported were nausea and vomiting. All adverse events were mild to moderate in intensity.

In 2010, we conducted the Phase 1 multiple ascending dose clinical trial of the intravenous formulation of eravacycline in 32 healthy subjects at a single clinical site in the United States. In the trial, subjects received 30-minute intravenous infusions of either placebo or eravacycline at doses of 0.50 or 1.50 mg/kg once daily for 10 days, 60-minute intravenous infusions of either placebo or eravacycline at a dose of 1.50 mg/kg once daily for

 

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10 days or 60-minute intravenous infusions of either placebo or eravacycline at a dose of 1.00 mg/kg twice daily for 10 days. In each cohort of eight patients, six patients received treatment and two patients received placebo. The most common adverse events were associated with the infusion site. All adverse events were mild to moderate in intensity.

In the Phase 1 MAD clinical trial, we also measured levels of eravacycline in urine in patients who had received eravacycline to assess the potential for treatment of cUTI. A summary of the results of those measurements, which were taken following the final dose on the last day of treatment, is shown in the table below. These data show that renal excretion is not the primary route of elimination for eravacycline. We believe that the levels of eravacycline in urine support the development of eravacycline as a potential first-line therapy in patients with cUTI.

Eravacycline Levels in Urine

 

MAD Dose Group

(mg/kg)

   Day 10 Urine Concentration in ng/mL
(%CV)
     0-8 Hours    8-24 Hours

0.5 every 24 hours infused in 30 minutes

   4,576.7 (57.9)    2,250.0 (31.1)

1.5 every 24 hours infused in 60 minutes

   13,316.7 (25.7)    5,565.0 (39.2)

1.0 every 12 hours infused in 60 minutes

   25,060.0 (21.1)    9,230.0 (26.1)

CV refers to the coefficient of variability, a statistical measure of the dispersion of a probability distribution.

The most recent tetracycline-based antibiotic to be approved for marketing by the FDA is tigecycline, which was approved in 2005 and is marketed by Pfizer under the name Tygacil. We have not conducted a head-to-head comparison of eravacycline and tigecycline in a clinical trial, but have compared the published data from Pfizer’s Phase 1 clinical trials of tigecycline to the data from our Phase 1 clinical trials of eravacycline. Based on this comparison, eravacycline demonstrated better gastrointestinal tolerability than tigecycline while also achieving higher blood levels with higher area under the curve, or AUC, than tigecycline. AUC is a measure of total exposure to a drug over a period of time. Specifically, with respect to tolerability, all subjects in Pfizer’s Phase 1 clinical trials of tigecycline that were treated with 75mg or 100mg of tigecycline every 12 hours experienced unacceptable rates and severity of nausea and emesis resulting in early termination of all subjects in both dosing groups. In the eravacycline Phase 1 MAD clinical trial, one of the six subjects in the 1.00 mg/kg every 12 hours dosing group discontinued the study drug because of nausea. The other subjects all tolerated the full 10 days of dosing. At the same time, the AUC0-12 for the 1.00 mg/kg every 12 hours dose in the eravacycline Phase 1 MAD clinical trial was 6344 ng*h/mL (19.9% CV), while the AUC0-12 for tigecycline administered at a higher dose (100 mg every 12 hours) was 4980 ng*h/mL (19% CV). While we believe this comparison to tigecycline’s previously published Phase 1 data, and the other comparisons we make in this prospectus to tigecycline’s previously published clinical trial data, are useful in evaluating eravacycline’s clinical trial results, the fact that we have not conducted a head-to-head study and that the tigecycline trials were conducted under different protocols at different sites and at different times than our trials may limit the value or reliability of any such comparison.

Phase 2 clinical trial of intravenous formulation in cIAI

In June 2012, we completed a global, multi-center, randomized, double-blind Phase 2 clinical trial to evaluate the efficacy, safety and pharmacokinetics of the intravenous formulation of eravacycline compared to ertapenem in patients with cIAI. We selected cIAI as the indication for the trial because we wanted to ensure that there would be a significant population of patients in the study with multi-drug resistant Gram-negative bacteria and because Gram-negative bacteria are prevalent in cIAI. We selected ertapenem as the comparison therapy

 

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because ertapenem is one of the antibiotics recommended by IDSA guidelines for the treatment of cIAI. We also established clinical sites in countries such as India, where multi-drug resistant Gram-negative pathogens have higher prevalence.

Trial Design. We enrolled 143 hospitalized patients with cIAI in the trial. These patients were randomized into three arms on a 2:2:1 basis:

 

   

an arm in which patients received 1.5 mg/kg of eravacycline administered intravenously once per day;

 

   

an arm in which patients received 1.0 mg/kg of eravacycline administered intravenously twice per day; and

 

   

a control arm in which patients received 1.0 g of ertapenem administered intravenously once per day, which is the standard dosing regimen for ertapenem.

Investigators obtained baseline intra-abdominal cultures at the time of operation and treated patients for a minimum of four days and a maximum of 14 days. The length of treatment for each patient was determined by the physician based on pre-set parameters. A test of cure, or TOC, visit took place ten to 14 days after the last dose of drug was administered and a final or follow-up visit occurred within four to six weeks after the last dose of drug was administered.

Of the 143 patients in the trial, four did not receive drug. Two were excluded because of incorrect randomization, one withdrew consent for inclusion in the trial after randomization, and one was excluded for having received non-study antibiotics prior to the first dose. At least one pathogen or bacterium responsible for the cIAI was identified following enrollment in 119 of the 139 patients who received drug in the trial. We refer to this subset of patients as the microbiologically-modified intent-to-treat, or m-MITT, patients. Of the 119 m-MITT patients, 109 were deemed clinically evaluable based on key inclusion and exclusion criteria being validated and key visits and assessments having been performed. We refer to this subset of the m-MITT patients as the microbiologically evaluable, or ME, patients. The 10 m-MITT patients that were not considered clinically evaluable were not classified as ME patients as a result of their withdrawing consent, failing to complete the study, failing to attend a TOC visit or having indeterminate results at the TOC visit. The primary endpoint of the trial was clinical response at the TOC visit in the ME patients. Clinical response was defined as complete resolution or significant improvement of signs or symptoms of infection with no further systemic antibiotic treatment required. Included as one of the secondary endpoints in the trial was clinical response at the follow-up visit in the m-MITT population. In the FDA’s recent draft cIAI guidance, the FDA suggested that the primary efficacy endpoint for a trial of cIAI should be complete resolution of baseline signs and symptoms attributable to cIAI in the microbiological intent-to-treat patient population 28 days after randomization and the absence of clinical failure including death and unplanned surgical procedures through the period ending 28 days following randomization. The draft guidance defined this population as all randomized patients who have baseline bacterial pathogens that cause cIAI and against which the investigational drug has antibacterial activity.

 

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A diagram summarizing the trial design follows:

Eravacycline Phase 2 Trial Design

 

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The baseline demographics of the patients in each arm of the trial are summarized in the table below. As shown in the table, patient demographics were similar across all three trial arms except for APACHE scores as, at baseline, the patients in the 1.5 mg/kg dose group exhibited slightly higher APACHE scores than the other treatment groups. APACHE scores are a commonly used severity of disease scoring system, where a higher number means that the patient had more severe disease and higher risk of death.

Eravacycline Phase 2 Trial Patient Demographics

 

Parameter

   Eravacycline
(1.5 mg/kg  every
24 hours)

N=56
    Eravacycline
(1.0 mg/kg  every
12 hours)
N=57
    Ertapenem
(1.0 g every
24 hours)

N=30
 

Mean Age (y) [Standard Deviation]

     43.6 [18.4     42.1 [17.2     41.8 [17.6

Mean Weight (kg) [Standard Deviation]

     68.1 [13.2     70.0 [14.4     68.8 [16.2

Male (%)

     38 (67.9 )%      43 (75.4 )%      22 (73.3 )% 

Caucasian (%)

     40 (71.4 )%      37 (64.9 )%      21(70.0 )% 

APACHE Score

      

Mean [Standard Deviation]

     8.2 [3.9     6.0 [3.8     6.1 [2.7

<10 (%)

     41 (74.6 )%      48 (84.2 )%      28 (96.6 )% 

10-15 (%)

     13 (23.6 )%      8 (14.0 )%      1   

>15

     1        1          

 

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The following table summarizes the diseases underlying the MITT patients’ infections, which were being treated with the antibiotics in the trial.

Eravacycline Phase 2 Trial MITT Population Diseases

 

Intra-Operative Diagnosis

   Eravacycline
(1.5mg/kg every
24 hours)

N=54
     Eravacycline
(1.0mg/kg every
12 hours)

N=56
     Ertapenem
(1.0g every
24 hours)
N=29
 

Complicated Appendicitis

     29         31         15   

Other

     25         25         14   

Perforation of Intestine

     5         5         1   

Complicated Diverticulitis

             2           

Gastric/Duodenal Perforation

     13         12         8   

Complicated Cholecystitis

     3         4         3   

Other (Abscess/Peritonitis)

     4         2         2   

Efficacy. In the trial, ME patients in the eravacycline arms experienced similar infection cure rates to the ME patients in the ertapenem arm, as summarized in the table below. The table also shows the 95% confidence interval, a statistical determination that demonstrates the range of possible differences in the point estimates of success that will arise 95% of the time the endpoint is measured.

Eravacycline Phase 2 Trial Primary Endpoint Analysis

 

Population

   Eravacycline
(1.5 mg/kg
every 24 hours)
     Eravacycline
(1.0 mg/kg
every 12 hours)
     Ertapenem
(1.0 g
Every 24 hours)
 

Microbiologically Evaluable (ME)

     N=42         N=41         N=26   

% Cure in ME (95% Confidence Interval)

     92.9 (80.5-98.5)         100 (91.4-100)         92.3 (74.9-99.1)   
  

 

 

    

 

 

    

 

 

 

Investigators in the trial had the discretion to determine the period that patients remained on the applicable treatment. The mean duration of treatment in the trial was 6.1 days for the patients receiving 1.5 mg/kg of eravacycline intravenously once per day; 5.6 days for the patients receiving 1.0 mg/kg of eravacycline intravenously twice per day; and 6.0 days for the patients receiving 1.0 g of ertapenem intravenously once per day.

 

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Of particular importance in the trial results was the performance of eravacycline against confirmed drug-resistant Gram-negative pathogens as well as other challenging Gram-negative pathogens. Due to the global, multi-center nature of the trial and our emphasis on sites in known geographic “hot spots” for multi-drug resistant Gram-negative bacteria, 25% of the Gram-negative pathogens identified in m-MITT patients were confirmed to be multi-drug resistant as a result of being ESBL-positive and/or carbapenem-resistant. The table below summarizes the pathogens isolated from the m-MITT patients enrolled in the Phase 2 clinical trial, of which 60.4% were members of the Enterobacteriaceae family. m-MITT patients in the trial were infected with an average of 1.8 pathogens:

Eravacycline Phase 2 Trial m-MITT Population Pathogens

 

    Total
Pathogens
    Eravacycline
(1.5 mg/kg  every
24 hours)
    Eravacycline
(1.0 mg/kg  every
12 hours)
    Ertapenem
(1.0 g every  24 hours)
 

Gram-negative aerobic pathogens

       

Escherichia coli

    94        40        37        17   

Klebsiella pneumoniae

    14        8        4        2   

Klebsiella oxytoca

    7        2        4        1   

Pseudomonas aeruginosa

    8        5        3          

Acinetobacter baumannii complex

    4        1        1        2   

Acinetobacter spp.

    1                      1   

Comamonas testosteroni

    2               2          

Proteus mirabilis

    2        1               1   

Aeromonas spp.

    1                      1   

Citrobacter braakii

    1        1                 

Citrobacter freundii

    1               1          

Enterobacter cloacae

    2               2          

Morganella morganii

    4        1               3   

Pantoea spp.

    1                      1   

Providencia rustigianii

    1               1          

Stenotrophomonas maltophilia

    1               1          

Total

    144        59        56        29   

Gram-positive aerobic pathogens

       

Streptococcus spp.

    15        5        6        5   

Streptococcus anginosus

    4        2        1        1   

Enterococcus faecalis

    8        2        2        4   

Enterococcus faecium

    3        1        1        1   

Enterococcus avium

    4        2        1        1   

Enterococcus gallinarum

    1                      1   

Staphylococcus spp.

    6        1        3        1   

Staphylococcus aureus

    7        1        4        2   

Bacillus spp.

    1                      1   

Leuconostoc spp.

    1               1          

Total

    50        14        19        17   

Anaerobic pathogens

       

Bacteroides fragilis

    5        1        1        3   

Bacteroides vulgatus

    2        2                 

Bacteroides ovatus

    1                      1   

Bacteroides thetaiotaomicron

    1               1          

Bacteroides ureolyticus

    3               3          

Clostridium spp.

    4               4          

Bifidobacterium spp.

    1               1          

Gemella morbillorum

    1        1                 

Total

    18        4        10        4   

 

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Safety and Tolerability. In the Phase 2 clinical trial, eravacycline demonstrated a comparable safety and tolerability profile to ertapenem. No patients in the trial suffered any serious adverse events that were found to be related to eravacycline, and the percentage of patients in the trial arms that experienced treatment emergent adverse events, or TEAEs, were similar. In addition, gastrointestinal adverse events known to be associated with tetracyclines such as nausea and vomiting occurred at modest rates in the eravacycline arms that were similar to the rates for the ertapenem arm. Adverse events associated with infusion sites were limited and similar in all treatment groups. The table below shows the adverse events experienced by patients in the trial that were assessed by the investigator as possibly related to the study drugs.

Eravacycline Phase 2 Trial Study-Drug Adverse Events

 

Adverse Event

(>1 occurrence)

   Eravacycline
(1.5 mg/kg  every 24
hours)

N=53a
    Eravacycline
(1.0 mg/kg  every
12 hours)

N=56
    Ertapenem
(1.0 g  every
24 hours)

N=30a
 

Any TEAE

     2 (3.8 )%      3 (5.4 )%      3 (10.0 )% 

Nausea

     —          2 (3.6 )%      1 (3.3 )% 

Vomiting

     1 (1.9 )%      1 (1.8 )%      —     

Elevated amylase

     —          —          1 (3.3 )% 

Elevated lipase

     —          —          1 (3.3 )% 

Thrombophlebitis (associated with infusion sites)

     —          1 (1.8 )%      —     

 

a

For the analysis of safety and tolerability, one of the MITT patients in the arm of the trial receiving 1.5 mg/kg of eravacycline intravenously once per day was reclassified into the ertapenem arm of the trial as a result of having, in error, received the ertapenem dosing instead of eravacycline.

Pharmacokinetics. Patients in the Phase 2 clinical trial were subjected to pharmacokinetic sampling during the period of treatment to enable us to assess plasma exposure levels of eravacycline in the trial and the feasibility of development of an effective oral formulation.

Eravacycline Phase 2 Trial Pharmacokinetic Results

 

    

Parameter

   Eravacycline
(1.5 mg/kg  every
24 hours)

N=48
    Eravacycline
(1.0 mg/kg  every
12 hours)

N=51
 

Cmax

   Mean (ng/mL)      1,445.6        952.6   
   %CV      80.8     79.8

AUC0-12

   Mean (ng*h/mL)      4,349.9        3,240.7   
   %CV      50.2     53.5

The table above summarizes selected pharmacokinetic parameters that we obtained from the pharmacokinetic sampling. Cmax refers to the maximum observed peak plasma concentration.

Efficacy for tetracycline-class molecules is driven by the ratio of AUC to MIC. MIC refers to minimum inhibitory concentration, which is the minimum concentration of an antibiotic needed to inhibit the growth of an organism. In the Phase 2 clinical trial, we measured AUC for the 12 hours following dosing. As a result, in order to understand the AUC of the dose groups we studied in the trial over the 24 hours following dosing, we relied on modeling to predict the AUC of eravacycline in differing dose sizes and schedules over the 24 hours following dosing. For the patients receiving 1.5 mg/kg of eravacycline intravenously once per day we estimated that the AUC over the 24 hours following dosing would be 5220 ng*h/mL. For the patients receiving 1.0 mg/kg of eravacycline intravenously twice per day, we estimated that the AUC over the 24 hours following dosing would

 

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be at least 6480 ng*h/mL. We calculated this latter figure by doubling the AUC over the 12 hours following dosing shown in the table above due to twice daily dosing in this arm of the trial. These estimated AUCs for eravacycline over the 24 hours following dosing are higher than the AUC over the 24 hours following dosing in the Phase 3 clinical trial data included in tigecycline’s product label. We believe that these higher estimated AUCs for eravacycline as compared to tigecycline combined with the better tolerability indicated for eravacycline in our Phase 2 clinical trial, is supportive of eravacycline’s potential to treat multi-drug resistant Gram-negative and other bacteria.

Oral Formulation of Eravacycline

As part of our eravacycline development program, we are developing an oral formulation of eravacycline for the treatment of cUTI in intravenous-to-oral step-down therapy. Based on our completed Phase 1 clinical trials, as well as data from our Phase 2 clinical trial of the intravenous formulation of eravacycline, we believe that eravacycline can be well enough absorbed as an oral medication to achieve the drug levels necessary to be effective in treating patients. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. We expect to complete this program by mid-2013. If the data from this program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI.

Phase 1 clinical trials of oral formulation. In order to assess the potential for eravacycline to be developed as an orally administered drug, we conducted a Phase 1 single ascending dose clinical trial in 2010 and a Phase 1 multiple ascending dose clinical trial in 2011. In the completed trials, we evaluated the compound for safety, tolerability and pharmacokinetics. Results of the trials demonstrated that an oral formulation of eravacycline could achieve drug levels equivalent to those in the patients that received intravenous infusions of 1.5 mg/kg of eravacycline once per day in our Phase 2 cIAI clinical trial, levels that were effective in treating patients in our Phase 2 cIAI clinical trial. In the oral clinical trials, we utilized simple formulations. For the SAD oral trial, we formulated eravacycline in liquid solution of 5% dextrose in water, commonly referred to as D5W. For the MAD oral clinical trial, we formulated eravacycline in a simple capsule.

As part of the completed Phase 1 clinical trials referred to above, we evaluated the impact of food and fasting on the absorption of orally administered eravacycline and observed a significant food effect. As a result, we focused our development efforts on patients in a fasted state.

In 2010, we conducted a Phase 1 single ascending dose clinical trial of the oral formulation of eravacycline in 28 healthy subjects in a single-center, placebo-controlled, double-blind clinical trial. In the trial, subjects received eravacycline reconstituted in a solution of D5W at doses of 50mg, 100mg, 200mg and 300mg or placebo. In each dose group of eight patients, six patients received eravacycline and two patients received placebo. The most common adverse event reported was nausea. All adverse events were mild to moderate in intensity.

In 2011, we conducted a Phase 1 multiple ascending dose clinical trial of the oral formulation of eravacycline in 58 healthy subjects in a single-center, placebo-controlled, double-blind clinical trial. In the trial, subjects received eravacycline capsules at doses of 50mg, 100mg, 200mg and 300mg or placebo. In each dose group of eight patients, six patients received eravacycline and two patients received placebo. The most common adverse events reported were nausea and vomiting. All adverse events were mild to moderate in intensity. We measured pharmacokinetic parameters for eravacycline. Doses of 100mg provided twice daily and 300mg provided once daily were well-tolerated, with key pharmacokinetic parameters summarized in the table below.

 

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Eravacycline Oral MAD Pharmacokinetic Results

 

    

Parameter

   Eravacycline
(100 mg  every
12 hours)
    Eravacycline
(300 mg  every
24 hours)
 

Cmax

   Day 7 Mean (ng/mL)      164        342   
   %CV      23.7     23.7

AUC0-24

   Day 7 Mean (ng*h/mL)      2,460 a      4,455   
   %CV      23.4     22.4

 

a

Reflects two doses administered in the 24 hour period.

In the MAD clinical trial we also administered a 400mg dose, which was not tolerated as a single daily dose due to gastrointestinal-related adverse events.

We have carried out extensive modeling of the intravenous and oral pharmacokinetic data from our clinical trials of eravacycline in order to establish an oral step-down dose following intravenous administration. Based on our modeling results of eravacycline, we believe that a twice daily dose of 200mg of oral eravacycline will achieve plasma exposure levels equivalent to those resulting from daily administration of the intravenous formulation of eravacycline at 1.5 mg/kg. Because multiple daily oral doses of up to 300mg were safe and well-tolerated in the Phase 1 MAD clinical trial, we believe that a twice per day oral dosage form of 200mg of eravacycline can be developed to permit oral step-down treatment of serious infections.

Future Clinical Plans

We are currently finalizing our pivotal Phase 3 program for eravacycline. We are designing the program to enable us to position eravacycline as a first-line empiric monotherapy for the treatment of cIAI and cUTI due to eravacycline’s broad-spectrum coverage of multi-drug resistant bacteria. We expect that our pivotal Phase 3 program will be consistent with the draft guidance recently issued by the FDA for drug development for cIAI and cUTI. The cIAI guidance indicates that, for companies developing a drug for cIAI and an additional indication caused by similar bacterial pathogens, such as cUTI, a single trial in cIAI and a single trial in that additional indication could be sufficient to provide evidence of effectiveness in both indications. We believe that prior to the issuance of this guidance, a company that was developing a drug for cIAI and an additional indication would have been required to conduct two Phase 3 clinical trials of the drug for the treatment of cIAI, enrolling 500 to 600 patients in each trial, and additional Phase 3 clinical trials of the drug for the treatment of the additional indication, even where cIAI and the additional indication were caused by similar bacterial pathogens. We believe that the opportunity provided by the recent guidance to submit an NDA package for two indications on the basis of only two Phase 3 clinical trials makes the process of developing and seeking approval of drugs for cIAI and a second indication more cost-effective. The trials can be conducted at the same time, and because the patient populations are different for the two trials, patient enrollment could be faster.

In January 2013, we discussed our pivotal Phase 3 program with the FDA at an end-of-Phase 2 meeting. Following these discussions, we are now moving ahead with our plans to conduct two global Phase 3 clinical trials of the intravenous formulation of eravacycline, one for the treatment of cIAI, which we expect to commence in the third quarter of 2013, and one for the treatment of cUTI, which we expect to commence in the fourth quarter of 2013. We expect to have top-line data from both of these clinical trials in the first quarter of 2015. We commenced a Phase 1 clinical program evaluating the pharmacokinetics and safety of oral formulations of eravacycline in the first quarter of 2013. We expect to complete this program by mid-2013. If the data from this program are favorable, then, subject to regulatory review, we would conduct our pivotal Phase 3 clinical trial of eravacycline for the treatment of cUTI as a Phase 3 clinical trial of the intravenous and oral formulations of eravacycline used in intravenous-to-oral step-down therapy for cUTI.

If we complete the Phase 3 clinical trials of eravacycline when we anticipate and the trials are successful, we expect to submit an NDA to the FDA in the second half of 2015 and an MAA to the EMA in the first half of

 

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2016. Our goal is to develop eravacycline to be the drug of choice for first-line empiric treatment of a wide variety of serious and life-threatening infections. We plan to evaluate eravacycline for the treatment of ABSSSI, acute bacterial pneumonias and other serious and life-threatening infections following our development of eravacycline for the treatment of cIAI and cUTI and subject to obtaining the necessary funding.

Preclinical Studies

In preclinical studies, we have evaluated the in vitro activity of eravacycline against a broad range of bacterial pathogens including Gram-negative, Gram-positive, atypical and anaerobic pathogens. In these studies, we also compared the potency of eravacycline to the potency of other antibiotic compounds against the same pathogens. In many cases, the isolates measured were resistant to one or more of the antibiotic compounds against which eravacycline was compared. In each case, we measured potency by determining the concentration of drug required to inhibit the growth of 90% of a panel of bacterial strains isolated from patients. We refer to this measurement as a MIC90 measurement. A lower MIC90 indicates greater potency against a particular bacterium in vitro. Historically, with tetracyclines, MIC90 values of up to 2 µg/mL have indicated that Gram-positive bacteria were susceptible to tetracyclines and for most Gram-negative bacteria up to 4 µg/mL. Traditionally, bacteria considered resistant to an antibiotic have MIC90 values for Gram-positive bacteria of 8 µg/mL and for Gram-negative bacteria of 16 µg/mL and higher.

In Vitro Activity Against Gram-negative Bacteria

The table below summarizes the in vitro activity of eravacycline and various antibiotics commonly used in hospitals today for the treatment of Gram-negative bacteria in panels that included 1,059 Gram-negative isolates. In each panel, isolates of a single species of bacteria were separately treated with each of the antibiotics in the study. The number specified in the table below for each species of bacteria indicates the number of isolates of that species that were included in the studies. The bacteria selected for evaluation were chosen because they are commonly found in serious hospital infections.

 

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As shown in the table, eravacycline demonstrated potent, broad-spectrum Gram-negative antibacterial activity. In the majority of instances, the MIC90 of eravacycline was equivalent to or lower than the MIC90 values of the other antibiotics studied for each bacterium. Key observations from these in vitro studies include:

 

   

Eravacycline had MIC90 values of under 2 µg/mL against clinical isolates of E. cloacae, A. baumannii, K. pneumoniae, including ESBL-producing and carbapenem-resistant isolates, C. freundii, S. maltophilia, M. morganii, P. vulgaris, P. stuartii, and K. oxytoca.

 

   

Eravacycline was twice as potent as the next most active comparator, tigecycline, against A. baumannii in a panel that was 44% resistant to carbapenems, 53% resistant to tetracyclines and 64% resistant to fluoroquinolones.

 

   

Eravacycline was four times more potent than tigecycline against ESBL-producing K. pneumoniae isolates.

 

   

83%, 29%, and 43% of the isolates were fully resistant to fluoroquinolones, carbapenems and gentamicin, respectively.

 

   

Isolates of Proteus mirabilis, one of the proteeae species included in the table above, were two times more susceptible to eravacycline (MIC90 of 4 µg/mL) than to tigecycline.

 

   

P. aeruginosa isolates were largely not susceptible to eravacycline (MIC90 of 16 µg/mL) or tigecycline (MIC90 in excess of 16 µg/mL).

In Vitro Activity Against Gram-positive Bacteria

The table below summarizes the in vitro activity of eravacycline and various antibiotics commonly used in hospitals today for the treatment of Gram-positive bacteria in panels that included 762 Gram-positive isolates. The bacteria selected for evaluation were chosen because they are commonly found in serious hospital infections.

 

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Eravacycline demonstrated excellent in vitro potency against methicillin-susceptible and resistant Staphylococcus aureus and Staphylococcus epidermidis, vancomycin-susceptible and resistant Enterococcus faecium and Enterococcus faecalis, penicillin-susceptible and -resistant Streptococcus pneumoniae, Streptococcus anginosus, Streptococcus intermedius, Streptococcus mitis, Streptococcus sanguis, Streptococcus pyogenes, and Streptococcus agalactiae. The MIC90 values for eravacycline against all of the streptococci and enterococci in the panels were less than 0.12 µg/mL. For staphylococci, including MRSA confirmed to contain Panton-Valentine leukocidin virulence factor, the MIC90 values were less than 0.5 µg/mL in 180 MRSA isolates tested.

In Vitro Activity Against Anaerobic Bacteria

The table below summarizes the in vitro activity of eravacycline and various antibiotics commonly used in hospitals today for the treatment of anaerobic bacteria in panels that included 190 anaerobic isolates. The bacteria selected for evaluation were chosen because they are commonly found in serious hospital infections.

 

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Key observations from these in vitro studies include that eravacycline:

 

   

had a MIC90 against B. fragilis, the most prevalent anaerobe in human infections, of 1 µg/mL, which was four times lower than tigecycline;

 

   

had excellent activity against a wide range of Gram-positive and Gram-negative anaerobes; and

 

   

provided broader coverage than the other antibiotics tested in the panel.

In addition, in the studies, many of the isolates from the Bacteroides, Prevotella and Clostridium perfringens species were vancomycin-resistant, and many of the isolates of the Peptostreptococcus spp. and C. perfringens species were metronidazole-resistant. Eravacycline showed strong activity against these isolates.

Other Indications

Eravacycline is also being developed as a potential empiric countermeasure for the treatment of disease caused by bacterial biothreat pathogens under funding from BARDA. In January 2012, BARDA awarded a five-year contract that provides a total of up to $67 million in funding for the development, manufacturing and

 

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clinical evaluation of eravacycline as a potential empiric countermeasure for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, including Francisella tularensis, which causes tularemia, Yersinia pestis, which causes plague, and Bacillus anthracis, which causes anthrax disease, as well as bacterial pathogens associated with moderate-to-severe community-acquired bacterial pneumonia and other serious hospital infections.

We are collaborating with CUBRC because when we initially determined to seek government funding we recognized that we did not have any expertise in bidding for, or the administration and management of, government-funded contracts. CUBRC serves as the prime contractor under the BARDA Contract, primarily carrying out a program management and administrative role with additional responsibility for the management of certain preclinical studies. We serve as lead technical experts on all aspects of the BARDA Contract and serve as a subcontractor responsible for management of chemistry, manufacturing and control activities and clinical studies.

In connection with the BARDA Contract, in February 2012, we entered into with CUBRC a five-year cost-plus-fixed-fee subcontract under which we may receive funding of up to approximately $39.8 million, reflecting the portion of the BARDA funding that may be paid to us for our activities.

Although the BARDA Contract, and our subcontract with CUBRC, have five-year terms, BARDA is entitled to terminate the project for convenience at any time, and is not obligated to provide funding beyond current-year amounts from Congressionally approved annual appropriations. To the extent BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us. For the 12-month base period from February 1, 2012 through January 31, 2013, committed funding from CUBRC under our BARDA subcontract was $6.3 million. As of December 31, 2012, we had received $3.4 million of this $6.3 million. In January 2013, BARDA committed to provide funding of $13.9 million to CUBRC for the eravacycline program for the 12-month period from February 1, 2013 to January 31, 2014. Committed funding from CUBRC to us under our BARDA subcontract for the 12-month period from February 1, 2013 to January 31, 2014 is $6.4 million. CUBRC has a right to terminate its subcontract with us only to the extent that BARDA first cancels the corresponding portions of CUBRC’s prime contract. If BARDA continues to support the program under the contract for the full five-year term, we believe BARDA funding for this program will be sufficient to provide the funds to advance eravacycline through enabling studies for an NDA, evaluation of efficacy in non-pivotal murine and non-human primate models challenged with biothreat pathogens and a Phase 2 clinical trial for the treatment of community-acquired bacterial pneumonia, commonly referred to as CABP.

Technology Platform

We believe that our proprietary chemistry technology, licensed from Harvard on an exclusive worldwide basis and enhanced at our company, represents a significant innovation in the creation of tetracycline drugs and has the potential to reinvigorate the clinical and market potential of the class.

The tetracycline class of antibiotics has been used successfully for more than 50 years. Unlike our tetracycline compounds, all tetracyclines on the market and under development of which we are aware are produced semi-synthetically, first in bacteria and then modified in a limited number of ways by available chemistry. These conventional methods have only been able to produce tetracycline antibiotics with limited chemical diversity, making it difficult for conventional technology to create tetracycline antibiotics that address a wide variety of multi-drug resistant bacteria. In part, because of the challenges in creating novel tetracycline molecules, only one tetracycline antibiotic has been developed and approved by the FDA for sale in the United States in the past 30 years.

By contrast, our proprietary technology makes it possible to create novel tetracycline antibiotics using a practical, fully synthetic process for what we believe is the first time. This fully synthetic process avoids the limitations of bacterially derived tetracyclines and allows us to chemically modify many positions in the tetracycline scaffold, including most of the positions that we believe could not practically be modified by any previous method. Using our proprietary chemistry technology, we can create a wider variety of tetracycline-based compounds than was previously possible, enabling us to pursue novel tetracycline derivatives for the treatment of multi-drug resistant bacteria that are resistant to existing tetracyclines and other classes of antibiotic products.

 

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The diagram below illustrates the tetracycline core scaffold. Scaffold positions marked with dots have been modified to date using conventional chemistry to create either tetracycline drugs that have been marketed or drug candidates of which we are aware that are currently in development. Our fully synthetic process also allows for modification of the positions marked with dots, but with greater opportunity for substitution than is possible using conventional chemistry. The scaffold positions marked with stars in the diagram below indicate useful positions that we have modified through our fully synthetic process that could not practically be modified by conventional chemistry.

 

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While the four positions on the bottom of the scaffold in the diagram above that are not marked with dots or stars can also be modified using our proprietary chemistry technology, these positions are involved in the binding of tetracyclines to the bacterial ribosome and, consequently, changes to these positions greatly reduce antibacterial activity of compounds. As a result, we are not pursuing compounds based on modifications of these positions.

We believe that our approach to tetracycline drug development provides us with strong intellectual property protection. We hold or have licensed rights under patents and patent applications that protect both our synthetic processes for developing tetracyclines and the compositions of matter of the individual compounds themselves. These include patents and patent applications directed towards the composition of matter for key intermediates like the enone used in the synthesis of eravacycline and our other product candidates. Unless a new synthetic method is created, we believe that, for the life of our intellectual property, our proprietary chemistry technology will be the only practical way of modifying the positions on the tetracycline core scaffold that have not been previously modified using conventional chemistry.

Our proprietary chemistry technology has allowed us to develop compounds that have been highly active in in vitro studies against tetracycline-resistant bacterial strains, including multi-drug resistant Gram-negative bacteria, and that have novel pharmacokinetic properties. To date, we have used our proprietary chemistry technology to create more than 2,800 new tetracycline derivatives that we believe could not be practically created with conventional methods. Our discovery program is focused on identifying novel compounds that will be effective against the toughest multi-drug resistant Gram-negative bacteria.

 

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Other Drug Development Programs

The following table sets forth our clinical and earlier-stage antibiotic compounds that we are developing for the treatment of serious and life-threatening infections and their status.

 

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TP-834

We synthesized TP-834 using our proprietary chemistry technology. In preclinical studies evaluating the in vitro potency of TP-834, the compound demonstrated broad coverage of the spectrum of pathogens associated with CABP and ABSSSI. In these studies, the pathogens covered included S. pneumoniae, H. influenzae, S. pyogenes, M. catarrhalis and MRSA, and TP-834’s spectrum compared well with clarithromycin, Zyvox, Levaquin and most drugs currently under development for CABP and ABSSSI. In studies in non-human primates, TP-834 was well-absorbed orally. We have completed most IND-enabling studies on the compound. Any further efforts by us with respect to TP-834 will be subject to the availability of resources not allocated to our development of eravacycline.

TP-271

TP-271 is a fully synthetic broad-spectrum preclinical compound that we are developing for respiratory diseases caused by bacterial biothreat pathogens under funding provided by NIAID. We are collaborating with CUBRC on the TP-271 program funded by NIAID.

We created TP-271 using our proprietary chemistry technology. In doing so, we made modifications to the tetracycline scaffold that were designed to improve potency and effectiveness against a broader spectrum of bacteria as compared to tetracycline and doxycycline, which are currently used for the treatment of pneumonia and other respiratory ailments.

In our development program for TP-271, we are conducting a number of in vitro, toxicology and animal studies to evaluate the efficacy of TP-271 against biothreat pathogens. TP-271 has performed as well as, or better than, standard-of-care comparators in studies in murine respiratory infection models challenged with public health pathogens. In susceptibility studies, TP-271 also demonstrated broad-spectrum activity against NIAID

 

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Category A and B public health bacterial pathogens including Francisella tularensis, Yersinia pestis, Burkholderia mallei, Burkholderia pseudomallei, Bacillus anthracis, and NIAID Category C public health bacterial pathogens (in vitro and in vivo) that are associated with CABP, including Streptococcus pneumoniae, including multi-drug resistant pneumococci, Staphylococcus aureus (methicillin-susceptible and methicillin-resistant), Haemophilus influenzae, Moraxella catarrhalis and Legionella pneumophila, including strains that are tetracycline-resistant.

Funding for TP-271 is covered by two awards from NIAID. The first award is a grant awarded in July 2011 that provides up to approximately $2.8 million in funding over five years, which we refer to as the NIAID Grant. The second award is a contract awarded to CUBRC in September 2011 that provides up to approximately $35.8 million in funding over five years. The NIAID Grant and the NIAID Contract each support the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, including Francisella tularensis, Yersinia pestis and Bacillus anthracis, as well as bacterial pathogens associated with community-acquired bacterial pneumonia.

We are collaborating with CUBRC because when we initially determined to seek government funding we recognized that we did not have any expertise in bidding for, or the administration and management of, government-funded contracts. CUBRC serves as the prime contractor under the NIAID awards, primarily carrying out a program management and administrative role, though also with responsibility for the management of certain preclinical studies under the NIAID Contract. We serve as lead technical experts on all aspects of the NIAID Grant and NIAID Contract and serve as a subcontractor responsible for management of chemistry, manufacturing and control activities and clinical studies.

In connection with the NIAID Contract, in October 2011, we entered into with CUBRC a five-year cost-plus-fixed-fee subcontract under which we may receive funding of up to approximately $13.3 million, reflecting the portion of the NIAID Contract funding that may be paid to us for our activities. In connection with the NIAID Grant, in November 2011, CUBRC awarded us a 55-month, no-fee subaward of approximately $980,000 reflecting the portion of the NIAID Grant funding that may be paid to us for