S-1 1 d668581ds1.htm FORM S-1 FORM S-1
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As filed with the Securities and Exchange Commission on April 2, 2014

Registration No. 333-            

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Lumena Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2834   27-4644068
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer Identification Number)

 

12531 High Bluff Drive, Suite 110

San Diego, California 92130

(858) 461-0694

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Michael Grey

President and Chief Executive Officer

Lumena Pharmaceuticals, Inc.

12531 High Bluff Drive, Suite 110

San Diego, California 92130

(858) 461-0694

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

Jason L. Kent, Esq.
Cooley LLP
4401 Eastgate Mall
San Diego, California 92121
(858) 550-6000
 

Cheston J. Larson, Esq.

Matthew T. Bush, Esq.

Latham & Watkins LLP

12670 High Bluff Drive

San Diego, California 92130

(858) 523-5400

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

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”), check the following box.  ¨

 

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

 

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

 

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

 

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

 

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

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of

securities to be registered

 

Proposed

maximum aggregate
offering price(1)

  Amount of
registration fee(1)

Common Stock, $0.001 par value per share

  $75,000,000   $9,660

 

 

(1)   Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

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 that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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

 

SUBJECT TO COMPLETION, DATED APRIL 2, 2014

 

PRELIMINARY PROSPECTUS

 

             Shares

 

LOGO

 

Common Stock

 

$         per share

 

 

 

This is the initial public offering of our common stock. We are selling              shares of common stock in this offering. We currently expect the initial public offering price of our common stock to be between $         and $         per share.

 

We have granted the underwriters an option to purchase up to              additional shares of common stock to cover over-allotments.

 

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

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

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

 

 

 

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

 

 

 

     Per Share      Total  

Public Offering Price

   $                   $               

Underwriting Discount(1)

   $        $    

Proceeds to Lumena Pharmaceuticals, Inc. (before expenses)

   $        $    

 

(1)   We refer you to “Underwriting,” beginning on page 155, for additional information regarding underwriter compensation.

 

Entities affiliated with certain of our existing stockholders and directors have indicated an interest in purchasing up to an aggregate of approximately $         million in shares of our 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 potential investors and any of these potential investors could determine to purchase more, less or no shares in this offering.

 

The underwriters expect to deliver the shares of common stock to purchasers on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

 

 

 

Citigroup    Cowen and Company    Leerink Partners

 

 

 

                    , 2014


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We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

 

 

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     49   

Use of Proceeds

     51   

Dividend Policy

     52   

Capitalization

     53   

Dilution

     55   

Selected Consolidated Financial Data

     58   

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

     59   

Business

     75   

Management

     117   

Executive and Director Compensation

     126   

Certain Relationships and Related Party Transactions

     143   

Principal Stockholders

     147   

Description of Capital Stock

     150   

Shares Eligible for Future Sale

     155   

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

     158   

Underwriting

     162   

Legal Matters

     168   

Experts

     168   

Where You Can Find Additional Information

     168   

Index to Financial Statements

     F-1   


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PROSPECTUS SUMMARY

 

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and our consolidated financial statements and the related notes, before deciding to buy shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Lumena,” “we,” “us” and “our” refer to Lumena Pharmaceuticals, Inc.

 

Overview

 

We are a biopharmaceutical company focused on the development and commercialization of novel products for rare cholestatic liver diseases and serious metabolic disorders, such as nonalcoholic steatohepatitis, or NASH, where there is a high unmet medical need. We are developing two clinical-stage product candidates, LUM001 and LUM002, that inhibit the apical sodium-dependent bile acid transporter, or ASBT, which is primarily responsible for recycling bile acids from the intestine to the liver. Our product candidates have the potential to treat orphan and more prevalent liver diseases for which there currently are limited therapeutic options. Preclinical and clinical data suggest that blocking bile acid transport and reducing bile acid reabsorption with ASBT inhibitors, such as LUM001 and LUM002, has the potential to slow disease progression, improve liver function and enhance the quality of life for patients suffering from cholestatic liver diseases and NASH.

 

Our Product Pipeline

 

We have seven ongoing or planned Phase 2 clinical trials of LUM001, four of which are in Alagille syndrome, or ALGS, and one planned Phase 2 clinical trial of LUM002. The following chart depicts key information regarding our product candidates, their indications, and their current stages of development:

 

LOGO

 

 

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The Role of Bile Acids and ASBT

 

Bile acids facilitate the absorption of dietary cholesterol, fat and fat-soluble vitamins and are increasingly being recognized as signaling molecules that regulate metabolic processes. Bile acids are synthesized in the liver and stored in the gall bladder. They are released into the gastrointestinal, or GI, tract, typically in response to the ingestion of food. ASBT is present in the distal, or lower, portion of the small intestine where it mediates the uptake of bile acids across the intestinal cell membrane. ASBT, together with other transporters and proteins, recycles bile acids from the GI tract back to the liver via the portal vein. When bile and cholesterol equilibrium, or homeostasis, is disrupted, bile acids can accumulate in the liver and are associated with significant liver damage and pruritus, or itching. Inhibiting ASBT results in more bile acids being excreted in the feces and reduced bile acids returning to the liver. Bile acids are also potent signaling agents which can bind to specific receptors in the colon and stimulate the release of proteins involved in metabolic control. ASBT inhibition has been shown to reduce cholesterol levels and improve metabolic parameters, including insulin resistance and blood glucose levels, and could therefore be effective in addressing NASH.

 

LUM001—An ASBT inhibitor in development for the treatment of cholestatic liver diseases

 

Our lead product candidate, LUM001, is a novel, once-daily, orally-administered, potent and selective ASBT inhibitor, which reduces bile acid intestinal absorption leading to an increase in bile acid excretion and lower levels of bile acids in the liver and systemic circulation. LUM001 is currently in Phase 2 clinical development in children for the treatment of orphan cholestatic liver diseases including ALGS and progressive familial intrahepatic cholestasis, or PFIC. Based on consultation with regulatory authorities, we expect to file for regulatory approval for LUM001 in ALGS and PFIC utilizing the results from our planned and ongoing pediatric Phase 2 trials. LUM001 is also in Phase 2 clinical development in adults for the treatment of primary biliary cirrhosis, or PBC, and primary sclerosing cholangitis, or PSC. Pending successful completion of our Phase 2 clinical trials and input from regulatory authorities, we plan to initiate a Phase 3 development program in these indications to support regulatory approval. We have developed a proprietary liquid formulation of LUM001 for children and a tablet formulation of LUM001 for adults.

 

Cholestatic liver diseases, including ALGS, PFIC, PBC and PSC, are characterized by elevated bile acids and pruritus, which is generally the most debilitating symptom afflicting children and adults with these diseases. Surgical intervention, which lowers bile acid levels, has been shown to relieve pruritus symptoms and slow disease progression in these patients, but is associated with significant complications. By reducing serum bile acids, LUM001 may offer a novel therapeutic approach to alleviate the pruritus and progressive liver damage associated with cholestatic liver diseases.

 

There are no approved therapies for the treatment of patients with ALGS, PFIC or PSC in the United States. Cholestyramine (Questran®) is only modestly effective at lowering bile acid levels and slowing progressive liver disease because patients generally cannot tolerate a high enough dosage to realize the full therapeutic benefit. Ursodeoxycholic acid (ursodiol), or UDCA, is approved for the treatment of PBC, but only 20-30% of patients with PBC fully respond to treatment with UDCA, and the rest eventually develop cirrhosis and liver failure. In children with ALGS and PFIC, in particular, invasive partial external biliary diversion surgery, or PEBD surgery, is often used to lower circulating bile acid concentrations. Such surgical procedures are associated with significant complications. We believe that there is a significant unmet medical need for a safe, effective and non-invasive treatment alternative for patients with cholestatic liver disease.

 

 

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Based on published industry data, we estimate the prevalence of these orphan cholestatic liver diseases in the table below, as well as the initial addressable market for LUM001, which consists of patients with moderate to severe pruritus who have not undergone PEBD surgery or a liver transplant:

 

Prevalence of Orphan Cholestatic Liver Diseases

 

     United States      European Union  
     Prevalence
Rate
     Prevalence      Initial
Addressable
Market
     Prevalence
Rate
     Prevalence      Initial
Addressable
Market
 

ALGS

     3/100,000         9,500         2,850         3/100,000         15,000         4,500   

PFIC

     1/100,000         3,000         900         2/100,000         10,000         3,000   

PBC

     40/100,000         125,000         20,000         30/100,000         150,000         24,000   

PSC

     14/100,000         45,000         9,000         3/100,000         15,000         3,000   

 

LUM001 was designed to be minimally absorbed into the systemic circulation, thereby minimizing potential safety concerns. It has been extensively studied through administration to more than 1,400 human subjects in 12 completed clinical trials evaluating the product candidate as a treatment for elevated cholesterol levels. Our product candidate demonstrated a favorable safety profile and an ability to reduce serum bile acid levels in clinical trials to date. We are currently conducting or expect to initiate seven Phase 2 clinical trials of LUM001 in North America and Europe. We expect to obtain data from several of these trials over the course of the next year, beginning with Phase 2 results in ALGS by the second half of 2014, followed by Phase 2 results in PFIC and PBC by late 2014 or early 2015. LUM001 has been granted orphan drug designation for ALGS, PFIC, PBC and PSC in the United States and the European Union, providing the opportunity to receive 7 years of market exclusivity in the United States and 10 years of market exclusivity in the European Union, which can be extended to 12 years in the European Union if trials are conducted in accordance with an agreed-upon pediatric investigational plan.

 

LUM002—An ASBT inhibitor in development for the treatment of NASH

 

Our second product candidate, LUM002, is a novel, once-daily, orally-administered, highly potent and selective ASBT inhibitor in development for the treatment of NASH, a condition characterized by fat deposits in the liver, leading to inflammation and significant fibrosis. While the underlying cause of liver injury in NASH is not known, it is strongly associated with obesity, type 2 diabetes, high cholesterol and triglycerides and other metabolic disorders. By blocking bile acid reabsorption, we expect LUM002 to reduce hepatic cholesterol levels and increase colonic bile acid concentrations. Elevated colonic bile acids signal through receptors on cells in the distal portion of the large intestine. This signaling stimulates the secretion of proteins that regulate insulin release from the pancreas and glucose metabolism. We believe that therapeutic strategies aimed at modulating insulin resistance and normalizing lipoprotein metabolism have significant potential to benefit patients with NASH. LUM002 has been evaluated in two completed Phase 1 clinical trials in healthy volunteers and metabolic disease patients, and we plan to initiate a Phase 2 clinical trial in NASH patients in the second half of 2014.

 

NASH represents a substantial unmet medical need. According to the National Digestive Diseases Information Clearinghouse, 2-5% of Americans, or 6 million to 16 million individuals, suffer from this disease, of which an estimated 600,000 have been identified as having severe liver disease, which we view as the initial addressable market for LUM002. In Western countries as a whole, industry sources estimate that NASH affects 2-3% of the general population, equating to an additional 10 million to 15 million individuals in Europe. NASH is becoming more common, largely believed to be related to the widespread increase in obesity. From 1980 to 2010, the rate of obesity in the United States alone has more than doubled in adults and more than tripled in children and is expected to increase by an additional 33% over the next two decades. Globally, the rate of obesity

 

 

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has also nearly doubled since 1980 and is expected to double again by 2030 if nothing is done to reverse the epidemic. NASH is one of the main causes of liver cirrhosis, behind hepatitis C and alcoholic liver disease, and is the fastest growing cause of liver transplantation in the United States. Despite the rapidly increasing incidence of NASH, there are no therapies currently approved for the treatment of this common liver disorder.

 

Based on the favorable clinical profiles of LUM001 and LUM002, we believe we are well positioned to significantly change the treatment paradigm for orphan cholestatic liver diseases as well as NASH. Each of these product candidates represents a highly attractive commercial opportunity. We intend to establish commercialization and marketing capabilities in North America for LUM001 and pursue strategic partnerships in other territories. We intend to seek strategic partnerships to accelerate the broader clinical development and commercialization of LUM002 in NASH and other metabolic diseases. We have exclusive worldwide rights to both of our product candidates.

 

Our Strategy

 

Our goal is to be a leader in the treatment of rare cholestatic liver diseases and serious metabolic disorders of the liver where there is a high unmet medical need. The key components of our strategy include:

 

   

Pursue rapid development and regulatory approval for our lead product candidate, LUM001, in ALGS and PFIC in children.    We expect to complete our ongoing and planned Phase 2 clinical trials in ALGS to support the filing of a new drug application, or NDA, with the U.S. Food and Drug Administration, or FDA, and a marketing authorization application, or MAA, with the European Medicines Agency, or EMA. We plan to submit data to support an additional indication for the treatment of PFIC either at the time of these filings or to submit supplemental filings following approval, if any, of LUM001 for ALGS.

 

   

Develop and seek regulatory approval for LUM001 in PBC and PSC in adults.    Pending successful completion of our Phase 2 clinical trials and input from regulatory authorities, we plan to initiate a Phase 3 development program of LUM001 in PBC and PSC to support NDA and MAA filings.

 

   

Advance the development and commercialization of LUM002 through a combination of internal development and strategic partnerships.    We plan to initiate a Phase 2 clinical trial of LUM002 in NASH in the second half of 2014. We intend to seek strategic partnerships to accelerate the broader clinical development and commercialization of LUM002 in NASH and other metabolic diseases.

 

   

Establish commercialization and marketing capabilities in North America for LUM001 and pursue strategic partnerships in other territories.    We plan to build the capabilities to effectively commercialize and market LUM001 in North America if approved by the FDA. We believe that this commercial organization can be modest in size and targeted to the relatively small number of specialists in the United States who treat patients with cholestatic liver disease. We intend to pursue strategic partnerships for additional clinical development, if required, and the commercialization of LUM001 in markets outside of North America.

 

   

Maximize the therapeutic potential of LUM001 in additional liver diseases.    Beyond our initial focus in ALGS and PFIC in children and PBC and PSC in adults, we plan to develop LUM001 in other orphan cholestatic liver diseases such as biliary atresia, intrahepatic cholestasis of pregnancy, benign recurrent intrahepatic cholestasis and drug-induced cholestasis.

 

 

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Risks Associated With Our Business

 

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include:

 

   

We have a limited operating history, and we have incurred net losses in every year since our inception, including an accumulated deficit of $24.6 million as of December 31, 2013, and we anticipate that we will continue to incur net losses in the foreseeable future.

 

   

Our business is dependent on the success of our lead product candidate, LUM001, and our second product candidate, LUM002, each of which may require significant additional clinical testing before we can seek regulatory approval and potentially launch commercial sales. For example, LUM001 has been studied in 12 completed clinical trials in healthy volunteers and patients with hypercholesterolemia rather than patients with ALGS, PFIC, PBC or PSC, and LUM002 has been studied in two completed Phase 1 clinical trials in healthy volunteers and patients with type 2 diabetes, a form of metabolic disease, not patients suffering from NASH. The results of these completed clinical trials of LUM001 and LUM002 may not be indicative of results of our Phase 2 clinical trials of LUM001 in patients with ALGS, PFIC, PBC, and PSC or of LUM002 in patients with NASH.

 

   

If the market opportunities for LUM001 and LUM002 are smaller than we believe they are, our future revenue may be adversely affected, and our business may suffer.

 

   

The regulatory approval process is lengthy and time-consuming, and if we experience significant delays in the clinical development and regulatory approval of LUM001 or LUM002, or we are unable to obtain regulatory approval of LUM001 or LUM002, our business will be substantially harmed.

 

   

If we fail to obtain additional financing, we may be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

   

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

 

   

Even though we have obtained orphan drug designation for LUM001 in ALGS, PFIC, PBC, and PSC, we may not be able to obtain or maintain the benefits associated with orphan drug status, including market exclusivity.

 

   

We depend on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm our business.

 

   

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

 

   

Even if we obtain regulatory approval for our product candidates, the products may not gain favorable reimbursement or market acceptance among physicians, patients, tertiary care centers, transplant centers and others in the medical community.

 

   

If our efforts to protect the proprietary nature of the intellectual property related to our product candidates are not adequate, we may not be able to compete effectively in our market.

 

   

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

 

 

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Corporate Information

 

We were incorporated in Delaware in January 2011. Our principal executive offices are located at 12531 High Bluff Drive, Suite 110, San Diego, California 92130, and our telephone number is (858) 461-0694. Our corporate website address is www.lumenapharma.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

We have obtained a registered trademark for Lumena Pharmaceuticals® in the United States and the European Union. This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

Implications of Being an Emerging Growth Company

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

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

 

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. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock to be outstanding after this offering

             shares

 

Over-allotment option

We have granted to the underwriters the option, exercisable for 30 days from the date of this prospectus, to purchase up to              additional shares of common stock.

 

Use of proceeds

We estimate that we will receive net proceeds of approximately $             million (or approximately $             million if the underwriters exercise their over-allotment option in full) from the sale of the shares of common stock offered by us in this offering, based on an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to fund development of LUM001 and LUM002 and for working capital purposes, including general operating expenses and pre-commercialization activities. See “Use of Proceeds.”

 

Risk factors

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

 

Proposed NASDAQ Global Market symbol

“LIVR”

 

Entities affiliated with certain of our existing stockholders and directors have indicated an interest in purchasing up to an aggregate of approximately $             million in shares of our 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 potential investors and any of these potential investors could determine to purchase more, less or no shares in this offering.

 

The number of shares of our common stock to be outstanding after this offering is based on 66,567,343 shares of common stock outstanding as of April 1, 2014, and excludes:

 

   

8,017,068 shares of common stock issuable upon the exercise of outstanding stock options as of April 1, 2014, at a weighted-average exercise price of $0.48 per share;

 

   

10,000 shares of common stock issuable upon the exercise of an outstanding warrant as of April 1, 2014, at an exercise price of $0.11 per share, which outstanding warrant will be automatically cancelled upon the closing of this offering if not previously exercised;

 

   

             shares of common stock reserved for future issuance under our 2014 employee stock purchase plan, or the ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering; and

 

 

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             shares of common stock reserved for future issuance under our 2014 equity incentive plan, or the 2014 plan, plus 866,600 shares of common stock reserved for future issuance under our 2012 equity incentive plan, or the 2012 plan, as of April 1, 2014, which shares will be added to the shares reserved under the 2014 plan upon its effectiveness, which will occur upon the execution and delivery of the underwriting agreement for this offering.

 

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

the conversion of all our outstanding preferred stock as of April 1, 2014 into an aggregate of 65,362,011 shares of common stock, which will occur automatically in connection with the closing of this offering;

 

   

no exercise by the underwriters of their option to purchase up to an additional              shares of our common stock to cover over-allotments;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and

 

   

a 1-for-     reverse stock split of our common stock to be effected prior to the closing of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following summary consolidated financial data should be read together 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. Our historical results are not necessarily indicative of the results that may be expected in the future. We derived the summary consolidated statement of operations data for the years ended December 31, 2012 and 2013, and for the period from January 24, 2011 (inception) to December 31, 2013 and the summary consolidated balance sheet data as of December 31, 2013 from our audited consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

                 Period from
January 24, 2011
(Inception) to
December 31,
2013
 
                
     Year Ended December 31,    
     2012     2013    
     (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

      

Operating expenses:

      

Research and development

   $ 6,684      $ 13,083      $ 20,094   

General and administrative

     1,228        1,968        3,710   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,912        15,051        23,804   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,912     (15,051     (23,804

Other income (expense):

      

Interest income

     3        —          3   

Interest expense

     (642     —          (797
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,551   $ (15,051   $ (24,598
  

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(1)

   $ (17.01   $ (14.23  
  

 

 

   

 

 

   

Weighted average shares outstanding, basic and diluted(1)

     502,765        1,057,429     
  

 

 

   

 

 

   

Pro forma net loss per share, basic and diluted (unaudited)(1)

     $ (0.59  
    

 

 

   

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

       25,517,313     
    

 

 

   

 

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

 

 

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     As of December 31, 2013
     Actual     Pro Forma(1)     Pro Forma as
Adjusted(2)(3)
     (unaudited)
     (in thousands)

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 13,884      $ 59,384     

Working capital

     10,986        56,486     

Total assets

     14,263        59,763     

Convertible preferred stock

     35,450        —       

Deficit accumulated during the development stage

     (24,598     (24,598  

Total stockholders’ equity (deficit)

     (24,359     56,591     

 

(1)   Pro forma amounts reflect (1) the sale and issuance of 29,727,063 shares of our Series B preferred stock in March 2014 and (2) the conversion of all our outstanding shares of convertible preferred stock as of December 31, 2013 and our Series B preferred stock issued in March 2014 into an aggregate of 65,362,011 shares of our common stock automatically in connection with the closing of this offering.

 

(2)   Pro forma as adjusted amounts reflect the pro forma conversion adjustments described in footnote (1) above, as well as the sale of              shares of our common stock in this offering at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(3)   A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by $             million, assuming the number of shares offered by us as stated on the cover page of this prospectus remains unchanged and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) equity by $             million, assuming the assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

 

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

 

Risks Related to Our Business and Industry

 

We have a limited operating history, and we have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the foreseeable future.

 

We are a clinical-stage biopharmaceutical company with a limited operating history. Our operations began in 2011 and we have only a limited operating history upon which you can evaluate our business and prospects. Our operations to date have been limited to conducting research and development activities for our lead product candidate, LUM001, and our second product candidate, LUM002. In addition, as an early stage company, we have limited experience and have not yet demonstrated an ability to overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical area. We have not yet demonstrated an ability to obtain regulatory approval for, or to commercialize, a product candidate. Consequently, any predictions about our future performance may not be as accurate as they would be if we had a history of successfully developing and commercializing pharmaceutical products.

 

Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effectiveness in the targeted indication or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in January 2011. For the years ended December 31, 2012 and 2013, we reported a net loss of $8.6 million and $15.1 million, respectively. As of December 31, 2013, we had a deficit accumulated during the development stage of $24.6 million.

 

We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and development of, and seek regulatory approvals for, our product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with drug development, we are unable to accurately predict the timing or amount of increased expenses, or when, if at all, we will be able to achieve profitability.

 

Our business is dependent on the success of LUM001 and LUM002, each of which may require significant additional clinical testing before we can seek regulatory approval and potentially launch commercial sales.

 

Our business and future success depends on our ability to obtain regulatory approval for, and then successfully commercialize, LUM001, which is currently in clinical development for the treatment of rare cholestatic liver diseases, and LUM002, which is currently in clinical development for the treatment of NASH. We currently generate no revenues from sales of any drugs, and we may never be able to develop a marketable

 

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drug. Our product candidates will require additional clinical and nonclinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient manufacturing capacity and significant marketing efforts before we can generate any revenues from product sales. For example, LUM001 has been studied in 12 completed clinical trials in healthy volunteers and patients with hypercholesterolemia rather than patients with ALGS, PFIC, PBC or PSC, and LUM002 has been studied in two completed Phase 1 clinical trials in healthy volunteers and patients with type 2 diabetes, not patients suffering from NASH. The results of these completed clinical trials of LUM001 and LUM002 may not be indicative of results of our Phase 2 clinical trials of LUM001 in patients with ALGS, PFIC, PBC, and PSC or of LUM002 in patients with NASH. We are not permitted to market or promote either LUM001 or LUM002 before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approvals.

 

Since the beginning of the third quarter of 2013, we have initiated two Phase 2 clinical trials and one Phase 2 extension trial of LUM001 in children with ALGS. We also plan to initiate another Phase 2 clinical trial of LUM001 in children with ALGS. We will seek further discussions with the FDA and EMA to determine if our Phase 2 clinical trials in ALGS may be used to support the filing of an NDA in the United States and an MAA in the European Union. Subject to the outcome of these discussions, we expect to rely on the results of our ongoing and planned Phase 2 clinical trials in ALGS to support an NDA filing and an MAA filing. We cannot guarantee that the FDA and EMA will agree that any of our Phase 2 clinical trials will qualify as registrational trials or that the FDA and EMA will not require additional nonclinical studies or Phase 3 clinical trials for commercial approval. We also plan to submit data from a single Phase 2 clinical trial in children with PFIC, which we initiated in the first quarter of 2014, to support approval for LUM001 in this indication either at the time of our NDA and MAA filings for ALGS or as supplemental filings following any approval for LUM001 in ALGS, which may not be approved by the FDA or EMA.

 

In addition, we initiated Phase 2 clinical trials of LUM001 in patients with PBC and PSC in the third quarter of 2013 and the first quarter of 2014, respectively. We will need to conduct one or more Phase 3 clinical trials in these indications in order to obtain data to support NDA and MAA filings. In the case of LUM002, we have completed a Phase 1 clinical trial in healthy volunteers and metabolic disease patients, and we plan to initiate a Phase 2 clinical trial in NASH patients in the second half of 2014. We expect that we will need to conduct a longer-term Phase 2 clinical trial prior to the initiation of a pivotal Phase 3 program to obtain data to support submission of an NDA filing for LUM002. Furthermore, the FDA has not yet indicated what will be acceptable endpoints for a Phase 3 clinical trial for the treatment of NASH. If the endpoints approved by the FDA for Phase 3 clinical trials in this indication differ from the endpoints of our planned clinical trials, we may need to conduct additional trials of LUM002 in order to support submission of an NDA filing.

 

There is no guarantee that any of our clinical trials will be successful or will be completed on time or at all, and the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials. Even if such regulatory authorities agree with the design and implementation of our clinical trials, we cannot guarantee that such regulatory authorities will not change their requirements in the future. In addition, even if the trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit LUM001 or LUM002 for approval. To the extent that the results of our clinical trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval for LUM001 or LUM002 may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval for LUM001 and LUM002.

 

Our clinical trials may fail to adequately demonstrate the safety and efficacy of our product candidates, which could prevent or delay regulatory approval and commercialization.

 

Before obtaining regulatory approvals for the commercial sale of a product candidate, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that a product candidate is both safe

 

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and effective for use in each target indication. Clinical trials often fail to demonstrate safety and efficacy of the product candidate studied for the target indication. Most product candidates that commence clinical trials are never approved by regulatory authorities for commercialization. In the case of LUM001, we are seeking to develop treatments for rare cholestatic liver diseases for which there is limited clinical experience, and, in some cases our clinical trials use novel end points and measurement methodologies, which add a layer of complexity to our clinical trials and may delay or prevent regulatory approval. Certain of our clinical trials designate a reduction in pruritus as an endpoint. For example, our Phase 2 clinical trial in the United States and Canada for patients with ALGS, which we refer to as ITCH and which was initiated in the first quarter of 2014, evaluates change from baseline in pruritus as assessed using caregiver and patient reported outcome instruments administered every morning and evening to capture the worst itch experienced over the previous 12 hours. Because the measure of pruritus relies on subjective patient feedback, it is inherently difficult to evaluate. It can be influenced by factors outside of our control, and can vary widely from day to day for a particular patient, and from patient to patient and site to site within a clinical trial. The placebo effect may also have a significant impact on pruritus trials. In addition, we are still in the process of validating the caregiver and patient reported outcome instruments being used in our current Phase 2 clinical trials. It is possible that the FDA will not accept the validation of these instruments or that they will require changes in the instruments, making additional clinical trials necessary.

 

Clinical drug development involves a lengthy and expensive process with uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.

 

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or safety profiles, notwithstanding promising results in earlier trials.

 

LUM001 has been previously evaluated as a treatment for elevated cholesterol levels in a clinical development program in which over 1,400 human subjects received LUM001 in a total of 12 completed clinical trials. These trials included healthy volunteers and patients with hypercholesterolemia, rather than patients with ALGS, PFIC, PBC or PSC. Although we believe LUM001 may have a beneficial effect in patients with cholestatic liver disease, we are now seeking to evaluate LUM001 in targeted indications within cholestatic liver disease, including the safety and efficacy of LUM001 as treatment for patients with ALGS, PFIC, PBC and PSC, for which it has not previously been evaluated. There can be no assurance that the bile acid-lowering effects of LUM001 seen in healthy volunteers and patients with hypercholesterolemia in our previous clinical trials will be replicated in patients with cholestatic liver diseases in our ongoing and planned clinical trials. In addition to the Phase 1 clinical trial in healthy volunteers and metabolic disease patients that we recently completed, LUM002 has previously only been evaluated in a single three-part Phase 1 clinical trial in healthy volunteers, and we have not yet commenced our planned randomized, double-blind, placebo-controlled Phase 2 clinical trial of LUM002 in NASH patients. We cannot be certain that any of our planned clinical trials will be successful, and any safety concerns observed in any one of our clinical trials in our targeted indications could limit the prospects for regulatory approval of our product candidates in other indications.

 

If the market opportunities for LUM001 and LUM002 are smaller than we believe they are, our future revenue may be adversely affected, and our business may suffer.

 

If the size of the market opportunities in each of our target indications is smaller than we anticipate, we may not be able to achieve profitability and growth. We focus our research and development of LUM001 on treatments for rare cholestatic liver diseases with relatively small patient populations, and we will initially target a subset of these patient populations consisting of patients with moderate to severe pruritus who have not

 

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undergone PEBD surgery or a liver transplant. Given the small number of patients who have the diseases that we are targeting with LUM001, it is critical to our ability to grow and become profitable that we continue to successfully identify patients with these rare cholestatic liver diseases. While we are targeting LUM002 for the treatment of NASH, a disease with a much larger prevalence as compared to the target populations for LUM001, our projections of both the number of people who have NASH or our target cholestatic liver diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient foundations, and market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be lower than expected. The effort to identify patients with diseases we seek to treat is in early stages, and we cannot accurately predict the number of patients for whom treatment might be possible. For example, NASH is often undiagnosed and if improved diagnostic techniques for identifying NASH patients who will benefit from treatment are not developed, our market opportunity may be smaller than we currently anticipate. Additionally, the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business. Further, even if we obtain significant market share for our product candidates, because the potential target populations are very small, we may never achieve profitability despite obtaining such significant market share.

 

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

 

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Each indication for which we plan to evaluate LUM001 is a rare cholestatic liver disease with limited patient populations from which to draw participants in clinical trials. We will be required to identify and enroll a sufficient number of patients with the disease under investigation for each of our ongoing and planned clinical trials of LUM001. Potential patients for LUM001 may not be adequately diagnosed or identified with the diseases which we are targeting or may not meet the entry criteria for our studies. We also may encounter difficulties in identifying and enrolling NASH patients with a stage of disease appropriate for our planned clinical trials. We may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible patients to participate in the clinical trials required by the FDA or other foreign regulatory agencies. In addition, the process of finding and diagnosing patients may prove costly. We have initiated or expect to initiate five clinical trials in pediatric cholestatic liver disease, two clinical trials in adult cholestatic liver disease and one planned clinical trial in NASH. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.

 

We believe we have appropriately accounted for the above factors in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are correct, or that we will not experience delays in enrollment, which would result in the delay of completion of such trials beyond our expected timelines.

 

The FDA regulatory approval process is lengthy and time-consuming, and we may experience significant delays in the clinical development and regulatory approval for our product candidates.

 

We have not previously submitted an NDA to the FDA, or similar drug approval filings to comparable foreign authorities. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and may not be obtained.

 

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We may also experience delays in enrolling and completing the initiated clinical trials or any future trials for a variety of reasons, including delays related to:

 

   

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

 

   

obtaining regulatory approval to commence a trial;

 

   

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

 

   

obtaining Institutional Review Board, or IRB, approval at each clinical trial site;

 

   

recruiting suitable patients to participate in a trial;

 

   

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

 

   

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

 

   

adding new clinical trial sites; or

 

   

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

 

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

 

We may fail to obtain regulatory approval for our product candidates.

 

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

 

   

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials or the validation of our caregiver and patient reported outcome instruments;

 

   

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

 

   

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

 

   

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

 

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

 

   

the data collected from clinical trials of LUM001 and LUM002 may not be sufficient to satisfy the FDA or comparable foreign regulatory authorities to support the submission of an NDA or other comparable submissions in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere;

 

   

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

 

Obtaining and maintaining regulatory approval for a product candidate in one jurisdiction does not mean that we will be successful in obtaining regulatory approval for that product candidate in other jurisdictions.

 

Obtaining and maintaining regulatory approval for a product candidate in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a drug candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

 

We expect to submit an MAA to the EMA for approval for LUM001 and LUM002 in the European Union. As with the FDA, obtaining approval of an MAA from the EMA is a similarly lengthy and expensive process and the EMA has its own procedures for approval for product candidates. The FDA and the EMA also have different bases for primary efficacy evaluation which impact our trial design. For example, in the United States, the primary efficacy endpoint for ITCH will be based on a clinical measure, or the mean change from baseline to Week 13 in pruritus as measured by the average daily score of the ItchRO(Obs), a caregiver-reported outcome instrument measuring severity of itch. The primary efficacy endpoint for our Phase 2 clinical trial in patients with ALGS in the United Kingdom, which we refer to as IMAGO, will be based on a biochemical marker, or the mean change from baseline to Week 13 in fasting serum bile acid level. As a result of these differing primary efficacy endpoints, even if one trial is successful, the other trial may not be. Regulatory authorities in jurisdictions outside of the United States and the European Union also have requirements for approval for product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of either LUM001 or LUM002 will be harmed, which would adversely affect our business, prospects, financial condition and results of operations.

 

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or result in significant negative consequences following marketing approval, if any.

 

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. To date, patients treated with LUM001

 

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and LUM002 have experienced drug-related side effects, including abdominal cramping (pain) and diarrhea/loose stools. There was one report of cholecystitis in a Phase 1 clinical trial of LUM001 and one report of elevated levels of alanine aminotransferase and aspartate aminotransferase, which could be indicative of potential injury to the liver, in a Phase 1 clinical trial of LUM002. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval for our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

 

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

 

   

regulatory authorities may withdraw approvals of such product;

 

   

regulatory authorities may require additional warnings on the label;

 

   

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

 

   

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

 

   

our reputation may suffer.

 

If we receive regulatory approval for a product candidate, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with any product.

 

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

 

   

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

 

   

fines, warning letters or holds on clinical trials;

 

   

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

 

   

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

 

   

injunctions or the imposition of civil or criminal penalties.

 

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

 

Even if we obtain regulatory approval for our product candidates, the products may not gain market acceptance among physicians, patients, tertiary care centers, transplant centers and others in the medical community.

 

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

 

   

the clinical indications for which the product candidate is approved;

 

   

physicians, major operators of tertiary care centers and transplant centers and patients considering the product as a safe and effective treatment;

 

   

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

 

   

the prevalence and severity of any side effects;

 

   

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

 

   

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

 

   

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

 

   

the cost of treatment in relation to alternative treatments;

 

   

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

 

   

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

 

   

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

 

   

the effectiveness of our sales and marketing efforts.

 

If any of our product candidates are approved but fail to achieve market acceptance among physicians, patients or others in the medical community, we will not be able to generate significant revenues, which would have a material adverse effect on our business, prospects, financial condition and results of operations. In addition, even if any of our product candidates gain acceptance, the markets for the treatment of patients with our target indications, including ALGS, PBC, PSC, PFIC and NASH, may not be as significant as we estimate.

 

Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates which could make it difficult for us to sell our product candidates profitably.

 

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

 

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Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and the amount of reimbursement. Reimbursement by a third-party payor may depend upon a number of factors, including, but not limited to, the third-party payor’s determination that use of a product is:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

 

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of our products. We may not be able to provide data sufficient to obtain adequate coverage and reimbursement. Assuming we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. If coverage and reimbursement of our future products are unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

 

In addition, the market for our products will depend significantly on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access through formulary controls or otherwise to a branded drug when a less costly generic equivalent or other alternative is available.

 

In the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained. In addition, since we plan to introduce our liquid and tablet formulations of LUM001 at different prices, we may face product substitution between formulations or downward pricing pressures from third-party payors on the higher priced formulation.

 

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

 

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

 

Third-party payors, whether domestic or foreign, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In both the United States and certain foreign

 

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jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. For example, in 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Healthcare Reform Act, was enacted. The Healthcare Reform Act, among other things, revised the methodology by which rebates owed by manufacturers for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs, and provided incentives to programs that increase the federal government’s comparative effectiveness research.

 

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

 

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

 

   

the demand for any product for which we obtain regulatory approval;

 

   

our ability to set a price that we believe is fair for our products;

 

   

our ability to generate revenues and achieve or maintain profitability;

 

   

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

 

   

the availability of capital.

 

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

 

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

 

We currently do not have a commercial organization for the marketing, sales and distribution of pharmaceutical products. To commercialize our product candidates we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. We expect that the majority of all ALGS, PFIC, PBC and PSC patients will be treated at tertiary care centers and transplant centers and therefore can be addressed with a targeted sales force. We intend to build our own commercial infrastructure in North America to target these centers, but will evaluate opportunities to partner with pharmaceutical companies that have established sales and marketing capabilities to commercialize LUM001 outside of North America. We intend to seek strategic partnerships to commercialize LUM002 in NASH.

 

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

 

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

 

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

 

   

differing regulatory requirements in foreign countries;

 

   

the potential for 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, price and exchange controls and other regulatory requirements;

 

   

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

 

   

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

 

   

foreign taxes, including withholding of payroll taxes;

 

   

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

 

   

difficulties staffing and managing foreign operations;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.

 

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

 

Although we currently have no specific plans to do so, we may seek to develop and commercialize product candidates in addition to LUM001 and LUM002. If we decide to pursue the development and commercialization

 

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

 

If we fail to develop LUM001 for additional indications, our commercial opportunity will be limited.

 

To date, we have focused the majority of our development efforts on the development of LUM001 for the treatment of patients with ALGS, PFIC, PBC and PSC. One of our strategies is to pursue clinical development of LUM001 in additional hepatic disease conditions such as biliary atresia, intrahepatic cholestasis of pregnancy, post-liver transplant cholestasis, benign recurrent intrahepatic cholestasis and drug-induced cholestasis.

 

Cholestatic liver diseases are all rare diseases and, as a result, the market size for the treatment of patients with ALGS, PFIC, PBC and PSC is limited. In addition, because a significant proportion of adult patients do not exhibit any symptoms at the time of diagnosis, cholestatic liver disease may be left undiagnosed for a significant period of time. Due to these factors, our ability to grow revenues may be dependent on our ability to successfully develop and commercialize LUM001 for the treatment of additional indications. Developing, obtaining regulatory approval and commercializing LUM001 for additional indications will require substantial additional funding beyond the net proceeds of this offering and is prone to the risks of failure inherent in drug development. We cannot provide you any assurance that we will be able to successfully advance any of these indications through the development process. Even if we receive regulatory approval to market LUM001 for the treatment of any of these additional indications, we cannot assure you that any such additional indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize LUM001 for these additional indications, our commercial opportunity will be limited.

 

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

 

The biopharmaceutical industry is characterized by intense competition and rapid innovation. Although we believe that we hold a leading position in our focus on rare cholestatic liver diseases, our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products that are more effective or less costly than our product candidates. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability profile, reliability, convenience of dosing, price and reimbursement.

 

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Outside of surgery, there are no approved therapies for the treatment of ALGS, PFIC, or PSC in the United States. UDCA, which is approved for the treatment of PBC, is sometimes used to treat patients with other cholestatic liver diseases. Cholestyramine and other bile salt resins, rifampin, and naltrexone are sometimes used to treat patients suffering from pruritus, and a number of drugs, including UDCA, rifampin and naltrexone are used off-label to treat patients suffering from cholestatic liver disease. In addition, there are product candidates in development for some of these indications. For example, Intercept Pharmaceuticals, Inc.’s product candidate obeticholic acid has received orphan drug designation for PBC in the United States and Europe and for PSC in the United States, and Albireo AB’s A4250 has received orphan drug designation for PFIC and PBC in the United States and Europe and for ALGS in Europe. Intercept is currently conducting a Phase 3 clinical trial of obeticholic acid in PBC and expects results to be available in the second quarter of 2014. We are also aware of other companies, including Eli Lilly and Company and Phenex Pharmaceuticals AG, that have FXR agonists in Phase 1 or earlier stages of development. Additionally, GlaxoSmithKline plc and Albireo AB have ASBT inhibitors in Phase 1 or preclinical development for cholestatic liver diseases. Johnson & Johnson and NovImmune SA are investigating monoclonal antibodies in Phase 2 trials as potential treatments for PBC and Gilead Sciences, Inc. is investigating a monoclonal antibody in Phase 2 for PSC. Dr. Falk Pharma GmbH has also acquired the rights to RhuDex®, a clinical stage compound, which it plans to develop for the treatment of PBC. Additionally, Dr. Falk Pharma GmbH is conducting a Phase 2 clinical trial of nor-Ursodeoxycholic acid in PSC and Phase 3 clinical trial of combination UDCA and budesonide, a steroid, as a treatment for PBC. Finally, NGM Biopharmaceuticals, Inc. is investigating a biologic in combination with UDCA in Phase 2 trials for PBC. In addition, invasive surgery, including liver transplantation, may be utilized for certain indications of cholestatic liver disease. Surgical or medical procedures such as partial external biliary diversion, or PEBD, surgery, nasobiliary drainage, and external filtering of bile acids from the blood, are also employed in an attempt to lower bile acid levels, manage pruritus and improve measures of liver function. In children with ALGS and PFIC, in particular, PEBD surgery is often used to lower circulating bile acid concentrations. In these patients, liver transplantation may be ultimately required due to liver failure and/or severe pruritus.

 

There are currently no therapeutic products approved for the treatment of NASH. There are several marketed therapeutics that are currently used off label for this indication, such as insulin sensitizers (e.g., metformin), antihyperlipidemic agents (e.g., gemfibrozil), pentoxifylline and UDCA, but they have not been proven effective in the treatment of NASH. We are aware of several companies that have product candidates in Phase 2 clinical development for the treatment of NASH, including Conatus Pharmaceuticals Inc., Galmed Medical Research Ltd., Genfit Corp., Gilead Sciences, Inc., Immuron Ltd., Intercept Pharmaceuticals, Mochida Pharmaceutical Co., Ltd., NasVax Ltd., Raptor Pharmaceutical Corp. and Takeda Pharmaceutical Company Limited, and there are other companies with candidates in earlier stage development. It is also possible that, in addition to the Intercept Pharmaceutical product candidate, one or more of the FXR agonist candidates mentioned above could be explored for the treatment of NASH. Even if we obtain regulatory approval for our product candidates, the availability and price of our competitors’ products could limit the demand, and the price we are able to charge, for our product candidates. We will not achieve our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug products or choose to reserve our product candidates for use in limited circumstances. Our inability to compete with existing or subsequently introduced drug products would have a material adverse impact on our business, prospects, financial condition and results of operations.

 

Even though we have obtained orphan drug designation for LUM001 in ALGS, PFIC, PBC and PSC, we may not be able to obtain or maintain the benefits associated with orphan drug status, including market exclusivity.

 

Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States. In September

 

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2013, the FDA granted orphan drug status to LUM001 for the treatment of patients with ALGS, PFIC, PBC and PSC in the United States. We also received orphan drug status for LUM001 for ALGS, PFIC, PBC and PSC in the European Union in January 2014. Generally, if a drug with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug may be entitled to a period of marketing exclusivity, which precludes the FDA or the EMA from approving another marketing application for the same drug for that time period. We can provide no assurance that another drug will not receive marketing approval prior to our product candidates. The applicable period is seven years in the United States and ten years in the European Union, which may be extended to twelve years in the European Union in the case of product candidates that have complied with an EMA-agreed upon pediatric investigation plan. The exclusivity period in the European Union can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. In addition, even after a drug is granted orphan exclusivity and approved, the FDA can subsequently approve another drug for the same condition before the expiration of the seven year exclusivity period if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In the European Union, the EMA may deny marketing approval for a product candidate if it determines such product candidate is structurally similar to an approved product for the same indication.

 

Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process. Also, regulatory approval for any product candidate may be withdrawn, and other product candidates may obtain approval before us and receive orphan drug exclusivity, which could block us from entering the market.

 

Even if we obtain orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the candidate from competition because different drugs can be approved for the same condition before the expiration of the orphan drug exclusivity period.

 

We may form or seek strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.

 

We may form or seek strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to LUM001, and any future product candidates that we may develop. We intend to seek a strategic partnership to accelerate the broader clinical development and commercialization of LUM002 in NASH and other metabolic diseases, subject to our requirement to first negotiate with Sanofi. Any of these relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for LUM001 or LUM002 because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view LUM001 or LUM002 as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to LUM001 or LUM002 could delay the development and commercialization of LUM001 and LUM002 in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.

 

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

 

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

 

We conduct our operations at our facility in San Diego, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

 

To induce valuable employees to remain at Lumena, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior scientific and medical personnel.

 

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

 

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

 

As of April 1, 2014, we had 17 employees, all of whom are full-time. As our development and commercialization plans and strategies develop, and as we transition into operating as a public company, we expect to need additional development, managerial, operational, financial, sales, marketing and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

   

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

 

   

managing our internal development efforts effectively, including the clinical and regulatory review process for LUM001 and LUM002, while complying with our contractual obligations to contractors and other third parties; and

 

   

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

 

In addition, by the second half of 2014, we expect to be conducting seven Phase 2 clinical trials of LUM001 and one Phase 2 clinical trial of LUM002 concurrently. Given the small size of our organization, we may encounter difficulties managing eight clinical trials at the same time, which could negatively affect our ability to manage the growth of our organization, particularly as we take on additional responsibilities associated with

 

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

 

Our internal computer systems, or those used by our contract research organizations or other contractors or consultants, may fail or suffer security breaches.

 

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

 

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

 

Our operations, and those of our CROs and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce LUM001 and LUM002. Our ability to obtain clinical supplies of LUM001 and LUM002 could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters is located in California near major earthquake faults and fire zones. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

 

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

 

We are exposed to the risk that employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) the laws of the FDA and other similar foreign regulatory bodies, including those laws that require the reporting of true, complete and accurate information to the FDA and other similar foreign regulatory bodies; (2) manufacturing standards; (3) healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws or (4) laws that require the true, complete and accurate reporting of our financial information or data. These laws may impact, among other things, our current activities with principal investigators and research subjects, as well as proposed and future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. If we obtain regulatory approval for any of our product candidates and begin commercializing those products in the United States and in the European Union, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations.

 

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

 

Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include, but are not limited to:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs;

 

   

federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other third-party payors that are false or fraudulent or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of,

 

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any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization;

 

   

the federal Physician Payment Sunshine Act, created under the Health Reform Law, and its implementing regulations, which require manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services, or HHS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

 

   

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback, false claims, consumer protection and unfair competition laws which may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements as well as submitting claims involving healthcare items or services reimbursed by any third party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government that otherwise restricts payments that may be made to healthcare providers; state laws that require drug manufacturers to file reports with states regarding marketing information, such as the tracking and reporting of gifts, compensations and other remuneration and items of value provided to healthcare professionals and entities (compliance with such requirements may require investment in infrastructure to ensure that tracking is performed properly, and some of these laws result in the public disclosure of various types of payments and relationships, which could potentially have a negative effect on our business and/or increase enforcement scrutiny of our activities); and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, with differing effects.

 

In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

 

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, health care reform legislation in the last several years has strengthened these laws. For example, the Healthcare Reform Law, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

 

Effective upon the closing of this offering, we will adopt a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting

 

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us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

 

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

 

We face an inherent risk of product liability as a result of the clinical testing of LUM001 and LUM002 and will face an even greater risk if we commercialize any products. For example, we may be sued if any of our product candidates causes or is perceived to cause 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, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates;

 

   

injury to our reputation;

 

   

withdrawal of clinical trial participants;

 

   

initiation of investigations by regulators;

 

   

costs to defend the related litigation;

 

   

a diversion of management’s time and our resources;

 

   

substantial monetary awards to trial participants or patients;

 

   

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

 

   

loss of revenue;

 

   

exhaustion of any available insurance and our capital resources;

 

   

the inability to commercialize any product candidate; or

 

   

a decline in our share price.

 

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry $5 million of primary product liability insurance and $5 million of excess product liability insurance covering our clinical trials. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. If we determine that it is prudent to increase our product liability coverage due to the commercial launch of any approved product, we may be unable to obtain such increased coverage on acceptable terms, or at all. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to

 

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pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

 

Risks Related to Our Reliance On Third Parties

 

We depend on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm our business.

 

We are dependent on patents, know-how and proprietary technology, both our own and licensed from others. We have in-licensed know-how related to LUM001 from Pfizer, Inc. and certain patents and know-how related to LUM001 from Satiogen Pharmaceuticals, Inc., or Satiogen. We have also in-licensed certain patents and know-how related to LUM002 from Sanofi and Satiogen. We are required to use commercially reasonable efforts or diligent efforts to commercialize products based on the licensed rights and to pay certain royalties based off our net sales and, in the case of Satiogen, our sublicensing revenues. Any termination of these licenses could result in the loss of significant rights and could harm our ability to commercialize our product candidates. See “Business—License Agreements” for a description of our license agreements, which includes a description of the termination provisions of these agreements.

 

We are generally also subject to all of the same risks with respect to protection of intellectual property that we license, as we are for intellectual property that we own, which are described below under “Risks Related to Our Intellectual Property.” If we or our licensors fail to adequately protect this intellectual property, our ability to commercialize products could suffer.

 

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

 

We currently rely on, and intend to continue relying on, third-party CROs in connection with our clinical trials for LUM001 and LUM002. We control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on our CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with cGCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these CROs fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials must be conducted with drug product produced under cGMP regulations and will require a large number of test subjects. Our failure or any failure by our CROs to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of our CROs violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

 

Our CROs are not our employees and, except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could affect their performance on our behalf. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or

 

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

 

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

 

We rely completely on third parties to manufacture our preclinical and clinical drug supplies and we intend to rely on third parties to produce commercial supplies of LUM001 and LUM002, if approved, and these third parties may fail to obtain and maintain regulatory approval for their facilities, fail to provide us with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

 

We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical drug supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture LUM001 or LUM002 on a clinical or commercial scale. Instead, we rely on contract manufacturers for such production. In particular, we rely on a number of different manufacturers to obtain our supply of LUM001 to support our clinical trial program, including different manufacturers for adult and pediatric formulations of LUM001. We rely on Sanofi to manufacture our clinical supply of LUM002. Although we believe we currently have sufficient supply of LUM002 to support our ongoing and planned Phase 2 clinical trials, if we were to experience an unexpected loss of LUM002 supply or require more LUM002 than we currently anticipate, we could experience delays in our Phase 2 clinical trials as Sanofi would need to manufacture additional LUM002, which can take up to two years to manufacture. In addition, while we are planning to manufacture clinical supply of LUM002 well in advance of initiation of our Phase 3 program, due to the long manufacturing lead time, any delay in our planned manufacturing may delay the initiation of our Phase 3 program for LUM002.

 

We do not currently have any long-term agreement with a manufacturer to produce raw materials, active pharmaceutical ingredients, and the finished products of LUM001 and LUM002. We will need to identify and qualify a third-party manufacturer prior to commercialization of our product candidates, and we intend to enter into agreements for commercial production with third-party suppliers or in the case of LUM002, with Sanofi or other third-party suppliers. Any delay in identifying and qualifying a manufacturer for commercial production could delay the potential commercialization of LUM001 or LUM002, and, in the event that we do not have sufficient product to complete our planned clinical trials, it could delay such trials.

 

The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the applicable regulatory authorities, including the FDA, pursuant to inspections that will be conducted after an NDA or comparable foreign regulatory marketing application is submitted. We do not control the manufacturing process of our product candidates and are completely dependent on our contract manufacturing partners for compliance with the FDA’s cGMP requirements for manufacture of both the active drug substances and finished drug product. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s strict regulatory requirements, they will not be able to secure or maintain FDA approval for the manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, or if our suppliers or contract manufacturers decide they no longer want to supply or manufacture for us, we may need to find alternative manufacturing facilities, in

 

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which case we might not be able to identify manufacturers for clinical or commercial supply on acceptable terms, or at all, which would significantly impact our ability to develop, obtain regulatory approval for or market LUM001 and LUM002.

 

In addition, the manufacture of pharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our supply of LUM001 or LUM002 or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of our product candidates will not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide our product candidate to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.

 

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

 

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

 

Risks Related to Our Financial Position and Capital Requirements

 

If we fail to obtain additional financing, we may be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the clinical development and seek regulatory approval of LUM001 and LUM002. We will require significant additional amounts in order to prepare for commercialization, and, if approved, to launch and commercialize LUM001 and LUM002.

 

We estimate that our net proceeds from this offering will be approximately $             million, based on the initial public offering price of $             per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We believe that such proceeds together with our existing cash

 

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and cash equivalents will be sufficient to fund our operations through at least the next 24 months. In particular, we expect that the net proceeds from this offering, along with our existing cash and cash equivalents, will allow us to complete our ongoing and planned Phase 2 clinical trials of LUM001 for ALGS, PFIC, PBC and PSC and our planned Phase 2 clinical trial for LUM002 for NASH, as well as to initiate our planned Phase 3 clinical trials of LUM001 for PBC and PSC. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We will require additional capital for the further development and commercialization of LUM001 and LUM002 and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate.

 

We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of LUM001, LUM002 or other research and development initiatives. We also could be required to seek collaborators for LUM001 or LUM002 at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to LUM001 or LUM002 in markets where we otherwise would seek to pursue development or commercialization ourselves.

 

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

 

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements.

 

Our report from our independent registered public accounting firm for the year ended December 31, 2013 includes an explanatory paragraph stating that our losses and negative cash flows from operating activities and deficit accumulated during the development stage at December 31, 2013 of $24.6 million raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment. We may also be forced to make reductions in spending, including delaying or curtailing our planned clinical programs, or to extend payment terms with our suppliers or licensors. Future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

 

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

 

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

 

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

 

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. As a result of our most recent private placements and other transactions that have occurred over the past three years, we have experienced such ownership changes, and, upon the closing of this offering, may experience, an additional “ownership change.” We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As of December 31, 2013, we had federal and state net operating loss carryforwards of approximately $17.1 million and $16.9 million, respectively, and federal and state research and development credits of $0.4 million and $0.2 million, respectively, which could be limited if we experience subsequent “ownership changes.”

 

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

 

As widely reported, global credit and financial markets have experienced extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

 

At December 31, 2013, we had approximately $13.9 million of cash, cash equivalents and short-term investments. While we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents since December 31, 2013, no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.

 

Risks Related to Our Intellectual Property

 

We currently rely on method-of-use and formulation patents to protect LUM001 and a combination of composition-of-matter, method-of-use, and formulation patents to protect LUM002.

 

We currently own patent applications in the United States, Europe, and other countries covering the methods of treating cholestasis using ASBT inhibitors, or ASBTis, including LUM001 and LUM002, with limited systemic exposure. We also own patent applications in the United States, Europe, and other countries covering the pediatric formulations of such ASBTis. We cannot guarantee you that a patent based on any of these patent applications will ever be issued. We do not have patents or patent applications covering LUM001 as a composition of matter. Therefore, the primary intellectual property protection for our LUM001 program will be any patents granted on the pending method-of-use and formulation patent applications.

 

We have licensed patents and patent applications in the United States, Europe and other countries from Sanofi which cover LUM002 as a composition of matter. The LUM002 program will utilize a combination of composition-of-matter, method-of-use and formulation patents.

 

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Composition-of-matter patents on active pharmaceutical ingredients are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. Method-of-use patents protect the use of a product for the specified method.

 

Method-of-use patents do not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their products for our targeted indication(s), physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

 

If our efforts to protect the proprietary nature of the intellectual property related to our product candidates are not adequate, we may not be able to compete effectively in our market.

 

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

 

We cannot be certain that the claims in our granted patents and pending patent applications covering LUM001 or LUM002 will be considered patentable by the United States Patent and Trademark Office, or the USPTO, courts in the United States, or by patent offices and courts in foreign countries. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property abroad.

 

The strength of patents in the biotechnology and pharmaceutical fields involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims that cover LUM001 or LUM002 in the United States or in foreign countries. Even if such patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Any successful opposition to our patents could deprive us of exclusive rights necessary for the successful commercialization of LUM001 or LUM002. Furthermore, even if they are unchallenged, our patents may not adequately protect our intellectual property, provide exclusivity for LUM001 or LUM002 or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents we hold with respect to LUM001 or LUM002 is threatened, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, LUM001 or LUM002. Further, if we encounter delays in our development efforts, including our clinical trials, the period of time during which we could market LUM001 or LUM002 under patent protection would be reduced. In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for our product candidates, we may be open to competition from generic medications.

 

For U.S. patent applications in which claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of the subject matter covered by the patent claims of our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our participation in an interference proceeding may fail and, even if successful, may result in substantial costs and distract our management and other employees.

 

For U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, or the

 

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American Invents Act, was signed into law. The American Invents Act includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern the administration of the American Invents Act, and many of the substantive changes to patent law associated with the American Invents Act, and in particular, the “first to file” provisions, were enacted on March 16, 2013. This will require us to be cognizant going forward of the time from invention to filing of a patent application. It is not clear what other, if any, impact the American Invents Act will have on the operation of our business. Moreover, the American Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

 

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidates and drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology, such as third parties involved in the manufacture of our product candidates, such as LUM002, and third parties involved in our clinical trials (such as the National Institute of Diabetes and Digestive and Kidney Diseases, a division within the National Institutes of Health, with respect to LUM001), to enter into confidentiality agreements. We cannot be certain that all such agreements have been duly executed, that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.

 

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

 

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patents and/or applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to foreign patent agencies. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect on our business.

 

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

 

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

 

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

 

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries do not protect intellectual property rights in the same manner and to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection but enforcement of such patent protection is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

 

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

 

The requirements for patentability may differ in certain countries, particularly developing countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In India, unlike the United States, there is no link between regulatory approval for a drug and its patent status. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.

 

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

 

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We are a party to a number of license agreements under which we are granted intellectual property rights that are important to our business. For example, certain trade secrets related to LUM001 are licensed from Pfizer, and patents, patent applications and trade secrets related to LUM002 are licensed from Sanofi. Our existing license agreements as related to LUM001 and LUM002 impose various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under a license agreement, or we are subject to a bankruptcy, the license agreement may be terminated, in which event we would not be able to develop, commercialize or market LUM001 or LUM002, as the case may be. See “Business—License Agreements” for a description of our license agreements, which includes a description of the termination provisions of these license agreements.

 

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

 

   

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

 

   

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

 

   

our right to sublicense intellectual property rights to third parties under collaborative development relationships;

 

   

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

 

   

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

 

If disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, our business, results of operations, financial condition and prospects may be adversely affected. We may enter into additional licenses in the future and if we fail to comply with obligations under those agreements, we could suffer adverse consequences.

 

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

 

Presently we have intellectual property rights, through licenses from third parties and under patents that we own, related to our product candidates. Because our programs may involve additional product candidates that require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to acquire, in-license or use these proprietary rights. In addition, our product candidates may require specific formulations to work effectively and efficiently and these rights may be held by others. We may be unable to acquire or in-license proprietary rights related to any compositions, formulations, methods of use, processes or other intellectual property rights from third parties that we identify as being necessary for our product candidates. Even if we are able to obtain a license to such proprietary rights, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology.

 

The licensing and acquisition of third-party proprietary rights is a competitive area, and companies, which may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party proprietary rights that we may consider necessary or attractive in order to commercialize our product candidates. More established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

 

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For example, we collaborate with U.S. and foreign academic institutions to accelerate our preclinical research or development under written agreements with these institutions, including a Cooperative Research and Development Agreement with the National Institute of Diabetes and Digestive and Kidney Diseases. Typically, these institutions provide us with an option to negotiate an exclusive license to any of the institution’s proprietary rights in technology resulting from the collaboration. Regardless of such option to negotiate a license, we may be unable to negotiate a license within the specified time frame or under terms that are acceptable to us. If we are unable to do so, the institution may offer, on an exclusive basis, their proprietary rights to other parties, potentially blocking our ability to pursue our program.

 

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

 

Third-party claims alleging intellectual property infringement may prevent or delay our drug discovery and development efforts.

 

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Recently, the America Invents Act introduced new procedures including inter partes review and post grant review. The implementation of these procedures brings uncertainty to the possibility of challenges to our patents in the future and the outcome of such challenges. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our activities related to our product candidates may give rise to claims of infringement of the patent rights of others.

 

We cannot assure you that any of our current or future product candidates will not infringe existing or future patents. We may not be aware of patents that have already issued that a third party might assert are infringed by one of our current or future product candidates. Nevertheless, we are not aware of any issued patents that will prevent us from marketing our product candidates.

 

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue and may be confidential for eighteen (18) months or more after filing, there may be currently pending third-party patent applications which may later result in issued patents that our product candidates or our technologies may infringe, or which such third parties claim are infringed by the use of our technologies.

 

Parties making claims against us for infringement or misappropriation of their intellectual property rights may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial expenses and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees if we are found to be willfully infringing a third party’s patents, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license

 

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would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize our product candidates, which could harm our business significantly. Even if we were able to obtain a license, the rights may be nonexclusive, which may give our competitors access to the same intellectual property.

 

In addition to infringement claims against us, if third parties have prepared and filed patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the USPTO to determine the priority of invention. Third parties may also attempt to initiate reexamination, post grant review or inter partes review of our patents in the USPTO. We may also become involved in similar proceedings in the patent offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology.

 

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

 

Third parties may infringe, misappropriate or otherwise violate our patents, patents that may issue to us in the future, or the patents of our licensors that are licensed to us. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

Generic drug manufacturers may develop, seek approval for, and launch generic versions of our products. If we file an infringement action against such a generic drug manufacturer, that company challenge the scope, validity or enforceability of our or our or our licensors’ patents, requiring us and/or our licensors to engage in complex, lengthy and costly litigation or other proceedings.

 

In addition, if we or one of our licensors initiated legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that the patent covering our product candidate, as applicable, is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection could have a material adverse impact on our business.

 

Litigation proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Finally, we may not be able to prevent, alone or with the support of our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

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

 

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

 

Risks Related to This Offering and Ownership of our Common Stock

 

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

 

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

 

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

 

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

 

   

the commencement, enrollment or results of our ongoing and planned Phase 2 clinical trials of LUM001 for ALGS, PFIC, PBC and PSC, our planned Phase 3 clinical trials of LUM001 for PBC and PSC, and our planned Phase 2 clinical trial for LUM002 for NASH or any future clinical trials we may conduct, or changes in the development status of LUM001 or LUM002;

 

   

any delay in our regulatory filings for LUM001 or LUM002 and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

 

   

adverse results or delays in clinical trials;

 

   

our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

   

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

 

   

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

 

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the failure to obtain adequate reimbursement of our product candidates;

 

   

adverse developments concerning our manufacturers;

 

   

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

 

   

our inability to establish collaborations if needed;

 

   

our failure to commercialize our product candidates;

 

   

additions or departures of key scientific or management personnel;

 

   

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

 

   

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

 

   

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

 

   

our ability to effectively manage our growth;

 

   

the size and growth, if any, of the ALGS, PFIC, PBC, PSC and NASH markets and other targeted markets;

 

   

our ability to successfully enter new markets or develop additional product candidates;

 

   

actual or anticipated variations in quarterly operating results;

 

   

our cash position;

 

   

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

 

   

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

 

   

changes in the market valuations of similar companies;

 

   

overall performance of the equity markets;

 

   

issuances of debt or equity securities;

 

   

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

 

   

trading volume of our common stock;

 

   

changes in accounting practices;

 

   

ineffectiveness of our internal controls;

 

   

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

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

general political and economic conditions; and

 

   

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

 

In addition, the stock market in general, and The NASDAQ Global Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may

 

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not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

 

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

 

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

 

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

 

Prior to this offering, our executive officers, directors, 5% stockholders and their affiliates owned approximately 91% of our voting stock as of April 1, 2014, and, upon the closing of this offering, that same group will hold approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option) in each case based on the initial public offering price of $         per share. In addition, our principal stockholder, Alta Partners VIII, LP, owns approximately 34% of our outstanding voting stock as of April 1, 2014 and will hold approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option) in each case based on the initial public offering price of $         per share. Therefore, even after this offering, these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

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

 

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $         per share, based on the initial public offering price of $         per share. Further, investors purchasing common stock in this offering will contribute approximately     % of the total amount invested by stockholders since our inception, but will own only approximately     % of the shares of common stock outstanding after giving effect to this offering.

 

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less when they purchased their shares than the price offered to the public in this offering and the exercise of stock options granted to our employees. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

 

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

 

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

 

After the closing of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act and the rules and regulations of The NASDAQ Global Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending December 31, 2015, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

 

We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our consolidated financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives

 

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will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

 

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities.

 

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

 

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

 

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

 

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

 

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares of common stock outstanding as of April 1, 2014, upon the closing of this offering we will have outstanding a total of              shares of common stock. Of these shares, only the shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable without restriction in the public

 

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market immediately following this offering. Citigroup Global Markets Inc., however, may, in its sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

 

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, up to an additional              shares of common stock will be eligible for sale in the public market, of which shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act, based on the initial public offering price of $         per share. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

 

After this offering, the holders of 66,352,011 shares of our common stock as of April 1, 2014 will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above and based on the initial public offering price of $         per share. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

 

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

 

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

 

Pursuant to our 2014 equity incentive plan, or the 2014 plan, which will become effective on the business day prior to the public trading date of our common stock, our management is authorized to grant stock options to our employees, directors and consultants. Additionally, the number of shares of our common stock reserved for issuance under our 2014 plan will automatically increase on January 1 of each year, beginning on January 1, 2015 (assuming the 2014 plan becomes effective before such date) and continuing through and including January 1, 2024, by     % of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. Unless our board of directors elects not to increase the number of shares available for future grant each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

 

We could be subject to securities class action litigation.

 

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

 

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

 

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering to fund the development of LUM001 and LUM002 and to fund working capital, including general operating expenses and pre-commercialization activities. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy

 

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contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

 

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

 

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

the success, cost and timing of our product development activities and clinical trials;

 

   

our ability to obtain and maintain regulatory approval for LUM001, LUM002, and any of our future product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

 

   

our ability to obtain funding for our operations;

 

   

the commercialization of our product candidates, if approved;

 

   

our plans to research, develop and commercialize our product candidates;

 

   

our ability to attract collaborators with development, regulatory and commercialization expertise;

 

   

future agreements with third parties in connection with the commercialization of LUM001, LUM002 or any other approved product;

 

   

the size and growth potential of the markets for our product candidates, and our ability to serve those markets;

 

   

the rate and degree of market acceptance of our product candidates, as well as the reimbursement coverage for our product candidates;

 

   

regulatory developments in the United States and foreign countries;

 

   

the performance of our third-party suppliers and manufacturers;

 

   

the success of competing therapies that are or may become available;

 

   

our ability to attract and retain key scientific or management personnel;

 

   

the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

 

   

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

 

   

our use of the proceeds from this offering; and

 

   

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates.

 

These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We discuss many of these risks in greater detail under “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

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You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $         million (or approximately $         million if the underwriters exercise their over-allotment option in full) from the sale of the shares of common stock offered by us in this offering, based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

 

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range 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.

 

The principal purposes of this offering are to obtain additional capital to support our operations, to establish a public market for our common stock and to facilitate our future access to the public equity markets. We anticipate that we will use the net proceeds of this offering for the following purposes:

 

   

approximately $         million to fund the development of LUM001;

 

   

approximately $         million to fund the development of LUM002; and

 

   

the remainder to fund working capital, including general operating expenses and pre-commercialization activities.

 

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

 

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operations through at least the next 24 months. In particular, we expect that the net proceeds from this offering, along with our existing cash and cash equivalents, will allow us to complete our ongoing and planned Phase 2 clinical trials of LUM001 for ALGS, PFIC, PBC and PSC and our planned Phase 2 clinical trial of LUM002 for NASH, as well as to initiate our planned Phase 3 clinical trials of LUM001 for PBC and PSC. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control.

 

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering, or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual use of the net proceeds will vary depending on numerous factors, including the progress of our clinical trials and other development efforts for LUM001 and LUM002 and other factors described in “Risk Factors” in this prospectus, as well as the amount of cash we use in our operations. As a result, our management will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds of this offering. In addition, we might decide to postpone or not pursue clinical trials or preclinical activities if the net proceeds from this offering and the other sources of cash are less than expected.

 

Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization:

 

   

on an actual basis as of December 31, 2013;

 

   

on a pro forma basis, giving effect to (1) the sale and issuance of 29,727,063 shares of our Series B preferred stock in March 2014, (2) the conversion of all our outstanding convertible preferred stock as of December 31, 2013 and the Series B preferred stock issued in March 2014 into an aggregate of 65,362,011 shares of our common stock automatically in connection with the closing of this offering, and (3) the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

   

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

 

The pro forma information below is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of December 31, 2013
     Actual     Pro
Forma
    Pro Forma
as
Adjusted(1)
     (in thousands, except share and per
share data)

Cash and cash equivalents

   $ 13,884      $ 59,384     
  

 

 

   

 

 

   

 

Convertible preferred stock:

      

Series A preferred stock, $0.001 par value: 38,991,196 shares authorized and 32,991,201 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

   $ 32,806      $ —       

Series A-1 preferred stock, $0.001 par value: 3,000,000 shares authorized and 2,643,747 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     2,644        —       

Stockholders’ equity (deficit):

      

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

     —          —       

Common stock, $0.001 par value: 48,750,000 shares authorized and 1,201,166 shares issued and outstanding, actual; 200,000,000 shares authorized and 66,563,177 shares issued and outstanding, pro forma, and 200,000,000 shares authorized and              shares issued and outstanding, pro forma as adjusted

     1        66     

Additional paid-in-capital

     238        81,123     

Deficit accumulated during the development stage

     (24,598     (24,598  
  

 

 

   

 

 

   

 

Total stockholders’ equity (deficit)

     (24,359     56,591     
  

 

 

   

 

 

   

 

Total capitalization

   $ 11,091      $ 56,591     
  

 

 

   

 

 

   

 

 

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

 

The number of shares of common stock shown in the table above is based on the number of shares of our common stock outstanding as of December 31, 2013, and excludes:

 

   

8,017,068 shares of common stock issuable upon the exercise of outstanding stock options as of April 1, 2014, at a weighted-average exercise price of $0.48 per share;

 

   

4,166 shares of common stock issued pursuant to the exercise of stock options in January and February 2014

 

   

10,000 shares of common stock issuable upon the exercise of an outstanding warrant as of April 1, 2014, at an exercise price of $0.11 per share, which outstanding warrant will be automatically cancelled upon the closing of this offering if not previously exercised;

 

   

            shares of common stock reserved for future issuance under the ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering; and

 

   

            shares of common stock reserved for future issuance under the 2014 plan (plus 866,600 shares of common stock reserved for future issuance under the 2012 plan as of April 1, 2014, which shares will be added to the shares reserved under the 2014 plan upon its effectiveness), which will occur upon the execution and delivery of the underwriting agreement for this offering.

 

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DILUTION

 

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

 

Our historical net tangible book deficit as of December 31, 2013 was approximately $24.4 million, or $20.28 per share of our common stock. Our historical net tangible book deficit is the amount of our total tangible assets less our liabilities and convertible preferred stock, which is not included within stockholders’ deficit. Historical net tangible book deficit per share is our historical net tangible book deficit divided by the number of shares of common stock outstanding as of December 31, 2013.

 

Our pro forma net tangible book value as of December 31, 2013 was $56.6 million, or $0.85 per share of common stock. Pro forma net tangible book value gives effect to (1) the sale and issuance of 29,727,063 shares of our Series B preferred stock in March 2014, and (2) the conversion of all of our outstanding convertible preferred stock (including the Series B preferred stock issued in March 2014) into an aggregate of 65,362,011 shares of our common stock, which will occur automatically in connection with the closing of this offering.

 

Pro forma as adjusted net tangible book value is our pro forma net tangible book value, plus the effect of the sale of              shares of our common stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders, and an immediate dilution of $         per share to new investors participating in this offering.

 

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share, the midpoint of the price range set forth on the cover page of this prospectus

     $                

Historical net tangible book deficit per share as of December 31, 2013

   $ (20.28  

Pro forma increase in net tangible book value per share as of December 31, 2013 attributable to pro forma transactions described in the preceding paragraphs

   $ 21.13     
  

 

 

   

Pro forma net tangible book value per share as of December 31, 2013

   $ 0.85     

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

   $       
  

 

 

   

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

    
     $     
    

 

 

 

Pro forma as adjusted dilution per share to investors participating in this offering

    
    

 

 

 

 

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

 

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $         and decrease (increase) the dilution in pro forma per share to investors participating in this offering by approximately $        , assuming the assumed initial public offering

 

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price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise in full their option to purchase              additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value will increase (decrease) to $         per share, representing an immediate increase in pro forma as adjusted net tangible book value to existing stockholders of $         per share and an immediate decrease (increase) of dilution of $         per share to new investors participating in this offering.

 

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2013, the number of shares purchased or to be purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us by existing stockholders (including the Series B preferred stock purchased in March 2014) and investors participating in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table below shows, investors participating in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

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

Existing stockholders before this offering

               $                             $                

Investors participating in this offering

                          
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

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

 

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

 

If the underwriters exercise their over-allotment option in full to purchase              additional shares of our common stock in this offering, the number of shares of common stock held by existing stockholders will be reduced to     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to             , or     % of the total number of shares of common stock to be outstanding after this offering.

 

The foregoing discussion and tables do not reflect any potential purchases by entities affiliated with certain of our existing stockholders who have indicated an interest in purchasing shares in this offering as described in “Underwriting.”

 

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The foregoing discussion and tables are based on 36,836,114 shares of common stock outstanding as of December 31, 2013, after giving effect to the conversion of our outstanding convertible preferred stock as of December 31, 2013 into an aggregate of 35,634,948 shares of common stock, plus, on a pro forma basis, 29,727,063 shares of Series B preferred stock issued in March 2014 on an as-converted basis, and excludes:

 

   

8,017,068 shares of common stock issuable upon the exercise of outstanding stock options as of April 1, 2014, at a weighted-average exercise price of $0.48 per share;

 

   

4,166 shares of common stock issued pursuant to the exercise of stock options in January and February 2014;

 

   

10,000 shares of common stock issuable upon the exercise of an outstanding warrant as of April 1, 2014, at an exercise price of $0.11 per share, which outstanding warrant will be automatically cancelled upon the closing of this offering if not previously exercised;

 

   

            shares of common stock reserved for future issuance under the ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering; and

 

   

            shares of common stock reserved for future issuance under the 2014 plan (plus 866,600 shares of common stock reserved for future issuance under the 2012 plan as of April 1, 2014, which shares will be added to the shares reserved under the 2014 plan upon its effectiveness), which will occur effective upon the execution and delivery of the underwriting agreement for this offering.

 

Effective immediately upon the execution and delivery of the underwriting agreement for this offering, an aggregate of             shares of our common stock will be reserved for issuance under the 2014 plan (plus 866,600 shares of common stock reserved for future issuance under our 2012 plan as of April 1, 2014, which shares will be added to the shares reserved under the 2014 plan upon its effectiveness). Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We derived the selected consolidated statement of operations data for the years ended December 31, 2012 and 2013 and for the period from January 24, 2011 (inception) to December 31, 2013 and the selected consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

                 Period from
January 24,
2011 (Inception)
to December 31,
2013
 
                
     Year Ended December 31,    
     2012     2013    

Consolidated Statement of Operations Data:

      

Operating expenses:

      

Research and development

   $ 6,684      $ 13,083      $ 20,094   

General and administrative

     1,228        1,968        3,710   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,912        15,051        23,804   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,912     (15,051     (23,804

Other income (expense):

      

Interest income

     3        —          3   

Interest expense

     (642     —          (797
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (8,551   $ (15,051   $ (24,598
  

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(1)

   $ (17.01   $ (14.23  
  

 

 

   

 

 

   

Weighted average shares outstanding, basic and diluted(1)

     502,765        1,057,429     
  

 

 

   

 

 

   

Pro forma net loss per share, basic and diluted (unaudited)(1)

     $ (0.59  
    

 

 

   

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

       25,517,313     
    

 

 

   

 

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

 

     As of December 31,  
     2012     2013  
     (in thousands)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 12,097      $ 13,884   

Working capital

     11,270        10,986   

Total assets

     12,210        14,263   

Convertible preferred stock

     20,822        35,450   

Deficit accumulated during the development stage

     (9,547     (24,598

Total stockholders’ deficit

     (9,515     (24,359

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a biopharmaceutical company focused on the development and commercialization of novel products for rare cholestatic liver diseases and serious metabolic disorders, such as NASH, where there is a high unmet medical need. We are developing two clinical-stage product candidates, LUM001 and LUM002, that inhibit ASBT, which is primarily responsible for recycling bile acids from the intestine to the liver. Our product candidates have the potential to treat orphan and more prevalent liver diseases for which there currently are limited therapeutic options. We have exclusive worldwide rights to both of our product candidates. Preclinical and clinical data suggest that blocking bile acid transport with ASBT inhibitors, such as LUM001 and LUM002, has the potential to slow disease progression, improve liver function and enhance the quality of life for patients suffering from cholestatic liver diseases and NASH by reducing bile acid reabsorption.

 

We are a development stage company founded in January 2011. To date, we have devoted substantially all of our resources to our research and development efforts relating to our product candidates, including conducting clinical trials for our product candidates, acquiring in-licensed intellectual property rights, manufacture of our product candidates, non-clinical testing, providing general and administrative support for these operations and building our intellectual property portfolio. We do not have any products approved for sale and have not generated any revenue. From our inception through December 31, 2013, we have funded our operations primarily through the private placement of preferred stock, common stock and convertible promissory notes totaling $32.2 million.

 

We have incurred net losses in each year since our inception. Our consolidated net losses were $8.6 million and $15.1 million for the years ended December 31, 2012 and December 31, 2013, respectively. As of December 31, 2013, we had a deficit accumulated during the development stage of $24.6 million. Substantially all our net losses have resulted from costs incurred in connection with our research and development programs, in-license fees and from general and administrative costs associated with our operations. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials and our expenditures on other research and development activities.

 

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

 

   

continue the development of LUM001 for the treatment of ALGS, PFIC, PBC and PSC and LUM002 for the treatment of NASH;

 

   

manufacture our product candidates for preclinical studies, clinical trials and preparation for commercial launch;

 

   

seek regulatory approvals in the United States and the European Union for LUM001 for any indications for which we successfully complete clinical trials, and for LUM002 for NASH;

 

   

establish commercialization and marketing capabilities in North America to commercialize any of our product candidates which may obtain regulatory and marketing approval;

 

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create additional infrastructure to support our operations as a public company and our product development and planned commercialization efforts;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

make milestone or other payments under our in-license agreements;

 

   

attract and retain skilled personnel; and

 

   

experience any delays or encounter issues with any of the above.

 

In addition, although we have no current plans to do so, we may in-license, acquire, or invest in complementary businesses, technologies, products or assets. We do not anticipate generating revenues from product sales for the foreseeable future, if ever. Accordingly, to fund further operations we will need to raise capital in addition to the net proceeds of this offering. Until such time that we can generate meaningful revenue from product sales, if ever, we expect to finance our operating activities through public or private equity or debt financings, government or other third-party funding, collaborations, strategic alliances and licensing arrangements or a combination of these. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could compromise our ability to execute on our business plan, which could materially adversely affect our business, financial condition and results of operations.

 

Financial Operations Overview

 

Research and Development Expenses

 

Since our inception, we have devoted substantially all of our resources to our research and development efforts relating to our product candidates, including licensing related intellectual property, manufacturing drug substance, drug product and clinical trial material, conducting non-clinical testing and clinical trials, and providing support for these operations.

 

Our clinical development program is focused on four indications for our lead product candidate, LUM001, which is the subject of seven ongoing or planned Phase 2 clinical trials, and we anticipate the majority of our financial resources to be dedicated to development of LUM001 in the future. To date, we have initiated or plan to initiate (1) three Phase 2 clinical trials and one 48 week extension study of LUM001 for the treatment of children with ALGS, (2) one Phase 2 clinical trial of LUM001 for the treatment of PBC, (3) one Phase 2 clinical trial of LUM001 for the treatment of children with PFIC, and (4) one Phase 2 clinical trial of LUM001 for the treatment of PSC. Significant portions of our research and development resources are focused on these clinical trials and other work needed to submit LUM001 for the treatment of these indications for regulatory approval in the United States and/or Europe. We plan to conduct a Phase 2 clinical trial of our second product candidate, LUM002, for the treatment of NASH in the second half of this year, and a significant amount of additional research and development resources will be required in order for us to submit LUM002 for regulatory approval in the United States. Our research and development expenses related to the development of LUM001 and LUM002 for these indications consist primarily of:

 

   

fees paid to contract research organizations, or CROs, in connection with our clinical trials, and other related clinical trial fees;

 

   

costs related to acquiring and manufacturing drug substance, drug product and clinical trial materials, including continued testing such as process validation and stability of drug substance and drug product;

 

   

costs related to toxicology testing and other research and non-clinical related studies;

 

   

in-license fees paid to pharmaceutical companies to acquire intellectual property rights for our product candidates, and potential future milestone payments related to these rights;

 

   

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

 

   

fees paid to consultants for research and development activities;

 

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research and development operating expenses; and

 

   

costs related to compliance with regulatory requirements.

 

We expense research and development costs as incurred. From our inception through December 31, 2013, we have incurred $20.1 million in research and development expenses, the significant majority of which relate to our development of LUM001. Research and development expenses will continue to be significant and will increase for the foreseeable future as we continue the development of LUM001 for the treatment of rare cholestatic liver diseases and LUM002 for the treatment of NASH.

 

The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval and obtaining supply of our product candidates for such trials is costly and time consuming. We may never succeed in achieving marketing approval for our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Our direct research and development expenses consist principally of external costs, such as fees paid to CROs and other service providers in connection with our clinical trials and nonclinical studies, license fees related to intellectual property rights for our product candidates and costs related to acquiring and manufacturing drug substance, drug product and clinical trial materials. We typically use our employee and infrastructure resources across multiple research and development programs. Our internal research and development expenses include employee, consultant, facility and other research and development operating expenses.

 

The following is a comparison of research and development expenses for the years ended December 31, 2012 and 2013 (in thousands):

 

     Years Ended December 31,  
         2012              2013      

External research and development

     

LUM001

     

Direct clinical trial costs

     

ALGS

   $ 154       $ 1,702   

PFIC

     —           401   

PBC

     —           1,596   

PSC

     —           266   
  

 

 

    

 

 

 

Total direct clinical trial costs

     154         3,965   

Clinical support, non-clinical, contract manufacturing and license fees

     1,999         2,126   
  

 

 

    

 

 

 

Total LUM001 external research and development costs

     2,153         6,091   

LUM002

     

Clinical, non-clinical, contract manufacturing and license fees

     2,413         3,170   
  

 

 

    

 

 

 

Total LUM002 external research and development costs

     2,413         3,170   

Internal and unallocated research and development expenses

     2,118         3,822   
  

 

 

    

 

 

 

Total research and development expenses

   $ 6,684       $ 13,083   
  

 

 

    

 

 

 

 

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

 

   

the scope, rate of progress, results and expense of our ongoing, as well as any additional, clinical trials and other research and development activities; and

 

   

the timing and receipt of any regulatory approvals.

 

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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. We intend to determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, and consulting fees for executive, finance, accounting and business development functions. Other significant costs include legal fees relating to patent and corporate matters, facility costs not otherwise included in research and development expenses, and fees for accounting and other consulting services.

 

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company including expenses related to services associated with maintaining compliance with NASDAQ listing rules and SEC requirements and insurance and investor relations costs. In addition, we expect to incur expenses associated with building a commercial organization in connection with and prior to potential future regulatory approval of LUM001.

 

Critical Accounting Policies and Estimates

 

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

 

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

 

Clinical Trial Accruals

 

We are required to estimate expenses resulting from our obligations under contracts with CROs, other vendors, consultants and clinical site agreements in connection with conducting clinical trials, including contract manufacturing. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect trial expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the

 

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trial. We determine accrual estimates through financial models taking into account discussion with clinical personnel and outside service providers as to the progress of trials or the services completed. During the course of a clinical trial, we adjust our rate of clinical expense recognition if actual results differ from our estimates. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known at that time. Although we do not expect that our estimates will be materially different from amounts actually incurred, our understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting amounts that are too high or too low for any particular period. Through December 31, 2013, there had been no material adjustments to our prior period estimates of accrued expenses for clinical trials. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials.

 

Stock-Based Compensation

 

Stock-based compensation expense represents the grant date fair value of employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of estimated forfeitures.

 

We account for stock options granted to non-employees using the fair value approach. These options are subject to periodic revaluation to reflect the current fair value at each reporting period until the non-employee completes the performance obligation or the date on which a performance commitment is reached.

 

As of December 31, 2013, the unrecognized compensation cost related to outstanding employee options and non-employee options was $0.3 million and $0.1 million, respectively, and is expected to be recognized as expense over approximately 2.93 years and 2.26 years, respectively.

 

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

 

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

 

Expected volatility.    We do not have sufficient history to estimate the volatility of our common stock price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. For the purpose of identifying peer companies, we consider characteristics such as industry, enterprise value, risk profiles, position within the industry and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards.

 

Expected option term.    We estimate the expected life of our employee stock options using the “simplified” method, whereby the expected life equals the average of the vesting terms and the original contractual term of the option. We expect to use the simplified method until we have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

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

 

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

 

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

 

     Years Ended December 31,  
     2012     2013  

Risk-free interest rate

     0.95     1.32

Expected volatility

     80.5     79.6

Expected option term (in years)

     6.08        5.95   

Expected dividend yield

     0.0     0.0

 

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

 

     Years Ended December 31,  
         2012             2013      

Risk-free interest rate

     1.78     3.02

Expected volatility

     76.6     75.6

Expected term (in years)

     9.84        9.77   

Expected dividend yield

     0.0     0.0

 

Common Stock Valuation

 

The following table summarizes by grant date the number of shares of common stock underlying stock options granted from January 1, 2012 through the date of this prospectus, as well as the associated per share exercise price and the estimated fair value per share of our common stock on the grant date:

 

Grant Date

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

November 2, 2012

     1,413,000       $ 0.11       $ 0.11   

January 23, 2013

     115,000         0.11         0.11   

February 18, 2013

     1,860,000         0.11         0.11   

April 11, 2013

     50,000         0.11         0.11   

August 23, 2013

     115,000         0.11         0.11   

October 30, 2013

     1,741,000         0.16         0.16   

November 1, 2013

     35,000         0.16         0.16   

February 26, 2014

     435,000         0.93         0.93   

March 3, 2014

     100,000         0.93         0.93   

March 21, 2014

     2,128,900         1.13         1.13   

March 24, 2014

     20,000         1.13         1.13   

April 1, 2014

     232,292         1.13         1.13   

 

Based on the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), the intrinsic value of stock options outstanding as of December 31, 2013 would be $        , of which $         would have been related to stock options that were vested at that date.

 

Determination of the Fair Value of Common Stock

 

We are required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations using the Black-Scholes option pricing model. The fair value of the common stock underlying our stock-based awards was determined on each grant date by our board of directors, with input

 

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from management. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for our common stock, on each grant date, our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our common stock, including:

 

   

the prices of our convertible preferred stock sold to investors in arm’s length transactions, and the rights, preferences and privileges of our convertible preferred stock as compared to those of our common stock, including the liquidation preferences of our convertible preferred stock;

 

   

our results of operations, financial position and the status of research and development efforts and achievement of enterprise milestones;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

In addition to the above factors, as part of its assessment of the fair value of our common stock for purposes of making stock option grants, our board of directors considered appraisals of the value of our common stock as of October 19, 2012, September 30, 2013, February 15, 2014 and March 13, 2014 that were prepared by an independent third-party valuation specialist using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the AICPA Practice Aid. The AICPA Practice Aid prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our company’s future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. We utilized the precedent transaction methodology of the market approach to establish the fair value of the enterprise in our October 19, 2012, September 30, 2013, February 15, 2014 and March 13, 2014 valuations.

 

Methods Used to Allocate Our Enterprise Value to Classes of Securities

 

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

 

   

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

 

   

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

 

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Probability-weighted expected return method, or PWERM.    The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

 

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

 

October 19, 2012 Valuation

 

In preparing the October 19, 2012 valuation, we allocated enterprise value based on a 60% weighting of the OPM and a 40% weighting of the current value method. Both the OPM and current method utilized the enterprise value determined using the market approach. This conclusion to weight the two methods of allocating enterprise value was based on our belief that both the OPM and current value method were both reflective of the value of our company as the OPM was a better reflection of our possible liquidation scenarios but the current value method was still relevant given its focus on historical start-up and development costs given the limited time we had been operating. The resulting fair value of our common stock was $0.11 per share.

 

For purposes of the valuation analysis, the time to liquidity was estimated as 3.0 years based on then-current plans and estimates of our board of directors and management regarding a liquidity event. In addition, a 56% discount was applied for lack of marketability, or DLOM, to the value indicated for our common stock based on mathematical models for calculating illiquidity discounts and the estimated time to liquidity. Because the enterprise value was established relative to the sale price of an illiquid security, the DLOM reflected only an incremental discount for lack of marketability attributed to the illiquidity of the common stock relative to that of the preferred stock. A discount was appropriate because our common stock was unregistered, and the holder of a minority interest in the common stock may not influence the timing of a liquidity event for our company. The October 19, 2012 valuation contemplated the June 2013 scheduled close of our Series A preferred stock which was committed to in June 2012.

 

November 2, 2012 to August 23, 2013 Grants.    Between November 2, 2012 and August 23, 2013, our board of directors determined that the fair value of our common stock was $0.11 per share in connection with the grants of stock options, in consideration of the valuation analysis as of October 19, 2012 and the other objective and subjective factors described above. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place since the October 19, 2012 valuation through August 23, 2013 and none were expected to occur in the near term.

 

September 30, 2013 Valuation

 

In preparing the September 30, 2013 valuation, we allocated enterprise value using the back-solve method of the OPM, which derives the implied equity value for one type of equity security from a contemporaneous transaction involving another type of equity security. We believed the current value method to be relevant given the recent achievement of several value generating events and our then estimate of the time to a liquidity event. The OPM back-solve method was applied to solve for the equity value and corresponding value of common stock based on the $1.00 per share price of an additional closing of our Series A preferred stock that was committed to in July 2013 and ultimately occurred in December 2013. The resulting fair value of our common stock was $0.16 per share.

 

For purposes of the valuation analysis, the time to liquidity was estimated as 1.5 years based on then-current plans and estimates of our board of directors and management regarding a liquidity event which was relatively

 

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consistent with the October 19, 2012 valuation. A 29% DLOM was applied to the value indicated for our common stock. Because the enterprise value was established relative to the sale price of an illiquid security, the DLOM reflected only an incremental discount for lack of marketability attributed to the illiquidity of the common stock relative to that of the preferred stock and the estimated timing of a liquidity event. A discount was appropriate because our common stock was unregistered, and the holder of a minority interest in the common stock may not influence the timing of a liquidity event for our company. In addition, the board of directors took into consideration the following events:

 

   

In September 2013, LUM001 received Orphan Designation for ALGS, PFIC, PBC and PSC in the United States.

 

   

In the third quarter of 2013, we initiated a Phase 2, 13-week, randomized, double-blind, placebo-controlled clinical trial for LUM001 for ALGS in the United Kingdom to evaluate LUM001 in children with ALGS.

 

   

In the third quarter of 2013, we initiated a Phase 2, 13-week, randomized, double-blind, placebo-controlled, multi-center trial in the United States and in the United Kingdom to evaluate LUM001 in patients with PBC.

 

October 30, 2013 to November 1, 2013 Grants.    Between October 30, 2013 and November 1, 2013, our board of directors determined that the fair value of our common stock was $0.16 per share in connection with the grant of stock options, in consideration of the valuation analysis as of September 30, 2013 and the other objective and subjective factors described above. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place since the September 30, 2013 valuation through November 1, 2013 and none were expected to occur in the near-term.

 

February 15, 2014 Valuation

 

In preparing the February 15, 2014 valuation, we used a hybrid method of the PWERM and OPM models to allocate enterprise value. We allocated enterprise value using a PWERM model for the scenarios of an IPO, merger or third-party acquisition and no liquidity event, or bankruptcy, and allocated enterprise value using an OPM model for a stay private scenario. The resulting fair value of our common stock was $0.93.

 

The hybrid model utilized a 40% probability that we would complete an IPO within 0.37 years, a 25% probability of a merger or third-party acquisition within 1.37 years, a 20% probability of a stay private scenario within 2.37 years, and a 15% probability that no liquidity event becomes available to the common stockholders. For the IPO liquidity event scenario, we used the median values of pre-money IPO valuations of comparable IPO companies. For the merger or third-party acquisition scenario, we used the median value of comparable merger or third-party acquisition transactions. For the stay private scenario, we used a back-solve method so that our enterprise value equaled the contemplated value of our company determined by our Series B preferred stock financing transaction with both existing and new arms-length investors, which we expected to be completed shortly after the valuation date. For the bankruptcy scenario we assumed no value for our company. For all scenarios we applied a DLOM of 20%, which was derived from the weighted average time to a liquidity event. As part of this determination, our board of directors considered the following internal and external value-generating events that occurred between October 2013 and February 15, 2014:

 

   

In December 2013, we initiated a Phase 2 extension trial of LUM001 in children with ALGS in the United Kingdom.

 

   

In January 2014, we received orphan drug designation for LUM001 for ALGS, PFIC, PBC and PSC in the European Union.

 

   

In January 2014, we held an IPO organizational meeting for this offering.

 

   

In February 2014, we initiated a Phase 2 clinical trial of LUM001 for PFIC in the United States.

 

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February 26, 2014 to March 3, 2014 Grants.    Between February 26, 2014 and March 3, 2014, our board of directors determined that the fair value of our common stock was $0.93 per share in connection with the grant of stock options, in consideration of the valuation analysis as of February 15, 2014 and the other objective and subjective factors described above. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place since the February 15, 2014 valuation through March 3, 2014 and none were expected to occur in the near-term.

 

We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

 

March 13, 2014 Valuation

 

In preparing the March 13, 2014 valuation, we used a hybrid method of the PWERM and OPM models to allocate enterprise value. We allocated enterprise value using a PWERM model for the scenarios of an IPO, merger or third-party acquisition and no liquidity event, or bankruptcy, and allocated enterprise value using an OPM model for a stay private scenario. The resulting fair value of our common stock was $1.13.

 

The hybrid model utilized a 45% probability that we would complete an IPO within 0.22 years, a 30% probability of a merger or third-party acquisition within 1.30 years, a 15% probability of a stay private scenario within 2.30 years, and a 10% probability that no liquidity event becomes available to the common stockholders. For the IPO liquidity event scenario, we used the median values of pre-money IPO valuations of comparable IPO companies. For the merger or third-party acquisition scenario, we used the median value of comparable merger or third-party acquisition transactions. For the stay private scenario, we used a back-solve method so that our enterprise value equaled the indicated value of our company as determined by our recent Series B preferred stock financing for which new arms-length investors participated. For the bankruptcy scenario we assumed no value for our company. For all scenarios we applied a DLOM of 20%, which was derived from the weighted average time to a liquidity event. As part of this determination, our board of directors considered the following internal and external value-generating events that occurred between February 15, 2014 and March 13, 2014:

 

   

On March 7, 2014, we sold 29,727,063 shares of our Series B convertible preferred stock to new and existing investors at $1.53 per share raising gross cash proceeds of $45.5 million.

 

   

On March 12, 2014, we obtained preliminary data from our LUM002 Phase 1 study which showed that LUM002 had a favorable safety profile.

 

March 21, 2014 to April 1, 2014 Grants. Between March 21, 2014 and April 1, 2014, our board of directors determined that the fair value of our common stock was $1.13 per share in connection with the grant of stock options, in consideration of the valuation analysis as of March 13, 2014 and the other objective and subjective factors described above. As part of this determination, our board of directors concluded that no significant internal or external value-generating events had taken place since the March 13, 2014 valuation through April 1, 2014 and none were expected to occur in the near-term.

 

Other Information

 

Net Operating Loss Carryforwards

 

As of December 31, 2013, we had federal and California tax net operating loss carryforwards of approximately $17.1 million and $16.9 million, respectively, which begin to expire in 2031 unless previously utilized. As of December 31, 2013, we had federal and California research and development tax credit carryforwards of approximately $0.4 million and $0.2 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2031, unless previously utilized. The California research and development tax credit carryforwards are available indefinitely until utilized.

 

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We expect the future utilization of net operating loss and tax credit carryforwards to be limited due to changes in ownership. In general, if we experience a greater than 50% aggregate change in ownership of certain significant stockholders or groups over a three-year period, or a Section 382 ownership change, utilization of our pre-change net operating loss carryforwards would be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state laws. The annual limitation generally is determined by multiplying the value of our stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the pre-change net operating loss carryforwards before utilization and may be substantial. We believe that our most recent private placement and other transactions that have occurred over the past three years have triggered an “ownership change” limitation. We have reduced our deferred tax assets related to net operating losses and research and development tax credit carryovers that are anticipated to expire unused as a result of ownership changes. These tax attributes have been excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. Future ownership changes as a result of the closing of this offering or subsequent shifts in our stock ownership may further limit our ability to utilize our remaining tax attributes.

 

JOBS Act

 

On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can 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 extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

 

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (1) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (2) complying 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 consolidated financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more, (b) the last day of our fiscal year following the fifth anniversary of the date of the closing of this offering, (c) the date on which we have issued more than $1 billion in non-convertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

 

Results of Operations

 

Comparison of the Years Ended December 31, 2012 and 2013

 

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

 

     Year Ended December 31,      Increase /
(Decrease)
 
         2012              2013         

Research and development

   $ 6,684       $ 13,083       $ 6,399   

General and administrative

     1,228         1,968         740   

Other expense (income), net

     639         —           (639

 

Research and Development Expenses

 

Research and development expenses were $6.7 million and $13.1 million for the years ended December 31, 2012 and 2013, respectively. The increase in research and development expenses during this period of $6.4 million

 

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was primarily due to $5.5 million in clinical trial expense, $1.9 million in contract manufacturing expense for drug substance, drug product and clinical trial materials, $1.7 million in compensation related to increase in headcount to support research and development operations and $0.7 million in non-clinical activities, offset by a decrease of $3.5 million in license payments made in 2012 to acquire intellectual property rights. During 2013, we initiated several clinical trials, all of which were ongoing as of December 31, 2013 and we anticipate research and development expenses to increase.

 

General and Administrative Expenses

 

General and administrative expenses were $1.2 million and $2.0 million for the years ended December 31, 2012 and 2013, respectively. The increase in general and administrative expenses during this period of $0.8 million was primarily due to an increase of $0.6 million related to professional fees and contract services and $0.2 million related to personnel costs associated with the building out of our corporate infrastructure.

 

Other Expense (Income), Net

 

Other expense (income), net primarily consists of interest expense and was $0.6 million and none for the years ended December 31, 2012 and 2013, respectively. The decrease in interest expense was a result of the extinguishment of convertible notes in 2012 due to their conversion into Series A preferred stock in June 2012 resulting in no debt in 2013.

 

Liquidity and Capital Resources

 

We have incurred losses and negative cash flows from operating activities since our inception. As of December 31, 2013, we had working capital of $11.0 million and an accumulated deficit of $24.6 million. We anticipate that we will continue to incur net losses into the foreseeable future as we continue the development of our product candidates, expand our corporate infrastructure, including the costs associated with becoming a public company and conducting pre-commercialization activities. We plan to continue to fund losses from operations and capital funding needs through public or private equity or debt financings, government or other third-party funding, collaborations, strategic alliances and licensing arrangements or a combination of these. The sale of additional equity or convertible debt could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. If we are not able to secure adequate additional funding we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, and future prospects.

 

Cash Flows

 

Since inception, we have funded our operations primarily from the private placement of preferred stock, common stock and convertible promissory notes totaling $32.2 million. As of December 31, 2013, we had $13.9 million in cash and cash equivalents and working capital of $11.0 million.

 

The following table shows a summary of our cash flows for the years ended December 31, 2012 and 2013 (in thousands):

 

     Year Ended December 31,  
         2012             2013      

Net cash provided by (used in):

    

Operating activities

   $ (4,540   $ (12,832

Investing activities

     (25     (10

Financing activities

     16,361        14,629   
  

 

 

   

 

 

 

Total

   $ 11,796      $ 1,787   
  

 

 

   

 

 

 

 

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Operating Activities.    Net cash used in operating activities was $4.5 million during the year ended December 31, 2012 as compared to $12.8 million during the year ended December 31, 2013. The increase in cash used in operating activities of $8.3 million was primarily the result of cash used to fund increased research and development activities.

 

Investing Activities.    We had no significant investing activities during the years ended December 31, 2012 and 2013.

 

Financing Activities.    Net cash provided by financing activities was $16.4 million and $14.6 million for the years ended December 31, 2012 and 2013, respectively. During 2012, net cash provided by financing activities was primarily the result of proceeds received from the issuance of convertible notes and the sale of our Series A preferred stock. During 2013, net cash provided by financing activities was a result of proceeds received from the issuance of our Series A preferred stock.

 

We believe that our existing cash and cash equivalents, along with the estimated net proceeds from this offering, will be sufficient to meet our anticipated cash requirements for at least the next 24 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

Our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. The 2013 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the development of LUM001, LUM002 or any of our future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing biopharmaceutical products, including the uncertainty of:

 

   

successful enrollment in, and completion and results of, clinical trials;

 

   

receipt and timing of marketing approvals from applicable regulatory authorities;

 

   

securing supply of our product candidates;

 

   

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; and

 

   

establishing commercialization and marketing capabilities, whether alone or in collaboration with others.

 

Off-Balance Sheet Arrangements

 

Through December 31, 2013, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.

 

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Contractual Obligations

 

The following summarizes our significant contractual obligations as of December 31, 2013:

 

     Payment due by period  
     Total      Less than 1
year
     1-3 years      3-5 years      More than 5
years
 

Operating lease obligation relating to facility(1)

   $ 239       $ 113       $ 126       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 239       $ 113       $ 126       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Consists of our corporate headquarters lease encompassing 2,750 square feet of office space that expires in January 2016.

 

We have no material non-cancelable purchase commitments with contract manufacturers or service providers, as we have generally contracted on a cancelable purchase order basis.

 

Contractual Arrangements

 

In addition to the amounts set forth in the table above, we have payment obligations under the below license and development agreements that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones. Payments under these license agreements are not included in the above contractual obligations table due to the uncertainty of the occurrence of the events requiring payment under these agreements.

 

Satiogen License Agreement

 

In February 2011, we entered into a license agreement with Satiogen Pharmaceuticals, Inc., or Satiogen. One of our directors serves on the board of directors of Satiogen and owns greater than five percent of its capital stock. Under the terms of the license agreement, we obtained an exclusive, worldwide license to certain patents and know-how controlled by Satiogen related to ASBT inhibitors, or the ASBTi Technology, and TGR5 agonists, or the TGR5 Technology. In consideration for the rights granted to us under the agreement, we issued to Satiogen 1,380,000 shares of our Series A-1 preferred stock, which were valued at $1.00 per share based on a recent financing. Accordingly, we recorded license expense of $1.4 million in August 2012. In addition, we issued to Satiogen 690,000 shares of our common stock which was recorded as license expense of $0.1 million based on the then fair value of our common stock. We are also required to pay to Satiogen up to an aggregate of $10.5 million upon the achievement of certain milestones, of which $500,000 relates to the initiation of certain development activities, $5.0 million relates to the completion of regulatory approvals and $5.0 million relates to commercialization activities. We will be required to pay to Satiogen a low single-digit royalty on net sales of products utilizing the ASBTi Technology or TGR5 Technology sold by us and our affiliates. Our royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country.

 

In the event we sublicense any of our rights under the ASBTi Technology or TGR5 Technology to a third party, we are obligated under the agreement to pay to Satiogen a fee based on a percentage of sublicense revenue received by us, which percentage ranges from the mid-teens to mid-twenties, depending on whether the right granted is in connection with the ASBTi Technology or TGR5 Technology, and the stage of development of such sublicensed technology. In addition, we are obligated under the agreement to pay to Satiogen a percentage of royalties we receive in consideration for the grant of such sublicense based on a percentage of revenue generated by such sublicensee for sales of products utilizing the ASBTi Technology or TGR5 Technology, which percentage is in the low-fifties and is subject to adjustment in certain circumstances.

 

Pfizer License Agreement

 

In June 2012, we entered into a license agreement with Pfizer Inc., or Pfizer, pursuant to which we obtained an exclusive, worldwide license to Pfizer’s know-how related to LUM001 (formerly SD-5613), or the Pfizer

 

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Know-How. In consideration for the rights granted to us under the agreement, we made an upfront payment to Pfizer of $350,000 and issued to Pfizer 763,747 shares of our Series A-1 preferred stock, which were valued at $1.00 per share based on a recent financing. Accordingly, we recorded license expense totaling $1.1 million in June 2012. As additional consideration, upon commercialization of any product utilizing the Pfizer Know-How, we will be required to pay to Pfizer a low single-digit royalty on net sales of such products sold by us, our affiliates or sublicensees. Our royalty obligations continue on a licensed product-by-licensed product basis until the eighth anniversary of the first commercial sale of such licensed product anywhere in the world.

 

Sanofi-Aventis License Agreement

 

In September 2012, we entered into a license agreement with Sanofi-Aventis Deutschland GmbH, or Sanofi, under which we obtained an exclusive, worldwide license to certain patents and know-how controlled by Sanofi related to LUM002 (formerly SAR-548304), or Sanofi Technology. In consideration for the rights granted to us under the agreement, we made an upfront payment to Sanofi of $500,000 in cash and issued to Sanofi 500,000 shares of our Series A-1 preferred stock, which were valued at $1.00 per share based on a recent financing. Accordingly, we recorded license expense totaling $1.0 million in June 2012. Sanofi has a one-time option during the term of the agreement to require us to repurchase all of our capital stock then held by Sanofi for $1.00 in the aggregate. We are also required to pay to Sanofi up to an aggregate of $36.0 million upon the achievement of certain regulatory, commercialization and product sales milestones. Upon commercialization of any product utilizing the Sanofi Technology, we will be required to pay to Sanofi tiered royalties in the mid to high single-digit range based upon net sales of licensed products sold by us and our affiliates and sublicensees in a calendar year, subject to adjustments in certain circumstances. Our royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the later to occur of the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country and ten years after the first commercial sale of a licensed product following regulatory approval in such country. In the event we sublicense our right to commercialize a product utilizing the Sanofi Technology, we are obligated to pay to Sanofi a fee based on a percentage of sublicense fees received by us, which percentage ranges from the mid-teens to low-thirties, depending on the stage of development of such licensed product, and is subject to adjustment in certain circumstances.

Cooperative Research and Development Agreement with the National Institute of Diabetes and Digestive and Kidney Diseases , or NIDDK

 

In January 2013, we entered into a cooperative research and development agreement, or CRADA, relating to our ongoing Phase 2 clinical development of LUM001 for the treatment of ALGS and PFIC. In accordance with the terms of the CRADA, we are obligated to make installment payments totaling approximately $1.5 million upon achievement of certain regulatory and clinical milestones.

 

The CRADA has a term of five years, ending in January 2018. If we unilaterally terminate the CRADA, NIDDK may, at its option, retain any funds transferred to NIDDK under the CRADA for use in completing the research plan under the agreement. Unless the termination was for safety reasons, we may be required to supply sufficient quantities of LUM001 and placebos to complete the trial. If we suspend development of LUM001 other than for safety reasons, without the transfer of our development efforts, assets and obligations to a third party within 180 days of discontinuation, NIDDK may continue developing LUM001. In such circumstances, we would be required to transfer to NIDDK all information necessary to manufacture LUM001 or arrange for an independent contractor to manufacture and provide LUM001 to NIDDK for a period equal to the earlier of two years or until completion of ongoing mutually agreed to protocols for studies to be performed under the CRADA.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Our cash and cash equivalents as of December 31, 2013 consisted of readily available checking and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our

 

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portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations. We do not believe that our cash or cash equivalents have significant risk of default or illiquidity. While we believe our cash and cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

 

We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.

 

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BUSINESS

 

Overview

 

We are a biopharmaceutical company focused on the development and commercialization of novel products for rare cholestatic liver diseases and serious metabolic disorders, such as nonalcoholic steatohepatitis, or NASH, where there is a high unmet medical need. We are developing two clinical-stage product candidates, LUM001 and LUM002, that inhibit the apical sodium-dependent bile acid transporter, or ASBT, which is primarily responsible for recycling bile acids from the intestine to the liver. Our product candidates have the potential to treat orphan and more prevalent liver diseases for which there currently are limited therapeutic options. We have exclusive worldwide rights to both of our product candidates. Preclinical and clinical data suggest that blocking bile acid transport and reducing bile acid reabsorption with ASBT inhibitors, such as LUM001 and LUM002, has the potential to slow disease progression, improve liver function and enhance the quality of life for patients suffering from cholestatic liver diseases and NASH.

 

Bile acids facilitate the absorption of dietary cholesterol, fat and fat-soluble vitamins and are increasingly being recognized as signaling molecules that regulate metabolic processes. Bile acids are synthesized in the liver and stored in the gall bladder. They are released into the gastrointestinal, or GI, tract, typically in response to the ingestion of food. ASBT is present in the distal, or lower, portion of the small intestine where it mediates the uptake of bile acids across the intestinal cell membrane. ASBT, together with other transporters and proteins, recycles bile acids from the GI tract back to the liver via the portal vein. When bile and cholesterol equilibrium, or homeostasis, is disrupted, bile acids can accumulate in the liver and are associated with significant liver damage and pruritus, or itching. Inhibiting ASBT results in more bile acids being excreted in the feces and reduced bile acids returning to the liver. Bile acids are also potent signaling agents which can bind to specific receptors in the colon and stimulate the release of proteins involved in metabolic control. ASBT inhibition has been shown to reduce cholesterol levels and improve metabolic parameters, including insulin resistance and blood glucose levels, and could therefore be effective in addressing NASH.

 

Our lead product candidate, LUM001, is a novel, once-daily, orally-administered, potent and selective ASBT inhibitor, or ASBTi, which reduces bile acid intestinal absorption leading to an increase in bile acid excretion and lower levels of bile acids in the liver and systemic circulation. LUM001 is currently in Phase 2 clinical development in children for the treatment of orphan cholestatic liver diseases including Alagille syndrome, or ALGS, and progressive familial intrahepatic cholestasis, or PFIC. Based on consultation with regulatory authorities, we expect to file for regulatory approval for LUM001 in ALGS and PFIC utilizing the results from our planned and ongoing pediatric Phase 2 trials. LUM001 is also in Phase 2 clinical development in adults for the treatment of primary biliary cirrhosis, or PBC, and primary sclerosing cholangitis, or PSC. Pending successful completion of our Phase 2 clinical trials and input from regulatory authorities, we plan to initiate a Phase 3 development program in these indications to support regulatory approval. We have developed a proprietary liquid formulation of LUM001 for children and a tablet formulation of LUM001 for adults.

 

Cholestatic liver diseases, including ALGS, PFIC, PBC and PSC, are characterized by elevated bile acids and pruritus, which is generally the most debilitating symptom afflicting children and adults with these diseases. Surgical intervention, which lowers bile acid levels, has been shown to relieve pruritus symptoms and slow disease progression in these patients, but is associated with significant complications. By reducing serum bile acids, LUM001 may offer a novel therapeutic approach to alleviate the pruritus and progressive liver damage associated with cholestatic liver diseases.

 

LUM001 was designed to be minimally absorbed into the systemic circulation, thereby minimizing potential safety concerns. It has been extensively studied through administration to more than 1,400 human subjects in 12 completed clinical trials evaluating the product candidate as a treatment for elevated cholesterol levels. Our product candidate demonstrated a favorable safety profile and an ability to reduce serum bile acid levels in clinical trials to date. We are currently conducting or expect to initiate seven Phase 2 clinical trials of LUM001 in North America and Europe. We expect to obtain data from several of these trials over the course of the next year, beginning with

 

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Phase 2 results in ALGS by the second half of 2014, followed by Phase 2 results in PFIC and PBC by late 2014 or early 2015. LUM001 has been granted orphan drug designation for ALGS, PFIC, PBC and PSC in the United States and the European Union, providing the opportunity to receive 7 years of market exclusivity in the United States and 10 years of market exclusivity in the European Union, which can be extended to 12 years in the European Union if trials are conducted in accordance with an agreed-upon pediatric investigational plan.

 

There are no approved therapies for the treatment of patients with ALGS, PFIC or PSC in the United States. Cholestyramine (Questran®) is only modestly effective at lowering bile acid levels and slowing progressive liver disease because patients generally cannot tolerate a high enough dosage to realize the full therapeutic benefit. Ursodeoxycholic acid (ursodiol), or UDCA, is approved for the treatment of PBC, but only 20-30% of patients with PBC fully respond to treatment with UDCA, and the rest eventually develop cirrhosis and liver failure. In children with ALGS and PFIC, in particular, invasive partial external biliary diversion surgery, or PEBD surgery, a procedure in which bile acids are diverted outside the body into an external bag through a hole in the abdomen, is often used to lower circulating bile acid concentrations. Such surgical procedures are associated with significant complications. We believe that there is a significant unmet medical need for a safe, effective and non-invasive treatment alternative for patients with cholestatic liver disease.

 

Based on published industry data, we estimate the prevalence of these orphan cholestatic liver diseases in the table below, as well as the initial addressable market for LUM001, which consists of patients with moderate to severe pruritus who have not received PEBD surgery or a liver transplant:

 

Prevalence of Orphan Cholestatic Liver Diseases

 

     United States      European Union  
     Prevalence
Rate
     Prevalence      Initial
Addressable
Market
     Prevalence
Rate
     Prevalence      Initial
Addressable
Market
 

ALGS

     3/100,000         9,500         2,850         3/100,000         15,000         4,500   

PFIC

     1/100,000         3,000         900         2/100,000         10,000         3,000   

PBC

     40/100,000         125,000         20,000         30/100,000         150,000         24,000   

PSC

     14/100,000         45,000         9,000         3/100,000         15,000         3,000   

 

Our second product candidate, LUM002, is a novel, once-daily, orally-administered, highly potent and selective ASBT inhibitor in development for the treatment of NASH, a condition characterized by fat deposits in the liver, leading to inflammation and significant fibrosis. While the underlying cause of liver injury in NASH is not known, it is strongly associated with obesity, type 2 diabetes, high cholesterol and triglycerides and other metabolic disorders. By blocking bile acid reabsorption, we expect LUM002 to reduce hepatic cholesterol levels and increase colonic bile acid concentrations. Elevated colonic bile acids signal through receptors on cells in the distal portion of the large intestine. This signaling stimulates the secretion of proteins that regulate insulin release from the pancreas and glucose metabolism. We believe that therapeutic strategies aimed at modulating insulin resistance and normalizing lipoprotein metabolism have significant potential to benefit patients with NASH. We have completed a Phase 1 clinical trial in healthy volunteers and metabolic disease patients and plan to initiate a Phase 2 clinical trial in NASH patients in the second half of 2014.

 

NASH represents a substantial unmet medical need. According to the National Digestive Diseases Information Clearinghouse, 2-5% of Americans, or 6 million to 16 million individuals, suffer from this disease, of which an estimated 600,000 have been identified as having severe liver disease, which we view as the initial addressable market for LUM002. In Western countries as a whole, industry sources estimate that NASH affects 2-3% of the general population, equating to an additional 10 million to 15 million individuals in Europe. NASH is becoming more common, largely believed to be related to the widespread increase in obesity. From 1980 to 2010, the rate of obesity in the United States alone has more than doubled in adults and more than tripled in children and is expected to increase by an additional 33% over the next two decades. Globally, the rate of obesity has also nearly doubled since 1980 and is expected to double again by 2030 if nothing is done to reverse the

 

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epidemic. NASH is one of the main causes of liver cirrhosis, behind hepatitis C and alcoholic liver disease, and is the fastest growing cause of liver transplantation in the United States. Despite the rapidly increasing incidence of NASH, there are no therapies currently approved for the treatment of this common liver disorder.

 

Based on the favorable clinical profiles of LUM001 and LUM002, we believe we are well positioned to significantly change the treatment paradigm for these orphan cholestatic liver diseases as well as NASH. Each of these represents a highly attractive commercial opportunity. We intend to establish commercialization and marketing capabilities in North America for LUM001 and pursue strategic partnerships in other territories. We intend to seek strategic partnerships to accelerate the broader clinical development and commercialization of LUM002 in NASH and other metabolic diseases.

 

Our Product Pipeline

 

We have seven ongoing or planned Phase 2 clinical trials of LUM001, four of which are in Alagille syndrome, or ALGS, and one planned Phase 2 clinical trial of LUM002. The following chart depicts key information regarding our product candidates, their indications, and their current stages of development:

 

LOGO

 

Our Strategy

 

Our goal is to be a leader in the treatment of rare cholestatic liver diseases and serious metabolic disorders of the liver where there is a high unmet medical need. The key components of our strategy include:

 

   

Pursue rapid development and regulatory approval for our lead product candidate, LUM001, in ALGS and PFIC in children.    We expect to complete our current Phase 2 clinical trials in ALGS to support the filing of a new drug application, or NDA, with the U.S. Food and Drug Administration, or FDA, and a marketing authorization application, or MAA, with the European Medicines Agency, or EMA. We plan to submit data to support an additional indication for the treatment of PFIC either at the time of these filings or to submit supplemental filings following approval, if any, of LUM001 for ALGS.

 

   

Develop and seek regulatory approval for LUM001 in PBC and PSC in adults.    Pending successful completion of our Phase 2 clinical trials and input from regulatory authorities, we plan to initiate a Phase 3 development program of LUM001 in PBC and PSC to support NDA and MAA filings.

 

   

Advance the development and commercialization of LUM002 through a combination of internal development and strategic partnerships.    We plan to initiate a Phase 2 clinical trial of LUM002 in NASH in the second half of 2014. We intend to seek strategic partnerships to accelerate the broader clinical development and commercialization of LUM002 in NASH and other metabolic diseases.

 

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Establish commercialization and marketing capabilities in North America for LUM001 and pursue strategic partnerships in other territories.    We plan to build the capabilities to effectively commercialize and market LUM001 in North America if approved by the FDA. We believe that this commercial organization can be modest in size and targeted to the relatively small number of specialists in the United States who treat patients with cholestatic liver disease. We intend to pursue strategic partnerships for additional clinical development, if required, and the commercialization of LUM001 in markets outside of North America.

 

   

Maximize the therapeutic potential of LUM001 in additional liver diseases.    Beyond our initial focus in ALGS and PFIC in children and PBC and PSC in adults, we plan to develop LUM001 in other orphan cholestatic liver diseases such as biliary atresia, intrahepatic cholestasis of pregnancy, benign recurrent intrahepatic cholestasis and drug-induced cholestasis.

 

The Role of Bile Acids and ASBT

 

The liver is responsible for many vital body functions, including the regulation of bile acid synthesis and metabolism. The liver uses cholesterol to produce bile acids. Once produced, bile acids are transported and stored in the gall bladder. In response to food ingestion, the gall bladder contracts and releases bile acids into the small intestine, where they promote digestion and absorption of dietary fats and fat-soluble vitamins A, D, E and K. At the end of the small intestine, bile acids are re-absorbed back to the liver. ASBT, the main bile acid transporter, is present in the distal portion of the small intestine. ASBT mediates the uptake of bile acids across the intestinal cell membranes. Approximately 95% of bile acids recirculate back to the liver, and the remaining bile acids are excreted from the body in the feces. The liver must produce a small amount of bile acids every day to make up for this loss.

 

It is well established that inhibiting ASBT results in more bile acids being excreted in the feces and reduced bile acids returning to the liver. Bacteria in the intestine change some of the bile acids to form secondary bile acids. These secondary bile acids are considered to be more toxic to the liver, and ASBT increases their excretion in the feces. Because ASBT is present in the intestinal surface, ASBT inhibitors such as LUM001 need not be absorbed into the body. LUM001 works inside the intestine without exposing the entire body to the medicine. This is important because patients with liver disease can have difficulty tolerating medicines that enter into the blood circulation.

 

We believe that LUM001 offers a safe and effective, non-invasive pharmacological approach to reducing serum bile acids and decreasing the damaging effects of high bile acid levels in the liver and the debilitating pruritus often associated with cholestatic liver diseases.

 

As the following graphic illustrates, treatment with LUM001 has the potential to lower bile acid levels in the blood and increase bile acid excretion:

 

LOGO    LOGO

 

 

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In addition to their role in digestion, bile acids are important signaling molecules that help regulate a network of metabolic pathways throughout the GI system. Bile acids bind to receptors in the colon that promote the release of small intestinal hormones, such as glucagon-like peptide-1, or GLP-1, and peptide YY, or PYY, that can stimulate insulin release from the pancreas and decrease plasma hemoglobin A1c, or HbA1c, a measure of glucose, or blood sugar, levels over time. In the liver, bile acids bind to other receptors that regulate bile acid production from cholesterol in a negative feedback loop. Under normal conditions, bile acids bind to these receptors and inhibit the synthesis of new bile acids. As bile acid levels are lowered, there is an increase in bile acid production from cholesterol, which can result in a decrease in cholesterol in the liver. High levels of cholesterol in the liver are thought to cause liver damage.

 

As the following graphic illustrates, treatment with LUM002 has the potential to increase colonic bile acids and decrease liver bile acids, triggering metabolic responses:

 

LOGO

 

Since hepatic cholesterol and fat both contribute to the inflammatory component of NASH, a reduction of serum and hepatic cholesterol is anticipated to decrease hepatic inflammation and slow the progression of fibrosis. LUM002, as a highly potent inhibitor of ASBT and bile acid reabsorption, is expected to regulate serum and hepatic bile acid and cholesterol concentrations and fatty acid metabolism in the liver. LUM002 has also been shown to modulate bile acid signaling in the intestine and thereby increase GLP-1 and reduce insulin resistance, leading to reduction in HbA1c and blood glucose, and could therefore be effective in addressing the metabolic component of NASH.

 

LUM001

 

Our lead product candidate, LUM001, is a novel, once-daily, orally-administered, potent and selective inhibitor of ASBT, and is currently in Phase 2 clinical development for the treatment of ALGS and PFIC in children and PBC and PSC in adults. These diseases are characterized by elevated bile acids and pruritus, which is generally considered the most debilitating symptom. By reducing serum bile acids, LUM001 may offer a novel therapeutic approach for alleviating the pruritus and progressive liver damage associated with cholestatic liver diseases. We are currently conducting or plan to initiate the following clinical trials:

 

   

three Phase 2 clinical trials and one 48-week extension trial of LUM001 in children with ALGS;

 

   

one Phase 2 clinical trial in children with PFIC;

 

   

one Phase 2 clinical trial in adults with PBC; and

 

   

one Phase 2 clinical trial in adults with PSC.

 

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Cholestatic Liver Diseases

 

Cholestatic liver disease is defined as an impairment of bile flow from the liver which may present with fatigue, pruritus and, in its most overt form, jaundice, or a yellowish tinge in the skin and the whites of the eyes. Elevated serum bile acids are a hallmark of many cholestatic liver diseases including ALGS, PFIC, PBC, PSC, biliary atresia, intrahepatic cholestasis of pregnancy, benign recurrent intrahepatic cholestasis and drug-induced cholestasis. Impairment of bile acid flow from the liver leads to cholestasis, hepatocellular injury and progressive liver disease that may ultimately result in liver failure requiring liver transplantation.

 

Severe pruritus, which patients often describe as intense itching under the skin that cannot be relieved and is present at all times, may present at all stages of cholestatic liver disease and is the most debilitating symptom afflicting cholestatic patients. Pruritus can be very distressing for patients and their caregivers. Terms such as “pins and needles,” “like having chronic poison ivy” or “crawling” have been used to describe the sensations of pruritus, which cannot be relieved by scratching. Nevertheless, patients often resort to destructive scratching behaviors that can cause bleeding and scarring. Pruritus can lead to a marked decrease in quality of life due to impaired sleep and depression and may even result in suicidal thoughts or actions. Caregivers, particularly parents of children with cholestatic liver disease, also suffer from impaired sleep and anxiety as they struggle to help their loved ones manage this debilitating symptom. In some patients, the emotional and physical effects of pruritus alone can justify liver transplantation.

 

Bile acids are believed to play a role in causing pruritus, as supported by the following observations:

 

   

interruption of the enterohepatic circulation in ALGS and PFIC patients through PEBD surgery can dramatically lower serum bile acids and relieve pruritus. In patients who continue to have pruritus despite surgical intervention, bile acids typically remain elevated;

 

   

case reports of PEBD surgery reversal have been associated with the rapid return of pruritus and increases in biochemical markers associated with cholestasis;

 

   

reduction of serum bile acids following nasobiliary drainage, or NBD, a medical procedure in which bile acids are drained through a tube inserted through the nose into the duodenum, has been associated with temporary relief of pruritus in some patients with cholestatic liver disease;

 

   

a significant correlation between a reduction in total serum bile acids and pruritus was demonstrated using a form of external filtering of bile acids from the blood, the molecular adsorbing recirculating system, or MARS, to treat PBC patients with resistant pruritus;

 

   

pruritus can be induced by applying topical bile acids, deoxycholate and chenodeoxycholate, to the skin;

 

   

bile acid analogues such as cholylsarcosine may induce pruritus in a dose-dependent manner; and

 

   

bile acids have been shown to activate TGR5, a bile acid receptor that is present on sensory nerves, stimulating the release of neuropeptides in the spinal cord that transmit itch.

 

There are no approved therapies for ALGS, PFIC or PSC in the United States and off-label use of existing drugs, such as UDCA, rifampin and naltrexone, is only partially effective at best. UDCA is approved for the treatment of PBC in the United States and the European Union. Randomized trials show that UDCA therapy for patients with PBC can result in improvement of the biochemical markers of cholestasis and can slow disease progression in some patients. However, only 20-30% of patients with PBC fully respond to treatment with UDCA, and the rest eventually develop cirrhosis and liver failure. Additionally, UDCA has limited beneficial effects on the symptoms of the disease, such as pruritus. Long-term follow-up data suggests that treatment with UDCA does not eliminate the need for liver transplantation.

 

Cholestyramine and other bile salt resins, rifampin, and naltrexone are sometimes used to treat patients suffering from pruritus, but have been shown to have limited efficacy, poor tolerability or inadequate safety profiles. Of these drugs, only cholestyramine has regulatory approval in the United States for the treatment of

 

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pruritus associated with partial biliary obstruction. Cholestyramine (Questran®) is only modestly effective at lowering bile acid levels or slowing progressive liver disease because patients generally cannot tolerate a high enough dosage to realize the full therapeutic benefit. Cholestyramine has significant side effects including constipation, hypoprothrombinemia, a blood disorder resulting in impaired blood clotting, and hyperchloremic acidosis, a condition involving excess acid in the body. In addition, because cholestyramine depletes bile acids along the full length of the GI tract, it has been reported to reduce the absorption of vitamins A, D, E and K, which can exacerbate vitamin deficiencies in children with cholestatic liver disease. Of particular concern is exacerbating the potential for vitamin K deficiency with cholestyramine therapy in patients with ALGS, which can lead to bleeding disorders. In comparison, we believe that LUM001 will have minimal impact on bile acid concentrations in the upper GI tract, facilitating normal nutritional and vitamin absorption.

 

In a recent retrospective review of management of pruritus in patients with ALGS, no more than 20% of patients experienced good or very good relief of pruritus following treatment with either UDCA or cholestyramine as noted in the table below.

 

Effect of UDCA and Cholestyramine in Alagille Syndrome Patients

 

     UDCA      Cholestyramine  

Efficacy

   Frequency
(n)
     Percentage
(%)
     Frequency
(n)
     Percentage
(%)
 

None—Some

     32         80         15         83   

Good—Very Good

     8         20         3         17   

Safety

           

Adverse Events

     3         8         6         33   

(Kronsten et al,. J. Ped. Gastroenterol. and Nut., 2013)

 

In children with ALGS and PFIC, in particular, PEBD surgery may be performed to lower circulating bile acid concentrations. PEBD surgery can alter the enterohepatic recirculation of bile salts in such a way that the excretion of bile acids from the liver may improve. Renal and cardiovascular complications associated with ALGS can add significant risk to the surgery. The success rates for those undergoing PEBD surgery, generally measured by decreased pruritus and serum bile acids, are variable. Some studies suggest that in up to 30% of patients, PEBD surgery fails to lower bile acids and consequently does not relieve pruritus or slow progressive liver disease. Post-operative complications from PEBD surgery include electrolyte imbalances, stomal prolapse, intestinal adhesions, bleeding, infections and incisional hernias. Recurrent surgery rates have been reported in 30-50% of the patients. In these patients, liver transplantation may be ultimately indicated due to liver failure and/or severe pruritus. Even after successful surgery, patients entering their teenage years often request reversal of the disfiguring procedure for social and body image reasons, whereupon symptoms such as pruritus generally return.

 

The following table summarizes published studies showing the reduction of pruritus in patients with ALGS and PFIC as a result of removing bile acids with surgical procedures such as PEBD surgery:

 

Reduction in Symptoms of Pruritus

 

Alagille Syndrome

    

PFIC

 
    Before PEBD
(mean)
    After PEBD
(mean)
         Before  PEBD
(median)
    After PEBD
(median)
 
Bile Acids (µmol/L)     115        28      

Bile Acids (µmol/L)

    337        11   
Bilirubin (mg/dL)     2.4        1.6      

Bilirubin (mg/dL)

    2.4        1.5   
Itching (0 (no scratching) to 4 (cutaneous mutilation))     4        1      

Itching (0 (no scratching) to 4 (cutaneous mutilation))

    3        1   

(Emerick et al, Hepatology, 2002; Emerick et al; BMC Gastroenterol., 2008; Schukfeh et al,. J. Ped. Surg., 2012)

 

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Alternative interventions such as NBD and MARS are also employed in an attempt to lower bile acid levels, manage pruritus and improve measures of liver function. However, NBD often proves difficult in children due to the presence of drainage tubes, and MARS is not readily available to all patients because of the limited number of treatment centers that perform this procedure. Both NBD and MARS are invasive and offer only temporary relief, but demonstrate that lowering bile acid levels can have clinical benefit.

 

In one clinical trial of PBC patients who were treated with MARS, significant reductions in pruritus, serum bile acids, bilirubin and gamma-glutamyl transferase, or GGT, were observed as noted in the following table:

 

Effects of MARS on Pruritus and Laboratory Measurements

 

     Overall (mean, n=20)
             Before                    After                   30 days        

Pruritus VAS

   70.2    20.1*   38.7*

Bilirubin (mg/dl)

   10.4    6.7**   1.9

Alanine Aminotransferase (IU/L)

   94    82   202

Alkaline Phosphatase (IU/L)

   1146    982   1024

Gamma-glutamyl transferase (IU/L)

   528    458***   459

Cholesterol (mg/dl)

   270    250&   289

Triglycerides (mg/dl)

   220    210   207

Bile acid (µM)

   40.1    24.1*   18.7**

* p <0.001 ** p <0.02, *** p <0.01, & p <0.05 vs. control group (where p-value is the statistical probability of a result due to chance alone, and a p-value of <0.05 reflects a statistically significant result).

 

(Pares et al, J. Hepatol. 2010)

 

We believe that a non-invasive, safe and effective pharmacological therapy that can reduce serum bile acids offers a distinct advantage in the treatment of patients with cholestatic liver disease. LUM001 may delay or eliminate the need for invasive procedures such as NBD, PEBD surgery, MARS and liver transplantation, avoiding the post-surgical complications and psychological and social issues associated with those procedures. We believe that once-daily, oral treatment with LUM001 has the potential to mimic the dramatic improvements in pruritus and biochemical markers observed with PEBD and NBD surgeries.

 

Alagille Syndrome (ALGS)

 

ALGS is a genetic disorder that can affect the liver, heart, vasculature, skeleton, eyes, kidneys, and central nervous system. In many patients with ALGS, the bile ducts are abnormally narrow, malformed and reduced in number. As a result, bile accumulates in the liver and causes scarring, preventing the liver from working properly to eliminate wastes from the bloodstream. Chronic cholestasis occurs in approximately 95% of clinically-recognized cases of ALGS and most commonly presents in the neonatal period or first three months of life. Overall, approximately 13% of patients undergo PEBD surgery and 21-31% of patients will require liver transplantation during childhood.

 

ALGS is also associated with several heart problems, including impaired blood flow from the heart into the lungs, which can often be addressed successfully through surgery. The disorder may also affect the blood vessels within the brain and spinal cord and the kidneys. Affected individuals may have an unusual butterfly shape of the bones of the spinal column and distinctive facial features including a broad, prominent forehead, deep-set eyes, and a small, pointed chin.

 

In more than 90% of cases, the disease is caused by mutations in the JAG1 gene, and a small proportion of patients with ALGS have mutations in a different gene, called NOTCH2. The JAG1 and NOTCH2 genes provide

 

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instructions for making proteins during embryonic development. These proteins influence how cells are used to build body structures in the developing embryo. It is believed that changes in either the JAG1 gene or NOTCH2 gene disrupt the Notch signaling pathway. As a result, errors may occur during development, especially affecting the bile ducts, heart, spinal column, and certain facial structures.

 

Signs and symptoms arising from liver damage in ALGS may include jaundice, pruritus, and deposits of cholesterol in the skin. The pruritus experienced by patients with ALGS is among the most severe in any chronic liver disease and is present in most affected children by the third year of life. A study to assess the health-related quality of life in ALGS-diagnosed patients indicated a significant burden in physical, psychological and social health. In patients who had not had a liver transplant, 75% had active scratching, with 32% having destruction of skin, bleeding or scarring. By comparison, only 12% of patients who had undergone liver transplant had any active scratching as outlined in the following table:

 

Pruritus Scores for Patients with and without Liver Transplant

 

Itching

   Without Liver Transplant
(n=53)
    With Liver
Transplant (n=17)
 

1. No scratching

     8 %   (4)      47 % (8) 

2. Rubbing the skin or mild scratching

     17 %   (9)      41 % (7) 

3. Actively scratching but no scrapes

     17 %   (9)      0 % (0) 

4. Actively scratching and scrapes

     26 % (14)      6 % (1) 

5. Actively scratching and destruction of skin, bleeding, scarring

     32 % (17)      6 % (1) 

(Elisofon, Emerick, Sinacore, & Alonso, 2010)

 

The estimated prevalence of ALGS is three in 100,000 people in both the United States and the European Union, and we estimate that there are 9,500 children with ALGS in the United States and 15,000 in the European Union. We believe that approximately 2,850 of these U.S. children and 4,500 of these EU children, with moderate to severe pruritus who have not received a liver transplant, will be the initial target patient population for treatment with LUM001. We believe the opportunity exists to broaden beyond this initial patient population as a potential treatment for the underlying condition of ALGS.

 

Progressive Familial Intrahepatic Cholestasis (PFIC)

 

PFIC is a rare genetic disorder that causes progressive liver disease, which typically leads to liver failure. The disease is inherited in an autosomal recessive way, meaning that there are mutations in the two copies of the gene, maternal and paternal, in order for the disease to be present. Signs and symptoms of PFIC typically begin in infancy and are related to hepatic bile buildup and liver disease. Specifically, affected individuals experience pruritus, jaundice, failure to gain weight and grow at the expected rate, high blood pressure in the vein that supplies blood to the liver, and an enlarged liver and spleen. Elevation of serum bile acids is a common feature of the disease. The most prominent and problematic ongoing manifestation of PFIC is pruritus, leading to a severely diminished quality of life. Approximately 35% of patients undergo PEBD surgery and nearly 50% require liver transplantation. The symptoms of PFIC normally develop during the first three to six months of life and, without surgery, the disease is fatal by the second decade of a patient’s life.

 

In people with PFIC, liver cells are less able to secrete bile due to mutations in proteins that control bile flow. The resulting buildup of bile in liver cells causes liver disease in affected individuals. Three types of PFIC have been identified:

 

   

PFIC1.    PFIC1, also referred to as Byler disease, is caused by impaired bile salt secretion due to mutations that affect the FIC1 protein. ATP8B1 gene mutations cause PFIC1. The ATP8B1 gene provides instructions for making a protein that helps to maintain an appropriate balance of bile acids. Mutations in the ATP8B1 gene result in the buildup of bile acids in liver cells, damaging these cells and causing liver disease. Children affected by PFIC1 usually develop cholestasis in the first months of life. In the absence

 

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of surgical treatment, progression to cirrhosis and end-stage liver disease ensues during the first or second decade of life. In addition to signs and symptoms related to liver disease, children with PFIC1 may have short stature, deafness, diarrhea, inflammation of the pancreas, and low levels of fat-soluble vitamins in the blood.

 

   

PFIC2.    PFIC2 is caused by impaired bile salt secretion due to mutation in the gene that encodes the bile salt export pump protein, or BSEP. Mutations in the ABCB11 gene are responsible for PFIC2. The ABCB11 gene provides instructions for making BSEP that moves bile acids out of the liver. Mutations in the ABCB11 gene result in the buildup of bile salts in liver cells, damaging these cells and causing liver disease. The signs and symptoms of PFIC2 are typically related to liver disease and tend to be more severe than those experienced by patients with PFIC1. Children with PFIC2 often develop liver failure within the first few years of life and are at increased risk of developing a type of liver cancer called hepatocellular carcinoma.

 

   

PFIC3.    PFIC3, which may also present in infancy or later in childhood or even during young adulthood, is a result of impaired multi-drug resistant 3 protein, or MDR3. PFIC3 is caused by mutations in the ABCB4 gene. The ABCB4 gene provides instructions for making a protein that moves certain fats called phospholipids across cell membranes. Mutations in the ABCB4 gene lead to a lack of phospholipids available to bind to bile acids, resulting in a buildup of free bile acids which damage liver cells. Most people with PFIC3 have signs and symptoms related to liver disease which usually do not appear until later in infancy or early childhood. Liver failure can occur in childhood or adulthood in patients with PFIC3.

 

Some patients with PFIC do not have a mutation in the ATP8B1, ABCB11, or ABCB4 gene. In these cases, the cause of the condition is unknown.

 

The disease is estimated to affect one in every 100,000 people in the United States and two in every 100,000 in the European Union, and we estimate that there are 3,000 children with PFIC in the United States and 10,000 in the European Union. Children with PFIC1 and PFIC2 who have not received a liver transplant present the most urgent medical need and constitute approximately 900 patients in the United States and 3,000 in the European Union, which will be our initial target patient population for treatment with LUM001. We believe the opportunity exists to broaden beyond this initial patient population, and we plan to evaluate the effectiveness of LUM001 in patients with PFIC3 in a subsequent clinical trial.

 

Primary Biliary Cirrhosis (PBC)

 

PBC is a chronic condition in which the bile ducts become inflamed and are slowly destroyed. When bile ducts are damaged, bile acids can build up in the liver, leading to irreversible scarring of liver tissue. PBC is thought to be caused by an autoimmune reaction, but what initiates the autoimmune destruction of the bile ducts is not known. Nearly 90% of all PBC patients are women and disease onset usually occurs between the ages of 40 and 60. Although a large proportion of patients are asymptomatic at diagnosis, symptoms develop as the disease progresses. The most common symptoms are pruritus and fatigue. When present, pruritus can have a marked negative effect on the quality of life for patients with the disease. Other symptoms of PBC include abdominal pain, jaundice, cholesterol-rich fat deposits in the skin or tendons, or xanthomas, and dry eyes and mouth. The disease develops over time and may ultimately cause the liver to stop working completely. Treatment with UDCA, the only approved therapy for PBC, is only effective in approximately 50% of patients. Early treatment can delay but not stop the eventual onset of cirrhosis and liver failure. When a person has end-stage liver disease, a liver transplant is necessary for survival.

 

Genetic factors may make a person prone to develop PBC. The disease is more common in people who have a parent or sibling, particularly an identical twin, with the disease. Genetic factors may also make some patients with PBC prone to develop other autoimmune diseases such as Sjogren’s syndrome, scleroderma, Raynaud’s phenomenon and CREST syndrome.

 

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We estimate that the prevalence of PBC is 40 per 100,000 people in the United States and 30 per 100,000 in the European Union, and prevalence rates are on the increase. We estimate that approximately 125,000 adults in the United States and 150,000 in the European Union suffer from PBC. We believe that the initial addressable market for LUM001 therapy is approximately 20,000 U.S. patients and 24,000 EU patients with moderate to severe pruritus who have not received a liver transplant. We believe the opportunity exists to broaden beyond this initial patient population as a potential treatment for the underlying condition of PBC.

 

Primary Sclerosing Cholangitis (PSC)

 

PSC is a disease that causes chronic inflammation and subsequent scarring of the bile ducts both inside and outside the liver. As scarring increases, the ducts become blocked and bile acids build up in the liver and damage liver cells. Eventually, scar tissue can spread throughout the liver, causing cirrhosis and liver failure. The causes of PSC are not known. Genes, immune system problems, bacteria, and viruses may all play a role in the development of the disease.

 

Most people with PSC are adults but the disease also occurs in children. The average age at diagnosis is 40 and approximately 70% of patients are male. Liver transplant is the only known cure for PSC, but transplant is typically reserved for patients with severe liver damage. Unlike other forms of cholestatic liver disease where liver transplantation is curative, PSC may recur post-liver transplantation.

 

Many patients are asymptomatic at diagnosis or have symptoms such as fatigue, abdominal discomfort, jaundice and pruritus. PSC can lead to various complications, including deficiencies of vitamins A, D, E, and K, infections of the bile ducts, cirrhosis, liver failure and bile duct cancer. PSC is also strongly associated with inflammatory bowel disease, or IBD. In PSC patients, the prevalence of IBD is reported to be in the range of 75-90%. The most frequent type of IBD in PSC is ulcerative colitis, which is diagnosed in approximately 87% of patients with IBD. Additionally, up to 13% have Crohn’s colitis disease.

 

The estimated prevalence of PSC is 14 in 100,000 people in the United States and 3 in 100,000 in the European Union with an average life expectancy of eight to ten years from diagnosis. We estimate that the disease affects 45,000 people in the United States and 15,000 in the European Union. We believe that the initial addressable market for LUM001 therapy is approximately 9,000 U.S. patients and 3,000 EU patients with moderate to severe pruritus who have not received a liver transplant. We believe the opportunity exists to broaden beyond this initial patient population as a potential treatment for the underlying condition of PSC.

 

Overview of LUM001

 

Our lead product candidate, LUM001, is a once-daily, orally-administered, potent and selective inhibitor of ASBT that reduces bile acid intestinal absorption and leads to increased bile acid excretion and lower levels of serum and hepatic bile acids. LUM001 is currently in Phase 2 clinical development for the treatment of orphan cholestatic liver diseases, including ALGS and PFIC in children and PBC and PSC in adults. All of these diseases are characterized by an impairment of bile flow, in which the liver is exposed to increased levels of bile acids, causing significant damage over time. We believe that by inhibiting ASBT, which is responsible for intestinal recycling of bile acids back to the liver, LUM001 may lower circulating bile acid levels and thereby reduce bile-acid mediated liver damage, leading to improvements in liver function and improving symptoms of cholestatic liver disease.

 

LUM001 was specifically designed to have limited systemic absorption, thereby minimizing potential safety concerns and avoiding drug-drug interactions. As a result, LUM001 acts locally inside the intestine before being excreted largely unchanged in the feces. At the doses being used in the LUM001 clinical trials, LUM001 is rarely detected in the systemic circulation. We believe this characteristic of the product candidate offers a novel, non-invasive approach with key safety advantages, particularly in patients with compromised liver function.

 

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LUM001 has been previously evaluated as a treatment for elevated cholesterol levels in a clinical development program in which over 1,400 human subjects received LUM001 in a total of 12 completed clinical trials. The overall objective of the previous clinical development program was to evaluate the safety and efficacy of oral administration of LUM001 for the reduction of serum LDL-cholesterol in patients with hypercholesterolemia, or high levels of cholesterol in the blood. The pharmacological effects of LUM001 in humans were evaluated in seven Phase 1 and three Phase 2 clinical trials. In addition, two trials compared different formulations of LUM001. The results from these trials suggest the following:

 

   

LUM001 lowers serum bile acids concentrations and increases bile acid excretion in feces, consistent with inhibition of intestinal bile acid reabsorption. At doses in adults of one mg/day or higher, LUM001 decreases bile acid levels with, for example, a ten mg/day dose causing approximately a 50% decrease in serum bile acids;

 

   

LUM001 results in reductions of serum LDL-cholesterol. Since serum LDL-cholesterol is a precursor in the pathway for synthesis of bile acids, it is therefore expected that serum LDL-cholesterol levels will also be reduced if the recycling of bile acids via the enterohepatic circulation is inhibited; and

 

   

LUM001 was generally safe and well tolerated, with only a single drug-related significant adverse event, or SAE, of cholecystitis reported in a Phase 1 clinical trial. Plasma levels of LUM001 were consistent with a drug that is minimally absorbed, and drug interaction studies showed no clinically significant interactions between LUM001 and any of three statins evaluated.

 

We are currently conducting or expect to initiate three randomized placebo-controlled Phase 2 clinical trials and one 48-week extension trial of LUM001 in children with ALGS. In addition, we initiated an open label clinical trial in children with PFIC and an open label clinical trial in adults with PSC in the first quarter of 2014. We are also conducting a randomized placebo-controlled Phase 2 clinical trial in adults with PBC. We have submitted investigational new drug applications, or INDs, for LUM001 for the treatment of ALGS, PFIC, PBC and PSC. We submitted the IND for ALGS on October 24, 2013; the IND for PFIC on October 29, 2013; the IND for PBC on April 26, 2013; and the IND for PSC on November 19, 2013. Previously, G.D. Searle & Co. submitted an IND for LUM001 (formerly SD-S613) on June 15, 1999. Ownership of the previous IND was transferred to Pfizer, which requested withdrawal of the previous IND without prejudice on July 15, 2005. The FDA acknowledged the withdrawal request, and the withdrawal was completed on July 25, 2005. In addition, between May 3, 2013 and March 26, 2014, we submitted four clinical trial applications, or CTAs, in the United Kingdom and five CTAs in Canada for LUM001.

 

Our Clinical Trials for LUM001

 

Phase 2 Trials in ALGS: ITCH and IMAGO

 

LUM001 is being investigated in the United States, Canada and the United Kingdom in two Phase 2, 13-week, randomized, double-blind, placebo-controlled, multi-center trials in children with ALGS. The trials are designed to investigate the effects of LUM001, compared to placebo, on pruritus, serum bile acids and biochemical markers associated with cholestatic liver disease, such as alanine aminotransferase, or ALT, serum liver alkaline phosphatase, or ALP, gamma glutamyl transferase, or GGT, and bilirubin, following daily dosing over a 13-week period. The U.S. and Canada trial, which we refer to as ITCH, was initiated in the first quarter of 2014 and will enroll 24 patients. The UK trial, which we refer to as IMAGO, was initiated in the third quarter of 2013 and will enroll 18 patients. We reached agreement with both the FDA and the Medicines and Healthcare Products Regulatory Agency in the United Kingdom on the requirements for a clinical registration package which they defined as a 40-50 patient database including 12 months of drug exposure in a subset of these patients. In the United States, we have entered into a Cooperative Research and Development Agreement, or CRADA, with the National Institute of Diabetes and Digestive and Kidney Diseases, or NIDDK, a division within the National Institutes of Health. NIDDK supports a collaborative research network, the Childhood Liver Disease Research and Education Network, or ChiLDREN, with whom we are collaborating on ITCH. The 14 U.S. hospitals within ChiLDREN treat approximately 80% of the pediatric cholestatic liver disease patients in the United States.

 

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In ITCH, the primary efficacy endpoint is the mean change from baseline to Week 13 in pruritus as measured by the average daily score of the ItchRO(Obs), a caregiver-reported outcome instrument measuring severity of itch. The average daily score will be calculated using the seven days pre-treatment for baseline, and the last seven days of treatment for Week 13. In IMAGO, the primary efficacy endpoint is the mean change from baseline to Week 13 in fasting serum bile acid level.

 

The secondary endpoints are mean change from baseline to Week 13 in fasting serum bile acid level (ITCH) and pruritus (IMAGO) as well as biochemical markers ALT, ALP, GGT and bilirubin (ITCH and IMAGO).

 

In ITCH, eligible subjects will be randomized to one of the three treatment groups including a high dose of 140 µg/kg/day, up to a maximum daily dose of 10 mg; a low dose of 70 µg/kg/day, up to a maximum daily dose of 5 mg; and placebo. For subjects randomized to LUM001, there will be a dose escalation period allowing subjects to acclimate to LUM001. The dose for each subject will be increased incrementally. At the end of four weeks, subjects will continue dosing for another nine weeks using the Week 4 dose, or the highest tolerated dose below the Week 4 dose.

 

In IMAGO, the trial consists of two cohorts, with each cohort having two treatment groups. The trial opened with enrollment in a first cohort consisting of a LUM001 dose of 140 µg/kg/day, up to a maximum daily dose of 10 mg, and placebo. The dose of the second cohort will be based on a blinded analysis of tolerability in the first cohort. If subjects tolerate the 140 µg/kg/day dose, the dose of LUM001 for the second cohort will be 280 µg/kg/day, up to a maximum daily dose of 20 mg. If subjects do not tolerate the first dose, the dose of LUM001 for the second cohort will be 70 µg/kg/day, up to a maximum daily dose of 5 mg.

 

In both studies, dosing will be stopped after Week 13 and subjects will be followed for an additional four weeks. All patients who complete ITCH or IMAGO will be able to participate in a long-term extension trial, which we refer to as IMAGINE.

 

Phase 2 Trial in ALGS: IMAGINE

 

IMAGINE, which was initiated in the fourth quarter of 2013, is a 48-week, multicenter, double-blind, long-term extension trial of LUM001 in children at least two years of age diagnosed with ALGS who have completed participation in either ITCH or IMAGO. IMAGINE is divided into three parts: a dose escalation period, a dose optimization period, and a stable dosing period. Subjects who were randomized to receive placebo in ITCH or IMAGO will receive LUM001 in IMAGINE. During the optimization period, dosing may be adjusted with the objective of achieving optimal control of pruritus up to a maximum daily dose of 280 µg/kg LUM001 or 20 mg total dose.

 

The primary objective of the trial is to evaluate the long-term safety and tolerability of LUM001 in pediatric subjects with ALGS. Secondary objectives of the trial are to evaluate the long-term effect of LUM001 on serum bile acids, pruritus and biochemical markers as well as the long-term effect of LUM001 on xanthomas associated with ALGS.

 

Phase 2 Trial in ALGS: ICONIC

 

ICONIC is planned to be a 48-week, open-label trial with a double-blind, placebo-controlled, randomized drug withdrawal period. The trial will be conducted at clinical sites in Europe, Canada and Australia and will enroll approximately 30 subjects. We plan to initiate ICONIC in the second quarter of 2014. The primary objective of ICONIC is to evaluate the long-term safety and tolerability of LUM001 in children with ALGS. Secondary objectives include to evaluate the effect of LUM001 on serum bile acid levels, biochemical markers of cholestasis and liver disease, pruritus and durability of drug effect.

 

The trial will be divided into four parts: an open label, dose escalation period up to a dose of 400 µg/kg/day, a stable dosing period, a randomized, double-blind, placebo-controlled drug withdrawal period and a long-term stable dosing period at doses up to 400 µg/kg/day.

 

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Phase 2 Trial in PFIC: INDIGO

 

We initiated a 48-week, open-label trial designed to evaluate the safety and efficacy of LUM001 in PFIC patients at least one year of age, which we refer to as INDIGO. INDIGO was initiated in the first quarter of 2014 and will enroll approximately 12 patients. The trial is being conducted at clinical sites in the United States, the United Kingdom and the European Union. We are collaborating with ChiLDREN on INDIGO. INDIGO was designed to evaluate the safety and tolerability of LUM001 and to investigate the effects of LUM001 on serum bile acids, biochemical markers associated with cholestatic liver disease, and pruritus following daily dosing.

 

INDIGO is divided into three parts: a screening period, a treatment period and a long-term exposure period. The treatment period is comprised of a dose escalation phase, a stable dosing period at 140 µg/kg/day, and a stable dosing period at 280 µg/kg/day.

 

The primary efficacy endpoint of INDIGO is the change from baseline to Week 13 in fasting serum bile acid level. The secondary endpoints include change from baseline to Week 13 in biochemical markers, including ALT, ALP, and bilirubin, and pruritus.

 

Phase 2 Trial in PBC: CLARITY

 

In the third quarter of 2013, we initiated a 13-week, randomized, double-blind, placebo-controlled, multi-center trial, which we refer to as CLARITY, to evaluate LUM001 in patients with PBC. The trial is being conducted at clinical sites in both the United States and the United Kingdom. The trial is designed to investigate the effects of two doses of LUM001 in combination with UDCA on changes from baseline in pruritus and biochemical markers associated with PBC. The trial will enroll approximately 60 subjects.

 

The primary efficacy endpoint of CLARITY is the change from baseline in pruritus at Week 13 as measured by the average daily score of ItchRO(Pt), a patient-reported outcome instrument measuring severity of itch. The secondary efficacy endpoints include change from baseline in pruritus at interim time points and change from baseline ALP and serum bile acid levels.

 

CLARITY will consist of two cohorts, with each cohort having two treatment groups. The trial began with enrollment in the first cohort consisting of a LUM001 dose of 10 mg/day plus UDCA and placebo plus UDCA. The dose of the second cohort will be based on a blinded analysis of tolerability in the first cohort. If subjects tolerate well the 10 mg dose, the target dose of LUM001 for a second cohort will be 20 mg/day. If subjects experience intolerance, the target dose of LUM001 for the second cohort will be 5 mg/day.

 

Phase 2 Trial in PSC: CAMEO

 

CAMEO is a 14-week open-label trial to evaluate the safety, tolerability and efficacy of LUM001 in patients with PSC during 14 weeks of treatment. The trial was initiated in the first quarter of 2014 and will be conducted at clinical sites in the United States. We expect to enroll approximately 20 patients in CAMEO.

 

The primary efficacy endpoint is change from baseline in the fasting serum bile acid level at Week 14. Secondary efficacy endpoints include change from baseline in pruritus, biochemical markers of cholestasis and liver function, fecal bile acid level and fecal microbiome populations at Week 14.

 

For an individual subject, the trial participation period will consist of a screening visit and a lead-in observation period, followed by a treatment period and a follow-up period. The treatment period includes a dose escalation period followed by a stable dosing period. During the dose escalation period, the dose will be increased at weekly intervals to acclimate the subject to LUM001, up to a maximum dose of 10 mg/day. At the end of the dose escalation period, subjects will continue dosing at 10 mg/day, or the highest tolerated dose for the stable dosing period.

 

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Previous Clinical Trials and Preclinical Development of LUM001

 

Previous Clinical Trials

 

The efficacy, pharmacokinetics, tolerability, and safety of LUM001 in humans have been evaluated in a total of 12 completed Phase 1 and Phase 2 clinical trials in healthy volunteers and patients with hypercholesterolemia that were conducted by Pfizer affiliates. Phase 1 clinical trials included a single and two multiple dose tolerability trials, an absorption, distribution, metabolism, and excretion trial, a statin co-administration trial, two statin interaction trials and a food composition trial. Phase 2 clinical trials included two dose-ranging trials in adult patients, a tolerability trial in adolescents and children, and a multiple dose tolerability and efficacy trial. Over 1,400 human subjects have been exposed to LUM001.

 

In a randomized, double-blind, placebo-controlled Phase 1 clinical trial in 167 human subjects treated for 28 days, 147 with LUM001 and 20 with placebo, LUM001 was shown to increase fecal bile acid excretion and to decrease serum bile acid concentrations (area under the curve, or AUC, a measure of drug concentration in the blood, for serum bile acids) at the doses indicated in the following graphic:

 

Mean Changes in Bile Acid Levels after Dosing with LUM001

 

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* p<0.05, ** p<0.01 and *** p<0.001 vs. control (0) (where p-value is the statistical probability of a result due to chance alone, and a p-value of <0.05 reflects a statistically significant result)

 

LUM001 was evaluated at daily doses up to 100 mg over 28 days and at daily doses up to 40 mg over ten weeks and was generally found to be safe. The most commonly reported adverse drug reactions in LUM001-treated patients were abdominal cramping or pain and diarrhea/loose stools. These gastrointestinal adverse events, or GI AEs, are believed to be mechanism-based, due to elevated bile acid concentrations in the colon.

 

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The frequency and severity of the GI AEs in adults, adolescents and children diminished over time. After three to four weeks on a stable dose of LUM001, GI AEs in adult patients decreased to near placebo levels as outlined in the following graphic, which shows the incidence of GI AEs at the indicated dose levels over an eight-week period following initial exposure to LUM001:

 

Percentage of Adult Patients with GI AEs Diminishes with Duration of Drug Exposure

 

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GI AEs in adults, adolescents and children were dose dependent. These results suggest that over time, an individual’s GI tract can adapt to the effects of the drug and experience a reduction in the incidence rate of GI AEs. To assess the effects of dose titration, LUM001 was evaluated in a 28-day once-daily dosing study in healthy volunteers. In a dose escalation arm, the dose was increased every seven days starting from 0.5 mg daily and proceeding to a maximum of 5 mg daily. Using this regimen, the incidence of GI AEs was comparable with the rate observed in the placebo group as demonstrated in the table below:

 

    Placebo
(n=20)
    1 mg daily
(n=8)
    2.5 mg  daily
(n=25)
    5 mg  daily
(n=26)
    0.5-5 mg  daily*
(n=16)
 

GI Adverse Events

         

Abdominal pain

    (10%)      (37%)      (16%)      (17%)      (6.3%) 

Constipation

    (10%)             (12%)               

Diarrhea

    (5%)      (12%)      (20%)      (7%)        

Nausea

                  (4%)      (4%)        

Pruritus Ani

                  (24%)      (15%)        

 

*   Week 1: 0.5mg, Week 2: 1.0mg, Week 3: 2.5mg, Week 4: 5.0mg

 

No clinically significant laboratory abnormalities were documented in LUM001-treated subjects. LUM001 is associated with mild, often transient elevations of triglycerides and ALT in a small percentage of subjects. No deaths related to LUM001 have occurred in trials conducted to date. With the exception of a single SAE of cholecystitis reported in a Phase 1 clinical trial, no other SAEs possibly related or related to LUM001 have been reported.

 

LUM001 was designed to be minimally absorbed to minimize potential safety concerns and avoid any drug-drug interactions related to systemic exposure. In human subjects exposed to LUM001, plasma levels after chronic oral administration of LUM001 are consistent with a drug that is minimally absorbed. LUM001 was rarely detectable after multiple dosing with 20 mg or less. The majority of orally administered LUM001 was excreted intact in the feces along with a few minor metabolites.

 

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Preclinical Development

 

In vitro studies with cells expressing human ASBT have demonstrated that LUM001 is a potent, selective inhibitor of bile acid recycling and has a high affinity for ASBT.

 

Preclinical studies in animal models, in which LUM001 was administered orally as a single dose or a once-daily dose for up to four weeks, indicate that selective inhibition of ASBT by LUM001 results in a dose-related increase in fecal bile acids and a dose-related decrease in serum bile acids. Results from a range of nonclinical safety studies indicate that LUM001 is safe and well-tolerated and support the dosing range and duration of treatment in our clinical trials. A study conducted in dogs to compare treatment with LUM001 and cholestyramine demonstrated that LUM001 is 1,000 times more potent in terms of reducing serum bile acid levels after a meal, or postprandial, than cholestyramine.

 

In this study, a single oral dose of LUM001 or cholestyramine was administered in a solution prior to feeding and blood samples were collected at 30-minute intervals for four hours after the meal. The graphic below shows the percentage inhibition of the expected bile acid increase in blood measured as the AUC for postprandial serum bile acids during the four-hour period following administration of LUM001 or cholestyramine at the indicated doses:

 

Percent Inhibition of Postprandial Rise in Total Serum Bile Acids in Dogs after a Single Oral Dose of Either LUM001 or Cholestyramine

 

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(*p<0.05) vs. vehicle group

 

A preclinical study showed that inhibiting ASBT with LUM001 significantly improved biochemical markers of liver function in rats that had undergone partial bile duct ligation, or pBDL, surgery to induce a state of cholestasis. Rats subjected to pBDL showed a significant elevation in serum bile acids and an impaired liver function as demonstrated by increases in biochemical markers of liver damage, including ALT, ALP, aspartate aminotransferase, or AST, GGT, and total bilirubin over a sham surgery group, in which the rats were opened and closed back up without being subjected to pBDL to ensure that there was no surgical effect. These are all key parameters known to increase in human cholestatic liver disease. Rats that were subjected to pBDL and received LUM001 showed an increase in excretion of bile acids in the feces, as well as a significant reduction of serum bile acids and improvements in biochemical markers of liver damage at 14 days post-pBDL.

 

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The graphic below compares the results from the sham surgery group, the vehicle group, in which the rats were subjected to pBDL but did not receive LUM001, and two groups receiving different doses of LUM001. These results show that inhibiting ASBT reduces circulating bile acid levels and improves liver function in animal models, further suggesting that ASBT inhibition may be an attractive approach to treating cholestatic liver disease:

 

LUM001 Treatment Reduces Serum Bile Acids and Liver Injury in pBDL Model

 

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Overview of LUM002

 

Our second product candidate, LUM002, is a once-daily, orally-administered, highly potent and selective inhibitor of ASBT. We believe that LUM002 offers a novel approach in the treatment of NASH, a common liver disease, by blocking bile acid reabsorption to reduce hepatic cholesterol levels and modulate colonic bile acid concentrations. Elevated colonic bile acids signal through receptors on cells in the distal portion of the large intestine. This signaling stimulates the secretion of proteins that regulate insulin release from the pancreas and glucose metabolism. We have completed a Phase 1 clinical trial in healthy volunteers and patients with type 2 diabetes, a form of metabolic disease. We plan to initiate a Phase 2 clinical trial of LUM002 in the second half of this year for the treatment of NASH.

 

LUM002 has been shown in animal studies to increase plasma GLP-1, which stimulates insulin release in the pancreas, and decrease HbA1c. Phase 1 clinical trials with LUM002 have shown that LUM002 also decreases serum total cholesterol and LDL-cholesterol, and animal studies with LUM002 and other ASBT inhibitors have shown that LUM002 and other ASBT inhibitors decrease serum LDL-cholesterol and cholesterol levels in the liver and reduce progression of atherosclerosis. Given the well-established association of cardiovascular disease with obesity and diabetes and the growing link with NASH, the positive benefit demonstrated for ASBT inhibitors such as LUM002 on these cardiovascular risk factors suggests that LUM002 may provide significant benefits in patients with NASH. LUM002 was designed to be minimally absorbed to minimize potential safety concerns and avoid any drug-drug interactions related to systemic exposure.

 

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INDs were not required for the completed Phase 1 clinical trials of LUM002 because those trials were completed outside of the United States. We submitted a CTA for LUM002 in the Netherlands on April 24, 2013, and Sanofi submitted a CTA for LUM002 in France on June 9, 2009. We would need to submit INDs prior to conducting any future trials in the United States.

 

NASH

 

NASH, an advanced form of nonalcoholic fatty liver disease, or NAFLD, is a condition characterized by fat deposits in the liver, which lead to inflammation and significant fibrosis. NASH and NAFLD resemble alcoholic liver disease, but occurs in people who consume little or no alcohol. It can slowly progress to a loss of hepatic function, irreversible liver damage and ultimately cirrhosis and hepatocellular carcinoma. NASH is the third-leading and fastest growing cause of liver transplantation in the United States, accounting for approximately 7.4% of liver transplants in 2010.

 

Studies have shown that metabolic abnormalities, such as diabetes, hypertension, dyslipidemia and obesity, are associated with a significant increase in the number of NAFLD patients progressing to NASH and advanced fibrosis. NAFLD is the most common liver disorder among adults in the Western world. Normally the liver contains some fat, but if more than 5-10% of the liver’s weight is fat, then it is referred to as a fatty liver, or steatosis. The spectrum of NAFLD ranges from simple steatosis to NASH, which can ultimately progress to end-stage liver disease.

 

Risk factors for developing NASH are similar to those for NAFLD. People with type 2 diabetes appear to have an increased risk of developing NAFLD and have a higher risk of developing fibrosis and cirrhosis associated with NASH. Studies to date have described a 60-76% prevalence of NAFLD and a 22% prevalence of NASH in diabetics. NAFLD affects 10-30% of the general population in the United States and is increasing. Estimates of prevalence in other parts of the world are as high as 37%.

 

NASH represents a substantial unmet medical need. According to the National Digestive Diseases Information Clearinghouse, 2-5% of Americans, or 6 million to 16 million individuals, suffer from this disease, of which an estimated 600,000 have been identified as having severe liver disease, which we view as our initial addressable market. In Western countries as a whole, industry sources estimate that NASH affects 2-3% of the general population, equating to an additional 10 million to 15 million individuals in Europe. NASH is becoming more common, largely believed to be related to the widespread increase in obesity. From 1980 to 2010, the rate of obesity in the United States alone has more than doubled in adults and more than tripled in children and is expected to increase by an additional 33% over the next two decades. Globally, the rate of obesity has also nearly doubled since 1980 and is expected to double again by 2030 if nothing is done to reverse the epidemic. NASH is one of the main causes of liver cirrhosis, behind hepatitis C and alcoholic liver disease, and is the fastest growing cause of liver transplantation in the United States. Despite the rapidly increasing incidence of NASH, there are no therapies currently approved for the treatment of this common liver disorder.

 

Our Recently Completed and Planned Clinical Trials for LUM002

 

We initiated a randomized, double-blinded, placebo controlled, multiple-dose Phase 1 clinical trial of LUM002 in the second quarter of 2013. The trial enrolled healthy subjects and patients with metabolic disease. There were four groups of 12 healthy subjects and one group of 11 patients with metabolic disease.

 

The primary objective of the trial was to evaluate the safety and tolerability of LUM002 administered orally, once daily, over a 28-day dosing interval in healthy subjects and metabolic disease patients.

 

The secondary objectives of the trial were to analyze the pharmacokinetic profile of LUM002, to evaluate the pharmacodynamic properties of LUM002 utilizing serum and fecal total bile acids and low density lipoprotein cholesterol as biomarkers, to explore the effect of LUM002 on liver enzymes and fat absorption parameters, and to explore the effect of LUM002 on glucose metabolism in metabolic disease patients.

 

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Subjects in Groups 1 to 4 were administered escalating once daily oral doses of LUM002 from 0.5-10 mg or placebo for 28 days. In addition, Group 5 included patients with type 2 diabetes who received LUM002 or placebo once daily for 28 days.

 

The key findings from the study were as follows:

 

   

LUM002 was generally safe and well tolerated in all dose groups. The most common adverse events were GI related and were mainly categorized as mild in nature. The incidence of such adverse events was higher in Weeks 1 and 2 in LUM002 treated subjects and diminished in Weeks 3 and 4. We have not yet explored the impact of dose escalation within individual patients on adverse events with LUM002 but would anticipate a further reduction in GI events as demonstrated in studies with LUM001. There were no drug-related adverse effects on liver enzymes.

 

   

Serum levels of LUM002 were below the level of detection in 44 of 45 LUM002 treated subjects, consistent with a minimally absorbed drug.

 

   

LUM002 decreased serum LDL cholesterol, with the 10 mg dose resulting in a decrease of 15% at day 28 compared to baseline (p-value of 0.001). There were no changes in triglyceride or serum HDL cholesterol levels in any cohort.

 

   

LUM002 increased serum levels of 4-cholesten-3-one, an intermediate in the conversion of cholesterol to bile acids, in a dose dependent manner as shown in the graphic below. In animal studies an increase in 4-cholesten-3-one has been indicative of a decrease in levels of cholesterol in the liver.

 

Serum C4 Concentration at Days -1, 14 & 28 (mean ± SD)

 

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LUM002 increased total fecal bile acid levels in a dose dependent manner as shown in the graphic below, indicating an increased level of bile acids in the colon, which has been shown to be accompanied by changes in hormones associated with metabolic control.

 

Total Fecal Bile Acids Days 26-28 [48 hours] – (mean ± SD)

 

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LUM002 reduced fasting glucose, with the 10 mg dose showing a drop of 1.4 mmol/L (13%) from baseline to day 28, as shown in the graphic below. The impact of LUM002 on insulin levels was consistent with improvements in insulin sensitivity.

 

Fasting Blood Glucose, Absolute Change from Baseline

(Day-1) LUM002 10 mg in Type 2 Diabetes (mean ± SD)

 

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We plan to commence a randomized, double-blind, placebo-controlled Phase 2 clinical trial of LUM002 in NASH patients in the second half of 2014. The trial will explore two doses of LUM002 and placebo patients treated for 13 weeks. We will explore a number of biochemical markers as clinical endpoints of efficacy.

 

Previous Clinical Trial and Preclinical Development of LUM002

 

Phase 1 Clinical Trial

 

LUM002 has been previously evaluated in a three-part Phase 1 clinical trial in healthy subjects conducted by Sanofi. The trial included (1) 72 subjects in a randomized, double-blind, placebo-controlled trial, of whom 54 received an oral single ascending dose, or SAD, of LUM002 ranging from 0.25 up to 300 mg, (2) 12 subjects in a randomized, double-blind, placebo-controlled trial, of whom eight received a dose of 50 mg orally administered once daily for 14 days, and (3) eight subjects who received two single oral doses of 75 mg, with one given during fed conditions and the second during fasted conditions, in a randomized, open-label trial.

 

With the exception of a single SAE of elevated ALT and AST, no other SAEs possibly related or related to LUM002 were reported. The most common AEs reported were GI disorders observed both in the placebo and in the LUM002 groups.

 

In the SAD part of the trial, the low systemic exposure to LUM002 in healthy subjects was in line with the expected minimal intestinal absorption of LUM002.

 

LUM002 was also found to decrease cholesterol levels in healthy subjects. Subjects dosed with 50 mg once a day for 14 days had a decrease from baseline of approximately 11% in total cholesterol and 16% in LDL-cholesterol levels. No analysis for statistical significance was performed.

 

Preclinical Development

 

In vitro, LUM002 has been shown to be a highly potent, selective inhibitor of human and animal ASBT. In vivo, orally administered LUM002 causes a dose-dependent increase in fecal excretion of bile acids and decrease in total serum bile acids in male Zucker Diabetic Fatty Rats.

 

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In a preclinical animal study, one group of hamsters received normal hamster chow, and the control group and LUM002-dosed hamsters received a cholesterol-enriched diet (0.1% by weight). In the cholesterol-fed hamsters, LUM002 increased fecal bile acid excretion and decreased serum LDL-cholesterol and hepatic cholesterol in a dose-dependent manner as shown in the following graphic:

 

Efficacy of LUM002 in Cholesterol-Fed Hamsters

(mean ± S EM) (n=6/group)

 

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(1) p < 0.05 normal chow versus control (2) p < 0.05 LUM002 versus control

 

 

In another study, LUM002 increased plasma GLP-1, decreased fasting plasma glucose concentration and decreased plasma HbA1c in Male Zucker Diabetic Fatty Rats, as shown in the following graphic:

 

Three-Week Study in Male Zucker Diabetic Fatty Rats

 

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Other Studies

 

In an animal study to assess the effect of blocking bile acid absorption, mice deficient in ASBT and fed a atherogenic diet for 16 weeks exhibited significant decreases in hepatic and plasma cholesterol levels and a blunting of the development of atherosclerosis.

 

In the Program on the Surgical Control of the Hyperlipedemias (POSCH) study of 838 patients with a single documented myocardial infarction, all mortality and atherosclerosis endpoints demonstrated statistically significant benefit in the group receiving ileal bypass surgery plus a controlled diet versus the group on a controlled diet alone. Ileal bypass achieves similar effects as ASBT inhibition and diverts bile acids to the colon.

 

Given the well-established association of cardiovascular disease with obesity and diabetes and the growing link with NASH, the positive benefit demonstrated for ASBT inhibitors such as LUM002 on these cardiovascular risk factors suggests that LUM002 may provide significant benefits in patients with NASH.

 

Additional Indications for LUM002

 

We believe that LUM002 may also have potential in the treatment of diabetes, a metabolic disorder that results from insufficient insulin production by the pancreas and is usually accompanied by insulin resistance and high blood glucose levels. In the liver, insulin normally suppresses glucose release, but with insulin resistance, the liver inappropriately releases glucose into the blood. By stimulating the release of insulin from the pancreas and reducing HbA1c and blood glucose, LUM002 may improve the metabolic complications linked to diabetes. LUM002 has previously been studied in patients with high LDL-cholesterol, and it may show benefits in patients with high LDL-cholesterol who are resistant or intolerant to other treatments, such as statins.

 

License and Development Agreements

 

License Agreement with Pfizer Inc.

 

In June 2012, we entered into a license agreement with Pfizer Inc., or Pfizer, pursuant to which we obtained an exclusive, worldwide license to Pfizer’s know-how related to LUM001 (formerly SD-5613), or the Pfizer Know-How. Under the agreement, we are permitted to research, develop, manufacture and commercialize products utilizing the Pfizer Know-How for the diagnosis, treatment, prevention, mitigation and cure of human diseases and disorders, and to sublicense such rights. Pfizer retained the right to use the Pfizer Know-How to conduct internal research and to use a third party to conduct research on Pfizer’s behalf.

 

We have sole responsibility and control over development and commercialization activities for the Pfizer Know-How and products utilizing the Pfizer Know-How, and we are obligated to use commercially reasonable efforts to develop and commercialize products utilizing the Pfizer Know-How. In the event we determine to sublicense to a third party our right to commercialize the Pfizer Know-How or products utilizing the Pfizer Know-How under the agreement, Pfizer has the first right to negotiate such a commercial license with us.

 

Ownership of inventions and discoveries under the agreement will be determined in accordance with the rules of inventorship under United States patent laws. We will own and bear all expenses incurred in preparing, filing, prosecuting and maintaining all patents for inventions that are solely invented by us.

 

In consideration for the rights granted to us under the agreement, we made an upfront payment to Pfizer of $350,000 and issued to Pfizer 763,747 shares of our Series A-1 preferred stock. As additional consideration, upon commercialization of any product utilizing the Pfizer Know-How, we will be required to pay to Pfizer a low single-digit royalty on net sales of such products sold by us, our affiliates or sublicensees. Our royalty obligations continue on a licensed product-by-licensed product basis until the eighth anniversary of the first commercial sale of such licensed product anywhere in the world.

 

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We may unilaterally terminate the agreement for any reason or no reason upon 90 days’ written notice to Pfizer. Either party may terminate the agreement in the event of the other party’s insolvency or for the other party’s material breach of the agreement which remains uncured after 60 days of receiving written notice of such breach, or 30 days in the case of a payment breach. Absent early termination, the agreement will automatically expire on a country-by-country basis upon the expiration of our royalty payment obligations.

 

License Agreement with Sanofi-Aventis Deutschland GmbH

 

In September 2012, we entered into a license agreement with Sanofi-Aventis Deutschland GmbH, or Sanofi, under which we obtained an exclusive, worldwide license to certain patents and know-how controlled by Sanofi related to LUM002 (formerly SAR-548304), or the Sanofi Technology. Under the agreement, we are permitted to develop and commercialize under the Sanofi Technology products containing LUM002. Additionally, under the agreement we are permitted to manufacture products containing LUM002 utilizing the Sanofi Technology and to sublicense such rights. In addition, Sanofi granted to us an exclusive option to obtain an exclusive license to manufacture LUM002 during the term of the agreement. Unless and until we exercise such option, we should exclusively be supplied by Sanofi with quantities of LUM002 to develop and commercialize products utilizing the Sanofi Technology. Sanofi retained the right to practice the Sanofi Technology outside the scope of the license granted to us under the agreement and to make and use LUM002 for internal research purposes, provided that upon our request, Sanofi is obligated to provide us with a written summary of the results of any such research to the extent such results relate to the use of LUM002 as an ASBT inhibitor.

 

Under the agreement, we have sole authority and responsibility over development and commercialization activities for licensed products, and we are required to use diligent efforts to perform certain development, regulatory and commercialization activities.

 

In the event we determine to subcontract with a third party for the manufacture of a product utilizing the Sanofi Technology following initiation of the first Phase 3 clinical trial related to such licensed product, Sanofi has the right under the agreement to negotiate for the performance of such manufacturing services. In addition, in the event we determine to sublicense or assign to a third party our rights to commercialize products utilizing the Sanofi Technology, Sanofi has the first right to negotiate such commercial license with us. Finally, in the event that we propose to explore a potential change in control transaction, Sanofi has the right to participate in such process, and, in the event that we receive a third party proposal regarding a change in control transaction, Sanofi will have an opportunity to provide a proposal with respect to such transaction.

 

We will own all inventions and discoveries arising out of activities conducted by us under the agreement. We will also be responsible for the preparation, filing, prosecution and maintenance of patents under the agreement. Further, we will have the first right, but will not be obligated, to enforce patents under the agreement. If we do not exercise our right to enforce patents under the agreement, Sanofi will be able to enforce the patents.

 

In consideration for the rights granted to us under the agreement, we made an upfront payment to Sanofi of $500,000 and issued to Sanofi 500,000 shares of our Series A-1 preferred stock. Sanofi has a one-time option during the term of the agreement to require us to repurchase all of our capital stock then held by Sanofi for $1.00 in the aggregate. We are also required to pay to Sanofi up to an aggregate of $36 million upon the achievement of certain regulatory, commercialization and product sales milestones. Upon commercialization of any product utilizing the Sanofi Technology, we will be required to pay to Sanofi tiered royalties in the mid to high single-digit range based upon net sales of licensed products sold by us and our affiliates and sublicensees in a calendar year, subject to adjustments in certain circumstances. Our royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the later to occur of the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country and ten years after the first commercial sale of a licensed product following regulatory approval in such country. In the event we sublicense our right to commercialize a product utilizing the Sanofi Technology, we are obligated to pay to Sanofi a fee based on a percentage of sublicense fees received by us, which percentage ranges from the mid-teens to low-thirties, depending on the stage of development of such licensed product, and is subject to adjustment in certain circumstances.

 

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For three years after the first commercial sale of a product utilizing the Sanofi Technology, on a licensed product-by-licensed product basis, we may not, through our own efforts or with an affiliate or third party, commercialize any product for specified indications with a method of action that reduces the reabsorption of bile acids in the intestinal tract, except for the commercialization of products utilizing the Sanofi Technology under the agreement.

 

We may unilaterally terminate the agreement for any reason or no reason upon 60 days’ written notice to Sanofi after the second anniversary of the agreement. We may also terminate the agreement on a country-by-country or licensed product-by-licensed product basis upon written notice to Sanofi (1) if we reasonably determine that we are precluded from proceeding with the first Phase 2B clinical trial for a product utilizing the Sanofi Technology in certain major markets due to certain safety failures or (2) after using diligent efforts, we reasonably determine that we are precluded from proceeding with a Phase 3 clinical trial for a product utilizing the Sanofi Technology in certain major markets due to certain safety or efficacy failures. Either party may terminate the agreement in the event of the other party’s insolvency or for the other party’s material breach of the agreement which remains uncured after 90 days of receiving written notice of such breach, or ten business days in the case of a payment breach. Absent early termination, the agreement will remain in effect on a country-by-country and licensed product-by-licensed product basis until the expiration of our royalty payment obligations for such licensed product in such country.

 

License Agreement with Satiogen Pharmaceuticals, Inc.

 

In February 2011, we entered into a license agreement with Satiogen Pharmaceuticals, Inc., or Satiogen, under which we obtained an exclusive, worldwide license to certain patents and know-how controlled by Satiogen related to ASBT inhibitors, or the ASBTi Technology, and TGR5 agonists, or the TGR5 Technology. Under the agreement, we are permitted to develop, manufacture and commercialize products utilizing the ASBTi Technology or TGR5 Technology for the diagnosis, treatment, prevention, mitigation and cure of human diseases and disorders, and to sublicense such rights.

 

We have sole responsibility and control over development and commercialization activities for products utilizing the ASBTi Technology or TGR5 Technology under the agreement and we are required to use commercially reasonable efforts to develop and commercialize such licensed products.

 

Ownership of inventions and discoveries conceived or reduced to practice under the agreement will be determined in accordance with the rules of inventorship under United States patent laws. We will own any and all inventions made by us or jointly with Satiogen under the agreement and we will be responsible for filing, prosecuting and maintaining any patents for such inventions. Satiogen will own any and all inventions that are solely invented by Satiogen under the agreement and will be responsible for preparing, filing, prosecuting and maintaining any patents for such inventions. Satiogen will be responsible for filing, prosecuting and maintaining patents related to the ASBTi Technology and TGR5 Technology controlled by Satiogen as of the effective date or during the term of the agreement. Additionally, prior to certain events specified in the agreement, Satiogen will have the sole right, but not the obligation, to enforce patents related to the ASBTi Technology and the TGR5 Technology; after which, we will have the sole right, but not the obligation, to enforce patents related to the ASBTi Technology and the TGR5 Technology.

 

In consideration for the rights granted to us under the agreement, we issued to Satiogen 1,380,000 shares of our Series A-1 preferred stock and 690,000 shares of our common stock. We are also are required to pay to Satiogen up to an aggregate of $10.5 million upon the achievement of certain milestones, of which $500,000 relates to the initiation of certain development activities, $5 million relates to the completion of regulatory approvals and $5 million relates to commercialization activities. We will be required to pay to Satiogen a low single-digit royalty on net sales of products utilizing the ASBTi Technology or TGR5 Technology sold by us and our affiliates. Our royalty obligations continue on a licensed product-by-licensed product and country-by-country basis until the expiration of the last valid claim in a licensed patent covering the applicable licensed product in such country.

 

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In the event we sublicense any of our rights under the ASBTi Technology or TGR5 Technology to a third party, we are obligated under the agreement to pay to Satiogen a fee based on a percentage of sublicense revenue received by us, which percentage ranges from the mid-teens to mid-twenties, depending on whether the right granted is in connection with the ASBTi Technology or TGR5 Technology, and the stage of development of such sublicensed technology. In addition, we are obligated under the agreement to pay to Satiogen a percentage of royalties we receive in consideration for the grant of such sublicense based on a percentage of revenue generated by such sublicensee for sales of products utilizing the ASBTi Technology or TGR5 Technology, which percentage is in the low-fifties and is subject to adjustment in certain circumstances. This payment will not exceed an amount that is one-half of our low single-digit royalty obligation to Satiogen.

 

We may unilaterally terminate the agreement for any reason or no reason upon 90 days’ written notice to Satiogen. If we cease all research, development and commercialization efforts with respect to all licensed products related to the ASBTi Technology or the TGR5 Technology for over one year, or we determine to cease all such efforts, Satiogen may elect to terminate the agreement with respect to the license under the ASBTi Technology or the TGR5 Technology, respectively. Either party may terminate the agreement for the other party’s material breach of the agreement which remains uncured after 90 days of receiving written notice of such breach. Absent early termination, the agreement will automatically terminate upon the expiration of our royalty obligations.

 

Cooperative Research and Development Agreement with the National Institute of Diabetes and Digestive and Kidney Diseases, or NIDDK

 

In January 2013, we entered into a cooperative research and development agreement, or CRADA, relating to our ongoing Phase 2 clinical development of LUM001 for the treatment of ALGS and PFIC. At the time the CRADA was signed, we anticipated that ITCH would include patients with both those diseases. Based on guidance from the FDA, we later separated these indications into two trials, ITCH and INDIGO. NIDDK supports a collaborative research network, ChiLDREN, with whom we are collaborating on ITCH and INDIGO. In accordance with the terms of the CRADA, we are obligated to make installment payments totaling approximately $1.5 million upon achievement of certain regulatory and clinical milestones.

 

Under the terms of the CRADA, inventions developed under the CRADA will be owned by the party that produced such inventions and jointly developed inventions will be jointly owned. We will have the first opportunity to file patent applications on any jointly developed inventions under the CRADA. If we do not exercise our rights, NIDDK will be able to file a patent application covering such inventions.

 

Under the terms of the CRADA, we have an option to elect a royalty-free, paid-up (except for patent prosecution and maintenance fees for patent applications and patents), worldwide and exclusive license for research, development and commercialization purposes on inventions made solely by NIDDK or jointly by us and NIDDK that claim the method of use of LUM001, including the right to sublicense to affiliates, contractors or collaborators. With respect to any other subject inventions made under the CRADA, we have an option to elect a royalty-free, paid-up, worldwide, nonexclusive and nontransferable license for research and development purposes, and an exclusive option to elect an exclusive or nonexclusive commercialization license. The U.S. government has also been granted a worldwide, nonexclusive, nontransferable, irrevocable, paid-up license in respect of any subject inventions under the CRADA; provided that, in the case of inventions made solely by us, the license will be limited to use for research or other government purposes. If we exercise an exclusive license to a CRADA subject invention, the U.S. government will retain the right to require us to grant to a responsible applicant a nonexclusive, partially exclusive or exclusive sublicense on terms that are reasonable under the circumstances, or if we fail to do so, grant a license itself if the U.S. government determines that the action is necessary (1) to meet health and safety needs, (2) to meet the requirements for public use specified by federal regulations, or (3) if we have failed to comply with the terms of the agreement. The exercise of these rights will only be in exceptional circumstances and is subject to administrative appeal and judicial review.

 

The CRADA has a term of five years, ending in January 2018. The parties to the CRADA may terminate the CRADA at any time by mutual written consent. Either party may terminate the CRADA at any time by providing

 

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60 days’ prior written notice to the other party. However, if we unilaterally terminate the CRADA, NIDDK may, at its option, retain any funds transferred to NIDDK under the CRADA for use in completing the research plan under the agreement. Unless the termination was for safety reasons, we may be required to supply sufficient quantities of LUM001 and placebos to complete the trial. If we suspend development of LUM001 other than for safety reasons, without the transfer of our development efforts, assets and obligations to a third party within 180 days of discontinuation, NIDDK may continue developing LUM001. In such circumstances, we would be required to transfer to NIDDK all information necessary to manufacture LUM001 or arrange for an independent contractor to manufacture and provide LUM001 to NIDDK for a period equal to the earlier of two years or until completion of ongoing mutually agreed to protocols for studies to be performed under the CRADA.

 

Intellectual Property

 

We are building an intellectual property portfolio around ASBT inhibition and our core product candidates, LUM001 and LUM002. A large part of our strategy for intellectual property portfolio building is to seek patent protection in the United States and other major markets that we consider important to the development of our business worldwide. Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates and other discoveries, inventions, trade secrets and know-how that are critical to our business operations. Our success also depends in part on our ability to operate without infringing the proprietary rights of others, and in part, on our ability to prevent others from infringing our proprietary rights. A comprehensive discussion on risks relating to intellectual property is provided under “Risk Factors” under the subsection “Risks Related to Our Intellectual Property.”

 

We have developed and continue to develop a patent portfolio around our lead product candidates, LUM001 and LUM002. We have filed patent applications in the United States, Europe and other countries covering methods of treating cholestasis using ASBTis that have limited systemic exposure, which, if issued, will expire in October 2032, absent any patent term adjustments or extensions. We have also filed patent applications in the United States, Europe and other countries covering the pediatric formulations of ASBTis that have limited systemic exposure, which, if issued, will expire in October 2032, absent any patent term adjustments or extensions. Additionally, we have licensed patent applications in the United States, Europe and other countries from Satiogen covering therapeutic uses of ASBTis that have limited systemic exposure, including methods of treating diabetes and obesity, which if issued will expire in November 2029, absent any patent term adjustments or extensions. Further, we have licensed an issued UK patent from Satiogen which covers methods of treating diabetes and obesity and which will expire in November 2029. We have licensed an issued U.S. patent, US 7,956,085, from Sanofi which covers LUM002, and salts thereof, which expires in December 2027. We also licensed patent applications in the United States, Europe and other countries from Sanofi covering methods of making LUM002 which, if issued, will expire in April 2029, absent any patent term adjustments or extensions. Patents related to LUM001 and LUM002 may be eligible for patent term extensions in certain jurisdictions, upon approval of a commercial use of the corresponding product by a regulatory agency in the jurisdiction where the patent was granted.

 

In addition to patent protection, we rely on trade secret protection, trademark protection and know-how to expand our proprietary position around our chemistry, technology and other discoveries and inventions that we consider important to our business. In addition, we currently have Orphan Drug Designation for LUM001 for the treatment of ALGS and PFIC in children and PBC and PSC in adults in the United States and the European Union, providing the opportunity to receive 7 years of market exclusivity in the United States and 10 years of market exclusivity in the European Union, which can be extended to 12 years in the European Union if trials are conducted in accordance with an agreed-upon pediatric investigational plan. We also seek to protect our intellectual property in part by entering into confidentiality agreements with companies with whom we share proprietary and confidential information in the course of business discussions, and by having confidentiality terms in our agreements with our employees, consultants, scientific advisors, clinical investigators and other contractors and also by requiring our employees, commercial contractors, and certain consultants and investigators, to enter into invention assignment agreements that grant us ownership of any discoveries or inventions made by them while in our employ.

 

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Furthermore, we seek trademark protection in the United States and internationally where available and when we deem appropriate. We have obtained registration for the Lumena trademark, which we use in connection with our pharmaceutical research and development services as well as our clinical-stage products.

 

Sales and Marketing

 

We currently do not have a commercial organization for the marketing, sales and distribution of pharmaceutical products. We intend to build the commercial infrastructure necessary to effectively support the commercialization of LUM001, if approved, in North America and to partner with third parties for commercialization of LUM001 in other markets. We believe that our commercial organization can be modest in size and targeted to the relatively small number of specialists who treat patients with cholestatic liver disease. We intend to seek strategic partnerships to accelerate the broader clinical development and commercialization of LUM002 in NASH and other metabolic diseases.

 

The commercial infrastructure for orphan products typically consists of a targeted, specialty sales force that calls on a limited and focused group of physicians supported by sales management, internal sales support, an internal marketing group and distribution support. Additional capabilities important to the marketplace include the management of key accounts such as managed care organizations, group-purchasing organizations, specialty pharmacies, government accounts and reimbursement support. Based on the number of physicians that treat orphan cholestatic liver diseases, we believe that we can effectively target the relevant audience for LUM001 in North America by establishing a sales force either internally or through a contract sales force. To develop the appropriate commercial infrastructure, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that LUM001 will be approved.

 

Manufacturing

 

We do not own or operate manufacturing facilities for the production of LUM001 and LUM002 or other product candidates that we may develop, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, active pharmaceutical ingredient and finished products for our preclinical research and clinical trials. We do not have any current contractual arrangements for the manufacture of commercial supplies of LUM001 or LUM002. Prior to receipt of approval from the FDA, we intend to enter into agreements for commercial production of our products with third party suppliers or, in the case of LUM002, with third party suppliers or Sanofi. We currently employ internal resources and third-party consultants to manage our manufacturing contractors.

 

Competition

 

There are no approved therapies for the treatment of ALGS, PFIC or PSC in the United States. Symptomatic treatment with antipruritics, such as cholestyramine (Questran®), typically provides only modest relief. Bristol Myers Squibb has discontinued Questran, but generic versions of the drug are marketed by Upsher-Smith Laboratories, Inc., Par Pharmaceutical Companies, Inc. and Sandoz, the generic pharmaceuticals division of Novartis AG. Ursodeoxycholic acid is approved for the treatment of PBC, but many patients continue to exhibit disease progression as evidenced by worsening biochemical markers of liver damage and symptoms such as pruritus. UDCA is marketed by a number of generic pharmaceutical companies such as Mylan Inc., Actavis Inc., Lannett Company, Inc. and Par Pharmaceutical Companies, Inc.

 

A number of drugs including UDCA, rifampin and naltrexone are used off-label to treat patients suffering from cholestatic liver disease. Additionally, surgical interventions, such as PEBD surgery and NBD, and extracorporeal liver support, such as MARS, are also employed in an attempt to lower bile acid levels, manage pruritus and improve measures of liver function.

 

Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. We are aware of

 

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a number of companies with farnesoid X receptor, or FXR, agonists in development that could be used to treat the cholestatic liver diseases that we are targeting. Intercept Pharmaceuticals, Inc. is currently conducting a Phase 3 clinical trial of obeticholic acid in PBC. Intercept expects results to be available in the second quarter of 2014. Intercept is also planning to initiate a Phase 2 study of obeticholic acid in PSC in the second half of 2014. We are also aware of other companies, including Eli Lilly and Company and Phenex Pharmaceuticals AG that have FXR agonists in Phase 2 or earlier stages of preclinical development. GlaxoSmithKline plc and Albireo AB have ASBT inhibitors in Phase 1 or preclinical development for cholestatic liver disease. Additionally, Johnson & Johnson and NovImmune SA are investigating monoclonal antibodies in Phase 2 clinical trials as potential treatments for PBC, and Gilead Sciences, Inc., is investigating a monoclonal antibody in a Phase 2 clinical trial in PSC. Dr. Falk Pharma GmbH has also acquired the rights to RhuDex®, a clinical stage compound, which it plans to develop for the treatment of PBC. Additionally, Dr. Falk Pharma GmbH is conducting a Phase 2 clinical trial of nor-Ursodeoxycholic acid in PSC and a Phase 3 clinical trial of combination UDCA and budesonide, a steroid, as a treatment for PBC. Finally, NGM Biopharmaceuticals, Inc., is investigating a biologic in combination with UDCA in Phase 2 clinical trials in PBC.

 

There are currently no therapeutic products approved for the treatment of NASH. There are several marketed therapeutics that are currently used off label for this indication, such as insulin sensitizers (e.g., metformin), antihyperlipidemic agents (e.g., gemfibrozil), pentoxifylline and UDCA, but they have not been proven effective in the treatment of NASH. We are aware of several companies that have product candidates in Phase 2 clinical development for the treatment of NASH, including Conatus Pharmaceuticals Inc., Galmed Medical Research Ltd., Genfit Corp., Gilead Sciences, Inc., Immuron Ltd., Intercept Pharmaceuticals, Mochida Pharmaceutical Co., Ltd., NasVax Ltd., Takeda Pharmaceutical Company Limited and Raptor Pharmaceutical Corp., and there are other companies with candidates in earlier stage programs. It is also possible that, in addition to the Intercept Pharmaceutical product candidate, one or more of the FXR agonist candidates mentioned above could be explored for the treatment of NASH.

 

Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of product candidates and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining approval for drugs and achieving widespread market acceptance. Our competitors’ products may be more effective, or more effectively marketed and sold, than any product we may commercialize and may render our product candidates obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our product candidates. We anticipate that we will face intense and increasing competition as new products enter the market and advanced technologies become available.

 

Government Regulation and Product Approval

 

As a pharmaceutical company that operates in the United States, we are subject to extensive regulation. Government authorities in the United States (at the federal, state and local level) and in other countries extensively regulate, among other things, the research, development, testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug products such as those we are developing. LUM001 and LUM002 and any other product candidates that we develop must be approved by the FDA before they may be legally marketed in the United States and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries. Generally, our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed in the United States, although there can be important differences. Additionally, some significant aspects of regulation in Europe are addressed in a centralized way, but country-specific regulation remains essential in many respects.

 

U.S. Drug Development Process

 

In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. Drugs are also subject to other federal, state and local statutes and regulations.

 

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The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. FDA sanctions could include, among other actions, refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls or withdrawals from the market, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

   

completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies in accordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, regulations and other applicable regulations;

 

   

submission to the FDA of an IND, which must become effective before human clinical trials may begin;

 

   

performance of adequate and well-controlled human clinical trials in accordance with applicable regulations, including the FDA’s current good clinical practice, or GCP, regulations to establish the safety and efficacy of the proposed drug for its proposed indication;

 

   

submission to the FDA of an NDA for a new drug;

 

   

a determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review;

 

   

satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug is produced to assess compliance with the FDA’s current good manufacturing practice, or cGMP, requirements to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity;

 

   

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

 

   

FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States.

 

Before testing any compounds with potential therapeutic value in humans, the drug candidate enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies, to assess the potential safety and activity of the drug candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs. The sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for human trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such trial.

 

Clinical trials involve the administration of the drug candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the

 

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parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.

 

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

 

   

Phase 1.    The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion, the side effects associated with increasing doses, and if possible, to gain early evidence of effectiveness. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

   

Phase 2.    The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases or conditions and to determine dosage tolerance, optimal dosage and dosing schedule.

 

   

Phase 3.    Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall benefit/risk ratio of the product and provide an adequate basis for product approval. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA. Phase 3 clinical trials usually involve several hundred to several thousand participants.

 

Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, FDA may mandate the performance of Phase 4 trials.

 

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA, the IRB, or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access to certain data from the trial. We may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.

 

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

 

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U.S. Review and Approval Processes

 

The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The application includes both negative or ambiguous results of preclinical and clinical trials as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational drug product to the satisfaction of the FDA. The submission of an NDA is subject to the payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances.

 

In addition, under the Pediatric Research Equity Act, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, the Pediatric Research Equity Act does not apply to any drug for an indication for which orphan designation has been granted. However, if only one indication for a product has orphan designation, a pediatric assessment may still be required for any applications to market that same product for the non-orphan indication(s).

 

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, the FDA has 12 months from its date of receipt in which to complete its initial review of a standard NDA for a new molecular entity and respond to the applicant, and eight months from date of receipt for a priority NDA. The FDA does not always meet its Prescription Drug User Fee Act goal dates for standard and priority NDAs, and the review process is often significantly extended by FDA requests for additional information or clarification.

 

After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. The FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions and typically follows the advisory committee’s recommendations.

 

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical sites to assure compliance with GCP requirements. After the FDA evaluates the application, manufacturing process and manufacturing facilities, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The Complete Response Letter may require additional clinical data and/or (an) additional pivotal Phase 3 clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may either

 

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resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data.

 

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling or may condition the approval of the NDA on other changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct one or more post-market studies or clinical trials. For example, the FDA may require Phase 4 testing, which involves clinical trials designed to further assess a drug safety and effectiveness, and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized. The FDA may also determine that a risk evaluation and mitigation strategy, or REMS, is necessary to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.

 

Orphan Drug Designation

 

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States or, if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making a drug product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan designation must be requested before submitting an NDA. After the FDA grants orphan designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

 

If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug or biological product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or inability to manufacture the product in sufficient quantities. The designation of such drug also entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. Competitors, however, may receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval of the same drug as defined by the FDA or if our product candidate is determined to be contained within the competitor’s product for the same indication or disease. If an orphan designated product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan exclusivity. Orphan drug status in the European Union has similar but not identical benefits in that jurisdiction.

 

We currently have Orphan Drug Designation for LUM001 for the treatment of ALGS and PFIC in children and PBC and PSC in adults in the United States and the European Union, providing the opportunity to receive 7 years of market exclusivity in the United States and 10 years of market exclusivity in the European Union, which can be extended to 12 years in the European Union if trials are conducted in accordance with an agreed-upon pediatric investigational plan.

 

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Expedited Development and Review Programs

 

The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drug products that meet certain criteria. Specifically, new drugs are eligible for Fast Track designation if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. Unique to a Fast Track product, the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.

 

Any product, submitted to the FDA for approval, including a product with a Fast Track designation, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug products studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast Track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

 

In 2012, the Food and Drug Administration Safety and Innovation Act, or FDASIA, was enacted. FDASIA established a new category of drugs referred to as “breakthrough therapies” that may be eligible to receive Breakthrough Therapy Designation. A sponsor may seek FDA designation of a drug candidate as a “breakthrough therapy” if the drug is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the Fast Track program features, as well as more intensive FDA interaction and guidance. The Breakthrough Therapy Designation is a distinct status from both accelerated approval and priority review, which can also be granted to the same drug if relevant criteria are met. If a drug is designated as breakthrough therapy, FDA will expedite the development and review of such drug. All requests for breakthrough therapy designation will be reviewed within 60 days of receipt, and FDA will either grant or deny the request.

 

We plan to request Fast Track and Breakthrough Therapy Designation for LUM001 for treatment of ALGS in the third quarter of 2014. Even if we receive one or both of these designations for LUM001, the FDA may later decide that LUM001 no longer meets the conditions for qualification. In addition, these designations may not provide us with a material commercial advantage.

 

Post-Approval Requirements

 

Any drug products for which we receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product,

 

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providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, and complying with FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.

 

In addition, quality control and manufacturing procedures must continue to conform to applicable manufacturing requirements after approval to ensure the long term stability of the drug product. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved NDA, including, among other things, recall or withdrawal of the product from the market. In addition, changes to the manufacturing process are strictly regulated, and depending on the significance of the change, may require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

 

The FDA also may require post-marketing testing, known as Phase 4 testing, and surveillance to monitor the effects of an approved product. Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.

 

U.S. Patent Term Restoration and Marketing Exclusivity

 

Depending upon the timing, duration and specifics of the FDA approval of the use of our product candidates, some of our U.S. patents, if granted, may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years, as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may intend to apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.

 

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the

 

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United States to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not approve or even accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovative drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA alternatively provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

 

Orphan drug exclusivity, as described above, may offer a seven-year period of marketing exclusivity, except in certain circumstances. Pediatric exclusivity is another type of non-patent market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.

 

Other U.S. Healthcare Laws and Compliance Requirements

 

Although we currently do not have any products on the market, if our drug candidates are approved and we begin commercialization, we may be subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. In the United States, such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security, price reporting, and physician sunshine laws and regulations.

 

The federal Anti-Kickback Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor.

 

Additionally, the intent standard under the Anti-Kickback Statute and the criminal healthcare fraud statutes (discussed below) was amended by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Healthcare Reform Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to

 

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have committed a violation. In addition, the Healthcare Reform Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below).

 

The federal False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to, or approval by, the federal government or knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-covered, uses.

 

HIPAA also created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the control or custody of, any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

 

Additionally, the federal Physician Payments Sunshine Act within the Healthcare Reform Act, and its implementing regulations, require that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. Manufacturers were required to begin data collection on August 1, 2013 and are required to report such data to the government by March 31, 2014 and by the 90th day of each calendar year thereafter. Such information will be made publicly available on or before September 30, 2014.

 

We may also be subject to data privacy and security regulations by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, including the final omnibus rule published on January 25, 2013, imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

 

In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states,

 

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manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, track and report gifts, compensation and other remuneration made to physicians and other healthcare providers, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

 

If our operations are found to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government programs, such as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual whistleblowers in the name of the government, or refusal to allow us to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

 

Pharmaceutical Coverage, Pricing and Reimbursement

 

Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we or our collaborators obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we or our collaborators receive regulatory approval for commercial sale will depend, in part, on the extent to which third-party payors provide coverage, and establish adequate reimbursement levels for such drug products.

 

In the United States, third-party payors include federal and state healthcare programs, government authorities, private managed care providers, private health insurers and other organizations. Third-party payors are increasingly challenging the price, examining the medical necessity and reviewing the cost-effectiveness of medical drug products and medical services, in addition to questioning their safety and efficacy. Such payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. We or our collaborators may need to conduct expensive pharmaco-economic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain the FDA approvals. Nonetheless, our product candidates may not be considered medically necessary or cost-effective.

 

Moreover, the process for determining whether a third-party payor will provide coverage for a drug product may be separate from the process for setting the price of a drug product or for establishing the reimbursement rate that such a payor will pay for the drug product. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also provide coverage for the drug product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

 

If we elect to participate in certain governmental programs, we may be required to participate in discount and rebate programs, which may result in prices for our future products that will likely be lower than the prices we might otherwise obtain. For example, drug manufacturers participating under the Medicaid Drug Rebate Program must pay rebates on prescription drugs to state Medicaid programs. Under the Veterans Health Care Act, or VHCA, drug companies are required to offer certain drugs at a reduced price to a number of federal

 

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agencies, including the U.S. Department of Veterans Affairs and Department of Defense, the Public Health Service and certain private Public Health Service designated entities in order to participate in other federal funding programs, including Medicare and Medicaid. Recent legislative changes require that discounted prices be offered for certain U.S. Department of Defense purchases for its TRICARE program via a rebate system. Participation under the VHCA also requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations. If our products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply.

 

Different pricing and reimbursement schemes exist in other countries. In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular drug candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

 

The marketability of any product candidates for which we or our collaborators receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we or our collaborators receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

Healthcare Reform

 

In March 2010, President Obama enacted the Healthcare Reform Act, which has the potential to substantially change healthcare financing and delivery by both governmental and private insurers, and significantly impact the pharmaceutical industry. The Healthcare Reform Act will impact existing government healthcare programs and will result in the development of new programs.

 

Among the Healthcare Reform Act’s provisions of importance to the pharmaceutical industry, in addition to those otherwise described above, are the following:

 

   

an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents apportioned among these entities according to their market share in some government healthcare programs;

 

   

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively, and a cap on the total rebate amount for innovator drugs at 100% of the Average Manufacturer Price, or AMP;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D;

 

   

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning in 2014 and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

   

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and

 

   

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

 

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

 

We anticipate that these new laws will result in additional downward pressure on coverage and the price that we receive for any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products. In addition, it is possible that there will be further legislation or regulation that could harm our business, financial condition, and results of operations.

 

The Foreign Corrupt Practices Act

 

The Foreign Corrupt Practices Act prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The Foreign Corrupt Practices Act also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.

 

Europe / Rest of World Government Regulation

 

In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products. Whether or not we or our potential collaborators obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application much like the IND prior to the commencement of human clinical trials. In the European Union, for example, a CTA must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.

 

The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

 

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To obtain regulatory approval of an investigational drug or biological product under EU regulatory systems, we must submit a marketing authorization application either under the so-called centralized or national authorization procedures.

 

Centralized procedure.    The centralized procedure provides for the grant of a single marketing authorization following a favorable opinion by the EMA that is valid in all European Union member states, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for medicines produced by specified biotechnological processes, products designated as orphan medicinal products, and products with a new active substance indicated for the treatment of specified diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions. The centralized procedure is optional for products that represent a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interest of public health.

 

National authorization procedures.    There are also two other possible routes to authorize medicinal products in several European Union countries, which are available for investigational medicinal products that fall outside the scope of the centralized procedure:

 

   

Decentralized procedure.    Using the decentralized procedure, an applicant may apply for simultaneous authorizations in more than one European Union country of medicinal products that have not yet been authorized in any European Union Member State and that do not fall within the mandatory scope of the centralized procedure.

 

   

Mutual recognition procedure.    In the mutual recognition procedure, a medicine is first authorized in one European Union Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other European Union countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.

 

The EMA grants orphan drug designation to promote the development of products that may offer therapeutic benefits for life-threatening or chronically debilitating conditions affecting not more than five in 10,000 people in the European Union. In addition, orphan drug designation can be granted if the drug is intended for a life threatening, seriously debilitating or serious and chronic condition in the European Union and without incentives it is unlikely that sales of the drug in the European Union would be sufficient to justify developing the drug. Orphan drug designation is only available if there is no other satisfactory method approved in the European Union of diagnosing, preventing or treating the condition, or if such a method exists, the proposed orphan drug will be of significant benefit to patients. Orphan drug designation provides opportunities for free protocol assistance, fee reductions for access to the centralized regulatory procedures and 10 years of market exclusivity following drug approval, which can be extended to 12 years if trials are conducted in accordance with an agreed-upon pediatric investigational plan. The exclusivity period may be reduced to six years if the designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity.

 

For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

 

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

 

Employees

 

As of April 1, 2014, we employed 17 employees, all of whom are full-time, consisting of clinical, research, operations, finance, and business development personnel. Six of our employees hold Ph.D. or M.D. degrees.

 

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None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

 

Facilities

 

We lease approximately 2,750 square feet of space for our headquarters in San Diego, California under an agreement that expires in January 2016. We believe that our existing facilities are adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

 

Legal Proceedings

 

We are currently not a party to any material legal proceedings.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth certain information regarding our current executive officers and directors as of April 1, 2014:

 

Name

   Age     

Position(s)

Executive Officers

     

Michael Grey

     61       President, Chief Executive Officer and Director

Alejandro Dorenbaum, M.D.

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