20-F 1 summittherapeutics20f2018.htm 20-F Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 20-F
______________________________
(mark one)
    
¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
    
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2018
OR
    
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                    
OR
    
¨
SHELL COMPANY PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _____________
Commission file number: 001-36866
______________________________
 Summit Therapeutics plc
(Exact name of Registrant as specified in its charter)
______________________________
England and Wales
(Jurisdiction of incorporation or organization)
136a Eastern Avenue
Milton Park, Abingdon
Oxfordshire OX14 4SB
United Kingdom
(Address of principal executive offices)
Glyn Edwards, Chief Executive Officer
Summit Therapeutics plc
136a Eastern Avenue
Milton Park, Abingdon
Oxfordshire OX14 4SB
United Kingdom
Tel: +44 (0)1235 443 939
Fax: +44 (0)1235 443 999
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
 
Name of each exchange on which registered
American Depositary Shares, each representing
5 Ordinary Shares, par value £0.01 per share
 
The Nasdaq Stock Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
______________________________
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
73,563,624 ordinary shares, par value £0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No  x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨  No  x
Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,"accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act
(check one):
Large accelerated filer  ¨                 Accelerated filer  x                  Non-accelerated filer ¨ 
Emerging growth company x   
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark which basis of accounting the registrant has used to prepared the financial statements included in this filing:
U.S. GAAP  ¨
International Financial Reporting Standards as issued by the International Accounting Standards Board  x
Other  ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17  ¨ Item 18  ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  x
 


TABLE OF CONTENTS
 
 
 
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Item 19:
 


i


GENERAL INFORMATION
In this Annual Report on Form 20-F, references to “Summit,” “we,” “us,” and “our” or to the “company” refer to Summit Therapeutics plc and its consolidated subsidiaries, except where context otherwise requires.
The trademarks, trade names and service marks appearing in this Annual Report on Form 20-F are the property of their respective owners.
PRESENTATION OF FINANCIAL AND OTHER DATA
The consolidated financial statement data as of January 31, 2018 and 2017 and for the three years ended January 31, 2018, 2017 and 2016 have been derived from our consolidated financial statements, as presented at the end of this Annual Report, which have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, and as adopted by the European Union and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States).
All references in this Annual Report to “$” are to U.S. dollars and all references to “£” are to pounds sterling. Solely for the convenience of the reader, unless otherwise indicated, all pounds sterling amounts as of and for the year ended January 31, 2018 have been translated into U.S. dollars at the rate at January 31, 2018, the last business day of our fiscal year ended January 31, 2018, of £1.00 to $1.4190. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate as of that or any other date.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that involve substantial risks and uncertainties. All statements contained in this Annual Report, other than statements of historical fact, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The forward-looking statements in this Annual Report include, among other things, statements about:
 
•
the timing and conduct of our clinical trials of ezutromid (formerly SMT C1100) for the treatment of patients with Duchenne muscular dystrophy and ridinilazole (formerly SMT19969) for the treatment of patients with Clostridium difficile infection, including statements regarding the timing of initiation and completion of the clinical trials and the period during which the results of the clinical trials will become available;

•
the timing of and our ability to obtain marketing approval of ezutromid and ridinilazole, and the ability of ezutromid and ridinilazole to meet existing or future regulatory standards;

•
our plans to continue the research and development of the F3 formulation of ezutromid, the F6 formulation of ezutromid and future generation utrophin modulators that we are developing in collaboration with the University of Oxford and Sarepta Therapeutics, Inc., or Sarepta;

•
our plans to conduct research and development and advance potential new mechanism antibiotic compounds identified and developed under our bacterial genetics-based discovery and development platform;

•
the potential benefits and future operation of our collaboration with Sarepta;

•
the potential benefits and future operation of our collaboration with the Biomedical Advanced Research and Development Authority, or BARDA;

•
the potential benefits and future operation of our license and commercialization agreement with Eurofarma Laboratórios SA;

•
the potential benefits of our acquisition of Discuva Limited, or Discuva, including the future operations of the acquired bacterial genetics-based discovery and development platform;

•
our plans with respect to possible future collaborations and partnering arrangements;

ii


•
our plans to pursue research and development of other future product candidates;

•
the potential advantages of ezutromid and ridinilazole;

•
the rate and degree of market acceptance and clinical utility of ezutromid and ridinilazole;

•
our estimates regarding the potential market opportunity for ezutromid and ridinilazole;

•
our sales, marketing and distribution capabilities and strategy;

•
our ability to establish and maintain arrangements for manufacture of ezutromid and ridinilazole;

•
our intellectual property position;

•
our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

•
the impact of government laws and regulations; and

•
our competitive position.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Annual Report, particularly in the “Risk Factors” section in this Annual Report, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Annual Report and the documents that we have filed as exhibits to this Annual Report completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.
 



iii

PART I
Item 1: Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2: Offer Statistics and Expected Timetable
Not applicable.
Item 3: Key Information
A. Selected Financial Data
The following table summarizes our consolidated financial data as of the dates and for the periods indicated. The consolidated financial statement data as of January 31, 2018 and 2017 and for the years ended January 31, 2018, 2017 and 2016 have been derived from our consolidated financial statements, as presented at the end of this Annual Report, which have been prepared in accordance with IFRS, as issued by the IASB, and as adopted by the European Union and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States). The consolidated financial statement data as of January 31, 2016, 2015 and 2014 and for the years ended January 31, 2015 and 2014 have been derived from our consolidated financial statements, which are not presented herein, which have also been prepared in accordance with IFRS as issued by the IASB, and as adopted by the European Union and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our consolidated financial statements are prepared and presented in pounds sterling, our presentation currency. Solely for the convenience of the reader, our consolidated financial statements as of and for the year ended January 31, 2018 have been translated into U.S. dollars at £1.00 to $1.4190 based on the foreign exchange rates published by the Federal Reserve Bank of New York for January 31, 2018. Such convenience translations should not be construed as a representation that the pound sterling amounts have been or could be converted into U.S. dollars at this or at any other rate of exchange, or at all.
Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements included at the end of this Annual Report and the related notes and Item 5, “Operating and Financial Review and Prospects” below.

Selected Consolidated Income Statement Data
 
Year Ended January 31,
 
2018

2018

2017

2016

2015

2014
 
(in thousands, except per share data)
Revenue
$
36,070

 
£
25,419

 
£
2,304

 
£
—

 
£
—

 
£
—

Other operating income
3,867

 
2,725

 
72

 
1,281

 
1,888

 
1,526

Operating loss
(18,198
)
 
(12,825
)
 
(24,853
)
 
(20,346
)
 
(12,233
)
 
(7,027
)
Finance income
4,393

 
3,096

 
8

 
30

 
51

 
9

Finance cost
(1,652
)
 
(1,164
)
 
(862
)
 
(2,879
)
 
(499
)
 
(385
)
Income tax credit
5,338

 
3,762

 
4,336

 
3,058

 
1,297

 
607

Loss for the period
(10,119
)
 
(7,131
)
 
(21,371
)
 
(20,137
)
 
(11,384
)
 
(6,796
)
Basic and diluted loss per ordinary share from continuing operations
$
(0.15
)
 
£
(0.11
)
 
(0.35
)
 
(0.34
)
 
(0.29
)
 
(0.33
)
Weighted average number of shares outstanding (in thousands)
65,434

 
65,434

 
61,549

 
59,102

 
39,599

 
20,510


1


Selected Consolidated Balance Sheet Data
 
As of January 31,
 
2018
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands)
Cash and cash equivalents
$
28,525

 
£
20,102

 
£
28,062

 
£
16,304

 
£
11,265

 
£
2,030

Working capital(1)
(4,478
)
 
(3,156
)
 
(5,621
)
 
1,327

 
359

 
(816
)
Total assets
76,573

 
53,962

 
37,587

 
25,057

 
19,396

 
7,295

Accumulated losses reserve
(114,794
)
 
(80,898
)
 
(73,767
)
 
(52,396
)
 
(32,259
)
 
(47,166
)
Total equity/(deficit)
$
14,012

 
£
9,875

 
£
(3,493
)
 
£
16,080

 
£
12,962

 
£
2,779

____________
(1)
We define working capital as prepayments and other receivables (including current tax receivables) less current liabilities.

Exchange Rate Information
The table below shows the period end, average, high and low exchange rates of U.S. dollars per pound sterling published by the Federal Reserve Bank of New York for the periods shown. The exchange rate on April 6, 2018 was £1.00 to $1.409. The rates set forth below are provided solely for your convenience and may differ from the actual rates used in the preparation of our consolidated financial statements included in this Annual Report.
 
Period End(1)
 
Average(2)
 
Low
 
High
 
($ per pound sterling)
Fiscal Year Ended January 31:
 
 
 
 
 
 
 
2014
1.645

 
1.572

 
1.484

 
1.661

2015
1.503

 
1.634

 
1.502

 
1.717

2016
1.418

 
1.518

 
1.417

 
1.588

2017
1.259

 
1.331

 
1.212

 
1.469

2018
1.419

 
1.301

 
1.215

 
1.426

Month Ended:
 
 
 
 
 
 
 
October 2017
1.328

 
1.320

 
1.306

 
1.133

November 2017
1.351

 
1.322

 
1.307

 
1.351

December 2017
1.353

 
1.340

 
1.332

 
1.353

January 2018
1.419

 
1.382

 
1.351

 
1.426

February 2018
1.379

 
1.396

 
1.379

 
1.413

March 2018
1.403

 
1.398

 
1.376

 
1.424

April 2018 (through April 6, 2018)
1.409

 
1.405

 
1.399

 
1.409

____________
(1)
In the event that the period end fell on a day for which data are not available, the exchange rate on the prior most recent business day is given.
(2)
The average of the noon buying rate for pounds sterling on the last day of each full month during the relevant year or each business day during the relevant month indicated.

B. Capitalization and Indebtedness
Not applicable.

C. Reasons for the Offer and Use of Proceeds
Not applicable.


2

D. Risk Factors
Our business has significant risks. You should consider carefully the risks described below, together with the other information contained in this Annual Report, including our financial statements and the related notes. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.
Risks Related to our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception. We expect to incur losses for at least the next several years and may never generate profits from operations or maintain profitability.
Since inception, we have incurred significant operating losses. Our net loss was approximately £7.1 million for the year ended January 31, 2018, £21.4 million for the year ended January 31, 2017 and £20.1 million for the year ended January 31, 2016 . As of January 31, 2018, we had an accumulated deficit of £80.9 million. To date, we have financed our operations primarily through issuances of our ordinary shares and American Depositary Shares, or ADSs, payments to us under our license and collaboration agreement with Sarepta Therapeutics, Inc., or Sarepta, a payment to us under our license and commercialization agreement with Eurofarma Laboratórios SA, or Eurofarma, and development funding and other assistance from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups for our product candidates. We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed development of any drugs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially in connection with conducting clinical trials for our lead product candidates, ezutromid (formerly SMT C1100) for the treatment of patients with Duchenne muscular dystrophy, or DMD, and ridinilazole (formerly SMT19969) for the treatment of patients with Clostridium difficile infection, or CDI, and seeking marketing approval for ezutromid and ridinilazole in the United States and the European Union, as well as other geographies. In addition, if we obtain marketing approval of ezutromid in the United States or other jurisdictions where we retain commercial rights, or ridinilazole where we retain commercial rights, we expect to incur significant sales, marketing, distribution and outsourced manufacturing expense, as well as ongoing research and development expenses.
In addition, our expenses will increase if and as we:
•
continue the research and development of the F3 formulation of ezutromid, the F6 formulation of ezutromid and future generation modulators that we are developing in collaboration with the University of Oxford and Sarepta;
•
continue the research and development of ridinilazole;
•
seek to identify and develop additional product candidates, including through our bacterial genetics-based platform for the discovery and development of new mechanism antibiotics;
•
seek marketing approvals for any product candidates that successfully complete clinical development;
•
ultimately establish a sales, marketing and distribution infrastructure in jurisdictions where we have retained commercialization rights and scale up external manufacturing capabilities to commercialize any product candidates for which we receive marketing approval;
•
acquire or in-license other product candidates and technology;
•
maintain, expand and protect our intellectual property portfolio;
•
hire additional clinical, regulatory and scientific personnel;
•
expand our physical presence; and
•
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.

3

Our ability to generate profits from operations and remain profitable depends on our ability to successfully develop and commercialize drugs that generate significant revenue. Based on our current plans, we do not expect to generate significant product sales revenue unless and until we obtain marketing approval for, and commercialize, ezutromid for the treatment of DMD or ridinilazole for the treatment of CDI. This will require us to be successful in a range of challenging activities, including:
•
successfully initiating and completing clinical trials of ezutromid for the treatment of DMD and ridinilazole for the treatment of CDI;
•
obtaining approval to market ezutromid for the treatment of DMD and ridinilazole for the treatment of CDI;
•
protecting our rights to our intellectual property portfolio related to ezutromid and ridinilazole;
•
contracting for the manufacture of clinical and commercial quantities of ezutromid and ridinilazole;
•
negotiating and securing adequate reimbursement from third-party payors for ezutromid and ridinilazole; and
•
establishing sales, marketing and distribution capabilities to effectively market and sell ezutromid in the United States and ridinilazole in the United States and the European Union, as well as other geographies.
We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to generate profits from operations. Even if we do generate profits from operations, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to generate profits from operations and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Our operations to date have been limited to organizing and staffing our company, developing and securing our technology, raising capital and undertaking preclinical studies and clinical trials of our product candidates. We have not yet demonstrated our ability to successfully complete development of any product candidates, obtain marketing approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
Assuming we obtain marketing approval for any of our product candidates, we will need to transition from a company with a research and development focus to a company capable of supporting commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
We expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we initiate and continue clinical trials of ezutromid for the treatment of DMD and ridinilazole for the treatment of CDI, continue our research activities and initiate preclinical programs for future product candidates. In addition, if we obtain marketing approval for ezutromid, in the United States or other jurisdictions where we retain commercial rights, ridinilazole where we retain commercial rights or any of our future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. Furthermore, we expect to continue to incur additional costs associated with operating as a public company in the United States in addition to in the United Kingdom. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

4

We believe that our existing cash and cash equivalents, as well as the $32 million we have been awarded under the base period of our contract with the Biomedical Advanced Research and Development Authority, or BARDA, for the development of ridinilazole and the cost-sharing arrangement under our license and collaboration agreement with Sarepta, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through at least April 30, 2019. In our DMD program, while we anticipate that these capital resources will allow us to obtain top-line data for our Phase 2 clinical trial of ezutromid, which we refer to as PhaseOut DMD, we do not expect these capital resources will be sufficient to complete our planned randomized, placebo controlled clinical trial of ezutromid. In addition, in our CDI program, while we also anticipate that these capital resources will allow us to initiate our two, planned Phase 3 clinical trials of ridinilazole, we do not expect to be able to complete these trials without additional capital. We have based the foregoing estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. This estimate assumes, among other things, that we do not obtain any additional funding through grants and clinical trial support or through new collaboration arrangements. Our future capital requirements will depend on many factors, including:
•
the progress, costs and results of clinical trials of ezutromid for DMD and ridinilazole for CDI;
•
the scope, progress, costs and results of preclinical development, laboratory testing and clinical trials for the F3 formulation of ezutromid, the F6 formulation of ezutromid and future generation modulators that we are developing in collaboration with the University of Oxford and Sarepta;
•
the number and development requirements of other future product candidates that we pursue;
•
the costs, timing and outcome of regulatory review of ezutromid, ridinilazole and our other future product candidates;
•
the costs and timing of commercialization activities, including product sales, marketing, distribution and manufacturing, for any of our product candidates that receive marketing approval;
•
subject to receipt of marketing approval, revenue received from commercial sales of ezutromid, ridinilazole or any of our other future product candidates;
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims;
•
the amounts we receive from Sarepta under our license and collaboration agreement, including for the achievement of development, regulatory and sales milestones and royalty payments;
•
our contract with BARDA and whether BARDA elects to pursue its designated options beyond the base period;
•
the amounts we receive from Eurofarma under our license and commercialization agreement, including for the achievement of development, commercialization and sales milestones and for product supply transfers;
•
our ability to establish and maintain collaborations, licensing or other arrangements and the financial terms of such arrangements;
•
the extent to which we acquire or invest in other businesses, products and technologies;
•
the rate of the expansion of our physical presence; and
•
the costs of operating as a public company in the United States and in the United Kingdom.
Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we are not planning to have commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. Additional financing may not be available to us on acceptable terms, or at all.

5


Raising additional capital may cause dilution to our investors, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, collaborations, strategic alliances, grants and clinical trial support from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups, debt financings, and marketing, distribution or licensing arrangements. We do not have any committed external source of funds other than the amounts we are entitled to receive from Sarepta under our license and collaboration agreement with them, from BARDA under the base period of our contract with them to fund, in part, the clinical development of ridinilazole and from Eurofarma under our license and commercialization agreement with them. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as an equity holder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends or other distributions.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Risks Related to the Development and Commercialization of our Product Candidates
We depend heavily on the success of our lead product candidates, ezutromid, which we are developing for the treatment of DMD, and ridinilazole, which we are developing for the treatment of CDI. All of our other programs are still in the discovery or candidate optimization stage. If we are unable to commercialize ezutromid and ridinilazole, or experience significant delays in doing so, our business will be materially harmed.
We have invested a significant portion of our efforts and financial resources in the development of ezutromid for DMD and ridinilazole for CDI, both of which are still in clinical development. Our ability to generate product revenues, which may not occur for several years, if ever, will depend heavily on the successful development and commercialization of ezutromid and ridinilazole. The success of each of these product candidates will depend on a number of factors, including the following:
•
successful completion of clinical development;
•
receipt of marketing approvals from applicable regulatory authorities;
•
establishing commercial manufacturing arrangements with third-party manufacturers;
•
obtaining and maintaining patent and trade secret protection and regulatory exclusivity;
•
protecting our rights in our intellectual property portfolio;
•
establishing sales, marketing and distribution capabilities;
•
launching commercial sales of ezutromid or ridinilazole, as applicable, if and when approved, whether alone or in collaboration with others;
•
acceptance of ezutromid or ridinilazole, as applicable, if and when approved, by patients, the medical community and third-party payors;
•
effectively competing with other therapies; and
•
maintaining a continued acceptable safety profile of ezutromid or ridinilazole, as applicable, following approval.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize ezutromid or ridinilazole, which would materially harm our business.

6

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of the U.S. Food and Drug Administration, or the FDA, or the European Medicines Agency, or the EMA, or do not otherwise produce favorable results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of ezutromid, ridinilazole or any other product candidate.
In connection with obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. In particular, the small number of patients in our early clinical trials may make the results of these clinical trials less predictive of the outcome of later clinical trials. The design of a clinical trial can determine whether its results will support approval of a product, and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced or completed. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.
For example, in 2009, we assigned certain technology relating to our DMD program to BioMarin DMD Regulator Limited, or BioMarin. BioMarin conducted a Phase 1 clinical trial of a prior formulation of ezutromid in 48 healthy adult volunteers. Subjects in this clinical trial achieved low systemic exposure of the drug, and there was variability in systemic exposure across subjects. Following this clinical trial of a prior formulation of ezutromid, BioMarin elected not to continue development of our assigned technology, citing pharmaceutical and pharmacokinetic challenges. In public statements, BioMarin indicated that it had concluded that the likelihood of achieving a therapeutic effect in DMD patients was highly unlikely. In 2010, BioMarin transferred the assets, and all commercialization rights, back to us. Our first Phase 1 clinical trial of ezutromid was conducted in healthy volunteers using a different formulation than the one evaluated by BioMarin. The results from this trial showed an improvement in plasma levels of ezutromid when administered orally with food. In our first Phase 1b clinical trial of ezutromid in DMD patients, patients had variable levels of ezutromid in the blood plasma following dosing, which we believe was potentially due to the impact of diet on absorption of ezutromid. In 2015, we reported top-line data from our second Phase 1b clinical trial of ezutromid in DMD patients, which we refer to as our Phase 1b modified diet trial, in which patients followed specific dietary guidance that recommended balanced proportions of fat, protein, and carbohydrates and dosing with a glass of whole milk. In our Phase 1b modified diet trial, while following specific dietary guidance, all of the patients in the trial achieved plasma levels of ezutromid that we believe may be sufficient to modulate the production of utrophin protein and possibly result in clinical benefit. In addition, in our Phase 1 clinical trial of the F6 formulation of ezutromid, the F6 formulation achieved a greater than six-fold increase in average maximum plasma levels in DMD patients compared to those achieved with the F3 formulation of ezutromid evaluated in our Phase 1 modified diet trial, and we believe such plasma levels are within the range necessary for a potential therapeutic effect. Nonetheless, while the results of our completed clinical trials to date suggest that diet may impact absorption of ezutromid, other disease related factors, such as abnormal gastrointestinal physiology, or other factors such as the level of activity of the liver enzyme CYP1A, may impact the absorption profile of DMD patients. Accordingly, it is possible that we will be unable to achieve plasma levels of ezutromid that are expected to bring therapeutic benefit in future clinical trials, and, in such a case, we will likely not be able to successfully complete the development of, obtain marketing approval for or commercialize this product candidate.
In addition, in our first Phase 1b clinical trial of ezutromid in DMD patients, patients experienced a statistically significant reduction in creatine kinase, or CK, and other enzyme markers of muscle damage following treatment with ezutromid. Although this was not a placebo controlled study and there may be other factors that influenced the results, we believed the lower levels of CK and the other enzymes compared to baseline potentially indicated a reduction in muscle damage and may have been evidence of ezutromid activity. However, in our Phase 1b modified diet trial, we did not observe a change in the levels of CK when patients received ezutromid as compared to when patients received a placebo. Likewise, we may not observe changes in levels of CK or other enzyme markers of muscle damage in longer-term clinical trials.
In addition, in the Phase 2 clinical trial of ezutromid in DMD patients, which we refer to as PhaseOut DMD, we observed a statistically significant reduction in levels of developmental myosin, a biomarker of damage in muscle fibers, following 24-weeks of treatment with ezutromid. We also observed a mean increase in utrophin protein expression although this did not reach statistical significance. We observed a statistically significant decrease in muscle inflammation in the soleus, or calf, muscle as measured by magnetic resonance spectroscopy transverse relaxation time T2, or MRS-T2; we also observed a decrease in MRS-T2 in the vastus lateralis, or thigh, which did not achieve statistical significance. Although this was not a placebo controlled trial and that there may be other factors that influenced the results, we believe that this decline in levels of developmental myosin, combined with the mean increase in utrophin protein levels, and the decrease in MRS-T2 we observed at 24 weeks compared to baseline, indicates a reduction in muscle damage and inflammation, and provides the first evidence of ezutromid target engagement and proof of mechanism. We may however not see similar or better results in the patients who will have their second biopsy after 48-weeks of treatment with ezutromid in PhaseOut DMD, or similar or

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better results in the patients' MRS-T2 after 48-weeks of treatment with ezutromid in PhaseOut DMD. We may also not observe changes in other measurements that include the amount of fat in muscles as measured by magnetic resonance spectroscopy, or MRS, or magnetic resonance imaging, or MRI, and changes in functional endpoints including the distance walked in six minutes or the North Star Ambulatory Assessment with longer-term dosing of ezutromid.
If we are required to conduct additional clinical trials or other testing of ezutromid or ridinilazole or any other product candidate that we develop beyond those that we contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these clinical trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
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be delayed in obtaining marketing approval for our product candidates;
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not obtain marketing approval at all;
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obtain approval for indications or patient populations that are not as broad as we intended or desired;
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obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;
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be subject to additional post-marketing testing requirements or restrictions; or
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have the product removed from the market after obtaining marketing approval.
If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing approval or commercialization of our product candidates could be delayed or prevented.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
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clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
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the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;
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we may be unable to enroll a sufficient number of patients in our clinical trials to ensure adequate statistical power to detect any statistically significant treatment effects;
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our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
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regulators, institutional review boards or independent ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
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we may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks;
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regulators, institutional review boards or independent ethics committees may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;
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the cost of clinical trials of our product candidates may be greater than we anticipate;
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the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and
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our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, institutional review boards or independent ethics committees to suspend or terminate the clinical trials.
Our product development costs will increase if we experience delays in testing or marketing approvals. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

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Because we are developing ezutromid for the treatment of a disease in which there is little clinical experience, there is increased risk that the outcome of our clinical trials of ezutromid will not be favorable.
There are currently only two approved therapies for the treatment of DMD that seek to alter the progression of the disease, one in the United States and one in Europe, and neither of which treat the entire DMD patient population. Data on the natural clinical progression of DMD remain limited despite the recent publication of data from natural history studies on DMD patients. This has resulted in limited clinical trial experience for the development of drugs to treat DMD. In particular, regulatory authorities in the European Union have not issued definitive guidance as to how to measure and achieve efficacy, and regulatory authorities in the United States have only recently issued guidance regarding the development of drugs for the treatment of DMD. As a result, the design and conduct of clinical trials for DMD is subject to increased risk.
In the last few years, a test of the distance walked by a patient in six minutes, commonly referred to as the six minute walk test, has been used as an endpoint in several clinical trials of product candidates for patients with DMD. It is viewed by U.S. and European regulators as a key outcome measure for DMD trials. We may nonetheless experience setbacks with our clinical trials for ezutromid or the clinical trials for our future product candidates for DMD because of the limited clinical experience in this indication. For example, regulators have not yet established what change in the distance walked in the six minute walk test is required to be demonstrated in a clinical trial of a DMD therapy in order to signify a clinically meaningful result or obtain marketing approvals. As a result, we may not achieve the pre-specified endpoint with statistical significance in clinical trials of ezutromid or of our other future product candidates for DMD, which would decrease the chance of obtaining marketing approval for ezutromid or our other future product candidates for DMD. In February 2018, the FDA published guidance regarding the development of drugs for the treatment of DMD, which identified a number of considerations regarding the design of clinical trials to evaluate the efficacy of a product candidate for the treatment of DMD. The FDA noted, among other considerations, that biomarkers that reliably reflect the health and amount of skeletal muscle at a biochemical, cellular, or tissue level may be useful across the DMD drug development process, including use as prognostic, predictive, or pharmacodynamic markers, or, in some instances if supported by sufficient scientific evidence and acceptable analytical methods, as surrogate endpoints to support accelerated approval. However, the FDA has not yet established specific parameters or measurements of biomarkers that are required for marketing approval. We are evaluating several biomarkers in PhaseOut DMD and, based on the positive interim 24-week results from PhaseOut DMD and this FDA guidance, are accelerating activities to prepare for the potential filing of a new drug application with the FDA for ezutromid for accelerated approval if we obtain positive 48-week results from PhaseOut DMD. However, the positive interim 24-week results from PhaseOut DMD may not be predictive of positive 48-week results. In addition, even if we believe the 48-week results we receive are positive, regulators may determine that such results are not clinically meaningful, that the biomarker data from PhaseOut DMD is not a surrogate of altering disease progression or that the biomarkers we have used are not sufficiently validated, in which case we would likely be required to complete a placebo controlled trial for purposes of seeking regulatory approval.
Our focus on utrophin modulation as a potential treatment for DMD is unproven, and we do not know whether we will be able to develop any products of commercial value for this indication.
Our scientific approach for treating DMD focuses on the discovery and development of utrophin modulators. There is no marketed drug that relies on utrophin modulation whereby the production of utrophin is maintained to compensate for the lack of dystrophin for the treatment of DMD or any other indication. As a result, we may not be able to replicate the results of our preclinical studies in our clinical trials of ezutromid, and our focus on targeting utrophin modulation may not result in the discovery and development of commercially viable drugs that safely and effectively treat DMD or other muscle-wasting disorders.
Moreover, we have not yet identified the level of utrophin modulation and associated production of utrophin needed to provide a clinical benefit to DMD patients. In our two completed Phase 1b clinical trials of the F3 formulation of ezutromid and our Phase 1 clinical trial of the F6 formulation of ezutromid, we observed variable plasma levels of drug among patients. Patients dosed with the F6 formulation in our Phase 1 clinical trial all achieved plasma concentration levels exceeding the level that corresponded to a 50% increase in utrophin expression in our preclinical studies. Meanwhile, only a proportion of patients dosed with the F3 formulation of ezutromid in each of our Phase 1b trials had plasma concentrations exceeding this 50% level. We believe that all the patients may still have achieved plasma levels of ezutromid sufficient to modulate the production of utrophin to a lesser extent and possibly result in clinical benefit. This belief is based in part on the work of Professor Kay Davies and her research group at the University of Oxford, in which the continued expression of utrophin protein in the transgenic lines of an mdx mouse, even at levels just above those in a normal mdx mouse, had a meaningful, positive effect on muscle performance. In addition, our ongoing Phase 2 clinical trial called PhaseOut DMD is evaluating the F3 and the F6 formulations of ezutromid. With the interim 24-week data, we have reported there to be no relationship between drug exposure and responses in pharmacology or safety measures. Nonetheless, although we do believe that utrophin modulation has been achieved with both formulations of ezutromid after 24 weeks of dosing in PhaseOut DMD, it is not certain if utrophin modulation will be maintained with longer-term dosing, and even if utrophin modulation is maintained, whether the level of utrophin modulation and production will lead to a clinical benefit for these patients.

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If we experience delays or difficulties in the enrollment of patients in our clinical trials, our receipt of necessary marketing approvals could be delayed or prevented.
We may not be able to initiate or continue clinical trials for our product candidates, if we are unable to locate and enroll a sufficient number of eligible patients to participate in these clinical trials. DMD is a rare disease with a relatively small patient population, which could result in slow enrollment of clinical trial participants. Because we expect that our current and planned clinical trials for DMD will be limited to boys in a specified age range and with a certain level of physical ability only, the number of patients eligible for our clinical trials is even smaller. Further, there are only a limited number of specialist physicians that treat DMD patients, and major clinical centers are concentrated in a few geographic regions. CDI is an acute infection that requires rapid diagnosis. For our planned Phase 3 clinical trials of ridinilazole, we need to identify potential patients, test them for CDI and enroll them within a 48-hour period. In addition, our competitors in both DMD and CDI have ongoing clinical trials for product candidates that could be competitive with our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.
Patient enrollment is affected by other factors, including:
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severity of the disease under investigation;
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eligibility criteria for the clinical trial in question;
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perceived risks and benefits of the product candidate under study;
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competition for patients, time and resources at clinical trials sites from other investigational therapies in clinical trials that target the same patient population;
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approval of other therapies to treat the indication that is being investigated in the clinical trial;
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efforts to facilitate timely enrollment in clinical trials;
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patient referral practices of physicians;
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the ability to monitor patients adequately during and after treatment; and
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proximity and availability of clinical trial sites for prospective patients.
Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients in our ongoing and planned clinical trials of ezutromid and ridinilazole or any of our other clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.
If serious adverse or inappropriate side effects are identified during the development of ezutromid or ridinilazole or any other product candidate, we may need to abandon or limit our development of that product candidate.
All of our product candidates are in clinical or preclinical development and their risk of failure is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive marketing approval. If our product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.
For example, although ezutromid has generally been well tolerated at all doses tested, one of the patients in our Phase 1 clinical trial of the F6 formulation of ezutromid exhibited changes in liver parameters in laboratory findings and withdrew from the trial, despite showing no clinical symptoms. The finding was classified as a serious adverse event.
Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause side effects or other safety issues that prevented further development of the compound. If we elect or are forced to suspend or terminate any clinical trial of our product candidates, the commercial prospects of such product candidate will be harmed and our ability to generate product revenues from such product candidate will be delayed or eliminated. Any of these occurrences could materially harm our business.

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Even if ezutromid or ridinilazole or any other product candidate receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.
If ezutromid, ridinilazole or any of our other future product candidates receive marketing approval, such products may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues or revenue from collaboration agreements, including our license and collaboration agreement with Sarepta and our license and commercialization agreement with Eurofarma, or any profits from operations. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
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the efficacy and potential advantages compared to alternative treatments or competitive products;
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the prevalence and severity of any side effects;
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the ability to offer our product candidates for sale at competitive prices, including in the case of ridinilazole, which we expect, if approved, will compete with vancomycin and metronidazole, both of which are available in generic form at low prices, and the antibiotic, fidaxomicin, and potentially other approaches to be used as an adjunctive therapy to antibiotics, such as the monoclonal antibody bezlotoxumab, vaccines or fecal therapy;
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convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support;
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the availability of third-party coverage and adequate reimbursement;
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the timing of any such marketing approval in relation to other product approvals;
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support from patient advocacy groups; and
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any restrictions on concomitant use of other medications.
Our ability to negotiate, secure and maintain third-party coverage and reimbursement may be affected by political, economic and regulatory developments in the United States, the European Union and other jurisdictions. Governments continue to impose cost containment measures, and third-party payors are increasingly challenging prices charged for medicines and examining their cost effectiveness, in addition to their safety and efficacy. These and other similar developments could significantly limit the degree of market acceptance of ezutromid or ridinilazole or any of our other future product candidates that receive marketing approval.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be successful in commercializing ezutromid or ridinilazole or any other product candidate if and when such product candidates are approved.
We do not have a sales or marketing infrastructure and have no experience in the sale or marketing of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. If ezutromid receives marketing approval, we intend to commercialize it in the United States with our own focused, specialized sales force. In the European Union, Switzerland, Norway, Iceland, Turkey and the Commonwealth of Independent States, we will rely on Sarepta to commercialize ezutromid pursuant to the license and collaboration agreement we entered into with Sarepta in October 2016. Sarepta also has an option to expand its commercial rights to include specified countries in Latin America, which means we may have to rely on Sarepta to commercialize ezutromid in these additional territories. We plan to evaluate the potential for utilizing additional collaboration, distribution and marketing arrangements with third parties to commercialize ezutromid in other jurisdictions where we retain commercialization rights. With respect to ridinilazole, we we will rely on Eurofarma to commercialize ridinilazole in Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Dominican Republic, Uruguay and Venezuela, pursuant to the license and commercialization agreement we entered into with Eurofarma in December 2017. We are also currently exploring options to develop and commercialize this antibiotic in other territories. We may also determine to commercialize ridinilazole directly in the United States and Europe with our own specialized sales force. There are risks involved with establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

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Factors that may inhibit our efforts to commercialize our products on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;
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the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
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unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we enter into arrangements with third parties to perform sales and marketing services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are acceptable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.
We face substantial competition, which may result in others discovering, developing or commercializing products before us or more successfully than we do.
The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates and any products we may seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide.
There is currently no approved therapy for the treatment of DMD applicable to all DMD patients that seeks to alter the progression of the disease. Corticosteroids, such as prednisolone and deflazacort, are the current standard of care for DMD patients, although these are symptomatic treatments that do not address the underlying cause of DMD and their use can be associated with severe side-effects and concerns over weight gain.
A number of biopharmaceutical companies, including Sarepta, are developing treatments for DMD based on exon-skipping approaches. Sarepta received accelerated approval for eteplirsen (Exondys 51), which based on its targeting of exon 51, has the potential to treat approximately 13% of DMD patients. We believe that there are three other exon-skipping therapies in clinical development that target exon 44, exon 45 and exon 53; skipping of the ten most common exons would treat in aggregate approximately 41% of all DMD patients. PTC Therapeutics, Inc. is developing ataluren (Translarna™), which is a small molecule that enables formation of functional dystrophin in DMD patients with nonsense mutations. DMD caused by nonsense mutations affects approximately 13% of all DMD patients. The European Commission has granted conditional approval for ataluren in Europe, and PTC is commercializing ataluren in several European countries. A number of other companies are pursuing alternative therapeutic approaches for the treatment of DMD, including Pfizer, Inc. and F. Hoffmann-La Roche Ltd, which are pursuing an approach based on muscle tissue growth through myostatin inhibition. Santhera Pharmaceuticals Holding AG is developing a treatment designed to delay the deterioration in respiratory function, and a number of other companies are developing gene therapy based approaches. For more information, see “Business—Competition” in this Annual Report. We believe that our approach of utrophin modulation has the potential to treat the entire population of DMD patients, unlike other DMD approaches that also seek to alter the progression of the disease but only address subsets of the total DMD population. We expect the price that we will charge for ezutromid, if approved, will reflect its status as an orphan drug that will be directed at a smaller population of patients.
Several pharmaceutical and biotechnology companies have established themselves in the market for the treatment of CDI, and several additional companies are developing products for the treatment of CDI. The current standard of care for CDI is treatment with the broad spectrum antibiotics vancomycin and metronidazole, both of which are available in generic form in the United States. Generic antibiotic therapies typically are sold at lower prices than branded antibiotics and generally are preferred by managed care providers of health services. The antibiotic fidaxomicin (DificidTM in the United States and DificlirTM in Europe), which is marketed in the United States by Cubist Pharmaceuticals, Inc., or Cubist, a wholly owned subsidiary of Merck & Co., Inc. and in Europe by Astellas Pharma Inc., was approved for treatment of CDI in the United States and the European Union. The late-stage antibiotic cadazolid, which was originally being developed by Actelion Pharmaceuticals Limited, before global rights were acquired by Johnson and Johnson in January 2017, was reported in 2017 to have missed the primary endpoint on non-inferiority to vancomycin on clinical cure in one Phase 3 clinical trial but achieved the same primary endpoint in a second Phase 3 clinical trial. Merck received approval from the FDA for bezlotoxumab (ZinplavaTM), a monoclonal antibody for the treatment of patients, in combination with an antibiotic, who have a high risk of disease recurrence. Other approaches in development for the treatment of CDI include vaccines and fecal biotherapy. For more information, see “Business—Competition” in this Annual Report.
Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are more effective, safer, have fewer or less severe side effects, are

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approved for broader indications or patient populations, or are more convenient or less expensive than any products that we develop and commercialize. Our competitors may also obtain marketing approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.
We believe that many competitors are attempting to develop therapeutics for the target indications of our product candidates, including academic institutions, government agencies, public and private research organizations, large pharmaceutical companies and smaller more focused companies.
Many of our competitors may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining approvals from regulatory authorities and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to or necessary for our programs.
Even if we are able to commercialize ezutromid, ridinilazole or any other product candidate that we develop, the product may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.
Our ability to commercialize ezutromid, ridinilazole or any other product candidate successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the E.U. and U.S. healthcare industries and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that coverage and reimbursement will be available for ezutromid, ridinilazole or any other product that we commercialize and, if coverage and reimbursement are available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for ezutromid may be particularly difficult because of the higher prices typically associated with drugs directed at smaller populations of patients. In addition, third-party payors are likely to impose strict requirements for reimbursement of a higher priced drug. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the applicable regulatory authority. Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. In the United States, third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. In the European Union, reference pricing systems and other measures may lead to cost containment and reduced prices. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

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Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, particularly the member states of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various E.U. member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidate to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on prices or reimbursement levels within the country of publication and other countries. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
•
reduced resources of our management to pursue our business strategy;
•
decreased demand for any product candidates or products that we may develop;
•
injury to our reputation and significant negative media attention;
•
withdrawal of clinical trial participants;
•
significant costs to defend the related litigation;
•
substantial monetary awards to clinical trial participants or patients;
•
loss of revenue;
•
increased insurance costs; and
•
the inability to commercialize any products that we may develop.
We have separate product liability insurance policies that cover our product candidates and each of our clinical trials. These policies each provide coverage of up to £5.0 million in the aggregate for clinical trials, or portions thereof, conducted in Europe and up to $5.0 million in the aggregate for clinical trials, or portions thereof, conducted in the United States. The insurance policies covering our clinical trials in the United States are also subject to a per claim deductible. The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. We will need to increase our insurance coverage when and if we begin commercializing ezutromid, ridinilazole or any other product candidate that receives marketing approval. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes.
Our operations currently, and may in the future, involve the use of hazardous and flammable materials, including chemicals and medical and biological materials, and produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and wastes, we cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials or disposal of hazardous wastes, we could be held liable for any resulting damages, and any liability could exceed our resources.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We also maintain liability insurance for some of these risks, but our policy has a coverage limit of £5.0 million per occurrence.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

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We may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on specific product candidates. As a result, we may forego or delay pursuit of opportunities with other product candidates that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates may not yield any commercially viable products.
We have based our research and development efforts for DMD on utrophin modulators, including the F3 formulation of ezutromid, the F6 formulation of ezutromid and our future generation utrophin modulators, and for CDI on the antibiotic ridinilazole. Notwithstanding our large investment to date and anticipated future expenditures in proprietary technologies that we use in the discovery of product candidates for DMD, CDI and other infectious diseases, we have not yet developed, and may never successfully develop, any marketed drugs using this approach. As a result of pursuing the development of product candidates using our proprietary technologies, we may fail to develop product candidates or address indications based on other scientific approaches that may offer greater commercial potential or for which there is a greater likelihood of success. Research programs to identify new product candidates require substantial technical, financial and human resources. These research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development.
If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
The anticipated benefits of any acquisition that we consummate may not be fully realized, may take longer to realize than expected or may not be realized at all.

Any acquisition we consummate will involve the integration of the operations, product candidates and technology of the acquired business with our existing operations and programs, and there are uncertainties inherent in any such integration. Unexpected difficulties in the integration process for an acquisition or the failure to retain key management personnel from an acquired business could adversely affect our business, financial results and financial condition. In addition, any acquisitions are likely to require significant resources and management attention, including the resources and attention required to further the development of any acquired product candidates or other development programs, and we may not realize the anticipated benefits from such an acquisition within the time period we expect, or at all. In addition, in any acquisition, the due diligence process may not identify all factors that could produce unintended or unexpected consequences for us. Undiscovered factors could cause us to incur potentially material financial liabilities and prevent us from achieving the expected benefits from the acquisition within our desired timeframe, or at all. In December 2017, we obtained a bacterial genetics-based platform for the discovery and development of new mechanism antibiotic compounds through our acquisition of Discuva. While we expect to use the acquired genetics-based platform to facilitate our discovery and development of new mechanism antibiotics, we may fail to do so. As a result, we may not obtain any value from our acquisition of Discuva.
The United Kingdom’s vote in favor of withdrawing from the European Union could lead to increased market volatility which could adversely impact the market price of our ordinary shares and ADSs and make it more difficult for us to do business in Europe.
On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union (commonly referred to as “Brexit”). The withdrawal of the United Kingdom from the European Union will take effect either on the effective date of the withdrawal agreement or, in the absence of agreement, two years after the United Kingdom provides a notice of withdrawal pursuant to Article 50 of the E.U. Treaty, unless the European Council, in agreement with the United Kingdom, unanimously decides to extend this period. On March 29, 2017, the U.K. Prime Minister formally delivered the notice of withdrawal. It appears likely that this withdrawal will involve a process of lengthy negotiations between the United Kingdom and European Union member states to determine the future terms of the United Kingdom’s relationship with the European Union. This could lead to a period of considerable uncertainty particularly in relation to United Kingdom financial and banking markets as well as on the regulatory process in Europe. As a result of this uncertainty, financial markets could experience significant volatility which could adversely affect the market price of our ordinary shares and ADSs.
We may also face new regulatory costs and challenges that could have a material adverse effect on our operations. Depending on the terms of Brexit, the United Kingdom could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers which could make our doing business in Europe more difficult. In addition, currency exchange rates in the pound sterling and the euro with respect to each other and the U.S. dollar have already been adversely affected by Brexit. Furthermore, at present, there are no indications of the effect Brexit will have on the pathway to obtaining marketing approval for any of our product candidates in the U.K., or what, if any, role the EMA may have in the approval process.

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Recent and potential future changes to U.S. and non-U.S. tax laws could materially adversely affect our company and holders of our ordinary shares and the ADSs.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the U.S. Internal Revenue Code of 1986. This new law substantial affects the U.S. federal income taxation of corporations, including by way of reductions in the nominal U.S. corporate income tax rate, limitations on interest deductions and the introduction of new anti-base erosion provisions. Many of these changes are effective immediately, without transition periods or grandfathering relief, and in some cases retroactively. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Treasury Department and the U.S. Internal Revenue Service; any these changes could modify various aspects of the legislation in ways that are either positive or negative for us or holders of the ADSs. As a result, the overall impact of this new legislation on us or on holders of our ordinary shares and the ADSs is uncertain and could be adverse. Other legislative or regulatory changes and judicial developments could also affect the taxation of our business or of holders of our ordinary shares and the ADSs.
Future changes in tax laws, regulations and treaties, or the interpretation thereof, in addition to initiatives related to the Base Erosion and Profit Shifting, or BEPS, Project of the Organisation for Economic Co-Operation and Development, or OECD; the European Commission’s “state aid” investigations; and other developments could have an adverse effect on the taxation of international businesses, including our own. Furthermore, countries where we are subject to taxes, including the United States, evaluate their tax policies and rules on a regular basis, and we may see significant changes in legislation and regulations concerning taxation.
We are unable to predict what tax changes may be enacted in the future or what effect such changes would have on our business, but such changes could affect our effective tax rates in countries where we have operations and could have an adverse effect on our overall tax position in the future, along with increasing the complexity, burden and cost of tax compliance.

Risks Related to our Dependence on Third Parties
We will depend heavily on our license and collaboration arrangement with Sarepta for the success of the products in our utrophin modulator pipeline in the European Union and other geographies. If Sarepta terminates our license and collaboration agreement or is unable to meet its contractual obligations, it could negatively impact our business.
In October 2016, we entered into a license and collaboration agreement pursuant to which we granted exclusive rights to Sarepta to commercialize products in our utrophin modulator pipeline, or the licensed products, in the European Union (including the United Kingdom, irrespective of the timing of Brexit), Switzerland, Norway, Iceland, Turkey and the Commonwealth of Independent States, or the licensed territories, with an option exercisable by Sarepta for commercialization rights to the licensed products in Central and South America.
Under the terms of the license and collaboration agreement, we are entitled to receive specified development, regulatory and sales milestone payments, as well as royalty payments. In addition, subject to certain exceptions and limitations, since January 1, 2018, we have shared all budgeted global research and development costs for our utrophin modulator pipeline with Sarepta, with Sarepta responsible for 45.0% of these research and development costs for the licensed products. In addition, Sarepta will be solely responsible for all commercialization activities and associated costs, relating to licensed products in the licensed territories.
Unless earlier terminated, the license and collaboration agreement will expire on a licensed product-by-licensed product and country-by-country basis upon the expiration of the royalty term in such country for such licensed product. The license and collaboration agreement may be terminated by Sarepta upon six months’ prior written notice in its entirety or on a licensed product-by-licensed product and country-by-country basis. Either party may, subject to a cure period, terminate the license and collaboration agreement in the event of the other party’s uncured material breach. Sarepta may also terminate the license and collaboration agreement under specified circumstances relating to the safety or regulatory approvability of ezutromid.
If Sarepta were to terminate the license and collaboration agreement or fail to meet its contractual obligations, the assumption by us of all costs related to the development of products in our utrophin modulator pipeline and the establishment of a commercial infrastructure in the licensed territories would require substantial resources, financial and otherwise, and could result in us incurring greater expenses than the increase in revenues from our direct sales of the licensed products in the licensed territories. It could also cause a delay in the development of ezutromid. Seeking and obtaining a viable, alternative collaborator to partner on the development and commercialization of the licensed products may not be available on similar terms or at all.



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Our reliance on government funding for ridinilazole adds uncertainty to our research and commercialization efforts with respect to ridinilazole.
We expect that a significant portion of the funding for the development of ridinilazole will come from our contract with BARDA. BARDA is entitled to terminate our BARDA contract for convenience at any time, in whole or in part, and there can be no assurance that our BARDA contract will not be terminated. Changes in government budgets and research priorities may result in a decreased and de-prioritized emphasis on supporting the development of antibacterial product candidates such as ridinilazole. If our BARDA contract is terminated or BARDA declines to exercise options for the full research program, or if there is any reduction or delay in funding under our BARDA contract, we may be forced to seek alternative sources of funding, which may not be available on non-dilutive terms, terms favorable to us, or at all. If alternative sources of funding are not available, we may suspend or terminate development activities related to ridinilazole.
BARDA could decide to delay certain of our activities, and we may elect to move forward with certain activities at our own risk and without BARDA reimbursement.
Under our BARDA contract, BARDA will regularly review our ridinilazole development efforts and clinical activities. Under certain circumstances, BARDA may direct us to delay certain activities and invest additional time and resources before proceeding. If we follow such BARDA direction, we may incur delays and additional costs for which we had not planned. In addition, even if BARDA does not direct us to delay certain activities, BARDA’s review of our progress may take longer than we expect, which may result in overall program delays. Also, the costs associated with following BARDA’s direction to delay certain activities may or may not be reimbursed by BARDA under our contract. Finally, if we decide not to follow the direction provided by BARDA and instead pursue activities that we believe are in the best interest of the development of ridinilazole, we might forgo reimbursement under our BARDA contract, and BARDA could assert that we are in default of our contractual commitments, potentially leading to the termination of our contract, and possibly suspension, debarment, or exclusion from eligibility for other U.S. government contracts, funding programs and regulatory approvals.
BARDA may elect not to pursue the designated options beyond the base period.
Even if BARDA does not terminate the contract, the BARDA contract does not require BARDA to provide funding beyond the amount currently obligated under the base period of the existing contract. Our BARDA contract includes an approximate 12-month base period providing for reimbursement of up to $32 million and options that, if exercised in full by BARDA, would extend the contract until the year 2022 and increase the total potential reimbursement to $62 million. However, BARDA will decide in its sole discretion whether to pursue each of the options under the contract and there can be no assurance that BARDA will elect to pursue any of the designated options beyond the base period. Changes in government budgets and research priorities may result in a decreased and de-prioritized emphasis on supporting the development of antibacterial product candidates such as ridinilazole. In such event, BARDA would have no obligation to exercise its options or extend our existing contract. Any such decision by BARDA to end its support for our ridinilazole research program could materially adversely affect our business.
Our reliance on government funding for the clinical and regulatory development of ridinilazole may impose requirements that increase the costs of commercialization and production of ridinilazole, if approved.
Our BARDA contract includes provisions that implement the U.S. government’s rights and remedies, many of which are not typically found in commercial contracts, including, for example, powers of the government to:
 
•
terminate agreements, in whole or in part, at any time, for any reason or no reason;

•
unilaterally modify the parties’ obligations under such contracts, subject to government-determined equitable price adjustments;

•
decline to exercise any option for work beyond the initial base period under multi-year contracts;

•
suspend contract performance if Congressionally appropriated funding becomes unavailable;

•
obtain rights to inventions and technical data made or first produced in the performance of such contracts;

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

•
suspend or debar the contractor from receiving new contracts pending resolution of alleged violations of procurement laws or regulations in the event of wrongdoing by us;

•
take actions that result in a longer development timeline than expected;

•
direct the course of a development program in a manner not chosen by the government contractor;

•
impose U.S. manufacturing requirements for products that embody or that are produced through the use of inventions conceived or first reduced to practice under such contracts;


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•
assert qualified march-in rights to grant licenses to third parties to practice contractor-owned inventions that are conceived or first reduced to practice under such contracts;

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

•
limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal-year basis, thereby leaving some uncertainty about the future availability of funding for a program even after it has been funded for an initial period.
We may not have the right to prohibit the U.S. government from using certain inventions and technical data funded by the government and developed by us, and we may not be able to prohibit third party companies, including our competitors, from using those inventions and technical data in providing products and services to the U.S. government. The U.S. government generally takes the position that it has the right to royalty-free use of inventions and technical data that are developed under U.S. government contracts. While we do not believe the intellectual property rights that we have granted to the U.S. government under the BARDA agreement will impact our rights to commercialize ridinilazole, the government’s non-exclusive license to intellectual property developed under the agreement and the government’s march-in to inventions made under the agreement may allow the government, or a third party on its behalf, to more easily and/or quickly develop a product that could compete with ridinilazole.
In addition, U.S. government contracts normally contain additional requirements that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These requirements include, for example:
 
•
specialized accounting systems unique to government contracts;
 
•
potential liability for price adjustments or recoupment of government funds after such funds have been spent;

•
mandatory disclosure of credible evidence of certain contractual or statutory violations occurring in connection with the contract;

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

•
mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs and environmental compliance requirements.
As an organization, we are relatively new to government contracting and the associated regulatory compliance obligations. If we fail to maintain compliance with those obligations, we may be subject to potential civil and/or criminal liability, termination of our BARDA contract, and/or suspension, debarment, or exclusion from eligibility for other U.S. government contracts, funding programs and regulatory approvals. As a U.S. government contractor, we are subject to financial audits and other reviews by the U.S. government of our costs and performance under our BARDA contract, as well as our accounting and general business practices related to our BARDA contract. Based on the results of its audits, the U.S. government may adjust our contract-related costs and fees, including allocated indirect costs.
Laws and regulations affecting government contracts, including our BARDA contract, make it more costly and difficult for us to successfully conduct our business. Failure to comply with these laws and regulations could result in significant civil and criminal penalties and adversely affect our business.
We must comply with numerous laws and regulations relating to the administration and performance of our BARDA contract. Among the most significant government contracting regulations that affect our BARDA contract are:
 
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the Federal Acquisition Regulation, or FAR, and agency-specific regulations supplemental to the FAR, which comprehensively regulate the procurement, formation, administration and performance of government contracts;  
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extensive U.S. government regulation of government-funded clinical research activities, including, for example, compliance requirements relating to protection of human and animal research subjects, restrictions on uses of human research materials, and conditions on dissemination of research results.  
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business ethics and public integrity obligations, which govern areas such as conflicts of interest, the recruitment and hiring of former government employees, bribes and gratuities, and limitations on and mandatory disclosure of lobbying activities, pursuant to laws such as the Anti-Kickback Act, the Procurement Integrity Act, the False Claims Act and the Foreign Corrupt Practices Act; and  
•
export control and import laws and regulations.

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In addition, U.S. government agencies such as the Department of Health and Human Services and the Defense Contract Audit Agency routinely audit and investigate government contractors for compliance with applicable laws and standards. These agencies review a contractor’s performance under its contracts, including contracts with BARDA, cost structure and compliance with applicable laws, regulations and standards.
These agencies also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be unreasonable, unallowable under applicable reimbursement policies, or improperly allocated to a specific contract will not be paid, while such costs already paid must be refunded. Claims for costs that are expressly unallowable under applicable reimbursement policies may also be subject to administrative penalties. If we are audited and such audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:
 
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termination of any government contracts, including our BARDA contract;
 
•
suspension of payments;
 
•
administrative sanctions, such as long-term monitoring arrangements;
 
•
fines; and
 
•
suspension, debarment, or exclusion from eligibility for U.S. government contracts, funding programs and regulatory approvals.

In addition, we could suffer serious reputational harm if allegations of impropriety were made against us, which could jeopardize our other research programs, deter research institutions from engaging with us, and cause our stock price to decrease.
We depend on collaborations with third parties for the development and commercialization of some of our product candidates. If those collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.

We have entered into a license and commercialization agreement with Eurofarma pursuant to which we granted Eurofarma rights to commercialize ridinilazole in specified countries in South America, Central America and the Caribbean. We are evaluating additional options to maximize the commercial opportunity for ridinilazole, including the relative merits of retaining our remaining commercialization rights for ourselves, seeking third-party collaborators for ridinilazole and/or securing additional non-dilutive funding from government entities, philanthropic organizations and charities. In addition, we have entered into a license and collaboration agreement with Sarepta to commercialize ezutromid in Europe and other geographies, and, we plan to continue to evaluate the potential for utilizing collaboration, distribution and marketing arrangements with third parties to commercialize ezutromid in geographies where we retain commercialization rights, including the United States. Moreover, we may seek third-party collaborators for development and commercialization of any future product candidates.
Our likely future collaborators for any marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. Under our license and collaboration agreement with Sarepta and our license and commercialization agreement with Eurofarma we have, and under any such arrangements we enter into with any third parties in the future we will likely have, limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities and efforts to successfully perform the functions assigned to them in these arrangements.
Our current collaborations pose, and any future collaboration likely will pose, numerous risks to us, including the following:
•
collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations and may not perform their obligations as expected;
•
collaborators may deemphasize or not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus, including as a result of a sale or disposition of a business unit or development function, or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;
•
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

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•
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
•
a collaborator with marketing and distribution rights to multiple products may not commit sufficient resources to the marketing and distribution of our product relative to other products;
•
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
•
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;
•
disputes may arise between the collaborator and us as to the ownership of intellectual property arising during the collaboration;
•
we may grant exclusive rights to our collaborators, which would prevent us from collaborating with others;
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disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and
•
collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.
For example, in 2009, we assigned certain technology relating to our DMD program to BioMarin. BioMarin conducted a Phase 1 clinical trial of a prior formulation of ezutromid in 48 healthy adult volunteers. In this clinical trial, subjects achieved low systemic exposure of the drug and there was variability of systemic exposure across subjects. Following this clinical trial of a prior formulation of ezutromid, BioMarin elected not to continue development of our assigned technology, citing pharmaceutical and pharmacokinetic challenges. In public statements, BioMarin indicated that it had concluded that the likelihood of achieving a therapeutic effect in DMD patients was highly unlikely. In 2010, BioMarin transferred the assets, and all commercialization rights, back to us.
Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.
Use of third parties to manufacture our product candidates may increase the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We do not own or operate manufacturing facilities for the production of clinical or commercial supplies of our product candidates. We have limited personnel with experience in drug manufacturing and lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. We currently rely on third parties for supply of the active pharmaceutical ingredients, or API, in our product candidates. Our strategy is to outsource all manufacturing of our product candidates and products to third parties.
We do not currently have any agreements with third-party manufacturers for the long-term clinical or commercial supply of any of our product candidates. We currently engage a single third-party manufacturer to provide clinical material of the API and fill and finish services for the final drug product of the F3 formulation of ezutromid that is being used in our Phase 2 clinical trial. We are engaged with a different drug product manufacturer to provide bulk drug product of the F6 formulation of ezutromid. A different third party manufacturer provides fill and finish services to supply the final drug product of the F6 formulation of ezutromid. We are engaged with a different third-party vendor to provide labelling, packaging and distribution services for the F3 and F6 formulations of ezutromid. We are engaged with another third-party manufacturer to provide clinical material of the API of ridinilazole with a different supplier responsible for fill and finish services to supply the final drug product for use in the planned Phase 3 clinical trials. We may be unable to conclude agreements for commercial supply with third-party manufacturers, or may be unable to do so on acceptable terms.

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Even if we are able to establish and maintain arrangements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
•
reliance on the third party for regulatory compliance and quality assurance;
•
the possible breach of the manufacturing agreement by the third party;
•
the possible misappropriation of our proprietary information, including our trade secrets and know-how; and
•
the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.
Third-party manufacturers may not be able to comply with current good manufacturing practice, or cGMP, regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.
Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.
In addition, in order to conduct late-stage clinical trials of our product candidates, we will need to have them manufactured in large quantities. Our third-party manufacturers may be unable to successfully increase the manufacturing capacity for any of our product candidates in a timely or cost-effective manner, or at all.
The third-party manufacturer responsible for the fill and finish services to supply the final drug product for our planned Phase 3 clinical trials of ridinilazole experienced challenges in the fill and finish process used to manufacture test batches of the clinical supply of ridinilazole, specifically the manufacture of ridinilazole in tablet form, which is also the form expected to be used commercially, and which is a change from the capsule form used in our completed clinical trials of ridinilazole. Because of these challenges, we were not able to obtain sufficient quantities of ridinilazole to commence our planned Phase 3 clinical trials in the first half of 2018 as originally planned and have delayed the commencement of those trials until the first quarter of 2019. If our third-party manufacturer is unable to resolve these challenges or is otherwise unable to manufacture sufficient quantity of the tablet form of ridinilazole, our planned Phase 3 clinical trials may be further delayed. Moreover, if our third-party manufacturers are unable to successfully scale up the manufacture of our product candidates in sufficient quality and quantity, the development, testing and clinical trials of that product candidate may be delayed or infeasible, and regulatory approval or commercial launch of that product candidate may be delayed or not obtained, which could significantly harm our business.
If the third parties that we engage to manufacture product for our preclinical tests and clinical trials should cease to continue to do so for any reason, we likely would experience delays in advancing these clinical trials while we identify and qualify replacement suppliers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively. Our inability to obtain adequate supplies of ezutromid for preclinical tests and clinical trials may also impact Sarepta’s ability to commercialize ezutromid and our second generation and future generation utrophin modulators. Under our license and collaboration agreement with Sarepta, we have agreed to use commercially reasonable efforts to supply to Sarepta active pharmaceutical ingredient, finished drug product and placebo for Sarepta to conduct research, development and commercialization activities. In addition, our inability to obtain adequate supplies of ridinilazole for clinical trials may also impact Eurofarma’s ability to commercialize ridinilazole, if marketing approval is obtained, in the jurisdictions where Eurofarma holds commercialization rights. Under our license and commercialization agreement with Eurofarma, we have agreed to use commercially reasonable efforts to supply or cause to be supplied to Eurofarma sufficient commercial supply of ridinilazole.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability, and the ability of Sarepta, Eurofarma and any other future collaborator, to develop product candidates and commercialize any products that receive marketing approval on a timely and competitive basis.
We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such clinical trials.
We do not independently conduct clinical trials for our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to perform this function. Any of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it would delay our product development activities.

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Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the clinical trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practice, or GCP, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity of data and confidentiality of clinical trial participants are protected. The EMA imposes similar requirements on us for products that are the subject of clinical trials in European Union, including the United Kingdom.
We also are required to register ongoing clinical trials and post the results of completed clinical trials on a U.S. government-sponsored database, www.ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. In September 2016, the U.S. Department of Health and Human Services through the U.S. National Institutes of Health issued new regulations that expand the legal requirements for submitting registration and results information for clinical trials involving FDA-regulated drugs, biologics and medical devices. The new rules require sponsors, among other things, to post results of clinical trials for unapproved products, including unfavorable results in clinical trials for unapproved uses of approved products. The EMA has also adopted transparency requirements that apply to clinical trials conducted in the European Union (EMA Policy/0070 on the publication of clinical data for medicinal products for human use, effective as of January 1, 2015). The EMA will implement this policy on the publication of clinical data in two phases. Phase 1 concerns the publication of clinical reports submitted to EMA as part of a marketing authorization application and through the centralized procedure. It entered into force on January 1, 2015. Phase 2 concerns the publication of individual patient data. The EMA will implement this phase at a later stage. This publication requirement for clinical reports may force us to disclose know-how relating to the design of clinical trials for our product candidates, which may harm our interests by disclosing valuable know-how to our competitors, which may be used to develop competing products to our product candidates.
Furthermore, third parties that we rely on for our clinical development activities may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. Our product development costs will increase if we experience delays in testing or obtaining marketing approvals.
We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.
Our ability to identify and develop future generations of utrophin modulators depends on our strategic alliance with the University of Oxford. If we fail to maintain our current strategic relationship with the University of Oxford, our business prospects may be materially adversely affected.
We have formed a strategic alliance with the University of Oxford pursuant to which we acquired an exclusive option to license intellectual property that is generated as part of our research in utrophin modulation. The goal of our strategic alliance with the University of Oxford is to identify and develop future generations of utrophin modulators that will include new mechanisms that could complement ezutromid. We rely on this strategic alliance and the University of Oxford to help identify and develop future generations of utrophin modulators. The continuation of a good relationship with the University of Oxford is important to our discovery and research efforts in this area. If our relationship with the University of Oxford deteriorates, if the University of Oxford fails to devote sufficient resources to the strategic alliance or if the University of Oxford challenges our option to license any intellectual property generated as part of the strategic alliance, our business prospects could be materially adversely affected.

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If we are not able to establish additional collaborations, we may have to alter our development and commercialization plans.
Our product development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate further with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by regulatory authorities, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge; and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under future license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators and changes to the strategies of the combined company.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
If we fail to comply with our obligations in our funding arrangements with third parties, we could be required to repay the grant funding we have received or grant to these third parties rights under certain of our intellectual property.
We have received grant funding for some of our development programs from philanthropic, non-government and not for profit organizations and patient advocacy groups pursuant to agreements that impose development and commercialization diligence obligations on us. If we fail to comply with these obligations, in certain instances the applicable organization could require us to repay the grant funding we have received with interest or grant to the organization rights under certain of our intellectual property, which could materially adversely affect the value to us of product candidates covered by that intellectual property even if we are entitled to a share of any consideration received by such organization in connection with any subsequent development or commercialization of the product candidates.
Risks Related to our Intellectual Property
If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products, including our bacterial genetics-based platform. We seek to protect our proprietary position by filing patent applications in the United States, in Europe and in certain additional foreign jurisdictions related to our novel technologies and product candidates that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, if we license technology or product candidates from third parties in the future, these license agreements may not permit us to control the preparation, filing and prosecution of patent applications, or to maintain or enforce the patents, covering the licensed technology or product candidates. These agreements could also give our licensors the right to enforce the licensed patents without our involvement, or to decide not to enforce the patents at all. Therefore, in these circumstances, these patents and applications may not be prosecuted or enforced in a manner consistent with the best interests of our business.

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The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents, narrow the scope of our patent protection or make enforcement more difficult or uncertain.
The laws of foreign countries may not protect our patent rights to the same extent as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. In addition, for the foregoing reasons, we may not pursue or obtain patent protection in all major markets or may not obtain protection that enables us to prevent the entry of third parties into the market.
Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our U.S. patents or pending U.S. patent applications, or that we were the first to file for patent protection of such inventions outside the United States or, since March 16, 2013, within the United States.
Moreover, we may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or the USPTO, or become involved in opposition, derivation, reexamination, reissue, inter partes review, post grant review, interference proceedings or other patent office proceedings, court litigation or International Trade Commission proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation concerning our patent rights could reduce the scope of or prevent the enforceability of, or invalidate, our patent rights, allowing third parties to commercialize our technology or products, or equivalent or similar technology or products, and so to compete directly with us, without payment to us, or, where such proceedings involve third-party patents, result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened or narrowed by operation of any of the foregoing, such an event could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.
Even if our patent applications issue as patents, they may not issue in a form that will provide us with adequate protection to prevent competitors from competing with us or otherwise to provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar, improved or alternative technologies or products in a non-infringing manner.
For example, although ridinilazole is protected by a U.S. composition of matter patent that recites hydrated forms of ridinilazole , and a method of treatment patent for Clostridium difficile associated disease, patent protection is not available for composition-of-matter claims that only recite the active pharmaceutical ingredient for ridinilazole without limitation to its use. Because ridinilazole lacks composition-of-matter protection for its active pharmaceutical ingredient, competitors will, subject to obtaining marketing approval, be able to offer and sell products with the same active pharmaceutical ingredient so long as these competitors do not infringe any other issued patents that would otherwise cover the drug’s usage, methods of treatment using the drug, drug formulations, drug dosage forms and the like. Moreover, method-of-treatment patent claims are more difficult to enforce than composition-of-matter claims for reasons including off-label sale, potential divided infringement issues and use of the subject compound in non-infringing manners. Physicians are permitted to prescribe an approved product for uses that are not described in the product’s labeling. Although off-label prescriptions may infringe our method-of-treatment patents, the practice is common across medical specialties and such infringement is difficult to prevent or prosecute. Off-label sales would limit our ability to generate revenue from the sale of our product candidates, if approved for commercial sale. In addition, if a third party were able to design around our dosage-form and formulation patents and create a different formulation and dosage form that is not covered by our patents or patent applications, we would likely be unable to prevent that third party from manufacturing and marketing its product.
In addition, other companies may attempt to circumvent any regulatory data protection or market exclusivity, such as orphan drug exclusivity in the United States, which we obtain under applicable legislation, which may require us to allocate significant resources to preventing such circumvention. Legal and regulatory developments in the European Union and elsewhere may also result in clinical trial data submitted as part of a marketing authorization application becoming publicly available. Such developments could enable other companies to use our clinical trial data to assist in their own product development and to obtain marketing authorizations in the European Union and in other jurisdictions. Such developments may also require us to allocate significant resources to prevent other companies from circumventing or violating our intellectual property rights. Our attempts to prevent third parties from circumventing our intellectual property and other rights may ultimately be unsuccessful. We may also fail to take the required actions or pay the necessary fees to maintain our patents.

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The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Future changes in U.S. statutory or case law beyond our control could affect some or all of the foregoing possibilities. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. This could be the case even after giving effect to patent term extensions and data exclusivity provisions preventing third parties from relying on clinical trial data filed by us for regulatory approval in support of their own applications for such approval. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
We may become involved in lawsuits or other enforcement proceedings to protect or enforce our patents or other intellectual property, which could be expensive, time-consuming and potentially unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property or that our patent and other intellectual property rights are invalid or unenforceable, including for anti-trust reasons. As a result, in a patent infringement proceeding, a court or administrative body may decide that a patent of ours is invalid or unenforceable, in whole or in part, or may construe the patent’s claims narrowly and so refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the competitor technology in question. Even if we are successful in a patent infringement action, the unsuccessful party may subsequently raise antitrust issues and bring a follow-on action thereon. Antitrust issues may also provide a bar to settlement or constrain the permissible settlement terms. Further, settlement agreements in the pharmaceutical sector are the subject of ongoing review by the antitrust authorities in the European Union.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies, including our bacterial genetics-based platform, without infringing the intellectual property and other proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference, derivation, inter partes review, reexamination, reissue or post-grant review proceedings before the USPTO. The risks of being involved in such litigation and office proceedings may also increase as our product candidates approach commercialization, and as we gain greater visibility as a publicly traded company in the United States. Third parties may assert infringement claims against us based on existing or future intellectual property rights and so restrict our freedom to operate. Third parties may also seek injunctive relief against us, whereby they would attempt to prevent us from practicing our technologies altogether pending outcome of any litigation against us. We may not be aware of all such intellectual property rights potentially relating to our product candidates prior to their assertion against us. For example, we have not conducted an in-depth freedom-to-operate search or analysis for ezutromid or ridinilazole. Any freedom-to-operate search or analysis previously conducted may not have uncovered all relevant patents and pending patent applications, and there may be pending or future patent applications that, if issued, would block us from commercializing ezutromid or ridinilazole. Thus, we do not know with certainty whether ezutromid, ridinilazole or any other product candidate or our commercialization thereof, does not and will not infringe any third party’s intellectual property.
If we are found to infringe a third party’s intellectual property rights, or in order to avoid or settle litigation, we could be required to obtain a license to enable us to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies as are licensed to us, and could require us to make substantial payments. Absent a license, we could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent or other intellectual property right. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties, or claims that we derived our inventions from another, could have a similar negative impact on our business.

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We may be subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary or otherwise confidential information or know-how of others in their work for us, we may be subject to claims that we or these employees have without authorization used or disclosed intellectual property, including trade secrets or other proprietary or confidential information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.
In addition, while we typically require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us and agreeing to cooperate and assist us with securing and defending our intellectual property, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual property litigation could cause us to spend substantial resources and could distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ADSs and ordinary shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, costs and lost management time, as well as uncertainties resulting from the initiation and continuation of patent litigation or other proceedings, could have a material adverse effect on our ability to compete in the marketplace.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary and confidential information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. However, we cannot guarantee that we have executed these agreements with each party that may have or have had access to our trade secrets or that the agreements we have executed will provide adequate protection. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary or confidential information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets, particularly unpatented know-how, were to be obtained or independently developed by a competitor, our competitive position would be harmed.

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Risks Related to Regulatory Approval and Marketing of our Product Candidates
Even if we complete the necessary clinical trials, the marketing approval process is expensive, time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of our product candidates. If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.
Our product candidates, including ezutromid and ridinilazole, and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us or our collaborators from commercializing the product candidate. We have not received approval to market ezutromid, ridinilazole or any of our other future product candidates from regulatory authorities in any jurisdiction.
We have only limited experience in filing and supporting the applications necessary to obtain marketing approvals for product candidates and expect to rely on third-party contract research organizations to assist us in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Regulatory authorities may determine that ezutromid, ridinilazole or any of our other future product candidates are not effective or only moderately effective, or have undesirable or unintended side effects, toxicities, safety profiles or other characteristics that preclude us from obtaining marketing approval or that prevent or limit commercial use.
The process of obtaining marketing approvals is expensive, may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable. If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially impaired.
Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, Brexit could materially impact the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could significantly and materially harm our business.
Our failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed in these other jurisdictions, and any approval we are granted for our product candidates in the United States and Europe would not assure approval of our product candidates in other jurisdictions.
In order to market and sell ezutromid, ridinilazole and our other future product candidates in foreign jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements in those jurisdictions. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA or EMA approval. The regulatory approval process outside the United States and Europe generally includes all of the risks associated with obtaining FDA and EMA approval. In addition, some countries outside the United States and Europe require approval of the sales price of a drug before it can be marketed. In many countries, separate procedures must be followed to obtain reimbursement. We may not obtain marketing, pricing or reimbursement approvals outside the United States and Europe on a timely basis, if at all. Approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States and Europe does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA or the EMA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market. Marketing approvals in countries outside the United States and Europe do not ensure pricing approvals in those countries or in any other countries, and marketing approvals and pricing approvals do not ensure that reimbursement will be obtained.

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Our ability to obtain and maintain conditional marketing authorizations in the European Union is limited to specific circumstances and subject to several conditions and obligations. A failure to renew any conditional approval that we obtain prior to full approval for the applicable indication would prevent us from continuing to market our products.
Conditional marketing authorizations based on incomplete clinical data may be granted for a limited number of listed medicinal products for human use, including products designated as orphan medicinal products under E.U. law, if (1) the risk-benefit balance of the product is positive, (2) it is likely that the applicant will be in a position to provide the required comprehensive clinical trial data, (3) unmet medical needs will be fulfilled and (4) the benefit to public health of the immediate availability on the market of the medicinal product outweighs the risk inherent in the fact that additional data are still required. Specific obligations, including with respect to the completion of ongoing or new studies, and with respect to the collection of pharmacovigilance data, may be specified in the conditional marketing authorization. Conditional marketing authorizations are valid for one year and may be renewed annually, if the risk-benefit balance remains positive, and after an assessment of the need for additional or modified conditions. Even if we, or a third-party collaborator, obtain conditional approval for ezutromid for the treatment of DMD or ridinilazole for the treatment of CDI, we or they may not be able to renew such conditional approval.
Even if we obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our products and compliance with such requirements may involve substantial resources, which could materially impair our ability to generate revenue.
Even if marketing approval of a product candidate is granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation, including the requirement to implement a risk evaluation and mitigation strategy or to conduct costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of the product. We and our collaborators must also comply with requirements concerning advertising and promotion for any of our product candidates for which we obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, neither we nor our collaborators will be able to promote any products we develop for indications or uses for which they are not approved. In addition, manufacturers of approved products and those manufacturers’ facilities are required to ensure that quality control and manufacturing procedures conform to cGMP, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We and our contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMP.
Accordingly, assuming we receive marketing approval for one or more of our product candidates, we and our contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control. If we are not able to comply with post-approval regulatory requirements, we could have the marketing approvals for our products withdrawn by regulatory authorities and our ability to market any future products could be limited, which could adversely affect our ability to achieve or sustain profitability. Thus, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.
Any product candidate for which we obtain marketing approval will be subject to strict enforcement of post-marketing requirements and we could be subject to substantial penalties, including withdrawal of our product from the market, if we fail to comply with all regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include, but are not limited to, restrictions governing promotion of an approved product, submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and recordkeeping.

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The FDA and other federal and state agencies, including the Department of Justice, or DOJ, closely regulate compliance with all requirements governing prescription drug products, including requirements pertaining to marketing and promotion of drugs in accordance with the provisions of the approved labeling and manufacturing of products in accordance with cGMP requirements. The FDA and DOJ impose stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of such requirements may lead to investigations alleging violations of the Food, Drug and Cosmetic Act and other statutes, including the False Claims Act and other federal and state health care fraud and abuse laws as well as state consumer protection laws. Our failure to comply with all regulatory requirements, and later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, may yield various results, including:
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litigation involving patients taking our products;
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restrictions on such products, manufacturers or manufacturing processes;
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restrictions on the labeling or marketing of a product;
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restrictions on product distribution or use;
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requirements to conduct post-marketing studies or clinical trials;
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warning or untitled letters;
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withdrawal of the products from the market;
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refusal to approve pending applications or supplements to approved applications that we submit;
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recall of products;
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fines, restitution or disgorgement of profits or revenues;
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suspension or withdrawal of marketing approvals;
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damage to relationships with any potential collaborators;
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unfavorable press coverage and damage to our reputation;
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refusal to permit the import or export of our products;
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product seizure; or
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injunctions or the imposition of civil or criminal penalties.
Non-compliance by us or any future collaborator with regulatory requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with regulatory requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
Non-compliance with E.U. requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
Fast track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
If a drug is intended for the treatment of a serious or life threatening condition and the drug demonstrates the potential to address unmet medical need for this condition, the drug sponsor may apply for FDA fast track designation. The FDA has granted fast track designation for ezutromid and ridinilazole. However, a fast track designation does not ensure that either ezutromid or ridinilazole will receive marketing approval or that approval will be granted within any particular timeframe. We may also seek fast track designation for other future product candidates. Even if the FDA grants fast track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. In addition, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program. Fast track designation alone does not guarantee qualification for the FDA’s priority review procedures.

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Priority review designation by the FDA may not lead to a faster regulatory review or approval process and, in any event, does not assure FDA approval of our product candidates.
If the FDA determines that a product candidate offers major advances in treatment or provides a treatment where no adequate therapy exists, the FDA may designate the product candidate for priority review. A priority review designation means that the goal for the FDA to review an application is six months, rather than the standard review period of ten months. Because the FDA designated ridinilazole as a qualified infectious disease product, or QIDP, ridinilazole also will receive priority review. We may also request priority review for ezutromid or other future product candidates. The FDA has broad discretion with respect to whether or not to grant priority review status to a product candidate, so even if we believe a particular product candidate is eligible for such designation or status, the FDA may decide not to grant it. Moreover, a priority review designation does not necessarily mean a faster regulatory review process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Receiving priority review from the FDA does not guarantee approval within the six-month review cycle or thereafter.
We may not be able to obtain orphan drug exclusivity for our product candidates. If our competitors are able to obtain orphan drug exclusivity for their products that are the same drug as our product candidates, or can be classified as a similar medicinal product within the meaning of E.U. law, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.
Regulatory authorities in some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as orphan drugs. The FDA has granted orphan drug designation to ezutromid for the treatment of DMD, and the EMA has designated ezutromid as an orphan medicinal product. Generally, if a product with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of market exclusivity, which, subject to certain exceptions, precludes the EMA from accepting another marketing application for a similar medicinal product or the FDA from approving another marketing application for the same drug for the same indication for that time period. The applicable market exclusivity period is seven years in the United States and ten years in the European Union. The E.U. exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation, including if the drug is sufficiently profitable so that market exclusivity is no longer justified.
In the European Union, a “similar medicinal product” is a medicinal product containing a similar active substance or substances as contained in a currently authorized orphan medicinal product, and which is intended for the same therapeutic indication. For a drug such as ezutromid, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use. Obtaining orphan drug exclusivity for ezutromid for DMD, both in the United States and in Europe, may be important to the product candidate’s success. If a competitor obtains orphan drug exclusivity for and approval of a product with the same indication as ezutromid before we do and if the competitor’s product is the same drug or a similar medicinal product as ours, we could be excluded from the market.
Moreover, even if we obtain orphan drug exclusivity for ezutromid for DMD, we may not be able to maintain it. For example, if a competitive product that is the same drug or a similar medicinal product as our product candidate is shown to be clinically superior to our product candidate, any orphan drug exclusivity we have obtained will not block the approval of such competitive product. In addition, orphan drug exclusivity will not prevent the approval of a product that is the same drug as our product candidate if the FDA finds that we cannot assure the availability of sufficient quantities of the drug to meet the needs of the persons with the disease or condition for which the drug was designated. Finally, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different products can be approved for the same condition.
On August 3, 2017, the U.S. Congress passed the FDA Reauthorization Act of 2017, or FDARA. FDARA, among other things, codified the FDA’s pre-existing regulatory interpretation, to require that a drug sponsor demonstrate the clinical superiority of an orphan drug that is otherwise the same as a previously approved drug for the same rare disease in order to receive orphan drug exclusivity. The new legislation reverses prior precedent holding that the Orphan Drug Act unambiguously requires that the FDA recognize the orphan exclusivity period regardless of a showing of clinical superiority. The FDA may further reevaluate the Orphan Drug Act and its regulations and policies. We do not know if, when, or how the FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business could be adversely impacted.
Although the FDA has designated ezutromid for the treatment of DMD as a rare pediatric disease, that designation will not expedite approval of ezutromid nor will it ensure that we receive a Priority Review Voucher if ezutromid is approved by the FDA for the treatment of DMD.
Under the Rare Pediatric Disease Priority Review Voucher program, a sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher, which can be redeemed to receive a priority review of a subsequent marketing application for a different product. The Priority Review Voucher is requested at the time of the marketing application and awarded upon approval of the product. The voucher may only be used once, but may be sold or transferred an unlimited number of times.

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In September 2016, the FDA notified us that we obtained rare pediatric disease designation for ezutromid for the treatment of DMD. The FDA’s rare pediatric disease designation gives us the potential to receive a Priority Review Voucher if ezutromid receives regulatory approval. Under the 21st Century Cures Act, the Rare Pediatric Disease Priority Review Voucher program was reauthorized until 2020. However, if a drug is designated before October 1, 2020, it is eligible to receive a voucher if approved before October 2022. As a result, unless the program is further extended, we will not receive a Priority Review Voucher if ezutromid is approved after October 2022. Moreover, even if we do receive a voucher, it may not be used to secure priority review of ezutromid for the treatment of DMD since it would only be issued upon approval of that product.
The efforts of the Administration to pursue regulatory reform may limit the FDA’s ability to engage in oversight and implementation activities in the normal course, and that could negatively impact our business.
The Trump Administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. On January 30, 2017, President Trump issued an executive order, applicable to all executive agencies, including the FDA, that requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This executive order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the executive order requires agencies to identify regulations to offset any incremental cost of a new regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within the Office of Management and on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
Our relationships with customers, healthcare providers and professionals and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates, including ezutromid or ridinilazole, for which we obtain marketing approval. Our future arrangements with customers, healthcare providers and professionals and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include, and are not limited to, the following:
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The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federally funded healthcare programs such as Medicare and Medicaid. This statute has been broadly interpreted to apply to manufacturer arrangements with prescribers, purchasers and formulary managers, among others. Several other countries, including the United Kingdom, have enacted similar anti-kickback, fraud and abuse, and healthcare laws and regulations.
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The federal False Claims Act imposes civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. The government and qui tam relators have brought False Claims Act actions against pharmaceutical companies on the theory that their practices have caused false claims to be submitted to the government. There is also a separate false claims provision imposing criminal penalties.
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The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
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HIPAA also imposes criminal liability for knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

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The federal Physician Sunshine Act requirements under the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, referred to together as the Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to payments and other transfers of value made to or at the request of covered recipients, such as physicians and teaching hospitals, and physician ownership and investment interests in such manufacturers. Payments made to physicians and research institutions for clinical trials are included within the ambit of this law.
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Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures. Additionally, some state and local laws require the registration of pharmaceutical sales representatives in the jurisdiction.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. Exclusion, suspension and debarment from government funded healthcare programs would significantly impact our ability to commercialize, sell or distribute any drug. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Current and future legislation may increase the difficulty and cost for us and any future collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the United States and some foreign jurisdictions, there have been and continue to be a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability of any future collaborators, to profitably sell any products for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any future collaborators, may receive for any approved products.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA. Among the provisions of the ACA of potential importance to our business and our product candidates are the following:
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an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;
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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
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expansion of healthcare fraud and abuse laws, including the civil False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;
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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70% starting January 1, 2019) point-of-sale discounts off negotiated prices;
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extension of manufacturers’ Medicaid rebate liability;
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expansion of eligibility criteria for Medicaid programs;
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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
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new requirements to report certain financial arrangements with physicians and teaching hospitals;
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a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

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In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments to providers of up to 2% per fiscal year that started in 2013 and, due to subsequent legislative amendments to the statute, will stay in effect through 2027 unless additional congressional action is taken, and the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used. Further, there have been several recent U.S. congressional inquiries and proposed state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products.
We expect that these healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any approved product and/or the level of reimbursement physicians receive for administering any approved product we might bring to market. Reductions in reimbursement levels may negatively impact the prices we receive or the frequency with which our products are prescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.
With enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise. Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. Further, each chamber of the Congress has put forth multiple bills designed to repeal or repeal and replace portions of the ACA. Although none of these measures has been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the ACA. The Congress will likely consider other legislation to replace elements of the ACA, during the next Congressional session.
The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In October 2017, the President signed a second Executive Order allowing for the use of association health plans and short-term health insurance, which may provide fewer health benefits than the plans sold through the ACA exchanges. At the same time, the Administration announced that it will discontinue the payment of cost-sharing reduction, or CSR, payments to insurance companies until Congress approves the appropriation of funds for such CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. A bipartisan bill to appropriate funds for CSR payments was introduced in the Senate, but the future of that bill is uncertain. We will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on our business.
The costs of prescription pharmaceuticals has also been the subject of considerable discussion in the United States, and members of Congress and the Administration have stated that they will address such costs through new legislative and administrative measures. To date, there have been several recent U.S. congressional inquiries and proposed and enacted state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

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Legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and any future collaborators to more stringent product labeling and post-marketing testing and other requirements.
In the European Union, similar political, economic and regulatory developments may affect our ability to profitably commercialize our products. In addition to continuing pressure on prices and cost containment measures, legislative developments at the European Union or member state level may result in significant additional requirements or obstacles that may increase our operating costs.
We are subject to anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect our business, results of operations and financial condition.
Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or Bribery Act, the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business and may do business in the future. The Bribery Act, FCPA and these other laws generally prohibit us, our officers, and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We may in the future operate in jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we may participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.
There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by U.K., U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.
Risks Related to Employee Matters and Managing Growth
Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the principal members of our executive and scientific teams, including Glyn Edwards, our Chief Executive Officer, Erik Ostrowski, our Chief Financial Officer, Dr. David Roblin, our Chief Operating Officer, Chief Medical Officer and President of Research and Development, Dr. Jonathon Tinsley, our Chief Scientific Officer, DMD, and Dr. Richard Vickers, our Senior Vice President, Anti-Infectives. Although we have formal employment agreements with each of our executive officers, these agreements do not prevent our executives from terminating their employment with us at any time. We do not maintain “key person” insurance on any of our executive officers. The unplanned loss of the services of any of these persons could materially impact the achievement of our research, development and commercialization objectives.
Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel, including in the United States where we plan to continue to expand our physical presence, will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous biotechnology and pharmaceutical companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

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We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA or Office of Inspector General regulations or similar regulations of comparable non-U.S. regulatory authorities, provide accurate information to the FDA or comparable non-U.S. regulatory authorities, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable non-U.S. regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Similar employee fraud or misconduct could occur with respect to reimbursement requests and other reports we are required to submit to BARDA. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation, or a request for the reimbursement of expenses that were not incurred, which could cause BARDA to terminate our contract with them. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, standards or 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 and results of operations, including the imposition of significant fines or other sanctions.
Risks Related to Ownership of the American Depositary Shares and our Ordinary Shares
The prices of the ADSs and our ordinary shares may be volatile and fluctuate substantially, which could result in substantial losses for holders of the ADSs and our ordinary shares.
The market prices of the ADSs on the Nasdaq Global Market and of our ordinary shares on AIM may be volatile and fluctuate substantially. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, holders of the ADSs and our ordinary shares may not be able to sell their ADSs or ordinary shares at or above the price at which they were purchased. The market price for the ADSs and ordinary shares may be influenced by many factors, including:
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the success of competitive products or technologies;
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results of clinical trials of ezutromid, ridinilazole and any other future product candidate that we develop;
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results of clinical trials of product candidates of our competitors;
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changes or developments in laws or regulations applicable to ezutromid and ridinilazole and any other future product candidates that we develop;
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our entry into, and the success of, any collaboration agreements with third parties;
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the operation of our contract with BARDA, and whether BARDA elects to pursue its option work segments beyond the base period;
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developments or disputes concerning patent applications, issued patents or other proprietary rights;
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the recruitment or departure of key personnel;
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the level of expenses related to any of our product candidates or clinical development programs;
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the results of our efforts to discover, develop, acquire or in-license additional product candidates, products or technologies;
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
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variations in our financial results or those of companies that are perceived to be similar to us;

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changes in the structure of healthcare payment systems;
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market conditions in the biotechnology and pharmaceutical sectors;
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general economic, industry and market conditions;
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the trading volume of ADSs on the Nasdaq Global Market and of our ordinary shares on AIM; and
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the other factors described in this “Risk Factors” section.
The dual listing of our ordinary shares and the ADSs may adversely affect the liquidity and value of the ADSs.
The ADSs are traded on the Nasdaq Global Market, and our ordinary shares are listed on AIM. The dual listing of our ordinary shares and the ADSs may dilute the liquidity of these securities in one or both markets and may adversely affect the maintenance of an active trading market for the ADSs in the United States. The price of the ADSs could also be adversely affected by trading in our ordinary shares on AIM. Although our ordinary shares are currently listed on AIM, we may decide at some point in the future to delist our ordinary shares from AIM, and our ordinary shareholders may approve such delisting. We cannot predict the effect such delisting of our ordinary shares on AIM would have on the market price of the ADSs on the Nasdaq Global Market.
Securities traded on AIM may carry a higher risk than shares traded on other exchanges that may impact the value of your investment.
Our ordinary shares are currently traded on AIM. Investment in equities traded on AIM is perceived by some to carry a higher risk than an investment in equities quoted on exchanges with more stringent listing requirements, such as the London Stock Exchange, New York Stock Exchange or the Nasdaq Stock Market. This is because AIM imposes less stringent corporate governance and ongoing reporting requirements than those other exchanges. In addition, AIM requires only semi-annual, rather than quarterly, financial reporting. You should be aware that the value of our ordinary shares may be influenced by many factors, some of which may be specific to us and some of which may affect AIM-listed companies generally, including the depth and liquidity of the market, our performance, a large or small volume of trading in our ordinary shares, legislative changes and general economic, political or regulatory conditions, and that the prices may be volatile and subject to extensive fluctuations. Therefore, the market price of our ordinary shares underlying the ADSs may not reflect the underlying value of our company.
Substantial future sales of our ordinary shares or the ADSs in the public market, or the perception that these sales could occur, could cause the price of the ADSs to decline significantly, even if our business is doing well.
Sales of a substantial number of our ordinary shares or ADSs in the public market could occur at any time. These sales, or the perception in the market that these sales could occur, could cause the market price of the ADSs and our ordinary shares to decline. Other than the 2,934,272 ordinary shares we issued in connection with our acquisition of Discuva, which are subject to a lock-up restriction expiring on September 23, 2018 and an orderly sale arrangement limiting the sale of such ordinary shares during the twelve-month period following the expiration of such lock-up restriction, and the 2,083,000 ordinary shares purchased by one of our principal shareholders in our March 2018 placement of ordinary shares in Europe under Regulation S of the Securities Act of 1933, the ordinary shares held by our major shareholders are available for sale and are not subject to contractual and legal restrictions on resale. If any of our directors, officers or major shareholders seek to sell substantial amounts of ADSs or ordinary shares, particularly if these sales are in a rapid or disorderly manner, or other investors perceive that these sales could occur, the market price of the ADSs and our ordinary shares could decrease significantly.
Holders of ADSs may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise their right to vote.
Except as provided in the deposit agreement relating to the ADSs, holders of the ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced by the ADSs. Holders of the ADSs will have the right to instruct the depositary with respect to the voting of the ordinary shares represented by the ADSs. If we tell the depositary to solicit your voting instructions, the depositary is required to endeavor to carry out your instructions. If we do not tell the depositary to solicit your voting instructions (and we are not required to do so), you can still send instructions, and, in that case, the depositary may, but is not required to, carry out those instructions. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

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As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the Securities and Exchange Commission than U.S. companies. This may limit the information available to holders of the ADSs.
We are a “foreign private issuer,” as defined in the rules and regulations of the Securities and Exchange Commission, or the SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for public companies organized in the United States.
As a foreign private issuer, we will continue to file an annual report on Form 20-F within four months of the close of each fiscal year ending January 31 and reports on Form 6-K relating to certain material events promptly after we publicly announce these events. However, because of the above exemptions for foreign private issuers, our shareholders will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
As a foreign private issuer, we are not subject to certain Nasdaq corporate governance rules applicable to public companies organized in the United States.
We rely on a provision in the Nasdaq Stock Market’s Listed Company Manual that allows us to follow English company law in general and the U.K. Companies Act 2006 in particular with regard to certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on the Nasdaq Stock Market.
For example, we are exempt from regulations of the Nasdaq Stock Market that require listed companies organized in the United States to:
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have a majority of the board of directors consist of independent directors;
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require non-management directors to meet on a regular basis without management present;
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adopt a code of conduct and promptly disclose any waivers of the code for directors or executive officers that should address certain specified items;
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have an independent compensation committee;
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have an independent nominating committee;
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solicit proxies and provide proxy statements for all shareholder meetings;
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review related party transactions; and
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seek shareholder approval for the implementation of certain equity compensation plans and issuances of ordinary shares.
As a foreign private issuer, we are permitted to follow home country practice in lieu of the above requirements. Accordingly, holders of the ADSs and our ordinary shares may not have the same protections afforded to shareholders of companies that are subject to these Nasdaq Stock Market requirements.
In accordance with our Nasdaq Stock Market listing, our Audit Committee is required to comply with the provisions of Section 301 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and Rule 10A-3 of the Exchange Act, both of which are also applicable to U.S. companies listed on the Nasdaq Stock Market. Because we are a foreign private issuer, however, our Audit Committee is not subject to additional requirements of the Nasdaq Stock Market applicable to listed U.S. companies, including an affirmative determination that all members of the Audit Committee are “independent,” using more stringent criteria than those applicable to us as a foreign private issuer.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As a “foreign private issuer” we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under SEC rules, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on July 31, 2018.

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In the future, we would lose our foreign private issuer status if a majority of our ordinary shares (including those represented by ADSs) are owned by U.S. shareholders and a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under applicable U.S. securities laws as a U.S. domestic issuer may be significantly higher than our current regulatory and compliance costs. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. For example, the annual report on Form 10-K requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus, equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the annual report on Form 20-F permits foreign private issuers to disclose compensation information on an aggregate basis. We will also have to report our results under U.S. Generally Accepted Accounting Principles, rather than under International Financial Reporting Standards, as a domestic registrant. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with corporate governance practices required for U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements of the Nasdaq Stock Market that are available to foreign private issuers.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make the ADSs less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company until January 31, 2021, or such earlier time that we are no longer an emerging growth company. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
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not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
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reduced disclosure obligations regarding executive compensation; and
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exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We expect to continue to take advantage of some or all of the available exemptions. We cannot predict whether investors will find the ADSs less attractive if we rely on these exemptions. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the market price of the ADSs may be more volatile.
In addition, the JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We incur increased costs as a result of operating as a company with ADSs that are publicly traded in the United States, and our management is now required to devote substantial time to new compliance initiatives.
As a company with ADSs that are publicly traded in the United States, and particularly after we are no longer an “emerging growth company,” we have incurred and will continue to incur significant legal, accounting and other expenses that we did not previously incur. In addition, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
However, for as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies as described in the preceding risk factor. We may remain an emerging growth company until January 31, 2021, although if the market value of our share capital held by non-affiliates exceeds $700 million as of any July 31 before that time or if we have annual gross revenues of $1.07 billion or more in any fiscal year, we would cease to be an emerging growth company as of January 31 of the applicable year. We also would cease to be an emerging growth company if we issue more than $1.0 billion of non-convertible debt over a three-year period.

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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of the ADSs.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or Section 404, or any subsequent testing by our independent registered public accounting firm, as and when required, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of the ADSs.
Pursuant to Section 404, we are required to furnish a report by our management on our internal control over financial reporting. However, as an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm until we are no longer an emerging growth company. To achieve compliance with Section 404 within the prescribed period, we are engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
We cannot assure you that we will not be classified as a passive foreign investment company for any taxable year, which may result in adverse U.S. federal income tax consequences to U.S. holders.
Based on our estimated gross income, the average value of our gross assets and the nature of our business, taking into account the market price of the ADSs, we do not believe that we were a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our tax year ended January 31, 2018 and do not expect to be a PFIC during our tax year ending January 31, 2019. A corporation organized outside the United States generally will be classified as a PFIC for U.S. federal income tax purposes (1) in any taxable year in which at least 75% of its gross income is passive income or on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income and (2) as to a given holder who was a holder in such year and regardless of such corporation’s income or asset composition in any subsequent taxable year unless, as to that holder, certain elections are made that can entail substantial tax costs to that holder. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. Our status in any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. The market value of our assets may be determined in large part by reference to the market price of the ADSs and our ordinary shares, which fluctuate and which may fluctuate considerably given that market prices of biotechnology companies have been especially volatile. If we were to be treated as a PFIC for any taxable year during which a U.S. holder held the ADSs, however, certain adverse U.S. federal income tax consequences could apply to the U.S. holder. See “Item 10.E Taxation.”
U.S. investors may have difficulty enforcing civil liabilities against us, our directors or members of senior management and the experts named in this Annual Report.
Our directors, certain members of our senior management and some of the experts named in this Annual Report are non-residents of the United States, and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible to serve process on such persons or us in the United States or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. Further, there is doubt as to whether English courts would enforce certain civil liabilities under U.S. securities laws pursuant to judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in the United Kingdom will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and the United Kingdom do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.

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The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated under U.K. law. The rights of holders of ordinary shares and, therefore, certain of the rights of holders of ADSs, are governed by U.K. law, including the provisions of the Companies Act 2006, and by our Articles of Association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations.
Holders of ordinary shares and ADSs may not receive a return on their ordinary shares or ADSs other than through the sale of their ordinary shares or ADSs.
Under current U.K. law, a company’s accumulated realized profits must exceed its accumulated realized losses (on a non-consolidated basis) before dividends can be paid. Therefore, we must have distributable profits before issuing a dividend. We have not paid dividends in the past on our ordinary shares. We intend to retain earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Accordingly, other than through the sale of the ADSs or our ordinary shares, holders of such securities are unlikely to receive a return in the foreseeable future.
Holders of ADSs may not receive distributions on our ordinary shares represented by the ADSs or any value for them if it is illegal or impractical to make them available to such holders.
The depositary for the ADSs has agreed to pay to holders of the ADSs or distribute the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. Holders of ADSs will receive these distributions in proportion to the number of our ordinary shares such ADSs represent. However, in accordance with the limitations set forth in the deposit agreement, it may be unlawful or impractical to make a distribution available to holders of the ADSs. We have no obligation to take any other action to permit the distribution of the ADSs, ordinary shares, rights or anything else to holders of the ADSs. This means that holders of the ADSs may not receive the distributions we make on our ordinary shares or any value from them if it is unlawful or impractical to make them available to such holders. These restrictions may have a material adverse effect on the value of the ADSs.
Our executive officers, directors and principal shareholders maintain the ability to control or significantly influence all matters submitted to stockholders for approval.
As of April 1, 2018, our executive officers, directors and principal shareholders beneficially owned, in the aggregate, ordinary shares and ADSs representing approximately 33.17% of our outstanding share capital. As a result, if these shareholders were to choose to act together, they would be able to control or significantly influence all matters submitted to our shareholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control or significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other holders of ADSs and ordinary shares may desire.
In addition, and in accordance with the terms of our articles of association, our board maintains a classified board structure such that not all members of the board are elected at one time. All of our directors are subject to election by our shareholders at the first annual general meeting after their appointment to our board and to re-election by our shareholders at least once every three years thereafter. Because our board of directors is responsible for appointing the members of our management team, this structure may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors.
If equity research analysts stop publishing research or reports about our business or if they issue unfavorable commentary or downgrade the ADSs or our ordinary shares, the prices of the ADSs or our ordinary shares could decline.
The trading market for the ADSs and our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of the ADSs or our ordinary shares could decline if one or more equity research analysts downgrades such securities or if analysts issue other unfavorable commentary about us or our business. In addition, if one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading prices and trading volumes of the ADS and our ordinary shares to decline.
We are exposed to risks related to currency exchange rates.
We conduct a significant portion of our operations outside of the United Kingdom. Because our financial statements are presented in pounds sterling, changes in currency exchange rates have had and could have a significant effect on our operating results when our operating results are translated into U.S. dollars. Exchange rate fluctuations between local currencies and the pound sterling create risk in several ways, including the following: weakening of the pound sterling may increase the pound sterling cost of overseas research and development expenses and the cost of sourced product components outside the United Kingdom; strengthening of the pound sterling may decrease the value of our revenues denominated in other currencies; the exchange rates on non-sterling transactions and cash deposits can distort our financial results; and commercial pricing and profit margins are affected by currency fluctuations.

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We have broad discretion in the use of our cash and cash equivalents and may not use them effectively.
Our management has broad discretion in the use of our cash and cash equivalents and could spend our cash in ways that do not improve our results of operations or enhance the value of the ADSs and ordinary shares. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the market price of the ADSs and ordinary shares to decline and delay the development of our product candidates.
Item 4: Information on the Company
A. History and Development of the Company
We were founded in 2003 and are a public limited company incorporated under the laws of England and Wales with the Registrar of Companies of England and Wales, United Kingdom. Our principal office, which we moved to in March 2017, is located at 136a Eastern Avenue, Milton Park, Abingdon, Oxfordshire, OX14 4SB, and our telephone number is +(44) 1235 443 939. Our U.S. operations are conducted by our wholly owned subsidiary Summit Therapeutics Inc., a Delaware corporation. Our ordinary shares have traded on AIM, which is a sub-market of the London Stock Exchange, since October, 2004, under the symbol “SUMM” and our American Depositary Shares have traded on the Nasdaq Global Market since March 2015, under the symbol “SMMT.”
Our website address is www.summitplc.com. The information contained on, or that can be accessed from, our website does not form part of this Annual Report. Our agent for service of process in the United States is C T Corporation System, 111 Eighth Avenue, New York, New York 10011.
In the three-year period ended January 31, 2018, we have invested a total of £0.8 million in equipment and facilities.

B. Business
Overview
We are a biopharmaceutical company focused on the discovery, development and commercialization of novel medicines for indications for which there are no existing or only inadequate therapies. Our focus is on rare diseases and infectious diseases. We are conducting clinical programs focused on the genetic disease Duchenne muscular dystrophy, or DMD, and the infectious disease Clostridium difficile infection, or CDI.
Duchenne Muscular Dystrophy
Our lead DMD product candidate is ezutromid (formerly SMT C1100), an orally administered small molecule. We are conducting a Phase 2 open label, multi-center, clinical trial of ezutromid in patients with DMD. This trial is designed to evaluate the potential benefits of longer-term dosing of ezutromid by measuring a number of endpoints related to muscle health and muscle function, along with monitoring the safety and tolerability of long-term exposure to ezutromid. We refer to this Phase 2 clinical trial as PhaseOut DMD, a Phase 2 proof of concept clinical trial. On January 25, 2018, we announced interim data from the first 24 weeks of treatment in PhaseOut DMD. On February 26, 2018, we announced further interim data from the first 24-weeks of treatment in PhaseOut DMD. We are accelerating preparatory activities for a placebo controlled clinical trial for ezutromid, and for a potential regulatory filing of ezutromid based on the 48-week results from PhaseOut DMD. We expect to report top-line data from the full 48-week trial in the third quarter of 2018.
Our DMD program is based on utrophin modulation, an approach to treating DMD that is independent of the underlying mutations in the dystrophin gene that cause the disease. We are a leader in the field of utrophin modulation, an approach that we believe has the potential to address the entire population of DMD patients. Other DMD approaches, such as exon-skipping and suppression of nonsense mutations, only address subsets of this population. The U.S. Food and Drug Administration, or the FDA, has granted orphan drug designation to ezutromid for the treatment of DMD, and the European Medicines Agency, or the EMA, has designated ezutromid as an orphan medicinal product. The FDA has also granted fast track designation and rare pediatric disease designation to ezutromid. In recent public statements, the FDA has stated that it recognizes the unmet medical need for DMD treatments, the devastating nature of the disease for patients and their families and the urgency to make new treatments available.
In October 2016, we entered into an exclusive license and collaboration agreement with Sarepta Therapeutics, Inc., or Sarepta, pursuant to which we granted Sarepta an exclusive license to commercialize our utrophin modulator pipeline, including ezutromid, in the European Union, Iceland, Norway, Switzerland, Turkey and the Commonwealth of Independent States, with an option to expand its commercial rights to include specified countries in Central and South America. We have retained commercialization rights to our utrophin modulator pipeline in the rest of the world.

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DMD is one of the most common and the most severe form of muscular dystrophy. DMD predominantly affects males and results in the progressive wasting of muscles throughout the body. The disease typically results in death by the time DMD patients reach their late twenties. Individuals with DMD are unable to produce dystrophin, a protein essential for maintaining healthy muscle function.
Utrophin is a naturally occurring protein that is functionally and structurally similar to dystrophin. Utrophin plays an active role in the development of new muscle fibers, in particular during fetal development, and in repairing damaged muscle fibers. Utrophin production is down regulated, or switched off, in the late stages of gestation and can switch on and off as needed to repair damaged muscle. We believe that our approach of utrophin modulation can be used to maintain the production of utrophin in all skeletal muscles, including the diaphragm, and the heart to compensate for the lack of dystrophin in DMD patients, thereby restoring and maintaining healthy muscle function. This approach to treating DMD is independent of the underlying dystrophin gene mutation, and we believe has the potential to treat the entire population of DMD patients.
To date, we have conducted four Phase 1 clinical trials of ezutromid. We completed a Phase 1 clinical trial in healthy volunteers in 2012, a Phase 1b clinical trial in DMD patients in May 2014 and another Phase 1b clinical trial in DMD patients in September 2015. In addition, we completed a Phase 1 clinical trial that evaluated a new formulation of ezutromid, which we refer to as the “F6” formulation, in healthy volunteers and DMD patients in August 2016. The second Phase 1b clinical trial of ezutromid in DMD patients evaluated another clinical formulation of ezutromid, which we refer to as the "F3" formulation, and the impact of diet on plasma levels of the drug. We refer to this second Phase 1b trial as our Phase 1b modified diet trial. In all of our Phase 1 trials, ezutromid was generally well tolerated at all doses tested.
We are also currently pursuing a broad utrophin modulator technology program to develop future generation utrophin modulator product candidates. This development is being undertaken as part of a strategic alliance with research groups at the University of Oxford.
Clostridium difficile Infection
Our lead CDI product candidate is ridinilazole (formerly SMT19969), an orally administered small molecule antibiotic. We reported positive top-line results from a Phase 2 clinical trial of ridinilazole in November 2015. Ridinilazole is designed to selectively target Clostridium difficile bacteria without causing collateral damage to the gut flora and thereby reduce CDI recurrence rates, which is the key clinical issue in this disease. The FDA has designated ridinilazole as a qualified infectious disease product, or QIDP, and the FDA granted ridinilazole fast track status. In 2013, the Centers for Disease Control and Prevention of the U.S. Department of Health and Human Services, or CDC, highlighted CDI as one of three pathogens that pose an immediate public health threat and require urgent and aggressive action.
CDI is a bacterial infection of the colon that produces toxins causing inflammation of the colon and severe diarrhea. CDI can also result in more serious disease complications, including pseudomembranous colitis, bowel perforation, toxic megacolon and sepsis. CDI typically develops following the use of broad spectrum antibiotics that can cause widespread damage to the natural gut flora and allow overgrowth of Clostridium difficile bacteria. CDI represents a serious healthcare issue in hospitals, long-term care homes and, increasingly, in the wider community. A study published in 2012 in Clinical Infectious Diseases, a peer reviewed journal published by the Infectious Diseases Society of America, estimated that CDI-related acute care costs total $4.8 billion per year in the United States alone.
We completed a Phase 1 clinical trial of ridinilazole in healthy volunteers in 2013. In this Phase 1 clinical trial, ridinilazole was highly selective for total clostridia bacteria with minimal impact on the other gut flora of subjects, which was consistent with the results of our preclinical studies of ridinilazole. In November 2015, we reported top-line results from our double blind, randomized, active controlled Phase 2 clinical trial that evaluated ridinilazole compared to the current standard of care, vancomycin, for the treatment of CDI. The Phase 2 clinical trial exceeded its primary endpoint of non-inferiority, with ridinilazole achieving statistical superiority over vancomycin in sustained clinical response, or SCR. The statistical superiority was driven by a large numerical reduction in recurrent disease compared with vancomycin. We subsequently reported that data from our Phase 2 clinical trial of ridinilazole showed ridinilazole to be highly preserving of the gut microbiome compared to patients who received vancomycin and experienced substantial damage to their gut microbiome that for many patients persisted during the 30-day post-treatment period. Ridinilazole was well tolerated at all doses tested in both Phase 1 and Phase 2 clinical trials. In September 2017, we reported top-line data from our exploratory open label, active controlled Phase 2 clinical trial evaluating ridinilazole compared to fidaxomicin. In the trial, ridinilazole preserved the gut microbiome of CDI patients to a greater extent than fidaxomicin, achieving a key secondary endpoint. The primary endpoint was safety with no new or unexpected safety signals identified with ridinilazole being well tolerated.

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We expect to commence Phase 3 clinical trials of ridinilazole for CDI in the first quarter of 2019, and we are currently undertaking activities to prepare ridinilazole for these trials. We expect the program will consist of two Phase 3 clinical trials comparing ridinilazole to vancomycin with the primary endpoint in both trials being superiority in SCR. We also plan to include other endpoints, including ones related to health economic outcome measures.
We have been awarded a contract from Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. government's Department of Health and Human Services' Office of the Assistant Secretary for Preparedness and Response worth up to $62 million that will, in part, fund our planned Phase 3 clinical trials. We have also received $2.5 million upfront as part of our license and commercialization agreement with Eurofarma Laboratórios S.A., or Eurofarma, and are eligible to receive an additional $3.75 million in development milestones upon the achievement of staged patient enrollment targets in the planned Phase 3 clinical trials of ridinilazole. We continue to explore various options to maximize the value of ridinilazole, including third party collaborations and securing additional non-dilutive funding from government entities and philanthropic, non-government and not for profit organizations.

Infectious Disease Pipeline
Our goal is to build a franchise in the field of infectious diseases through the discovery and development of new mechanism antibiotics focused on treating patients with serious bacterial infections where there is a substantial unmet need and where we believe we have the ability to show advantages over current treatments. Our focus is on pathogens that are classed as representing serious healthcare threats. On December 23, 2017, we expanded our activities in the field of infectious diseases with the acquisition of Discuva Limited, a privately held U.K.-based company. Through this acquisition, we obtained a bacterial genetics-based platform that facilitates the discovery and development of new mechanism antibiotics. With this acquisition, we believe we are better placed to advance additional potential drug treatments for patients with serious bacterial infections. In March 2018, we unveiled a series of novel mechanism antibiotics identified using this platform that target gonorrhea. We expect to select a candidate to advance into IND enabling studies in the second half of 2018.

Our Product Development Pipeline
The following table summarizes our product development pipeline. We are also developing an earlier stage pipeline of future generation utrophin modulators for the treatment of DMD and antibiotic compounds for serious bacterial infections.
clostridiumdifficilepla01.jpg
*
We have granted Eurofarma an exclusive license to the commercial rights for ridinilazole in specified countries in South America, Central America and the Caribbean. We retain commercialization rights in the rest of the world.
†
We have granted Sarepta an exclusive license to the commercial rights for our utrophin modulator pipeline, including ezutromid, in the European Union, Iceland, Norway, Switzerland, Turkey and the Commonwealth of Independent States, with an option to expand its commercial rights to include specified countries in Central and South America. We retain commercialization rights in the rest of the world.

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Our Strategy
Our goal is to become a fully integrated biopharmaceutical company focused on the discovery, development and commercialization of novel medicines for indications for which there are no existing or only inadequate therapies, with a current focus on DMD and CDI. The key elements of our strategy to achieve this goal are:
Rapidly advance the development of our lead product candidates, ezutromid for DMD and ridinilazole for CDI.
We are focusing our resources and business efforts primarily on rapidly advancing the development of ezutromid for the treatment of DMD and ridinilazole for the treatment of CDI. We believe that there is significant market potential for each of these product candidates. We also believe that the orphan drug and fast track designations of ezutromid and the QIDP and fast track designations of ridinilazole may expedite the regulatory review process for each of these product candidates and potentially provide market protection benefits. We are currently conducting our PhaseOut DMD clinical trial. This Phase 2 clinical trial is evaluating the benefits of longer-term dosing of ezutromid by measuring a number of endpoints related to muscle health and muscle function, including distribution of utrophin protein in muscle fibers and levels of muscle fiber regeneration from muscle biopsies, changes in muscle inflammation and fat infiltration through the use of magnetic resonance parameters, the distance walked during the six minute walk test and the North Star Ambulatory Assessment, a multi-point test of motor functions. We reported 24-week biopsy data in January 2018 and reported additional findings in February 2018. These interim 24-week data showed ezutromid treatment resulted in an average increase in utrophin protein intensity, and a statistically significant decrease in muscle damage and inflammation as measured by biopsy and magnetic resonance. We are undertaking preparatory activities for a placebo controlled trial and a potential regulatory filing of ezutromid based on the 48-week results. We expect to report top-line 48 week data from PhaseOut DMD during the third quarter of 2018. We reported top-line data from our double blind, randomized, active controlled Phase 2 clinical trial that evaluated ridinilazole compared to vancomycin for the treatment of CDI in November 2015. The primary endpoint of the trial was exceeded with ridinilazole achieving statistical superiority over vancomycin in sustained clinical response, with this superiority being driven by a large numerical reduction in recurrent disease compared to vancomycin. We are undertaking activities required to advance ridinilazole into Phase 3 clinical trials and, as detailed below, are evaluating our options to maximize the commercial potential of ridinilazole.
Maintain and expand our leadership in the field of utrophin modulation and in the research and development of new mechanism antibiotics.
We are developing ezutromid as the first of a new class of drugs called utrophin modulators. Utrophin modulation is an approach to treating DMD that is independent of the underlying dystrophin gene mutation. Our co-founder and scientific advisor, Professor Kay Davies at the University of Oxford, discovered utrophin and then developed the concept of utilizing utrophin modulation as a treatment potentially applicable to all DMD patients. Our DMD program was founded to develop and commercialize drugs for DMD using this approach to treatment. We are applying, and seeking to enhance, our existing knowledge, experience and proprietary rights to maintain and expand our leadership in the field of utrophin modulation. In addition to the PhaseOut DMD clinical trial for ezutromid, we are also currently pursuing, in collaboration with the University of Oxford, a broad utrophin modulator technology program consisting of novel, future generation, small molecule utrophin modulators with potential new utrophin-related mechanisms. We are also developing ridinilazole as a novel mechanism antibiotic that is designed to selectively target Clostridium difficile bacteria without causing collateral damage to the gut flora and thereby reduce rates of CDI recurrence. We are seeking to apply our existing knowledge and experience to position ourselves as a leader in antibiotic research and development and generate a pipeline of new mechanism antibiotics that show clear advantages over current standard of care treatment. Our focus is on treating pathogens that have been recognized as posing urgent or serious healthcare threat. The discovery of new antibiotics is being supported by our genetics-based platform that was obtained as part of our acquisition of Discuva Limited.
Collaborate with Sarepta on the global research, development and commercialization of our utrophin modulator pipeline.
We entered into an exclusive license and collaboration agreement with Sarepta in October 2016 pursuant to which we granted Sarepta the exclusive right to commercialize products in our utrophin modulator pipeline in the European Union, Iceland, Norway, Switzerland, Turkey and the Commonwealth of Independent States, which we refer to as the licensed territory. Such products include ezutromid and our future generation of small molecule utrophin modulators, which we refer to collectively as the licensed products. We have agreed to collaborate with Sarepta on the research and development of the licensed products under a joint, global development plan through a joint steering committee. Sarepta has the final decision making authority with respect to commercialization decisions of the licensed products in the licensed territories. We are working with Sarepta to implement the global development plan and fulfill our respective contractual obligations under the terms of the license and collaboration agreement that includes research and development activities, sharing of global research and development costs from January 1, 2018, manufacture and supply of licensed product material, intellectual property, and commercialization activities.

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Commercialize ezutromid for DMD in the United States with our own specialty commercial team.
We hold exclusive commercialization rights for ezutromid for all indications in the United States. If ezutromid receives marketing approval, we intend to commercialize it initially in the United States with our own focused, specialized sales force that we plan to establish. We believe that medical specialists treating DMD are sufficiently concentrated that we will be able to effectively promote ezutromid with a targeted sales team in the United States and potentially other territories. We also believe that our relationships with patient advocacy groups will strengthen our ability to market ezutromid. We also plan to evaluate the potential for utilizing collaboration, distribution and other marketing arrangements with third parties to commercialize ezutromid in the jurisdictions where we retain commercial rights.
Maximize the commercial potential of ridinilazole.
We hold exclusive commercialization rights for ridinilazole for all indications in the United States and Europe. We entered into an exclusive license and commercialization agreement with Eurofarma in December 2017 pursuant to which we granted Eurofarma the exclusive right to commercialize ridinilazole in certain countries in South America, Central America and the Caribbean. We have also been awarded a contract from BARDA worth up to $62 million that will, in part, fund our planned Phase clinical trials of ridinilazole. We continue to evaluate our options to maximize the commercial opportunity for ridinilazole. We may seek additional third-party collaborators for the development and commercialization of ridinilazole in certain territories or potentially retain commercialization rights for ourselves. We are also exploring funding options from government entities and philanthropic, non-government and not for profit organizations. In this evaluation, we are considering factors such as the anticipated development costs required to achieve marketing approval, the sales and marketing resources required in each territory in which we receive approval, the relative size of the market opportunity in such territory, the particular expertise of the third party and the proposed financial terms of any arrangement with third party collaborators, government entities or philanthropic, non-government or not for profit organizations.
Seek additional governmental and other third party grants and support.
We have obtained development funding and other assistance from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups for our product candidates. For example, we have received grant funding and clinical trial support from Innovate UK and several DMD organizations, including groups based in the United States, such as the Muscular Dystrophy Association, Parent Project Muscular Dystrophy, Charley’s Fund, Cure Duchenne, Foundation to Eradicate Duchenne and the Nash Avery Foundation, and groups based in the United Kingdom, such as Joining Jack. The Wellcome Trust Limited provided funding for ridinilazole up until the completion of our Phase 2 proof of concept clinical trial and BARDA is providing funding that, in part, will support our planned Phase 3 clinical trials of ridinilazole. We plan to continue to encourage these types of organizations to provide additional funding and support for our development programs.
Duchenne Muscular Dystrophy Overview
Duchenne muscular dystrophy is one of the most common and the most severe form of muscular dystrophy. DMD is a fatal disease that results in progressive wasting of muscles throughout the body. DMD is caused by different genetic mutations affecting the dystrophin gene on the X-chromosome, and therefore predominately affects males. As a result of these genetic mutations, DMD patients are unable to produce dystrophin, a protein essential for maintaining healthy muscle function. Over time, the muscles of DMD patients deteriorate and are infiltrated by fat and scar tissue, which is referred to as fibrosis, leading to the loss of ambulation, loss of respiratory and cardiac function and ultimately death.
Based on prevalence data published in January 2018 by Orphanet, a publicly available reference portal for information on rare diseases and orphan drugs, we estimate that there are approximately 50,000 DMD patients in the developed world and 250,000 DMD patients globally. According to an article published in 2013 in the peer reviewed journal Muscle & Nerve, approximately one in every 5,000 males is born with DMD. All ethnic groups are generally susceptible to DMD at approximately the same rates. Approximately two-thirds of DMD cases are due to inherited mutations, with the remainder being the result of spontaneous mutations in the dystrophin gene in patients with no familial history of the disease.
DMD is typically diagnosed in patients who are between two and seven years of age. The onset of the physical symptoms can be difficult to recognize, but early indicators of disease due to muscle weakness include difficulty walking or jumping, frequent falling over and becoming fatigued more easily. A preliminary diagnosis is typically made by measuring blood plasma levels of the enzyme creatine kinase, or CK. CK levels in DMD children are often ten to 100 times higher than CK levels in non-DMD children. A diagnosis of DMD is then confirmed through genetic testing using blood cells or muscle biopsy. In the United States and Europe, there are a number of newborn screening studies that can diagnose DMD at birth, although these tests are not yet routinely performed.

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Initially, DMD affects the skeletal muscles in the arms, legs and trunk. By around 12 years of age, most DMD patients will need to use a wheelchair on a regular basis. Significant loss of skeletal muscle function takes place during the teenage years, and, while greater assistance is needed for activities involving arms, legs or trunk, most patients will retain use of their fingers, allowing them to write or use computers. Symptoms of scoliosis, or curvature of the spine, may also develop due to loss of trunk muscle function.
In the later stages of disease progression, life threatening heart and respiratory conditions become common. The function of the diaphragm and muscles responsible for the mechanical aspects of breathing deteriorates, leading to shortness of breath and build-up of fluid in the lungs and requiring ventilation at night and eventually on a 24-hour basis. DMD patients also develop cardiomyopathy, or enlarged hearts. The failure of the cardiac and respiratory systems typically leads to death by the time DMD patients reach their late twenties.
Current DMD Treatments and Development Approaches
There is currently no approved therapy for the treatment of DMD applicable to all DMD patients that seeks to alter the progression of the disease. Corticosteroids are prescribed to DMD patients from a young age to help treat symptoms of the disease. However, long-term use of corticosteroids is associated with severe side effects and concerns over weight gain. Other treatments to manage the symptoms of the disease include regular physiotherapy, surgery and mechanical support, such as wheelchairs and leg braces, and dietary supplements.
There are different approaches in development for the treatment of DMD, some of which seek to alter, slow or stop the progression of the disease by targeting the underlying genetic cause and others that seek to provide symptomatic relief. One disease modifying treatment for DMD is based on a scientific approach known as exon-skipping. Exons are organic molecules known as nucleotides within the DNA strand that the cellular machinery translates to make truncated but functional protein. In a sub-population of DMD patients, synthesis of the dystrophin protein is disrupted because of mutations that may be due, among other factors, to deleted exons. Exon-skipping technology seeks to allow the production of a truncated but still functional dystrophin protein. According to an article published in 2009 in the peer reviewed journal Human Mutation, skipping of the ten most common exons would treat in aggregate approximately 41% of all DMD patients. There is currently one approved exon-skipping treatment in the United States, called eteplirsen (Exondys 51™), which is being developed and commercialized by Sarepta. Eteplirsen received accelerated approval from the FDA in September 2016, and based on the size of the DMD population described in the aforementioned article in Human Mutation, it has the potential to treat approximately 13% of patients with DMD. We believe that there are additional exon-skipping therapies currently in clinical development to address additional exons and that these, in aggregate with eteplirsen, would treat less than one-third of all DMD patients. Another approach that seeks to alter the progression of the disease involves targeting the specific genetic mutations known as nonsense mutations. Nonsense mutations create a premature stop signal in the translation of the genetic code and prevent the production of functional dystrophin protein. There is currently one approved nonsense mutation treatment in Europe, called ataluren (Translarna™), which is being developed and commercialized by PTC Therapeutics Inc. Ataluren received conditional approval from the EMA in May 2014. DMD caused by nonsense mutations affects approximately 13% of all DMD patients. One other potential disease modifying treatment approach in development is gene therapy, which has the potential to address the genetic cause of DMD by using an adeno-associated virus to deliver a shortened, yet functional, version of the dystrophin or utrophin gene to a DMD patient. A number of other treatments being developed seek to alleviate the symptoms of DMD. These include promotion of muscle tissue growth based on myostatin inhibition, anti-inflammatory and anti-fibrotic drugs and treatments to improve cardiac and respiratory function.
The FDA recognizes the unmet medical need in DMD, the devastating nature of the disease for patients and their families and the urgency to make new treatments available. The FDA publicly stated in October 2014 that it remains committed to working with all companies to expedite the development and approval of safe and effective drugs to treat this disease. The Director of the FDA’s Center for Drug Evaluation and Research also stated in a speech in July 2014 that the agency was willing to explore the use of all potential pathways for approval of DMD drugs, including accelerated approval, as appropriate. In February 2018, the FDA issued guidance on developing drugs for the treatment of DMD and related dystrophinopathies that included information around the design of patient clinical trials, clinical trial endpoints and considerations pertaining to an accelerated approval pathway.

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Our Utrophin Modulation Approach for the Treatment of DMD
Our Approach
We believe that our approach of utilizing utrophin modulation for DMD has the potential to slow or stop the progression of DMD in all patients with the disease. Utrophin is a naturally occurring protein that is functionally and structurally similar to dystrophin. The aim of utrophin modulation is to maintain the production of full-length utrophin in all skeletal muscles, including the diaphragm, and the heart to compensate for the lack of dystrophin in DMD patients, thereby restoring and maintaining healthy muscle function. This approach to treating DMD is independent of the underlying dystrophin gene mutation. As illustrated in the figure below, we believe utrophin modulation has the potential to treat the entire population of DMD patients, unlike other DMD approaches that also seek to alter, slow or stop the progression of the disease but only address subsets of the total DMD population.

patienpopulationspotentially.jpg utropinmodulationa01.jpg
Further, we believe utrophin modulation could potentially be complementary to potential treatments for DMD based on other scientific approaches, including approaches that are focused on restoring dystrophin, such as exon-skipping and suppression of nonsense mutations. We also expect that utrophin modulation has the potential to benefit patients with Becker muscular dystrophy, a milder form of the disease in which the majority of patients produce low levels of shortened dystrophin.
The Role of Utrophin and Dystrophin in Muscle Fibers
Utrophin and dystrophin are structurally and functionally similar proteins that perform a critical role in maintaining the proper function of muscle fibers, although at different times and in different settings. The roles of utrophin and dystrophin depend on whether the muscle fibers are mature, in the development stage or in the process of being repaired and regenerated. As discussed below, dystrophin plays an active role in maintaining the function of mature muscle fibers, while utrophin plays an active role in the development of new muscle fibers and in repairing damaged muscle fibers.
Role of Dystrophin in Mature Muscle
Each muscle in the body is made up of bundles of thousands of muscle fibers. Dystrophin and a group of different proteins that bind to dystrophin, which are called the Dystrophin Associated Protein Complex, or DAPC, are located at specific sites along the entire length of the muscle cell membrane, referred to as the sarcolemma, of every muscle fiber. Dystrophin works by linking the actin cytoskeleton, which is a part of the muscle fiber’s contractile apparatus, to the DAPC in the sarcolemma. The DAPC, in turn, links the sarcolemma to the extracellular matrix, which binds the bundles of muscle fibers together. This link serves as a molecular shock absorber that helps to maintain stability and elasticity of muscle fibers during contraction and relaxation. In the absence of dystrophin, this linkage is lost and muscles become damaged, which leads to continual destructive rounds of muscle degeneration and regeneration and ultimately to progressive muscle wasting. The figure below depicts the DAPC and illustrates the role of dystrophin (or utrophin) and the other proteins that make up this complex.


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The Role of Dystrophin or Utrophin in the Associated Protein Complex

 roleofdystrophina01.jpg
Role of Utrophin in Developing Muscle
In both DMD patients and healthy individuals, utrophin and the proteins that comprise the DAPC are highly localized at specific sites along the length of muscle fibers during fetal development. Utrophin production is then down regulated, or switched off, in the late stages of gestation. In the normal muscle fiber of healthy individuals, the production of dystrophin begins to replace utrophin at these sites in the maturing muscle fiber, eventually fully replacing utrophin. In the muscle fiber of DMD patients, who are unable to produce functional dystrophin to substitute for the down regulating utrophin, these sites in the muscle fiber become unoccupied, which leads to muscle degeneration as muscles mature.
Role of Utrophin in Regenerating Muscle
In both DMD patients and healthy individuals, utrophin is localized to the neuromuscular junctions, which connect nerve fibers and muscles, and myotendinous junctions, which connect tendons and muscles. The other major role of utrophin in muscle fibers is to stabilize newly regenerating muscle fibers as part of the natural repair process. After a muscle fiber is damaged, utrophin production switches on as needed to repair the damaged region and then switches off following successful repair.

Role of Developmental Myosin
In DMD patients and healthy individuals, developing skeletal muscle express different forms of myosin, a protein that plays a role in the contraction of muscle fibers. Developmental myosins are transiently expressed during embryonic and fetal development and disappear shortly after birth when adult myosins are expressed to perform the same role. Developmental myosins are also re-expressed during muscle fiber repair and so provide a specific marker of muscle fiber regeneration. Patients with DMD have higher levels of developmental myosin due to their muscle fibers going through a continuous cycle of damage and repair caused by the absence of functional dystrophin protein, which means developmental myosin can be used as a biomarker of muscle fiber repair. For example, in validation studies patients with DMD exhibited higher levels of developmental myosin compared to patients with Becker muscular dystrophy, or BMD, a milder form of muscular dystrophy disease, with the lowest levels of developmental myosin seen in non-DMD and non-BMD muscle.
Expected Effect of Utrophin Modulation for DMD
We believe that our approach of utrophin modulation can be used to maintain the production of utrophin in maturing and mature muscle fibers and compensate for the lack of dystrophin in DMD patients, thereby restoring and maintaining healthy muscle function. If production of utrophin can be maintained and compensate for the lack of dystrophin then we believe that this would lead to a reduction in the cycle of muscle damage and repair as measured by the biomarker developmental myosin. The figure below illustrates the transition from utrophin to dystrophin production in the normal muscle fiber of a healthy individual, the effect of the lack of dystrophin production in the muscle fiber of a DMD patient and the expected effect of utrophin modulation in the muscle fiber of a DMD patient to compensate for the lack of dystrophin production.


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devregenaratingfiber.jpg
Origins of Our Utrophin Modulation Approach
Our co-founder and scientific advisor, Professor Kay Davies at the University of Oxford, discovered utrophin and then developed the concept of utilizing utrophin as a treatment potentially applicable to all DMD patients. Our DMD program was founded to develop and commercialize drugs for DMD using this approach to treatment. Professor Davies’ research group at the University of Oxford developed transgenic lines of an mdx mouse that were genetically engineered to continually express utrophin protein. The mdx mouse is a naturally occurring animal model that is dystrophin deficient and is the standard disease model for studies of DMD. In these experiments, the continued expression of utrophin, even at levels just above those in a normal mdx mouse, had a meaningful, positive effect on muscle performance.
Our utrophin modulation program uses small molecule drugs that are designed to achieve the same effect seen in the transgenic mdx mouse experiments and to continually express utrophin to protect muscle fibers against DMD.

Ezutromid Overview
Our most advanced utrophin modulator product candidate is ezutromid, an orally administered small molecule.
To date, we have conducted four Phase 1 clinical trials of ezutromid. We completed a Phase 1 clinical trial of ezutromid in healthy volunteers in 2012, a Phase 1b clinical trial of ezutromid in DMD patients in May 2014 and another Phase 1b clinical trial of ezutromid in DMD patients in September 2015. In addition, we completed a Phase 1 clinical trial evaluating a new formulation of ezutromid, which we refer to as the “F6” formulation, in healthy volunteers and DMD patients in August 2016. The second Phase 1b clinical trial of ezutromid in DMD patients evaluated another clinical formulation of ezutromid, which we refer to as the “F3” formulation, and the impact of diet on plasma levels of the drug. We refer to this second Phase 1b trial as our Phase 1b modified diet trial. Our Phase 1b modified diet trial met its primary objective with patients achieving plasma levels of ezutromid that may be sufficient to modulate the production of utrophin protein and possibly result in clinical benefit while following specific dietary guidance. In our Phase 1 clinical trial evaluating the F6 formulation of ezutromid, the evaluable patients who received the highest dose achieved an over six-fold increase in the average maximum plasma concentration level compared to the F3 formulation of ezutromid.
In all four Phase 1 clinical trials, ezutromid was generally well tolerated at all doses tested. One patient in the Phase 1 clinical trial of the F6 formulation of ezutromid exhibited changes in liver parameters and withdrew from the trial, despite showing no clinical symptoms. The findings were classified as a serious adverse event. No other serious adverse events reported in our Phase 1 clinical trials of ezutromid.

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We are conducting a Phase 2 clinical trial of ezutromid, which we refer to as PhaseOut DMD, in patients with DMD at trial sites in the United Kingdom and the United States. The PhaseOut DMD trial is evaluating the benefits of longer-term dosing of the F3 and F6 formulations of ezutromid by measuring a number of endpoints related to muscle health and muscle function, including distribution of utrophin protein in muscle fibers and levels of muscle fiber regeneration from muscle biopsies, changes in muscle inflammation and fat infiltration through the use of magnetic resonance, distance walked during a six minute walk test and the North Star Ambulatory Assessment. We completed enrollment for PhaseOut DMD in May 2017, with a total of 40 ambulatory boys between their fifth and tenth birthday enrolled. We reported 24-week interim data for PhaseOut DMD in January 2018 and February 2018 and expect to report top-line data from the full 48-week trial in the third quarter of 2018. At the end of 48-weeks of dosing, patients in PhaseOut DMD have the option to enroll in an extension phase and continue to be dosed with ezutromid. We expect that the extension phase will last until ezutromid either receives marketing approval in the relevant country or its development is discontinued.
We believe that the F3 and F6 formulations of ezutromid will be appropriate for administration to DMD patients, especially children.
The FDA has granted orphan drug designation to ezutromid for the treatment of DMD, and the EMA has designated ezutromid as an orphan medicinal product. In the United States, if a product with orphan designation receives FDA approval, the FDA will not approve a later product for the same indication that uses the same active ingredient for seven years, unless the later product is shown to be clinically superior. In the European Union, if an orphan medicinal product receives EMA approval, the EMA will not approve a later product for the same therapeutic indication and with the same method of action for ten years after the orphan medicinal product receives EMA approval, subject to certain exceptions, including if the later product demonstrates clinical superiority. The FDA has also granted ezutromid fast track designation and rare pediatric disease designation. Fast track designation provides companies with advantages such as opportunities for more frequent interactions with the FDA during all aspects of development, submission of a new drug application, or NDA, on a rolling basis, and eligibility for accelerated approval and priority review. With rare pediatric disease designation we could qualify for a priority review voucher upon the approval of ezutromid, which could be used for a subsequent marketing application or sold or transferred an unlimited number of times (although only used once).
Collaboration with Sarepta
In October 2016, we entered into an exclusive license and collaboration agreement with Sarepta. Under the terms of the agreement, we granted Sarepta the exclusive right to commercialize products in our utrophin modulator pipeline in the European Union, Switzerland, Norway, Iceland, Turkey and the Commonwealth of Independent States, which we refer to as the licensed territory. Such products include ezutromid and our pipeline of future generation small molecule utrophin modulators, which we refer to as the licensed products. We also granted Sarepta an option to expand the licensed territory to include specified countries in Central and South America. We retained commercialization rights in the rest of the world.
Under the terms of the license and collaboration agreement, we have received an aggregate of $62.0 million in payments from Sarepta, that comprised of an upfront payment of $40.0 million and a milestone payment of $22.0 million that we received following the first dosing of the last patient enrolled in our PhaseOut DMD clinical trial. In addition, we are eligible to receive future ezutromid-related development, regulatory and sales milestone payments totaling up to $500.0 million. We will also be eligible to receive development and sales milestone payments related to potential second generation and future generation utrophin modulator candidate(s). We are also eligible to receive escalating royalties ranging from a low to high teens percentage of net sales on a product-by-product basis in the licensed territories. If Sarepta elects to exercise its option for rights in specified countries in Central and South America, we would be entitled to additional fees, milestones and royalties.
We have agreed to collaborate with Sarepta on the research and development of licensed products under a joint, global development plan. Under the license and collaboration agreement, we were solely responsible for all research and development costs for the licensed products until December 31, 2017. Since January 1, 2018, we have been responsible for 55.0% of all global budgeted research and development costs related to the licensed products, and Sarepta has been responsible for 45.0% of such costs. Sarepta has final decision making authority with respect to commercialization decisions of the licensed products in the licensed territories. Sarepta will be solely responsible for all commercialization activities and associated costs, relating to licensed products in the licensed territories.

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Ezutromid Clinical Development
To date we have completed four Phase 1 clinical trials of ezutromid, which are summarized in the table below. The design and results of each clinical trial are discussed in more detail further below.
Trial
 
Description
 
Duration of
Treatment
 
Total No.
of Patients
 
No. of Patients
Treated with
Ezutromid
Phase 1 healthy volunteer trial (Trial 01)
 
Double blind, placebo controlled, ascending single and multiple oral dose trial
 
10 days
 
49
 
36
Phase 1b DMD patient trial (Trial 02)
 
Open label, ascending single and multiple oral dose trial
 
10 days
 
12
 
12
Phase 1b modified diet trial (Trial 03)
 
Double blind, randomized, placebo controlled multiple oral dose trial with dietary guidance
 
14 days
 
12
 
12
Phase 1 healthy volunteer and DMD patient trial (Trial 04)
 
Open label, ascending multiple oral dose trial with dietary guidance evaluating new F6 formulation of ezutromid
 
5 days (healthy volunteers) and 7 days (DMD patients)
 
24
(16 healthy
volunteers,
8 DMD
patients)
 
24
(16 healthy
volunteers,
8 DMD
patients)
Phase 1 Clinical Trial in Healthy Volunteers (Trial 01)
In 2012, we completed a double blind, placebo controlled, ascending single and multiple oral dose Phase 1 clinical trial of ezutromid in healthy volunteers. We conducted this clinical trial at a single site in the United Kingdom under approval from the Medicines and Healthcare products Regulatory Agency, or MHRA, and the U.K. Health Research Authority Ethics Review Committee, or the Ethics Review Committee. We enrolled 49 healthy male subjects who were between 18 and 55 years of age. Forty-seven subjects completed the clinical trial. Two subjects withdrew from the clinical trial for reasons unrelated to ezutromid.
The primary objective of the clinical trial was to determine the safety and tolerability of single and multiple oral doses of ezutromid in healthy male subjects. The secondary objectives were to determine the single and multiple oral dose pharmacokinetics of ezutromid based on the concentration of the drug in blood plasma and the effect of fasting on the single oral dose pharmacokinetics of ezutromid.

We conducted the clinical trial in two parts. Part 1 consisted of an ascending single dose study with a fasted effect evaluation. We evaluated a total of 32 subjects, who were divided into four equal cohorts of eight subjects each. Subjects in the four cohorts received one of the following doses of ezutromid: 50 mg/kg, 100 mg/kg, 200 mg/kg or 400 mg/kg. Six subjects in each cohort received ezutromid at the specified dose, and two subjects in each cohort received placebo. Each subject in the cohort receiving ezutromid at a dose of 200 mg/kg received doses under both fasted and fed conditions, while the subjects in the other cohorts received doses under normal, fed conditions, with no special dietary rules. One subject was removed during Part 1 of the clinical trial prior to dosing in a fasted state after testing positive for drug use.
Part 2 of the clinical trial consisted of a multiple ascending dose study. We evaluated a total of 16 subjects, who were divided into two cohorts of eight subjects each. In the first cohort, six subjects received 100 mg/kg doses of ezutromid and two subjects received placebo, in each case administered twice per day for ten days. In the second cohort, six subjects received 200 mg/kg doses of ezutromid and two subjects received placebo, in each case administered twice per day for ten days.

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Analysis of Trial Results
We observed the following results from this clinical trial:
 
•
Ezutromid was Well Tolerated. In both Part 1 and Part 2 of the clinical trial, ezutromid was well tolerated at all doses tested. The only observed treatment related adverse event was pale stools, which only occurred at the 200 mg/kg and 400 mg/kg dose levels. The pale stools were attributed to unabsorbed ezutromid passing through the gastrointestinal tract at these higher dose levels. All other adverse events were mild in severity and resolved without treatment.

•
Higher Plasma Concentrations When Ezutromid Dosed with Food. The dietary state of subjects in the clinical trial had a meaningful effect on systemic exposure. As illustrated in the figure below, after we administered a single dose of 200 mg/kg of ezutromid to subjects in the 200 mg/kg cohort of Part 1 of the clinical trial, the mean plasma concentration of drug in the blood over time, as determined by quantification of the area under the curve, in the subjects when they were in a fed state (n = 6) was approximately five times higher than the same subjects when they were in a fasted state (n = 5).

compofmeanplasmaa01.jpg

•
Targeted Plasma Levels Achieved in All Subjects after Multiple Dosing. When we administered 100 mg/kg doses of ezutromid twice a day for ten days, the steady state plasma concentration achieved in all subjects was greater than 0.2 µM (67 ng/mL), which was the concentration that corresponded to a 50% increase in utrophin protein levels in our preclinical studies described in more detail below. The mean blood plasma concentration of ezutromid in the 12 hours following administration of the final dose is illustrated in the figure below. However, there were differences among subjects, with the amount of time that each subject had plasma concentrations of utrophin protein greater than 0.2 µM ranging from seven to 12 hours following dosing. Utrophin protein has a half-life of three to four weeks, and we believe that a few hours of exposure to ezutromid following regular dosing may lead to an accumulation of utrophin protein in muscle tissue over time. Subjects receiving 200 mg/kg doses of ezutromid twice a day for ten days did not achieve higher plasma concentrations of ezutromid than subjects receiving 100 mg/kg doses of ezutromid on this dosing schedule. As a result, we expect that the maximum dose of ezutromid in our future clinical trials will be 100 mg/kg.  
•
Stable Plasma Levels of Ezutromid When Administered Through Multiple Dosing. When we administered 100 mg/kg doses of ezutromid twice a day for ten days with meals, all subjects achieved stable, or steady state, blood plasma concentrations of drug within three to five days after the beginning of dosing. However, we observed differences in plasma concentrations across subjects, which we believe resulted from varying levels of activity of CYP1A, a liver enzyme that metabolizes ezutromid, in different subjects.
Initial Phase 1b Clinical Trial in DMD Patients (Trial 02)
In May 2014, we completed an open label, ascending single and multiple oral dose Phase 1b clinical trial of ezutromid in patients with DMD. We believe this clinical trial was the first time a utrophin modulator drug had been administered to DMD patients. We conducted this clinical trial at four sites in the United Kingdom under approval from the MHRA and the Ethics Review Committee. We enrolled 12 boys with DMD who were between five and 11 years of age.
The primary objective of the clinical trial was to determine the safety and tolerability of single and multiple oral doses of ezutromid. The secondary objectives were to determine the single and multiple oral dose pharmacokinetics of ezutromid and its metabolites in patients with DMD. In addition, an exploratory objective of the clinical trial was to quantify potential systemic activity biomarkers.

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We divided the patients into three cohorts of four boys each. Patients in each of the cohorts received different doses of ezutromid for 11 days. The patients in all of the cohorts were treated in a fed state. The clinical trial protocol provided for the administration of ezutromid within ten minutes after consuming a substantial meal. Patients in the first cohort received the following doses of ezutromid:
 
•
a single 50 mg/kg dose on day one;
•
50 mg/kg doses administered twice per day on days two to ten; and
•
a single 50 mg/kg dose on day 11.

Patients in the second cohort received the following doses of ezutromid:
 
•
a single 100 mg/kg dose on day one;
•
100 mg/kg doses administered twice per day on days two to ten; and
•
a single 100 mg/kg dose on day 11.
Patients in the third cohort received the following doses of ezutromid:
 
•
a single 100 mg/kg dose on day one;
•
100 mg/kg doses administered three times per day on days two to ten; and
•
a single 100 mg/kg dose on day 11.
Analysis of Trial Results
We observed the following results from this clinical trial:
 
•
Ezutromid was Well Tolerated. Ezutromid was well tolerated at all doses tested in this clinical trial with no serious adverse events reported. All reported adverse events were mild in severity and gastrointestinal in nature. In the opinion of the trial investigator, there were no clinically meaningful changes in physical examination, vital signs and hematology or biochemistry parameters in any of the patients. We also did not observe any issues with patient compliance.

•
Patients had Variable Plasma Levels of Ezutromid; Possible Impact from Diet on Absorption of Ezutromid. We observed variability among patients in all three cohorts in plasma concentrations of ezutromid after administering multiple daily doses for eleven days. As illustrated in the figure below, the mean blood plasma concentrations of two of the 12 DMD patients, who we refer to as high absorbers, exceeded the target level of 0.2 µM (67 ng/mL) for several hours following dosing. We determined this target level prior to conducting this clinical trial based on the composite results of our preclinical studies in tissue culture, or in vitro preclinical studies, and our preclinical studies in live animals, or in vivo preclinical studies, which indicated that this plasma concentration leads to an increase of approximately 50% in levels of utrophin protein. The mean plasma concentrations of the remaining ten patients, who we refer to as low absorbers, were less than this target level and similar to the levels achieved by fasted healthy volunteers in our completed Phase 1 clinical trial who had received a single 200 mg/kg dose of ezutromid. Nonetheless, we believe that the patients who did not achieve the target plasma level in the clinical trial may still have achieved a plasma level of ezutromid sufficient to modulate the production of utrophin and possibly result in a clinical benefit. This belief is based in part on the work of Professor Davies’ research group, in which the continued expression of utrophin protein in transgenic lines of an mdx mouse, even at levels just above those in a normal mdx mouse, had a meaningful, positive effect on muscle performance.

We believe that the similarity of ezutromid plasma levels between the majority of DMD patients in this Phase 1b clinical trial and fasted healthy volunteers in our completed Phase 1 clinical trial may be due to a complex absorption profile in DMD patients that results from patients following low fat, low calorie diets. DMD patients often follow such diets due to concerns over the consequences of long-term corticosteroid use and potential resulting weight gain. In addition, we believe that other DMD disease-related factors, such as abnormal gastrointestinal physiology, may impact the absorption profile of DMD patients.
 
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Patients Experienced a Reduction in CK and Other Enzyme Markers of Muscle Damage. We observed a reduction compared to baseline in the enzymes CK, aspartate aminotransferase, or AST, and alanine aminotransferase, or ALT, in over 90% of the patients in the clinical trial during dosing with ezutromid. Other liver associated enzymes, gamma glutamyl transferase, alkaline phosphatase and albumin, showed no meaningful change from baseline over the same dosing period. The levels of CK, ALT and AST are typically low in healthy people. In DMD patients, however, damage to muscle fibers leads to the release of these enzymes from the muscle and accumulation in the blood. The mean reductions in CK, ALT and AST were statistically significant as compared to the baseline pre-dose levels (p <0.05). We determine statistical significance based on a widely used, conventional statistical method that establishes the p-value of clinical results. Typically, a p-value of 0.05 or less represents statistical significance. Following the end of dosing, the levels of these enzymes increased toward pre-

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dose levels. In addition, the reduction in CK was consistent with the results of a preclinical in vivo study that we conducted in the mdx mouse model, described in more detail below, in which we observed a reduction in CK following single daily dosing of ezutromid. We did not observe a correlation between the dose level of ezutromid administered and the degree of change in the levels of these enzymes. Although this was not a placebo controlled study and there may be other factors that influenced the results, we believed at the time that the lower levels of CK, AST and ALT compared to baseline potentially indicated a reduction in muscle damage and may have been evidence of ezutromid activity. We consequently further evaluated this observed reduction in the enzyme markers of muscle damage in our subsequent Phase 1b modified diet trial. The results of the Phase 1b modified diet trial are described below.
Phase 1b Modified Diet Clinical Trial (Trial 03)
In August and September 2015, we reported results from our Phase 1b modified diet trial of ezutromid in patients with DMD. This trial evaluated the formulation of ezutromid, which we refer to as the “F3” formulation, and which was derived from the earlier clinical formulations of ezutromid that were evaluated in Trial 01 and Trial 02. We conducted this clinical trial at four sites in the United Kingdom under approval from the MHRA and the Ethics Review Committee. We enrolled a total of 12 boys with DMD who were between five and thirteen years of age.
The primary objective of this clinical trial was to determine the pharmacokinetics of single and multiple oral doses of ezutromid in patients with DMD who followed specific dietary guidance that recommended balanced proportions of fat (30%), protein (25%) and carbohydrates (45%) and dosing with a glass of whole milk. We sought to achieve this dietary balance by requesting that patients, with support from research dietitians and the patients’ legal guardians, consume a diet containing all of the major food groups, vitamins, minerals and dietary fiber, with a daily calorie intake that is appropriate for the age and activity level of each patient. The goal of this dietary guidance was to demonstrate an increase in the level of ezutromid in blood plasma compared to the blood plasma levels we observed among DMD patients in our initial Phase 1b clinical trial. The trial protocol included a number of secondary objectives, including evaluations of the safety and tolerability of single and multiple oral doses of ezutromid; the daily variability in the steady state pharmacokinetics of ezutromid; and the levels of CK as a potential biomarker of ezutromid activity.
We divided the patients into three cohorts of four patients each. The cohorts were randomized into three sequential 14-day treatment periods during which each patient in the clinical trial received ezutromid at a dose level of 1,250 mg, ezutromid at a dose level of 2,500 mg or a placebo. All doses were administered orally with 100 mL of whole milk and with patients having consumed either breakfast or an evening meal depending on the time of day. There was a wash out period, which is a period of time during which patients received no administration of the drug, of at least 14 days between each of the treatment periods. The clinical trial was blinded as to the order in which patients received the lower dose of drug, higher dose of drug or placebo. The patients in each cohort were dosed with either ezutromid or placebo as follows: 
•
a single dose on day one; and
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twice daily doses on days two to fourteen.
A follow-up safety visit was conducted twelve to fourteen days after administration of the final dose in the final treatment period. Each patient received specific dietary guidance after which there was a dietary run-in period of at least one week prior to the start of the first treatment period.
Analysis of Trial Results
We observed the following results from our Phase 1b modified diet trial: 
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Modified Diet had a Positive Impact on Plasma Absorption. In this trial, plasma absorption of ezutromid was increased in patients with DMD who followed specific dietary guidance that provided a balanced diet of fats, carbohydrates and proteins. Ten of the 12 patients achieved plasma exposure levels above 30 ng/mL for a mean of 14.0 hours in a 22-hour period on day 14 of the trial, with six of these patients achieving levels above 67 ng/mL for a mean of 8.2 hours in the same 22-hour period on day 14. Plasma levels of 30 ng/mL and 67 ng/mL correlate to an increase in utrophin levels of approximately 30% and 50%, respectively, based on our in vitro studies that were undertaken in myoblast cells from patients with DMD and myotubes from healthy individuals. The remaining two patients achieved maximum plasma exposure levels that exceeded 20 ng/mL. We believe that these two patients also achieved plasma exposure that may be sufficient to modulate the production of utrophin protein and possibly result in clinical benefit. The plasma exposure levels described above for all 12 patients were achieved after each received twice daily doses of 2,500 mg of ezutromid.
The impact of adhering to the modified diet on the absorption of ezutromid was further evidenced when we compared the results of seven patients who participated in our initial Phase 1b clinical trial in 2014 and our Phase 1b modified diet trial. All of these seven patients had increased plasma levels in the Phase 1b modified diet trial as compared to plasma levels observed in our initial Phase 1b trial. The increase in plasma levels ranged from approximately 100% to nearly 300%.


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Higher Plasma Levels of Ezutromid were Observed on Day 14 Compared to Day 1 in the Majority of Patients. In this trial, seven of the 12 patients had higher plasma levels when measuring plasma levels over time and calculating the area under the curve, or AUC, on day 14 compared to day 1. This accumulation of drug had not been observed in our previous Phase 1 clinical trial conducted in healthy volunteers or our initial Phase 1b clinical trial conducted in patients with DMD. We expect to evaluate the impact of longer-term dosing of ezutromid on plasma exposure in future clinical trials, including in our Phase 2 PhaseOut DMD clinical trial.

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Treatment with Ezutromid did not Alter CK Levels, an Enzyme Biomarker of Muscle Damage, Compared to Placebo. We did not observe a change in the levels of the enzyme CK compared to baseline when patients were treated with 1,250 mg or 2,500 mg of ezutromid twice a day for 14 days compared to placebo. In our initial Phase 1b clinical trial, in which there was no placebo control, we observed a statistically significant reduction in CK levels compared to baseline when dosing patients with ezutromid. We believe that the results from our Phase 1b modified diet trial indicate that the reduction in CK levels we observed previously is likely not related to treatment with ezutromid. We plan to evaluate CK levels, as well as additional biomarkers, over a longer duration of exposure to ezutromid in future clinical trials.

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Ezutromid was Well Tolerated. Ezutromid was well tolerated at all doses tested in this clinical trial, with no serious adverse events reported. All reported adverse events were mild in severity and resolved prior to completion of the study. The most common adverse event was pale stools and this was reported by patients in the placebo group and each of the ezutromid treatment groups. In the opinion of the trial investigator, there were no clinically meaningful changes in physical examination, vital signs and hematology or biochemistry parameters in any of the patients. We also did not observe any issues with patient compliance.
Phase 1 Clinical Trial of Potential New Formulation of Ezutromid (Trial 04)
In August 2016, we reported top-line results from an open label, Phase 1 clinical trial of two new formulations of ezutromid. We conducted the trial at six sites in the United Kingdom under approval from the MHRA and the Ethics Review Committee.
The primary objective of the Phase 1 clinical trial was to determine the pharmacokinetics of multiple oral doses of the new formulations of ezutromid. The trial protocol included a number of secondary objectives, including evaluation of the safety and tolerability of single and multiple oral doses of the two formulations of ezutromid; to explore the effect of food to a fasting condition on the pharmacokinetics of ezutromid in healthy volunteers; and the daily variability in the steady state pharmacokinetics of ezutromid. The Phase 1 trial was divided into two parts. Part A evaluated two new formulations in healthy volunteers and Part B evaluated one of the two new formulations tested in Part A based upon the plasma concentration profile data and safety results. All doses were administered orally.
Part A
We enrolled a total of 16 healthy male volunteers between 18 to 55 years of age. There were two treatment periods each lasting five days: treatment period one evaluated one new formulation of ezutromid which we refer to as “F5” formulation, and treatment period two evaluated a different new formulation of ezutromid which we refer to as “F6” formulation.
In treatment period one, eight healthy male volunteers were administered the F5 formulation as follows:
 
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A twice daily dose of 3,000 mg on days one to three in a fed state;
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A twice daily dose of 6,000 mg on day four in a fed state;
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A single dose of 6,000 mg in the morning on day five in a fasted state; and
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A single dose of 6,000 mg in the evening on day five in a fed state.
In treatment period two, eight healthy male volunteers were administered the F6 formulation as follows:
 
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A twice daily dose of 2,000 mg on days one to three in a fed state;
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A twice daily dose of 4,000 mg on day four in a fed state;
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A single dose of 4,000 mg in the morning on day five in a fasted state; and
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A single dose of 4,000 mg in the evening on day five in a fed state.
The morning and evening doses were separated by approximately ten to twelve hours.
Based on the plasma concentration levels achieved in healthy subjects and the safety data from Part A of the trial, the F6 formulation of ezutromid was selected for further evaluation in patients with DMD in Part B of the trial.

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Part B
We enrolled a total of eight patients with DMD aged between 5 and 9 years of age and treated them with the F6 formulation of ezutromid that had been tested in Part A of the clinical trial. Patients received three ascending doses over three treatment periods:
 
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250 mg twice a day for seven days;
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500 mg twice a day for seven days; and
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1,000 mg twice a day for seven days.
There was a wash out period of a minimum of seven days between treatment periods. Patients followed the same specific dietary guidance as we used in our Phase 1b modified diet clinical trial.
Analysis of trial results
We observed the following results from our Phase 1 clinical trial evaluating the new formulations of ezutromid:
 
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Healthy Volunteers Demonstrated Increased Plasma Levels With the F6 Formulation of Ezutromid. In healthy volunteers, the F6 formulation of ezutromid achieved an over ten-fold increase in plasma levels compared to the F3 formulation of ezutromid. This formulation was selected to progress into Part B of the trial and undergo evaluation in patients with DMD.

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DMD Patients Demonstrated Increased Plasma Levels of Ezutromid with F6 Formulation. At the 1,000 mg twice a day dose of the F6 formulation of ezutromid, the five evaluable patients achieved an average maximum plasma concentration of 390 ng/mL on day 7, the final day of dosing. By comparison, in our Phase 1b modified diet trial, a twice daily dose of 2,500 mg of the F3 formulation of ezutromid achieved an average maximum plasma concentration of 63 ng/mL on day 14, the final day of dosing. We believe both the F6 and F3 formulations of ezutromid will be able to modulate utrophin. However, we anticipate that only one of these formulations will be chosen to move forward in clinical development, based on the safety and efficacy data from PhaseOut DMD.

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Ezutromid was Generally Well Tolerated. Ezutromid was generally well tolerated at all doses tested in both the healthy volunteers and DMD patients, except for one DMD patient who exhibited changes in liver parameters and withdrew from the trial, despite showing no clinical symptoms. The finding was classified as a serious adverse event.
BioMarin Phase 1 Clinical Trial in Healthy Volunteers
In 2009, we assigned certain technology relating to our DMD program to BioMarin DMD Regulator Limited, or BioMarin. In 2010, BioMarin conducted a Phase 1 clinical trial of a prior formulation of ezutromid in 48 healthy adult volunteers. The clinical trial was conducted at a single site in the United Kingdom. BioMarin reported that ezutromid was well tolerated by the subjects in this clinical trial. Subjects in this trial achieved low systemic exposure of the drug, and there was variability in systemic exposure across subjects. Following this clinical trial of a prior formulation of ezutromid, BioMarin elected not to continue development of our assigned technology, citing pharmaceutical and pharmacokinetic challenges. In public statements, BioMarin indicated that it had concluded that the likelihood of achieving a therapeutic effect in DMD patients was highly unlikely. In 2010, BioMarin transferred the assets, and all commercialization rights, back to us. As described above, in our various Phase 1 clinical trials of ezutromid in healthy volunteers and patients, in which we administered ezutromid as two different formulations in combination with specific dietary guidance, we were able to achieve plasma concentrations that we believe will be sufficient to modulate utrophin production .
Ongoing Phase 2 ‘PhaseOut DMD’ Clinical Trial
We are conducting a Phase 2 clinical trial of ezutromid, which we refer to as PhaseOut DMD, in patients with DMD. PhaseOut DMD is a 48 week open label trial that is being conducted at trial sites in the United Kingdom and the United States. PhaseOut DMD enrolled a total of 40 ambulatory boys between their fifth and tenth birthday inclusive who have a genetically confirmed diagnosis of DMD. The enrolled patients were required to be on stable doses of corticosteroids for a minimum of six months. We began conducting the trial at sites in the United Kingdom after receiving approval from the MHRA in January 2016 and in the United States after our investigational new drug application was cleared by the FDA in April 2016. We commenced enrollment at trial sites in the United Kingdom in June 2016 and at trial sites in the United States in November 2016. We completed enrollment for PhaseOut DMD in May 2017. At the end of 48 weeks of dosing, patients in PhaseOut DMD have the option to enroll in an extension phase and continue to be dosed with ezutromid. As of January 2018, 18 of 19 eligible patients have enrolled into the extension phase. We expect that the extension phase will last until ezutromid either receives marketing approval in the relevant country or its development is discontinued.

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In PhaseOut DMD, 30 of the enrolled patients are scheduled to receive the F3 formulation of ezutromid at a dose level of 2,500 mg twice daily via oral administration, and the remaining ten patients are scheduled to receive the F6 formulation of ezutromid at a dose level of 1,000 mg twice daily via oral administration. All patients will receive dietary guidance, consistent with that provided in our Phase 1b modified diet trial, to ensure they are receiving balanced proportions of fat, proteins and carbohydrates. At the time of dosing, patients will consume whole milk and will have also recently eaten either breakfast or an evening meal, depending on the time of day. The trial protocol specifies that there should be a gap of between eight to twelve hours between the breakfast and evening meal doses.
We have designed the PhaseOut DMD trial to evaluate the activity and safety of ezutromid and utrophin modulation and it will consist of the following four parts:
 
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Screening and Baseline Stage: A screening and baseline phase lasts up to 28 days for each patient. During this time, we take a number of baseline measurements. These include magnetic resonance spectroscopy / magnetic resonance imaging, or MR, analysis of upper leg muscle, a baseline muscle biopsy from the bicep, blood samples for pharmacokinetic and enzyme biomarker measurements, and baseline measurements for functional tests, including the six minute walk test and the North Star Ambulatory Assessment.

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Treatment Stage: The treatment phase for each patient lasts a total of 48 weeks. During the treatment stage, an MR analysis will be conducted at 12, 24, 36 and 48 weeks of treatment. Blood samples for pharmacokinetic and enzyme biomarker analysis will be taken at 4, 8, 12, 24, 36 and 48 weeks of treatment. In addition, 24 of the patients are scheduled to have a second muscle biopsy taken at week 24, with the remaining 16 patients are scheduled to have their second biopsy at week 48; As of January 2018, one patient from each of these groups has withdrawn from the trial prior to their second biopsy due to reasons unrelated to ezutromid. Functional tests will be performed at 12, 24, 36 and 48 weeks of treatment.

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Safety and Tolerability Follow-up Stage: Each patient in the trial will have a 30-day safety and tolerability follow up. For trial patients who do not enroll in the extension phase, the safety and tolerability follow-up will occur after the 48 week treatment phase. Patients enrolling in the extension phase are expected to have a 30-day safety and tolerability follow-up following completion of the extension phase.

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Trial Extension Phase: At the end of the 48 weeks of dosing, all patients have the option of enrolling into an extension phase and continue to receive ezutromid. We expect that the extension phase will last until ezutromid either receives marketing approval in the relevant country or its development is discontinued. This extension phase will allow us to monitor safety and efficacy data related to longer-term dosing of the F3 and F6 formulations of ezutromid. The decision to include the extension phase followed a review of the safety and tolerability data from PhaseOut DMD by an independent data monitoring committee. A protocol amendment was submitted to the MHRA, U.K. Ethics Committee and the FDA in March 2017 and was subsequently approved, which enables enrollment of patients into the extension phase once they have completed 48 weeks of dosing without a cessation in dosing.

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Additional Cohort: The amended protocol we submitted to the regulatory authorities and ethics committee to extend the trial also provides for the enrollment into PhaseOut DMD of patients who participated in prior clinical trials of ezutromid but who did not meet the inclusion criteria for PhaseOut DMD. All safety, tolerability and functional data from this arm of the trial will be distinct from analyses of the efficacy portion of PhaseOut DMD.
Clinical Trial Objectives
The primary objective of our PhaseOut DMD clinical trial is to investigate changes in magnetic resonance parameters from baseline in leg muscle health . Reports in the peer reviewed literature have shown MR has potential as a non-invasive biomarker to measure disease progression through measurement of changes in inflammation and fat infiltration in leg muscles. This trial will monitor disease progression after treatment with ezutromid by measuring changes from baseline in levels of muscle inflammation and fat infiltration in leg muscle during the course of the 48 week trial. We will also investigate if there are any relationships between changes in magnetic resonance parameters in leg muscle with blood plasma concentrations of ezutromid, which we will measure at baseline and over the course of the trial.
We also will investigate in our PhaseOut DMD clinical trial changes in utrophin expression in muscle and muscle fiber regeneration. The muscle biopsies taken during the trial will be used to investigate changes from baseline in utrophin protein expression and changes in muscle regeneration biomarkers.
The clinical trial is also expected to investigate a number of functional measures. These will include changes from baseline in distance walked during the six minute walk test, changes from baseline in the North Star Ambulatory Assessment, changes from baseline in a 10 meter run test, and changes from baseline in performance of upper limbs. We will also monitor changes in a variety of blood biomarkers related to muscle health, including the enzyme CK, during the trial.

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We believe that these objectives collectively will enable us to better understand the potential benefits of long-term dosing with the F3 and F6 formulations of ezutromid on the progression of DMD in a pediatric population. We will also seek to understand if there are any potential relationships between changes in magnetic resonance parameters, utrophin expression, muscle fiber regeneration and other assessments of muscle function. This trial will be the longest period of time that ezutromid has been dosed in patients and will increase the amount of safety and tolerability data for ezutromid.
We reported interim 24-week data from PhaseOut DMD in January 2018, with further findings from this clinical trial reported in February 2018. The interim data included muscle biopsy data from the group of patients who were scheduled to have their second muscle biopsy after completing 24 weeks of treatment with either the F3 formulation or F6 formulation of ezutromid, and 24-week magnetic resonance and functional data analysis from all patients in the trial who completed 24 weeks of treatment.
Analysis of PhaseOut DMD interim clinical trial results
We observed the following results from the interim 24 week data from PhaseOut DMD.
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Mean Increase in Utrophin Protein Intensity. We observed an increase in mean utrophin protein intensity levels of 7% in biopsies at 24 weeks compared to baseline (0.370 to 0.396, 95% C.I., -0.005, 0.058). Background levels of utrophin are high in patients with DMD as their muscle fibers undergo a continuous cycle of damage and repair. Utrophin protein is produced during the initial stage of muscle repair, but its production is naturally switched off as muscle fibers mature.
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Reduction in Muscle Damage as Measured by Developmental Myosin. We observed a statistically significant and meaningful reduction in muscle damage as measured by a 23% decrease in mean developmental myosin in muscle biopsies at 24 weeks compared to baseline (11.37% to 8.76%, 95% C.I., -4.33, -0.90). Developmental myosin is a biomarker of muscle damage and is present in muscle fibers that are repairing. Studies show that there is a correlation between disease severity and levels of developmental myosin present in muscle fibers with higher levels typically found in DMD patients with lower levels found in patients with the milder disease, BMD.
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Reduction in Muscle Inflammation as Measured by Magnetic Resonance Spectroscopy. We observed a decrease in muscle inflammation as measured by magnetic resonance spectroscopy transverse relaxation time T2, or MRS-T2. We observed a mean decrease from baseline to 24 weeks in the soleus (calf muscle) in patients (n=38) of -0.861 milliseconds that achieved statistical significance (31.850 milliseconds to 30.989 milliseconds, 95% C.I., -1.440, -0.281). We also observed a mean decrease of -0.470 milliseconds in MRS-T2 in the vastus lateralis (thigh muscle) of patients (n=37) from baseline to 24 weeks (32.265 milliseconds to 31.795 milliseconds, 95% C.I., -1.158, 0.218). We believe the decrease in MRS-T2 is independent of any anti-inflammatory effect provided by corticosteroids due to the patients being on stable regimens of such treatments.
•
DMD Patients Achieved Plasma Levels of Ezutromid Expected to Modulation Utrophin Protein with F3 and F6 Formulation. We observed that all patients achieved plasma levels of ezutromid that we believe will be sufficient to modulate the expression of utrophin protein. The responses in utrophin protein intensity, developmental myosin and MRS-T2 were observed in patients treated with either the F3 or the F6 formulations of ezutromid. We did not observe a relationship between drug exposure levels and responses to these pharmacology measures or the safety measures after 24-weeks of treatment with ezutromid.
We also observed other findings from the interim 24 week PhaseOut DMD data.
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A decrease in the mean muscle fiber diameter from 42.1µm at baseline to 40.3µm at 24 weeks as measured by muscle biopsy.
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The mean fat fraction in the vastus lateralis muscle increased from 14.7% at baseline to 18.5% at 24 weeks (n=37) as measured by magnetic resonance spectroscopy. We believe that the potential for change in this magnetic resonance parameter is expected to be observable after longer-term dosing of patients.
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A change in mean six-minute walk distance from 404m at baseline to 395m at 24 weeks (n=39) and a change in mean North Star Ambulatory Assessment score from 25.0 at baseline to 24.4 at 24 weeks (n=39). The North Star Ambulatory Assessment has a maximum score of 40.
•
All patients retained ambulation after 24-weeks of treatment (n=39).

Ezutromid was also well tolerated after 24 weeks of dosing in PhaseOut DMD.
The muscle biopsies were analyzed using fully automated techniques that can assess whole cross-sections of biopsies containing several thousand individual fibers. These techniques were developed by Summit in collaboration with Flagship Biosciences Inc., or Flagship. Following strict handling and processing protocols, all biopsies contributed to the overall dataset with 22 matched pairs of baseline/week 24 biopsies assessed in the developmental myosin and fiber diameter assay and 18 matched pairs of baseline/week 24 biopsies assessed in the utrophin assay.


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In light of the positive interim 24-week data, we are accelerating preparatory activities for a placebo controlled clinical trial for ezutromid, and for a potential regulatory filing of ezutromid based on the 48-week results from PhaseOut DMD. We expect to report top-line 48-week data during the third quarter of 2018.
Ezutromid Preclinical Studies
We have conducted a broad preclinical program for ezutromid in collaboration with Professor Kay Davies and her research group at the University of Oxford. The preclinical program consists of in vitro and in vivo studies designed to support the potential of ezutromid to modulate the expression of utrophin protein. The following is a summary of key observations from studies completed to date:
 
•
Increased Utrophin Levels in DMD Patient Derived Myoblast Cells. We dosed in vitro muscle derived cells called myoblasts from DMD patients with ezutromid. After three days of dosing, we observed a two-fold mean increase in utrophin protein levels in these myoblast cells as compared to baseline levels.

•
Increased Utrophin Protein Expression in Heart, Diaphragm and Other Skeletal Muscles in mdx Mouse. We dosed mdx mice with ezutromid daily for 28 days. Following the 28 days of dosing, we observed increased mean utrophin protein levels in the diaphragm (p<0.05) and the heart (p<0.01) as compared to untreated mdx mice. We also observed an increase in utrophin protein levels in the tibialis anterior, or TA, and extensor digitorum longus, or EDL, skeletal muscles. We also observed a mean increase in utrophin messenger ribonucleic acid, or mRNA, which is the precursor to utrophin protein. We believe that the good systemic distribution of drug observed in this experiment is important for DMD therapies that aim to maintain ambulation and prolong life for DMD patients.

•
Localized Utrophin Production at the Sarcolemma in mdx Mouse. In the mdx mouse experiment described in the prior bullet, we observed an increase in utrophin protein in the TA and EDL skeletal muscles of mdx mice treated with ezutromid compared to untreated mdx mice as evidenced by an observable increase in the number of utrophin positive muscle fibers in these muscles. The increase in utrophin protein was localized at the sarcolemma, which is the required site of action for utrophin production in muscle. In a separate study in which we forced mdx mice to exercise, we observed a similar increase in utrophin positive muscle fibers in the diaphragm and the TA and EDL muscles, and an increase of utrophin levels within these muscle fibers, of mdx mice treated with ezutromid compared to untreated mdx mice. We believe that these results are noteworthy because DMD disease pathology is even more pronounced in the diaphragm and hind-limb muscles of the forced exercise mdx mice as compared to sedentary mdx mice.

•
Reduction in Secondary Markers of DMD in mdx Mouse. We dosed mdx mice with ezutromid daily for 28 days. In this study, we observed a mean 75% reduction in CK levels as compared to untreated mdx mice after 15 days, which is the time at which muscle degeneration is at a maximum in this model. We continued to observe lower mean CK levels in the treated mdx mice group after 28 days, at which point muscle degeneration stabilized. Plasma levels of CK, muscle regeneration, inflammation and fibrosis are secondary markers of DMD. We also observed a reduction in the mean level of muscle fiber regeneration in mdx mice treated with ezutromid compared to untreated mdx mice as evidenced by a reduction in the number of muscle fibers with centrally localized nuclei, which are biomarkers of regeneration. We believe this resulted from the continual expression of utrophin, which protected the dystrophin deficient muscle fibers, and therefore reduced the amount of muscle regeneration. In addition, following treatment with ezutromid, we observed a mean reduction in overall skeletal muscle inflammation and fibrosis in the mdx mice treated with ezutromid compared to untreated mdx mice, which indicates a reduction in muscle fiber damage.
 
•
Protection of Muscle Function in Forced Exercise mdx Mouse. We dosed mdx mice with ezutromid daily for 28 days and forced the mice to exercise during this treatment period. As illustrated in the figure below, at the end of dosing the forced exercise mdx mice treated with ezutromid demonstrated a statistically significant mean increase in protection against exercise-induced forelimb weakness (p<0.05) compared to untreated forced exercise mdx mice. We measured forelimb weakness by the force increment required for the mdx mice to lose the strength to grip. The mdx mice treated with ezutromid exhibited forelimb strength comparable to that observed in the wild type control mice, which unlike mdx mice are not dystrophin deficient. The untreated mdx mice experienced a mean decrease in forelimb strength by the end of the 28 day study. Forcing the mdx mouse to exercise worsens the impact of DMD and we believe more closely approximates the pathology of human DMD patients.
 

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chart-859b3e22891c56d8983.jpg

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Target Plasma Concentration to Achieve a 50% Increase in Utrophin Levels. The composite results from our in vitro and in vivo preclinical studies indicated that a plasma concentration of approximately 0.2 µM (67 ng/mL) leads to an increase of approximately 50% in levels of utrophin protein. These plasma concentration findings formed the basis of the target pharmacokinetic level that we have used in our clinical trials of ezutromid. As noted above, in the experiments performed by Professor Kay Davies, the continued expression of utrophin, even at levels just above those in a normal mdx mouse, had a meaningful, positive effect on muscle performance.
Our Pipeline of Future Generation Utrophin Modulators
We plan to apply and enhance our existing knowledge, experience and proprietary rights to maintain and expand our leadership in the field of utrophin modulation. Our co-founder and scientific advisor, Professor Kay Davies at the University of Oxford, discovered utrophin and then developed the concept of utilizing utrophin modulation as a treatment potentially applicable to all DMD patients. Our DMD program was founded to develop and commercialize drugs to treat DMD using this approach. Our intellectual property estate for ezutromid for the treatment of DMD includes composition of matter patents granted in major territories, including the United States and Europe. We plan to apply and enhance our existing knowledge, experience and proprietary rights to maintain and expand our leadership in the field of utrophin modulation. In addition to the F3 and F6 formulations of ezutromid, we are currently pursuing novel, future generation utrophin modulators, some of which may have potential new utrophin-related mechanisms, that we are developing in collaboration with the University of Oxford.
We were previously pursuing internally developed second generation utrophin modulators that are structurally related to ezutromid, but designed to include improved pharmacokinetic properties and achieve higher plasma levels of drug at lower doses. However, in September 2016, we announced that the development of our second generation utrophin modulators would be placed on hold due to the substantial increase in ezutromid plasma levels achieved with the F6 formulation of ezutromid in our most recently completed Phase 1 clinical trial. We are now focusing on advancing the F3 and F6 formulations of ezutromid and our preclinical future generation utrophin modulators.
Strategic Alliance with the University of Oxford
In November 2013, as part of our program for the development of additional utrophin modulators, we formed a strategic alliance with the University of Oxford. Under this alliance, we acquired an exclusive option to license intellectual property that is generated as part of our research in utrophin modulation as part of the alliance. We announced in November 2015 a multi-year extension of the strategic alliance with the University of Oxford that will run until November 2019, with an option to extend it for a further 12 months. The goal of our collaboration with the University of Oxford is to identify and develop future generations of novel utrophin modulators that will include new mechanisms that could complement ezutromid and our second generation modulators. In December 2015, we reported achievement of the first research milestone as part of the collaboration with the nomination of two series of utrophin modulators for progression into lead optimization studies. These two series of compounds are structurally distinct from ezutromid, with one series having a potential new utrophin modulation mechanism that appears to be distinct from ezutromid.


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Biomarker Program
We believe that the development of new biomarkers could play an important role in furthering our understanding of the potential benefits of utrophin modulators in treating DMD. A biomarker is a measurable biological or chemical change that is believed to be associated with the severity or presence of a disease or other physiological state of an organism. We expect our biomarkers will be related to the mechanism of utrophin modulation and will examine other aspects of muscle health, including inflammation and muscle fiber regeneration. Our biomarker program includes the following:
 
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quantifying numbers of utrophin positive fibers and distribution of utrophin protein in each fiber from muscle biopsies using immunohistochemistry;
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evaluating muscle biopsies to quantify numbers of regenerating fibers; and
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developing other serum biomarkers that will quantify muscle damage.
We are collaborating with the specialist biomarker development company Flagship on the development of automated, digital analysis tools to allow for the precise and reproducible measurement of utrophin expression and levels of muscle fiber regeneration, including the measurement of developmental myosin. We presented analytical validation data at the 22nd International Congress of the World Muscle Society in October 2017. We believe that the development of these tools will have an important role in helping to further our understanding of the potential benefits of utrophin modulator therapies, including ezutromid, and we are using these tools in analyzing the muscle biopsies in our PhaseOut DMD clinical trial. Our collaboration with Flagship builds on a manual quantification approach that we developed with research groups at the Institute of Child Health at University College London. Data from our collaboration was published in the peer reviewed literature in March 2016.

Clostridium difficile Infection Overview
Clostridium difficile infection is a bacterial infection of the colon that produces toxins causing inflammation of the colon and severe diarrhea. CDI can also result in more serious disease complications, including pseudomembranous colitis, bowel perforation, toxic megacolon and sepsis. CDI represents a serious healthcare issue in hospitals, long-term care homes and, increasingly, in the wider community. We estimate there are over one million cases of CDI each year in the United States and Europe, based on an epidemiology report on CDI that was published in 2015 by Decision Resources, a healthcare research and consulting company. In addition, CDI is responsible for approximately 29,000 deaths per year in the United States, according to a study published in the New England Journal of Medicine in 2015. A separate study published in 2012 in Clinical Microbiology and Infection, a peer reviewed journal published by the European Society of Clinical Microbiology and Infectious Diseases, indicated that CDI may be underdiagnosed in approximately 25% of cases. A study published in The Journal of Hospital Infection, a peer reviewed journal published by the Healthcare Infection Society, reported that CDI is two to four times more common than hospital associated infections caused by methicillin-resistant Staphylococcus aureus, a bacterium frequently associated with such infections. The Healthcare Cost and Utilization Project, a family of databases developed through a federal-state-industry partnership sponsored by the Agency for Healthcare Research and Quality of the U.S. Department of Health and Human Services, reported an approximate 3.5 fold increase in hospital stays associated with CDI between 2000 and 2008. The economic impact of CDI is significant. A study published in 2012 in Clinical Infectious Diseases estimated that acute care costs total $4.8 billion per year in the United States alone.
CDI originates from a bacterium known as Clostridium difficile, or C. difficile. C. difficile sometimes can be a harmless resident of the gastrointestinal tract. The complex community of microorganisms that make up the natural gut flora usually moderates levels of C. difficile. The natural gut flora are an essential part of the normal function of the gastrointestinal tract and also have wide implications to human health, such as the proper function of the immune system. CDI typically develops following the use of broad spectrum antibiotic agents that can cause widespread damage to the natural gut flora and allow overgrowth of C. difficile. Hypervirulent C. difficile strains have also emerged and are frequently associated with more severe disease. In the United States, the hypervirulent strain, ribotype 027, accounts for approximately one-third of all CDI cases.
The primary clinical issue with CDI is disease recurrence. This is in contrast to other bacterial threats for which drug resistance is the principal concern. According to an article published in 2012 in the peer reviewed journal Clinical Microbiology and Infection, up to 25% of patients with CDI suffer a second episode of the infection. The risk of further recurrence rises to 65% after a patient suffers a third episode of CDI. In addition, each episode of recurrent disease is associated with greater disease severity and higher mortality rates. Recurrent disease is associated with an increased burden on the healthcare system.
In 2013, the CDC highlighted CDI as one of three pathogens that pose an immediate public health threat and require urgent and aggressive action. In 2012, the Generating Antibiotics Incentives Now Act provisions of the FDA Safety and Innovation Act, or GAIN, became law. The goal of GAIN is to encourage the development of new antibiotics that treat specific pathogens, including C. difficile, which cause serious and life threatening infections.

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Current CDI Treatments
Existing treatment options for CDI are limited. Currently the mostly commonly used treatments for CDI are vancomycin or off label use of metronidazole, both of which are broad spectrum antibiotics. Although these antibiotics reduce levels of C. difficile, both also cause significant collateral damage to the gut flora as a result of their broad spectrum of activity. This collateral damage to the gut flora leaves patients vulnerable to recurrent CDI. A review published in 2012 in the peer reviewed journal International Journal of Antimicrobial Agents reported recurrence rates of 24.0% for vancomycin and 27.1% for metronidazole. Metronidazole is frequently used in mild or moderate cases of CDI and has been associated with a number of side effects. A narrower spectrum antibiotic fidaxomicin was approved in the United States and the European Union, but it has not been shown to be superior to vancomycin in the treatment of patients with the hypervirulent strain ribotype 027. In October 2016, the FDA approved bezolotoxumab, a monoclonal antibody for use in conjunction with an antibiotic in patients who have a high risk of disease recurrence. Bezolotoxumab binds to toxin B, one of the toxins produced by the C. difficile bacteria, to neutralize its effects. In February 2018, updated guidelines on the treatment of CDI in adults and children were published in Clinical Infectious Diseases by the Infectious Diseases Society of America and Society for Healthcare Epidemiology of America. These revised guidelines recommend the use of vancomycin or fidaxomicin in preference to metronidazole in the treatment of an initial episode of CDI. Use of metronidazole is only recommended when it is not possible to access vancomycin or fidaxomicin.
Ridinilazole for the Treatment of CDI
We are developing ridinilazole as an orally administered small molecule antibiotic for the treatment of CDI. Ridinilazole is designed to selectively target C. difficile bacteria without causing collateral damage to the gut flora and thereby reduce CDI recurrence rates. The active ingredient in ridinilazole is a bis-benzimidazole tetrahydrate. We believe, based on preclinical studies conducted to date, that ridinilazole is part of a novel structural class of antibiotics that is distinct from the major classes of marketed antibacterials.
In November 2015, we reported top-line results from our double blind, randomized, active controlled Phase 2 clinical trial that evaluated ridinilazole compared to the current standard of care, vancomycin, for the treatment of CDI. The Phase 2 clinical trial exceeded its primary endpoint of non-inferiority, with ridinilazole achieving statistical superiority over vancomycin in sustained clinical response, or SCR. The statistical superiority was driven by a large numerical reduction in recurrent disease compared with vancomycin. We subsequently reported that data from our Phase 2 clinical trial also showed ridinilazole to be highly preserving of the gut microbiome compared to patients who received vancomycin and experienced substantial damage to the gut microbiome which for many patients persisted during the 30-day post-treatment period. In September 2017, we reported top-line data from our exploratory, open label, active controlled Phase 2 clinical trial evaluating ridinilazole compared to fidaxomicin for the treatment of CDI. In the trial, ridinilazole preserved the gut microbiome of CDI patients to a greater extent than fidaxomicin, achieving a key secondary endpoint. Ridinilazole was well tolerated at all doses tested in our completed Phase 1 and Phase 2 clinical trials. Activities to prepare ridinilazole for Phase 3 clinical trials continue, and we plan to commence these trials in the first quarter of 2019.

We have been awarded a contract from BARDA worth up to $62 million that will, in part, fund our planned Phase 3 clinical trials of ridinilazole. We have also received a $2.5 million upfront payment as part of our license and commercialization agreement with Eurofarma and are eligible to receive an additional $3.75 million in development milestones upon the achievement of staged patient enrollment targets in the planned Phase 3 clinical trials of ridinilazole.
The FDA has designated ridinilazole as a qualified infectious disease product, or QIDP. The QIDP incentives are provided through GAIN. The QIDP designation provides for priority review by the FDA, eligibility for “fast track” status and extension of statutory exclusivity periods in the United States for an additional five years upon FDA approval of the product for the treatment of CDI. The FDA granted fast track designation to ridinilazole in July 2015.
Ridinilazole Clinical Development
Phase 1 Clinical Trial in Healthy Volunteers
In 2013, we completed a randomized, partially blind, placebo controlled Phase 1 clinical trial of ridinilazole in healthy volunteers. We conducted this clinical trial at a single site in the United Kingdom under approval from the MHRA and the Ethics Review Committee. We enrolled 56 healthy male subjects in the clinical trial who were between 18 and 55 years of age. The primary objective of the clinical trial was to determine the safety and tolerability of single and multiple ascending oral doses of ridinilazole. The secondary objectives included determining the single and multiple oral dose pharmacokinetics of ridinilazole, assessing the effect of food on systemic exposure of ridinilazole and assessing the effect of multiple oral doses of ridinilazole on gut flora.

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We conducted the clinical trial in two parts. Part 1 consisted of an ascending single dose study and a food effect evaluation study. In Part 1, we evaluated a total of 40 subjects, divided into the following six cohorts:
 
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four fasted subjects, randomized for three subjects to receive a single 2 mg dose of ridinilazole and one subject to receive placebo;
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four fasted subjects, randomized for three subjects to receive a single 20 mg dose of ridinilazole and one subject to receive placebo;
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eight fasted subjects, randomized for six subjects to receive a single 100 mg dose of ridinilazole and two subjects to receive placebo;
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eight fasted subjects, randomized for six subjects to receive a single 400 mg dose of ridinilazole and two subjects to receive placebo;
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eight fasted subjects, randomized for six subjects to receive a single 2,000 mg dose of ridinilazole and two subjects to receive placebo; and
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eight subjects, randomized for six subjects to receive a single 1,000 mg dose of ridinilazole under fasted conditions and a single 1,000 mg dose under fed conditions, and two subjects to receive two single doses of placebo on the same dosing schedule. The doses under fed and fasted conditions were separated by a minimum of six days.
Part 2 of the clinical trial consisted of a multiple dose study. In Part 2, we evaluated a total of 16 subjects, who were divided into the following two cohorts:
 
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eight subjects randomized for six subjects to receive 200 mg doses of ridinilazole twice per day for nine days with a single final dose on day ten and two subjects to receive placebo on the same dosing schedule; and
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eight subjects randomized for six subjects to receive 500 mg doses of ridinilazole twice per day for nine days with a single final dose on day ten and two subjects to receive placebo on the same dosing schedule.
Analysis of Trial Results
We observed the following results in this clinical trial:
 
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Ridinilazole was Well Tolerated. Ridinilazole was well tolerated at all doses tested in the clinical trial. The incidence of adverse events in the clinical trial was low for patients treated with ridinilazole and comparable to the incidence of adverse events for patients receiving placebo. The majority of the adverse events that were considered to be possibly related to ridinilazole were classified as gastrointestinal disorders and were mild in severity and resolved without intervention. One patient withdrew from the clinical trial after suffering from appendicitis on day one. The trial investigator determined this serious adverse event was unlikely to be related to treatment with ridinilazole.

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Ridinilazole was Retained in the Gastrointestinal Tract. Ridinilazole was targeted to the gastrointestinal tract, which is the site where CDI occurs in the body. Systemic exposure was close to or below the level of detection in both fed and fasted subjects.

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Ridinilazole was Highly Selective for Total Clostridia Bacteria with Minimal Impact on Other Natural Gut Flora. We measured levels of bacteria in fecal samples from Part 2 of the clinical trial for gut flora composition on the day prior to commencement of dosing and on days four and nine of drug administration during the clinical trial. As illustrated in the figure below, in both the 200 mg and 500 mg dose cohorts, median levels of key bacteria groups that comprise the natural gut flora remained relatively constant during this period and did not fluctuate substantially from baseline. The one exception was the total clostridia bacterial group. The counts of total clostridia decreased from the
baseline level to zero by day four of dosing and remained at zero on day nine of dosing. C. difficile is a member of the total clostridia group. We did not detect any C. difficile viable cells or spores in the fecal samples of any of the healthy volunteer subjects at any point during the clinical trial. Bacteria levels are shown in the figure below on a logarithmic scale, which condenses the wide range of values to a format showing the relative differences in values. We believe these data, which are consistent with the data from our preclinical studies, support the highly selective antibiotic effect of ridinilazole.


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Phase 2 Clinical Trial in Patients with CDI
In November 2015, we reported top-line results from our randomized, double blind, active controlled, multicenter, Phase 2 clinical trial of ridinilazole in patients with CDI, and we presented additional data during 2016. We have referred to this as our Phase 2 proof of concept clinical trial and as “CoDIFy.”
We conducted this clinical trial at approximately 35 sites in the United States and Canada. The trial was conducted under an Investigational New Drug Application, or IND, that we submitted to the FDA in January 2014. We enrolled a total of 100 patients between 18 to 90 years of age. The trial randomized patients in a one-to-one ratio to receive either a 200 mg dose of ridinilazole administered twice per day for ten days or a 125 mg dose of vancomycin administered four times per day for ten days. Patients who received ridinilazole were also administered a placebo twice a day for ten days to ensure the trial remained blinded.
The primary objective of this clinical trial was to evaluate the efficacy of ten days of dosing with ridinilazole compared to treatment with vancomycin. The primary efficacy endpoint was non-inferiority on sustained clinical response, or SCR, which is defined as clinical cure based on the resolution of diarrhea at the test of cure, or TOC, visit on day 12 and no recurrence of CDI within 30 days after the end of treatment. The secondary efficacy endpoints were investigator assessed clinical response at the TOC visit and rate of recurrence of CDI within 30 days after the end of treatment. Secondary objectives of this clinical trial were the assessment of the safety and tolerability of ten days of dosing of ridinilazole compared to vancomycin, the plasma and fecal concentrations of ridinilazole in patients with CDI who received ridinilazole and the health status of CDI patients who received ten days of treatment of ridinilazole compared to patients who received ten days of treatment of vancomycin. We also assessed the impact of ridinilazole on the gut flora of patients in the clinical trial as one of a number of exploratory objectives.
Analysis of Results
We observed the following results in our Phase 2 proof of concept trial:
 
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Ridinilazole Demonstrated Statistical Superiority Over Vancomycin. Our Phase 2 proof of concept trial met its primary endpoint with ridinilazole achieving a SCR rate of 66.7% compared to 42.4% for vancomycin (non-inferiority margin of 15%, p=0.0004). This represented statistical superiority of ridinilazole over vancomycin using the pre-specified 90% confidence interval. The primary analysis was conducted on the modified intent-to-treat, or mITT, population (36 patients dosed with ridinilazole, 33 patients dosed with vancomycin) that comprised patients with CDI confirmed by the presence of free toxin in feces. The results of the mITT population were consistent with the intent-to-treat, or ITT, population (50 patients dosed with ridinilazole, 50 patients dosed with vancomycin) and the per protocol, or PP, population (31 patients dosed with ridinilazole, 25 patients dosed with vancomycin). We also observed a generally consistent trend to improved SCR with ridinilazole across subgroups at higher risk of recurrence, including the elderly, patients who were on concomitant antibiotics at the start of treatment and patients with a prior history of CDI.
 
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Ridinilazole Demonstrated a Large Reduction in Rates of Recurrence Compared to Vancomycin. We observed that the statistical superiority in SCR with ridinilazole compared to vancomycin was driven by a large numerical reduction in rates of disease recurrence. Clinical cure rates at the end of ten days of treatment were similar, with ridinilazole achieving a rate of 77.8% compared to 69.7% for vancomycin, but ridinilazole achieved a recurrence rate of 14.3% compared to 34.8% for vancomycin during the 30-day post-treatment period.


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Ridinialzole Preserved the Gut Microbiome. Stool samples were obtained from 82 patients enrolled in the Phase 2 clinical trial to evaluate the efficacy of ridinilazole compared to vancomycin. These samples were analyzed on study entry, day five and day ten of treatment, day 25 and day 40 post-entry and at the time of any recurrence for five specific bacterial groups associated with a healthy gut microbiome (Bacteroides, Prevotella, Enterbactericeae, C. coccoides and C. leptum) and also for total bacteria present. We observed that patients treated with vancomycin had a significant decrease (p<0.001) in four of the five bacterial groups (Bacteroides, Prevotella, C. coccoides and C. leptum) at day five and day ten, and a significant decrease in total bacteria. Patients treated with ridinilazole did not have a significant decrease in these specific bacterial groups nor the total bacteria. Moreover, we observed the initial evidence of recovery of these key bacterial groups in some patients treated with ridinilazole. We believe that these data provide evidence that ridinilazole is able to preserve a healthy gut microbiome during treatment for CDI and that the recovery of the key bacterial groups contributed to the large numerical reduction in disease recurrence we observed in the trial results.

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Ridinilazole was Retained in the Gastrointestinal Tract. Ridinilazole was targeted to the gastrointestinal tract, which is the site where CDI occurs in the body. Systemic exposure was close to or below the level of detection in patients with CDI, with plasma concentrations very similar to those observed in our Phase 1 clinical trial in healthy volunteers.
 
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Ridinilazole Reduced Biomarkers of Inflammation. We measured levels of two key markers of inflammation, calprotectin and lactoferrin, in feces collected from the 69 patients who comprised the mITT group. The samples analyzed were collected at the time of randomization (prior to initiation of treatment), at day five and at day ten. We observed that ridinilazole and vancomycin reduced concentrations of calprotectin and lactoferrin by similar levels when analyzing the results for all patients. We also observed that a subset of patients with severe CDI had a greater reduction in levels of calprotectin and lactoferrin when treated with ridinilazole compared to vancomycin. We believe these data indicate that ridinilazole is associated with a greater reduction in inflammatory markers compared to vancomycin in patients with severe CDI.

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Ridinilazole was Well Tolerated. Ridinilazole was generally well tolerated. The overall rate of adverse events and serious adverse events reported in the ridinilazole and vancomycin treatment arms were comparable.
Phase 2 Exploratory Clinical Trial of Ridinilazole Compared to Fidaxomicin
In September 2017, we reported top-line data from our randomized, open label, active controlled, multicenter Phase 2 clinical trial evaluating ridinilazole compared to fidaxomicin for the treatment of CDI. This exploratory clinical trial was designed to generate data comparing ridinilazole to fidaxomicin, a CDI antibiotic launched in 2011, and the results of this clinical trial are expected to help to inform the commercial positioning of ridinilazole. We conducted this clinical trial at sites in the United Kingdom, Europe and the United States, enrolling 27 patients between 18 and 90 years of age. We randomized patients in a one-to-one ratio to receive either a 200 mg dose of ridinilazole administered twice per day for ten days or a 200 mg dose of fidaxomicin administered twice per day for ten days. The trial population was unbalanced with more patients randomized to ridinilazole with predisposing factors for recurrent CDI, and at a higher risk of poorer clinical outcomes as measured by ATLAS score, a tool for evaluating CDI in patients by age, temperature, leukocytes and albumin levels, and use of systemic antibiotics.


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The primary efficacy objective of this clinical trial was to determine the safety and tolerability of ten days of dosing with 200 mg of ridinilazole compared to dosing with 200 mg of fidaxomicin. The secondary objectives of the clinical trial were to assess the following:
 
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the plasma pharmacokinetics of ridinilazole in patients with CDI;
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the qualitative and quantitative effect of ridinilazole and fidaxomicin on gut flora;
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the plasma, urine and fecal concentrations of ridinilazole and its metabolites; and
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the efficacy of ten days of dosing with ridinilazole compared to fidaxomicin for the treatment of CDI.
The measurement of efficacy was based on investigator assessed clinical response at the test of cure, or TOC, visit, with clinical cure defined as resolution of diarrhea while on treatment and maintained at the TOC visit, and sustained clinical response, defined as clinical cure at the TOC visit and no recurrence of CDI within 30 days after the end of treatment.
We reported the following findings:
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Ridinilazole Preserved the Microbiome to a Greater Extent than Fidaxomicin. We observed that following 10 days of treatment, ridinilazole had markedly less of an impact on the gut microbiome of trial patients by measures of overall diversity and changes in key bacterial families when compared to those trial patients dosed with fidaxomicin. We observed that while ridinilazole and fidaxomicin both reduced the abundance of C. difficile, fidaxomicin treated patients had reduced abundance of other bacterial families, including Firmicutes phylum that are thought to have direct functional roles in protecting against CDI. We observed that for a number of these bacterial families, the difference between the two treatments reach statistical significance. We also reported alpha diversity, as measured by the Simpson's Diversity Index, as another measure of microbiome health, We observed a greater reduction in alpha-diversity during fidaxomicin treatment compared with ridinilazole treatment. These measures were a key secondary endpoint of the trial. We believe that these measures provide further evidence of ridinilazole's precision in killing C. difficile while preserving the gut microbiome.
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Ridinilazole was Well Tolerated. The primary endpoint of the trial was safety, as measured by the number of treatment emergent adverse events and serious adverse events. During the trial, no new or unexpected safety signals were identified and ridinilazole was well-tolerated.
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Comparable Rates of Sustained Clinical Response. We observed that seven of the 14 ridinilazole treated patients and six of the 13 fidaxomicin treatment patients were cured at the end of treatment and did not have a recurrence of CDI within the following 30 days to achieve a sustained clinical response. The trial was however not designed for efficacy comparisons due to the small number of patients enrolled and so we believe no conclusions on efficacy should be made based solely on this data.
Phase 3 Clinical Trial Program
In February 2017, we outlined our plans for the Phase 3 development program of ridinilazole following an end of Phase 2 meeting with the FDA and a scientific advice process with the EMA. We expect to conduct two Phase 3 clinical trials evaluating ridinilazole compared to the standard of care antibiotic, vancomycin, with each trial expected to enroll approximately 700 patients with CDI. The primary endpoint of the Phase 3 clinical trials is expected to be superiority in SCR. Other planned endpoints include health economic outcome measures. The Phase 3 clinical trial designs are consistent with the successful proof of concept Phase 2 clinical trial of ridinilazole. Activities to prepare ridinilazole for Phase 3 clinical trials continue, and we plan to commence these trials in the first quarter of 2019.
We have been awarded a contract from BARDA worth up to $62 million that will, in part, fund our planned Phase 3 clinical trials. We have also received $2.5 million upfront as part of our license and commercialization agreement with Eurofarma and are eligible to receive an additional $3.75 million in development milestones upon the achievement of staged patient enrollment targets in the planned Phase 3 clinical trials of ridinilazole.
CDI Preclinical Data
In a range of preclinical studies, ridinilazole demonstrated an encouraging profile as a potential antibiotic for the treatment of initial CDI and reduction of CDI recurrence. The following is a summary of key observations from these studies:
 
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Potency Against C. difficile. We screened ridinilazole in vitro against panels of C. Difficile clinical isolates from the United States and the United Kingdom. In these studies, ridinilazole displayed a potent bactericidal effect against all clinical isolates of C. difficile, including hypervirulent strains, such as ribotype 027. Ridinilazole was more potent than both vancomycin and metronidazole, and was either equally potent to, or more potent than, fidaxomicin. We have also tested ridinilazole against a panel of C. difficile clinical isolates that maximize the diversity of resistance to key classes of commonly used antibiotics. Ridinilazole did not display evidence of cross resistance with other classes of key antibiotics in common use.

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Targeted Spectrum of Activity. We conducted in vitro testing of ridinilazole, vancomycin, metronidazole and fidaxomicin against a wide panel of bacteria that are commonly found in the gut flora and are necessary for normal function of the gastrointestinal tract and also have wide implications on human health, such as the proper function of the immune system. As illustrated in the figure below, in this study ridinilazole had a minimal antibiotic effect against these beneficial bacterial groups. Ridinilazole also displayed higher selectivity for C. difficile in this study as compared to vancomycin, metronidazole and fidaxomicin and published data for cadazolid, an antibiotic that was reported recently by another company to have missed its primary endpoint of non-inferiority to vancomycin on clinical cure in one Phase 3 clinical trial, but achieved the same primary endpoint in a second Phase 3 clinical trial. In vitro potency is measured by determining the concentration of a drug (in micrograms per liter) needed to inhibit the growth of 90% of the bacterial strains being tested, referred to as a MIC90 measurement. A high number, typically higher than 256, indicates a weak antimicrobial effect, and a low number, typically less than eight, indicates a potent antimicrobial effect. We believe that the targeted spectrum of activity for ridinilazole seen in this study compared to the relatively broad spectrum of activity of other antibiotics indicates the potential for ridinilazole to selectively target C. difficile bacteria without causing collateral damage to the gut flora and thereby reduce CDI recurrence rates.

Profile of Selectivity of Ridinilazole vs. Other CDI Antibiotics
profileselectivitya01.jpg
 
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Protection Against CDI Recurrence. In a hamster model, we infected one group of hamsters with the hypervirulent CDI strain ribotype 027 and a second group of hamsters with a second CDI strain ribotype 012. In the United States, the hypervirulent CDI strain ribotype 027 accounts for approximately one third of all CDI cases. We then treated hamsters from each of the two infected groups with different doses of ridinilazole, vancomycin and fidaxomicin for five days. We evaluated disease recurrence over the 21 days following treatment. In this hamster model, a hamster fatality within the first five days is a result of initial C. difficile infection, while a fatality from day six to day 25 is a result of recurrent disease. As illustrated in the figure below, the hamsters from both infected groups that were treated with two different doses of ridinilazole had survival rates of 90% to 100% against strain ribotype 027 and 80% to 100% against strain ribotype 012. These survival rates were higher than hamsters treated with vancomycin (0% to 10% survival rates) for both CDI strains, comparable to hamsters treated with two different doses of fidaxomicin against strain ribotype 027 (90% to 100% survival rates) and higher than hamsters treated with two different doses of fidaxomicin against strain ribotype 012 (0% to 40% survival rates). All infection control hamsters received placebo and died by the second day following infection.

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Inhibition of Sporulation. In the in vitro testing of ridinilazole described above, we treated C. difficile cells with different concentrations of ridinilazole and measured the percentage of spores formed 96 hours after treatment. Untreated cells had a 100% conversion rate into C. difficile spores, which are the dormant protected form of the bacteria, after 96 hours. In this study, treatment with ridinilazole resulted in a meaningful reduction in spore count compared with untreated cells against all strains of C. difficile tested. We believe the reduction in sporulation may benefit rates of recurrent disease as the spores are highly resistant to standard cleaning practices and lead to increased risks of environmental persistence and disease transmission.
 
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Reduction in Toxin and Inflammation Levels. In an in vitro study, Caco-2 cells, a type of cell found in the colon of humans commonly used in studies of intestinal function, were exposed to C. difficile and then treated with ridinilazole, metronidazole and vancomycin or were untreated to act as a control. Following treatment with ridinilazole, toxin A levels were reduced by 91%, toxin B was not detected and IL-8 levels were reduced by 74%. Metronidazole and vancomycin had minimal effect on toxin A or B concentrations, and IL-8 concentrations were similar to control. Toxins A and B are produced by C. difficile to elicit an inflammatory response, including IL-8 release, which results in the symptoms of the disease including severe diarrhea. We believe that these data indicate that ridinilazole has the potential to reduce the severity of disease symptoms and that it has the potential to be more effective than current treatment options.

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Concomitant Antibiotic Use. In an in vitro bacterial culture study, we administered ridinilazole in combination with selected other antibiotics. In this study, concomitant use of antibiotics had neither a synergistic nor an antagonistic effect on the MIC90 values of ridinilazole against the C. difficile strains tested. We believe these results indicate that concomitant use of other antibiotics will not diminish the potency of ridinilazole. We believe this is an important finding because a significant portion of CDI patients receive antibiotic treatment for persistent or new infections.

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Low Propensity for Resistance. In an in vitro study, we treated C. difficile bacteria with ridinilazole and assessed the number of resistant bacteria at the end of treatment. We repeated this process multiple times, with each cycle referred to as a serial passage. We observed that use of ridinilazole resulted in a low frequency of spontaneous mutation and no resistance after 14 serial passages of treatment. We have also evaluated ridinilazole mutant prevention concentration, or MPC, a measure evaluating the ability of an antibiotic to minimize the development of resistant organisms, against C. difficile clinical isolates. In vitro results show that ridinilazole has low MPC values against these isolates, providing further evidence supporting ridinilazole’s profile for low resistance development.

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Ridinilazole Arrests Cell Division. In an in vitro study, we treated C. difficile bacteria with ridinilazole and assessed its effects on killing the bacteria. The study revealed that ridinilazole halts C. difficile cell division, characterized by a significant increase in the length of C. difficile cells and an absence of division septum formation.

Infectious Disease Pipeline

We are seeking to build a pipeline of new mechanism antibiotics focused on treating patients with serious bacterial infections where there is a substantial unmet need and where we believe we have the ability to show advantages over current treatments. On December 23, 2017, we expanded our activities in this field when we acquired Discuva Limited, a privately held U.K.-based company. Through this acquisition, we obtained a bacterial genetics-based platform that facilitates the discovery and development of new mechanism antibiotics. With this acquisition, we believe we are better placed to advance additional potential drug treatments for patients with serious bacterial infections. In March 2018, we announced that we had identified a new series of antibiotic compounds that have shown to have high potency against strains of gonorrhea with no development of resistance to date. These series were identified using our recently acquired bacterial genetics-based platform. We intend to select a candidate from this series for entry into IND enabling studies in the second half of 2018.
Our Collaborations and Funding Arrangements
Sarepta Therapeutics, Inc.
In October 2016, we entered into an exclusive license and collaboration agreement with Sarepta, pursuant to which we granted Sarepta the exclusive right to commercialize products in our utrophin modulator pipeline in the European Union, Switzerland, Norway, Iceland, Turkey and the Commonwealth of Independent States, which we refer to as the licensed territory. Such products include ezutromid and our future generation of small molecule utrophin modulators, which we refer to as licensed products. We also granted Sarepta an option to expand the licensed territory to include certain specified countries in Central and South America. We retain commercialization rights in the rest of the world.

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Financial Terms
Under the terms of the license and collaboration agreement, we received an aggregate of $62.0 million in payments from Sarepta that were comprised of an upfront payment of $40.0 million and a milestone payment of $22.0 million that we received following the first dosing of the last patient enrolled in our PhaseOut DMD clinical trial. In addition, we are eligible to receive up to an additional $20.0 million from Sarepta in specified development milestones for ezutromid and up to $150.0 million from Sarepta in specified regulatory milestones related to ezutromid in the licensed territory. We are also eligible to receive up to $65.0 million in specified development milestones and up to $225.0 million in specified regulatory milestones from Sarepta for our future generation small molecule utrophin modulators in the licensed territory. In addition, we are also eligible to receive up to $330.0 million from Sarepta in specified sales milestones on a product-by-product basis, as well as tiered, escalating royalties ranging from a low to high teens percentage of net sales on a product-by-product basis in the licensed territory. The royalties are subject to potential reductions, including for a specified portion of royalty payments that Sarepta may become required to pay under any third-party license agreements, subject to a maximum royalty reduction.
Research and Development Obligations
Under the license and collaboration agreement, we have agreed to collaborate with Sarepta on the research and development of the licensed products pursuant to a joint development plan through a joint steering committee comprised of an equal number of representatives from each party. Sarepta has the final decision making authority with respect to commercialization decisions of the licensed products in the licensed territory. If the joint steering committee elects not to pursue development of a second generation or future generation small molecule utrophin modulator candidate, then we may engage, under certain circumstances, in the development of such candidate for commercialization outside of the licensed territory and outside of the agreement, subject to Sarepta’s option, exercisable at Sarepta’s discretion and only available to Sarepta under certain specified circumstances, to bring such candidate under the license and collaboration agreement.
Under the license and collaboration agreement, we were solely responsible for all research and development costs for the licensed products until December 31, 2017. From January 1, 2018, we will be responsible for 55.0% of the budgeted research and development costs related to the licensed products in the licensed territory, and Sarepta will be responsible for 45.0% of such costs. Any costs in excess of 110.0% of the budgeted amount are borne by the party that incurred such costs. We are also obligated to spend a specified minimum amount on the research and development of certain licensed products prior to the end of 2019.
Manufacture and Supply of Licensed Products
We have agreed to use commercially reasonable efforts to supply to Sarepta active pharmaceutical ingredient, finished drug product and placebo for Sarepta to conduct research, development and commercialization activities for the licensed products in accordance with the license and collaboration agreement. Sarepta also will have the right to establish back up and second source suppliers under certain circumstances.
Intellectual Property
Under the terms of the license and collaboration agreement, each party will own the entire right, title and interest in and to all know-how and patent rights first made or invented solely by the employees or consultants of such party in the course of the collaboration, and all such know-how and patent rights will be included in the licenses granted to the other party under the license and collaboration agreement. The parties will jointly own all rights, title and interests in and to all know-how and patent rights first made or invented jointly by employees or consultants of the parties in the course of the collaboration.
Latin America Option
Under the license and collaboration agreement, Sarepta has an exclusive option, which we refer to as the Latin America Option to expand the licensed territory to include specified countries in South and Central America, which we refer to as the Option Territory. Sarepta may exercise the Latin America Option at any time prior to the date that is three months following the first receipt of regulatory approval for a licensed product in the United States or the European Union. We are eligible to receive from Sarepta up to an aggregate of $17.0 million for the exercise of the Latin America Option and the achievement of certain regulatory milestones. If Sarepta exercises the Latin America Option, it will be solely responsible for all research, development and commercialization costs of the licensed products that are specific to the Option Territory. We are also be eligible to receive up to $82.5 million in specified sales milestones on a product-by-product basis in the Option Territory, as well as royalties at the same rates as elsewhere in the licensed territory.


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Commercialization
Under the license and collaboration agreement, Sarepta will be solely responsible for all commercialization activities and associated costs, relating to licensed products in the licensed territories. Sarepta has agreed to use commercially reasonable efforts to commercialize licensed products in specified countries within the licensed territories and, if the Latin America Option is exercised, to use commercially reasonable efforts to commercialize licensed products in certain specified countries within the Option Territory.
Termination Provision
Unless earlier terminated, the license and collaboration agreement will expire on a licensed product-by-licensed product and country-by-country basis upon the expiration of the royalty term in such country for such licensed product. The license and collaboration agreement may be terminated by Sarepta upon six months’ prior written notice in its entirety or on a licensed product-by-licensed product and country-by-country basis. Either party may, subject to a cure period, terminate the license and collaboration agreement in the event of the other party’s uncured material breach. Sarepta may also terminate the license and collaboration agreement under specified circumstances relating to the safety or regulatory approvability of ezutromid. Except with respect to a second generation or future generation small molecule utrophin modulator candidate that the joint steering committee elects not to pursue, as described above, during the term of the license and collaboration agreement the parties are prohibited from commercializing small molecule utrophin modulators anywhere in the world outside of the collaboration. Such exclusivity commitment may survive for one year following termination with respect to one party depending upon the circumstances of termination.
Standstill Provision
The license and collaboration agreement also contains a standstill provision pursuant to which, among other things, each party has agreed that, for a period from the execution of the license and collaboration agreement until the date that regulatory approval is first received for a licensed product, subject to certain exceptions, or unless invited in writing by the other party to do so, neither party nor its respective affiliates will, directly or indirectly: (i) effect or seek, offer or propose to effect, or cause or participate in any acquisition of securities or assets of the other party; any tender or exchange offer, merger, consolidation or other business combination involving the other party; any recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to the other party; or any “solicitation” of “proxies” or consents to vote any voting securities of the other party, or in any way advise or, assist any other person in doing so; (ii) form, join or in any way participate in a “group” with respect to any securities of the other party; (iii) act in concert with any person in relation to voting securities of the other party; (iv) otherwise act to seek to control or influence the management, board of directors or policies of the other party; (v) take any action reasonably expected to force the other party to make a public announcement regarding any such matters; or (iv) enter into any agreements, discussions or arrangements with any third party with respect to any of the foregoing.
University of Oxford
In November 2013, we acquired all of the outstanding equity of MuOx Limited, or MuOx, a spin out of the University of Oxford founded by Professors Stephen Davies and Kay Davies. MuOx is our wholly owned subsidiary. In connection with that acquisition, we and MuOx entered into a set of agreements with the University of Oxford and its technology transfer division, Isis Innovation Limited, which is now known as Oxford University Innovation Limited, or OUI, regarding the development of small molecule utrophin modulators. In November 2015, this set of agreements were extended through November 2019, with an option to extend for a further twelve months.
Research Sponsorship
We have agreed to fund a drug research and discovery program in the University of Oxford laboratories to identify and research utrophin modulators to treat DMD. The University of Oxford is responsible for conducting this program. OUI has no obligations under the research sponsorship agreement. We refer to the agreement that governs our research sponsorship with the University of Oxford, which we, the University of Oxford and OUI entered into in November 2013, amended and restated in July 2014 and amended further in November 2015 and September 2017, as the research sponsorship agreement. Under the research sponsorship agreement, we have agreed to fund up to £4.6 million over a six-year research period ending in November 2019. If we exercise our right to extend the research period by an additional year, we have agreed to fund an additional £0.8 million, for a total of £5.4 million. As of January 31, 2018, we had paid the University of Oxford £3.1 million of this amount.
The University of Oxford will own all intellectual property arising from the sponsored research, and we have agreed to assign to the University of Oxford any intellectual property arising from the sponsored research that either we or third parties whom we engage, may create, subject to our exercise of an option to obtain an exclusive license under the intellectual property arising from the sponsored research, as described below.

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Either we or the University of Oxford would have the right to terminate the research sponsorship agreement for specified reasons, including the other party’s insolvency or material breach, if the breach remains uncured for a specified period or is uncurable, or our mutual determination, at specified times, that there are valid scientific reasons for terminating the project. The University of Oxford may also terminate the research sponsorship agreement if we default on more than one payment obligation and do not remedy the failure within a specified period after receiving notice. We may also terminate the research sponsorship agreement, after a specified period of time if any of the principal investigators is unable or unwilling to continue supervising the sponsored research and the successor proposed by the University of Oxford is not acceptable to us on reasonable and substantial grounds.
License of Know-How
In November 2013, OUI executed a know-how license agreement with MuOx. We refer to the agreement, which was amended in July 2014 and March 2017, as the know-how license agreement. In the know-how license agreement, OUI granted MuOx a license under specified know-how, consisting of data and other information associated with specified utrophin modulators and biological screening technology, and all intellectual property rights pertaining to the specified know-how, to research, develop, make, have made, use, have used, import, have imported, export, have exported, and market the licensed know-how and products or processes resulting from the licensed know-how. The know-how license agreement was novated to us in March 2017. We refer to the know-how specified in the know-how license agreement, as Oxford’s background know-how. Our rights under Oxford’s background know-how in the specified utrophin modulators are exclusive and sublicenseable. Our rights under Oxford’s background know-how in the biological screening technology were initially exclusive, but became non-exclusive in November 2016. In March 2017, we amended the know-how license agreement to extend our rights under Oxford’s background know-how for certain biological screening technologies to November 2019, subject to an option to extend for a further twelve months. We paid to OUI a nominal amount upon its entry into the amendment in March 2017 and, pursuant to the amendment, agreed to pay to OUI additional nominal amounts annually for the term of the exclusive license period, provided the amounts payable in the final year of the exclusive license period shall only be payable if we further extend the term of the exclusive license. Our rights under the know-how license agreement are sublicenseable with OUI’s consent, which may not be unreasonably withheld. Our rights are also subject to the rights of the University of Oxford, the Muscular Dystrophy Association and the Muscular Dystrophy Campaign, and their respective employees, students and agents, to use and publish Oxford’s background know-how for specified scholarly and academic research and teaching purposes. We have agreed to use commercially reasonable efforts to develop, exploit and market Oxford’s background know-how or any compound deriving from Oxford’s background know-how.
The know-how license agreement will remain in effect at least until November 2019 with respect to the biological screening technology know-how, and otherwise, with respect to each of the compound or biological screening technology know-how, as long as we or our sublicensees are using commercially reasonable efforts to research and develop compounds derived from that know-how. Either we or OUI would have the right to terminate the know-how license agreement if the other party materially breaches the know-how license agreement and the breach remains uncured for a specified period or is uncurable. We may terminate the know-how license agreement at our discretion by giving OUI six months’ prior written notice. OUI may terminate the know-how license agreement on thirty days’ notice if we fail to use commercially reasonable efforts to exploit Oxford’s background know-how and do not remedy such breach within a specified time, or immediately, if we take specified actions relating to winding up or experience certain insolvency-related events.
Exclusive Option Rights
We refer to the intellectual property rights arising under the research sponsorship agreement, or arising from research and development of small molecule utrophin modulation conducted by or under the supervision of certain University of Oxford scientists, that is created or reduced to practice after November 2013 and within a specified time after the expiration or termination of the research sponsorship agreement, as arising IP. Under an option agreement that we, the University of Oxford and OUI entered into in November 2013 and amended in November 2015, which we refer to, as amended, as the option agreement, OUI granted us an exclusive option to license the arising IP. We paid OUI £10,000 in connection with entering into the amendment to the option agreement. We may exercise the option within specified periods.
In connection with entering into the initial option agreement, we paid OUI an option fee of a specified amount and issued to OUI warrants to purchase up to 354,090 of our ordinary shares at a purchase price of £0.20 per ordinary share. In connection with the November 2015 amendment, we extended the period during which OUI may exercise such options to February 2020. The warrants may be exercised based on the achievement of certain research, development and regulatory milestones. In November 2015, we announced the nomination of two series of new utrophin modulators for progression into lead optimization studies to achieve the first research milestone. This entitled OUI to subscribe for 50,000 new ordinary one penny shares at an exercise price of 20 pence per share during the three month period starting November 22, 2016, all of which were exercised in February 2017. The remaining warrants did not meet the specified milestones in the specified timeframe and have now lapsed.

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If we exercise our option to obtain a license under arising IP, we would be obligated to pay OUI up to a specified sum in option exercise fees, and OUI will use reasonable efforts to enter into a license agreement as quickly as possible, subject to OUI obtaining all necessary intellectual property assignments and conducting its internal due diligence procedures.
For any arising IP for which we have exercised the option and that comprises new chemical entities or compounds, which we refer to as optioned compounds, we would obtain an exclusive, sublicenseable license. We are obligated to pay milestone payments of up to £75,000 upon the achievement of specified development milestones, whether such milestones occur prior to or after our exercise of the option to obtain an exclusive sublicenseable license. Following exercise of such an option we would also be obligated to pay milestone payments upon the achievement of specified regulatory milestones with respect to each optioned compound. The specified regulatory milestone payment is due each time the specified regulatory milestone is achieved with respect to an optioned compound and, if each optioned compound achieved each regulatory milestone once, we would be obligated to pay OUI a total of £3.7 million in regulatory milestone payments for each optioned compound.
We would also be obligated to pay OUI a low single digit royalty of net sales by us, our affiliates or sublicensees of any product containing an optioned compound, which we refer to as a licensed product, subject to specified reductions. Our obligation to pay the royalty would expire on the later of the expiration of the last valid claim of any licensed patent or patent application claiming the licensed product or 20 years after the date on which we enter the license agreement. We would also be obligated to pay OUI a low single digit percentage of any payments we receive in connection with granting a sublicense under the licensed arising IP.
If we funded the development of the arising IP for the optioned compounds, through our funding under the research sponsorship agreement or by funding work at contract research organizations prior to the creation of the arising IP, then the milestone and royalty payments will be reduced to reflect the value that our funding delivered to the arising IP. We and OUI would negotiate such adjustment in good faith. If we and OUI are unable to agree, an expert will be appointed to make the determination.
For any arising IP for which we have exercised the option and that does not comprise new chemical entities or compound, which we call enabling IP, we would obtain an exclusive license, which we could sublicense with OUI’s prior written consent, not to be unreasonably withheld, delayed or conditioned. We and OUI would negotiate the milestone payments and any other payments that we would be obligated to pay to OUI with respect to enabling IP. If we and OUI are unable to agree, an expert will be appointed to make the determination.
Any license granted to us under arising IP would be subject to the rights of the University of Oxford, and any person who at any time worked on the licensed arising IP, to use and publish the arising IP for specified scholarly and academic research and teaching purposes. We would also be obligated to use commercially reasonable efforts to develop, exploit and market the arising IP licensed to us.
The license agreement would remain in effect as long as we are using commercially reasonable efforts to develop and market the licensed products, unless terminated earlier by us or OUI, or extended by mutual agreement. Either we or OUI would be permitted to terminate the license agreement at any time if the other party materially breaches the license agreement and the breach remains uncured for a specified period or the breach is uncurable. We would be permitted to terminate the license agreement for any reason after it has been in effect for three years upon giving six months’ prior written notice. OUI would be permitted to terminate the license agreement if we challenge the validity of the licensed patents or patent applications or if we claim that we are no longer obligated to make payments to OUI under the license agreement because the know-how is unnecessary, or if we take specified actions relating to winding up or experience certain insolvency-related events. Upon termination of the license agreement, we would be obligated to grant OUI an irrevocable, transferable, non-exclusive license to develop, make, have made, use and market any improvements made by us during the option period, and related intellectual property rights, subject to the payment of a reasonable royalty.
The option agreement will remain in effect until a specified period of time, sufficient for us and OUI to enter into the license agreement, after our rights to exercise the options terminate, unless the option agreement is terminated earlier by either OUI and the University of Oxford, or us. Either we, or OUI and the University of Oxford, may terminate the option agreement at any time if the other materially breaches the option agreement and the breach remains uncured for a specified period or the breach is uncurable, or if the other becomes insolvent. We may also terminate the option agreement, effective on each anniversary of the effective date of the option agreement, by giving 60 days’ prior written notice to OUI and the University of Oxford.

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Wellcome Trust
In October 2012, we entered into a translation award funding agreement with the Wellcome Trust Limited, as trustee of the Wellcome Trust, in order to support a Phase 1 and a Phase 2 clinical trial of ridinilazole for the treatment of CDI. We refer to the translation award funding agreement as the translation award agreement. Under the translation award agreement, we were eligible to receive up to £4.0 million from the Wellcome Trust, of which we have received the entire £4.0 million. The translation award agreement followed a funding agreement we and the Wellcome Trust entered in October 2009, which we refer to as the discovery award agreement, under which we received £2.3 million for preclinical development of CDI antibiotics. We refer to any compound or product that is covered by intellectual property rights created under the discovery award agreement or the translation award agreement, or that is covered by intellectual property rights that we created or to which we had rights prior to October 2009 and that relate to the activities under the discovery award agreement or the translation award agreement, as the award products. We agreed to use commercially reasonable efforts to achieve certain development milestones by specified dates.
We would be required to make a full or partial repayment to the Wellcome Trust of the funding we received under the translation award agreement, plus accrued interest, under specified conditions, including our unauthorized use of the award amount, our fraudulent or willful misconduct, our knowingly withholding material information from the Wellcome Trust, or an acquisition by certain third parties of all or a material part of our business or assets or of a majority of our equity. Upon such a full repayment, our obligation to share a portion of net revenue with the Wellcome Trust would terminate.
Termination
Unless earlier terminated by the Wellcome Trust, the translation award agreement will terminate on the earlier of our full repayment of the award amount, plus accrued interest, to the Wellcome Trust following its request for repayment, or the expiration of all payment obligations under the translation award agreement and the revenue sharing agreement. The Wellcome Trust may terminate the translation award agreement for specified reasons, including our material breach or insolvency related events or the Wellcome Trust’s determination that the clinical trials should be terminated due to a serious failure in the progress, management or conduct of the clinical trials, if we do not remedy such condition within a specified period after receiving notice.
Assignment
We may not, without the Wellcome Trust’s prior consent, assign, transfer or declare a trust over the translation award agreement or otherwise dispose of any of our rights or obligations under the translation award agreement, with such consent not being unreasonably withheld, delayed or conditioned, other than an assignment to our affiliates.
Revenue Sharing Agreement
The terms of the translation award agreement required us to enter into a revenue sharing agreement with the Wellcome Trust prior to the further development (beyond the Phase 2 trial supported by the 2012 translational award agreement) and commercialization, which together we refer to as the "Exploitation" of any compound or product that is covered by the intellectual property rights created under the translational award agreement or the discovery award agreement, or that is covered by background intellectual property rights. Under such revenue sharing agreement, the Wellcome Trust would be entitled to a share of the net revenue that we, our affiliates, licensees or third-party collaborators receive under the Exploitation of the award products or any intellectual property associated with such Exploitation.
In October 2017, we entered into a revenue sharing agreement with the Wellcome Trust. Under the terms of the revenue sharing agreement: i) if we commercialize ridinilazole, the Wellcome Trust is eligible to receive a low-single digit percentage of net revenue (as defined in the translation award agreement), and a one-time milestone payment of a specified amount if cumulative net revenues exceed a specified amount; ii) if a third party commercializes ridinilazole, the Wellcome Trust is eligible to receive a mid-single digit percentage of the net revenues we receive from commercial sales by such third party, and a one-time milestone payment of a specified amount if cumulative net revenues we receive exceed a specified amount. In addition, following the first commercial sale by such third party, the Wellcome Trust is eligible to receive a one-time milestone payment equal to a low-single digit percentage of the aggregate amount of any pre-commercial payments we receive from third-party licensees prior to such commercial sale; and iii) in the event of an assignment or sale of the assets or intellectual property pertaining to ridinilazole, the net proceeds we receive from such assignment or sale would be treated as net revenue under the revenue sharing agreement.

Under the revenue sharing agreement, it was agreed that any development funding or grant funding we receive from BARDA or other third parties, including licensees, would not be classified as net revenue or as a pre-commercial payment. In addition, under the revenue sharing agreement, the Wellcome Trust agreed to terminate all of its rights under the translation award agreement to develop or commercialize the award products or the related intellectual property in specified markets and in specified indications, in the event that we were not developing or commercializing the award products or such intellectual property for such markets or in such indications.


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Unless earlier terminated, the revenue sharing agreement will expire upon later of the expiration of the last patent or patent application covering ridinilazole; the expiration of any agreement or payment obligations entered into by ourselves with a third party relating to the Exploitation of ridinilazole; and the expiration of any payment obligations owed to the Wellcome Trust relating to the Exploitation of ridinilazole. In addition, each party has the right to terminate the revenue sharing agreement if the other party materially breaches the agreement and the breach remains uncured for a specified period or the breach is uncurable, or if the other party experiences specified insolvency related events.
Muscular Dystrophy Association
In December 2011, we entered into a grant agreement with the Muscular Dystrophy Association, Inc., or MDA, a not for profit corporation based in New York, in order to partially fund a Phase 1 clinical trial of ezutromid to treat DMD. We refer to this grant agreement with MDA as the MDA grant agreement. To date, we have received the entire amount of MDA’s grant to us, or an aggregate of $750,000.
Financial Terms
We refer to small molecules that can upregulate the utrophin gene, including ezutromid and compounds with similar mechanisms of action to which we have rights, as project compounds. Under the MDA grant agreement, we have agreed to make specified milestone payments to MDA during our or our affiliates’ development and commercialization of pharmaceutical products containing the project compounds, which we refer to as project products. Because we raised more than a specified aggregate amount of funding, we have paid a specified sum to MDA under the terms of the agreement, which we refer to as the MDA cash infusion milestone payment.
We have also agreed to pay MDA a specified lump sum amount, less any previously paid MDA cash infusion milestone payment, following the regulatory approval of any project product for use or sale in the United States or European Union for the treatment of DMD or Becker muscular dystrophy, or BMD, and an additional specified sum upon achievement of a commercial milestone. We would be obligated to pay MDA a low single digit percentage royalty of worldwide net sales by us, our affiliates or licensees of any project product. If we assign our rights to any of the project compounds or experience specified change in control events, MDA may require our assignee to assume our obligations under the MDA grant agreement with respect to the assigned rights, or require us to pay MDA the greater of a low single digit percentage of the fair market value of the assigned rights, or an amount that would give MDA an internal rate of return of a low double digit percentage on its grant to us.
Interruption License
Upon the occurrence of specified events, which we refer to as interruptions, we have agreed to refund to MDA the entire grant amount of $750,000 plus a low double digit interest on that amount, subject to specified exemptions. An interruption may occur if we or our affiliates cease reasonable research, development and commercialization of project products and cease using diligent efforts to obtain a third party development and commercialization partner, which require our annual expenditure of a minimum specified amount on such efforts for longer than a specified period. Interruptions may also occur if we license the rights to develop and commercialize project products to a third party without retaining a right of reversion, and such partner ceases reasonable development and commercialization of project products for longer than a specified period or ceases to sell project products in the United States or European Union, or if we, upon the reversion of such rights from a third party commercialization partner to us, fail to use reasonable efforts to develop and commercialize project products and cease using diligent efforts to obtain a third party development and commercialization partner, or, within a specified period from the date of reversion, to license the development and commercialization activities of project products to a third party. In all such cases, we are exempt from interruption payments in the event of specified scientific failures, including if we fail to achieve primary endpoints for any clinical trial of ezutromid, if the project compounds are unfit for administration to humans or if we cannot develop a commercial manufacturing process.
We have granted to MDA, effective on the occurrence of such an interruption, an exclusive, sublicenseable, worldwide, perpetual, irrevocable and royalty-free license under the patent rights, know-how and intellectual property that we control, useful for the project compounds or project products, to research, develop, manufacture, have manufactured, use, sell, offer to sell, import and export the project compounds and project products for the prevention, treatment, or amelioration of DMD or BMD. We refer to such license as the interruption license. Upon the effectiveness of the interruption license, we would be obligated to assign to MDA or its designee the regulatory filings, regulatory approvals, and contract rights that we or our affiliates own, and deliver specified know-how, in each case, relating to project compounds and project products.
MDA acknowledges that if a royalty or other payment is due to any third party from whom we licensed or acquired the intellectual property licensed to MDA, the interruption license is contingent on MDA or its sublicensee assuming those obligations resulting from their exercise of the interruption license.

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Termination
The MDA grant agreement will continue indefinitely.
Duchenne Partners Fund
In December 2011, we entered into a grant agreement with the Duchenne Partners Fund, LLC, or DPF, a Delaware limited liability company, in order to partially fund a Phase 1 clinical trial of ezutromid to treat DMD. We refer to this grant agreement with DPF as the DPF grant agreement. To date, we have received the entire amount of DPF’s grant to us, or an aggregate of $500,000.
Financial Terms
We refer to small molecules that can upregulate the utrophin gene, including ezutromid and compounds with similar mechanisms of action to which we have rights, as project compounds. Under the DPF grant agreement, we have agreed to make specified milestone payments to DPF during our or our affiliates’ development and commercialization of pharmaceutical products containing the project compounds, which we refer to as project products. Because we raised more than a specified aggregate amount of funding, we have paid a specified sum to DPF under the terms of the agreement, which we refer to as the DPF cash infusion milestone payment. We have also agreed to pay DPF a specified lump sum amount, less any previously paid DPF cash infusion milestone payment, following the regulatory approval of any project product for use or sale in the United States or European Union for the treatment of DMD or BMD and an additional specified sum upon achievement of a commercial milestone. We would be obligated to pay DPF a low single digit percentage royalty of worldwide net sales by us, our affiliates or licensees of any project product. If we assign our rights to any of the project compounds or experience specified change in control events, DPF may require our assignee to assume our obligations under the DPF grant agreement with respect to the assigned rights, or require us to pay DPF the greater of a low single digit percentage of the fair market value of the assigned rights, or an amount that would give DPF an internal rate of return of a low double digit percentage on its grant to us.
Termination
The DPF grant agreement will continue indefinitely.
BARDA
In September 2017, we were awarded a contract from the Biomedical Advanced Research and Development Authority, or BARDA, to fund, in part, the clinical and regulatory development of ridinilazole for the treatment of infections caused by C. difficile. The contract includes an approximate 12-month base period with federal government funding of approximately $32 million. In addition, there are three option work segments that, if exercised in full by BARDA, would increase the total federal government funding under the contract to approximately $62 million.
The contract provides for a cost-sharing arrangement under which BARDA would fund a specified portion of estimated costs for the continued clinical and regulatory development of ridinilazole for CDI. Under this cost sharing arrangement, we are responsible for a portion of the costs associated with each segment of work, including any costs in excess of the estimated amounts.
During the base period of the contract, BARDA has agreed to fund, in part, activities for our two planned Phase 3 clinical trials of ridinilazole, including obtaining requisite regulatory approvals for the opening of trial sites, arranging for the manufacture of clinical supply of ridinilazole and engaging third-party contract research organizations to conduct the planned clinical trials including initial patient enrollment and treatment. The three option work segments, if exercised in full, would provide for up to an additional $30 million of funding from BARDA and would support the development of ridinilazole through to potential submission of applications for marketing approval. Activities to be covered by the three option work segments include the completion of patient enrollment and treatment in our two planned Phase 3 clinical trials and the delivery of final reports related to both trials; drug manufacturing-related enabling activities for the submission of applications for marketing approval; and the preparation, submission and review of applications for marketing approvals of ridinilazole for CDI in the United States.
Each of the three option work segments is an independent, discrete work segment that is eligible to be exercised, in BARDA’s sole discretion, upon the completion of agreed-upon milestones and deliverables. If all option work segments are exercised by BARDA, the contract would run into 2022, unless extended by us and BARDA.


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The contract specifies the plan of activities to be conducted under the contract. In addition to our obligations to conduct the activities provided for by the plan, we are obligated to satisfy various federal reporting requirements, addressing clinical progress, technical issues, and intellectual property and financial matters. Payments to us under the contract are expected to be made monthly after we invoice BARDA for allowable costs that have been incurred.
BARDA may terminate this agreement upon our uncured default in our performance of the agreement or at any time if the contracting officer determines that it is in the U.S. government’s interest to terminate the agreement.
Under standard U.S. government contracting terms, the U.S. government receives only limited rights for government use of certain of our pre-existing data and certain data produced with non-federal funding, to the extent such data are required for delivery to BARDA under the contract. The U.S. government receives unlimited rights to use and disclose new data first produced under the contract with BARDA. Except for commercialization rights to ridinilazole in South America, Central America and the Caribbean, we currently have exclusive worldwide commercialization rights to ridinilazole and retains these rights under the BARDA contract. However, the U.S. government is entitled to a nonexclusive, nontransferable, worldwide, royalty-free license to practice or have practiced any patent on an invention that is conceived or first reduced to practice under the contract, which is referred to as a subject invention.
In addition, the U.S. government may obtain additional rights if we do not elect to retain ownership of a subject invention or if we do not satisfy certain disclosure and patent prosecution obligations with respect to a subject invention. Furthermore, the government is entitled to march-in rights under our contract with BARDA. March-in rights permit the U.S. government to require that we grant a license to a subject invention to a third party if we have not taken effective steps to achieve practical application of the invention within a reasonable time; if such action is necessary to meet health and safety needs and/or requirements for public use that we are not meeting; or if we have not obtained from any exclusive licensee the required agreement for manufacturing such invention substantially in the United States or a waiver of this requirement.

Discuva Limited Acquisition

Share Purchase Agreement

On December 23, 2017, we entered into a share purchase agreement with the shareholders of Discuva, a private limited company organized under the laws of England and Wales pursuant to which we acquired all of the outstanding share capital of Discuva. Discuva was a discovery stage company with a bacterial genetics-based platform that facilitates the discovery and development of new mechanism antibiotics. 

Under the terms of the share purchase agreement, we paid the Discuva shareholders a total upfront consideration comprised of (A) £5.0 million in cash plus an amount equal to the cash and cash equivalents of Discuva minus (i) indebtedness, (ii) any other liabilities of Discuva at the closing of the transaction that had arisen outside of the ordinary course of business and (iii) funds to be held in escrow and (B) £5.0 million of our ordinary shares, satisfied by the issue of 2,934,272 of our fully-paid, new ordinary shares at a price per share of £1.704.
In addition, the Discuva shareholders will be entitled to receive contingent payments from us based on (i) the receipt of potential research and development tax credits to which Discuva may be entitled for the period from April 1, 2015 to the date of the share purchase agreement and (ii) approximately one-half of the economic benefit from any amounts received in connection with certain payments made to us under an existing collaboration agreement between Discuva and F. Hoffman - La Roche Limited, or Roche. Separately, certain employees, former employees and former directors of Discuva are eligible for further payments from Discuva of up to £7.9 million based on specified development and clinical milestones related to proprietary product candidates developed under the platform.
Under the terms of the share purchase agreement, the Discuva shareholders agreed, subject to certain limited exceptions, to a lock-up period lasting until September 23, 2018 during which they will not sell, transfer or otherwise dispose of, or create any encumbrance over any of, the ordinary shares received as consideration. Following the lock-up period, each of the Discuva shareholders has agreed for a period of twelve months to only dispose of their ordinary shares in accordance with certain orderly market undertaking provisions specified in the share purchase agreement, which, among other things, limit the number of ordinary shares each seller may dispose of during such twelve-month period.
The share purchase agreement also prohibits the selling Discuva shareholders from engaging in certain business activities which are competitive with the business of Discuva at the time of the transaction and from soliciting customers or hiring employees of Discuva, subject to certain limited exceptions as set forth in the agreement, for a period of two years following the date of the agreement.


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The share purchase agreement contained customary representations and warranties that ourselves and the selling Discuva shareholders made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the share purchase agreement and may be subject to important qualifications and limitations agreed to by the us and the Discuva shareholders in connection with negotiating its terms. Moreover, the representations and warranties may be subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders or may have been used for the purpose of allocating risk between us and the Discuva shareholders rather than establishing matters as facts. For the foregoing reasons, no person should rely on such representations and warranties as statements of factual information at the time they were made or otherwise.


Eurofarma Laboratórios S.A.

On December 21, 2017, we entered into an exclusive license and commercialization agreement with Eurofarma, pursuant to which we granted Eurofarma the exclusive right to commercialize ridinilazole in Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Dominican Republic, Uruguay and Venezuela, which we refer to as the licensed territory. We have retained commercialization rights in the rest of the world.
Financial terms
Under the terms of the license agreement, we received an upfront payment of $2.5 million and are entitled to receive an additional $3.75 million in development milestones upon the achievement of staged patient enrollment targets in the licensed territory in one of our two planned Phase 3 clinical trials of ridinilazole. We are eligible to receive up to $21.5 million in development, commercial and sales milestones when cumulative net sales equal or exceed $100.0 million in the licensed territory. Each subsequent achievement of an additional $100.0 million in cumulative net sales will result in us receiving additional milestone payments, which, when combined with anticipated product supply transfer payments from Eurofarma paid to us in connection with a commercial supply agreement to be entered into between the two parties, will provide payments estimated to range from a mid- to high-teens percentage of cumulative net sales in the licensed territory. We estimate such product supply transfer payments from Eurofarma will range from a high single-digit to low double-digit percentage of cumulative net sales in the licensed territory.
Regulatory and Commercial
Under the license agreement, Eurofarma is responsible for all costs related to obtaining regulatory approval of ridinilazole in the licensed territory and is obligated to use commercially reasonable efforts to file applications for regulatory approval in specified countries in the licensed territory within a specified time period after we have filed an application for regulatory approval, or obtained regulatory approval, for ridinilazole in a jurisdiction where we retain commercial rights. To assist Eurofarma in obtaining regulatory approvals in the licensed territory, we are responsible, at our expense, to conduct such additional chemistry, manufacturing and control studies as may be required by regulatory authorities in countries within the licensed territory. We retain sole responsibility for the clinical development of ridinilazole in all countries and are responsible for all costs related to obtaining regulatory approval for ridinilazole outside of the licensed territory.
We are obligated to use commercially reasonable efforts to supply or cause to be supplied to Eurofarma sufficient commercial supply of ridinilazole, and Eurofarma has agreed to purchase its supply of ridinilazole exclusively from us. If we are unable to supply Eurofarma with commercial supply of ridinilazole during the term of the agreement, we are obligated to transfer to Eurofarma or its third-party suppliers’ know-how that would be needed for Eurofarma or its third-party suppliers to manufacture the product for commercial sale in the licensed territory.
Termination
Unless earlier terminated, the license and commercialization agreement will expire upon the latest of (i) the earliest date on which there are no longer any valid patent claims covering ridinilazole in the licensed territory, (ii) the earliest date on which there is no longer regulatory exclusivity for ridinilazole in the licensed territory or (iii) ten years from the date of the first commercial sale of ridinilazole in the licensed territory. The license agreement may be terminated by Eurofarma in its entirety upon six months’ prior written notice any time after Eurofarma has paid to us the specified development milestones related to our planned Phase 3 clinical trials of ridinilazole. Either party may, subject to a cure period, terminate the license agreement in the event of the other party’s uncured material breach. Eurofarma may also terminate the license agreement under specified circumstances relating to the safety, efficacy or regulatory approvability of ridinilazole or under specified circumstances if Eurofarma determines certain commercialization plans are no longer economically viable.


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Each of the parties has granted to the other a right of reference to copy and use all information included in any regulatory filing in connection with such other party’s development, manufacture and commercialization, as applicable, of ridinilazole in the territories where such other party retains such rights. In addition, during the term of the license agreement, except in certain limited circumstances, Eurofarma has agreed not to commercialize any competing antibiotic treatments actively marketed for the treatment of CDI in the licensed territory or our territory without our prior written consent. Similarly, we have agreed not to commercialize any antibiotic treatments competing with the licensed products which would be actively marketed for the treatment of CDI in the licensed territory.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technologies, knowledge, experience and scientific resources provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions, government agencies and private and public research institutions. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.
Many of our competitors may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain marketing approvals for their products more rapidly than we obtain approval for ours. In addition, our ability to compete may be affected because in some cases insurers or other third-party payors seek to encourage the use of generic products. This may have the effect of making branded products less attractive, from a cost perspective, to buyers.
The key competitive factors affecting the success of our product candidates are likely to be their efficacy, safety, convenience, price and the availability of coverage and reimbursement from government and other third-party payors.
The competition for ezutromid and ridinilazole includes the following:
Ezutromid
There is currently no approved therapy for the treatment of DMD applicable to all DMD patients that seeks to alter, slow or stop the progression of the disease. Corticosteroids, such as prednisolone and deflazacort, are the current standard of care for DMD patients, although these are symptomatic treatments that do not address the underlying cause of DMD, and their use can be associated with severe side effects and concerns over weight gain. Other companies are developing alternative therapeutic approaches to the treatment of DMD, a number of which are outlined below.
Exon Skipping. Sarepta is developing treatments for DMD based on exon-skipping approaches. Exons are organic molecules known as nucleotides within the DNA strand that the cellular machinery translates to make full-length, functional protein. In a sub-population of DMD patients, synthesis of the dystrophin protein is disrupted because of mutations that may be due, among other things, to deleted exons. Exon-skipping technology seeks to allow the production of a shorter but still functional dystrophin protein and take the disease phenotype to that of the milder form of muscular dystrophy called Becker muscular dystrophy, or BMD. Sarepta is developing treatments for DMD based on exon-skipping approaches and received accelerated approval from the FDA for eteplirsen in September 2016. Eteplirsen targets exon 51 and targets approximately 13% of all DMD patients. Sarepta is also developing other exon-skipping therapies to treat other genetic mutations. Sarepta also has product candidates in clinical trials that are targeting exon 44, which is applicable to approximately 6% of all DMD patients, exon 45, which is applicable to approximately 8% of all DMD patients, and exon 53, which is applicable to approximately 6% of all DMD patients. According to an article published in 2009 in the peer reviewed journal Human Mutation, skipping of the ten most common exons would treat in the aggregate approximately 41% of all DMD patients. We believe that there are exon-skipping therapies currently in clinical development to address four of these exons and that skipping of these exons would treat in the aggregate less than one-third of all DMD patients. Other companies developing therapies targeting exon mutations include Nippon Shinyaku Co., Ltd., which is conducting Phase 2 clinical trials in Japan and the United States and Wave Life Sciences Ltd., which commenced a Phase 1 clinical trial in November 2017.


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Nonsense mutations. PTC Therapeutics, Inc., or PTC, is developing ataluren (TranslarnaTM). Ataluren is a small molecule that enables formation of functional dystrophin in DMD patients with nonsense mutations. DMD caused by nonsense mutations affects approximately 13% of all DMD patients. The European Commission has granted conditional approval for ataluren in Europe, and PTC is commercializing ataluren in several European countries. In October 2015, PTC announced a Phase 3 confirmatory clinical trial of ataluren did not achieve its primary endpoint, and in February 2016, PTC announced its receipt of a “refuse to file” letter from the FDA indicating that PTC’s NDA for ataluren was not sufficiently complete to permit a substantive review. In March 2017, PTC announced the filing over protest of the NDA for ataluren, which allows PTC to have its NDA filed and reviewed following receipt of a refuse to file determination. In February 2018, PTC announced the FDA had denied PTC's appeal of the "complete response" letter in relation to the NDA for ataluren.
Other DMD approaches. A number of other companies are pursuing alternative therapeutic approaches for the treatment of DMD. Tivorsan Pharmaceuticals is developing a recombinant form of biglycan, a protein that is naturally produced in the body and regulates production of utrophin in developing muscle, which is currently in preclinical development. Pfizer, Inc., or Pfizer, and Roche, are pursuing an approach based on muscle tissue growth through myostatin inhibition. Pfizer is developing the myostatin inhibitor PF-06252616 (domagrozumab) and initiated a Phase 2 clinical trial in patients with DMD in December 2014. Roche is developing BMS-986089, a myostatin inhibitor that is currently in Phase 1/2 clinical development;Roche acquired BMS-986089 from the Bristol-Myers Squibb Company in April 2017. Santhera Pharmaceuticals Holding AG, or Santhera, completed a Phase 3 clinical trial of its product candidate, idebenone (Raxone®/Catena®), in 2014 and reported that idebenone delayed deterioration in respiratory function. Santhera filed a MAA with the EMA in 2016 and in September 2017 received a negative opinion from the Committee for Medicinal Products for Human Use, or CHMP; on appeal, CHMP maintained its negative opinion. Santhera is conducting a confirmatory Phase 3 trial of idebenone in DMD patients who are receiving concomitant corticosteroids. Catabasis Pharmaceuticals, Inc., or Catabasis, is developing edasalonexent as a non-steroidal, anti-inflammatory drug. Catabasis reported top-line results in January 2017 from a Phase 1/2 clinical trial in which edasalonexent did not meet its primary endpoint; Catabasis reported positive results from an open-label extension of this Phase 1/2 clinical trial in October 2017 and February 2018, and it intends to progress edasalonexent into a Phase 3 clinical trial during the first half of 2018. Akashi Therapeutics, or Akashi, is developing HT-100, an anti-inflammatory and anti-fibrotic small molecule that aims to reduce fibrosis and inflammation. In February 2016, Akashi announced that dosing and enrollment into a Phase 1b/2a clinical trial of HT-100 was suspended due to a fatality in the trial. A number of companies are targeting gene therapy based approaches for DMD which has the potential to address the genetic cause of DMD by using an adeno-associated virus to deliver a shortened, yet functional, version of the dystrophin gene to a DMD patient and change the disease phenotype to BMD. Companies with gene therapy based approaches include Asklepios Biopharmaceuticals, Inc., which is developing biostrophin and is currently in Phase 1 clinical development, and Solid Biosciences, or Solid, which commenced a Phase 1/2 adaptive clinical trial in patients with DMD in November 2017; in March 2018, Solid announced the Phase 1/2 clinical trial had been placed on clinical hold by the FDA following a serious adverse event in the trial.
Ridinilazole
Several pharmaceutical and biotechnology companies have established themselves in the market for the treatment of CDI, and several additional companies are developing products for the treatment of CDI. We expect that these products will compete with ridinilazole.
Antibiotics. Currently the mostly commonly used treatments for CDI are the broad spectrum antibiotics vancomycin and metronidazole, both of which are available in generic form in the United States. Generic antibiotic therapies typically are sold at lower prices than branded antibiotics and generally are preferred by managed care providers of health services. The antibiotic fidaxomicin (Dificid™ in the United States, Dificlir™ in Europe) is approved for the treatment of CDI in the United States and the European Union. Fidaxomicin was originally developed by Optimer Pharmaceuticals, Inc., which was later acquired by Cubist Pharmaceuticals, Inc., or Cubist. Cubist was recently acquired by Merck & Co., Inc., or Merck. Other antibiotics in late-stage clinical trials include cadazolid, which was originally being developed by Actelion Pharmaceuticals Limited, or Actelion, before global rights were acquired by Johnson and Johnson in January 2017. In June 2017, Actelion reported that cadazolid missed the primary endpoint of non-inferiority to vancomycin on clinical cure in one Phase 3 clinical trial, but achieved the same primary endpoint in a second Phase 3 clinical trial.
Other CDI approaches. A number of other approaches for the treatment of CDI are in development. Merck is developing the monoclonal antibodies bezlotoxumab (Zinplava™), which received approval from the FDA in October 2016. Bezlotoxumab is an antibody that neutralizes certain toxins that are produced by C. difficile bacteria and indicated to reduce recurrence for CDI in patients who are receiving antibacterial drug treatment and are at high risk of disease recurrence. Merck has also filed a MAA with the EMA, and the CHMP of the EMA issued an opinion recommending approval of bezlotoxumab in November 2016. Sanofi Pasteur SA is developing the vaccine ACAM-CDIFF for primary prevention of CDI. ACAM-CDIFF is likely to be used only in high-risk patients given the difficulty of administering a vaccine to a broad population. In December 2017, Sanofi announced it was ending development stating there was a low probability of the trial meeting its primary endpoint following a review of interim data. Pfizer is developing the vaccine PF-06425090 that aims to induce a functional antibody response to neutralize the C difficile bacterial toxins. Pfizer reported top-line Phase 2 results in January 2017 and commenced enrollment into a Phase 3 trial in March 2017.

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Fecal biotherapy aims to recolonize the bacteria that comprise the natural gut flora and would also be adjunctive therapy to antibiotics. Fecal biotherapy approaches in development include SER-109 and SER-262, which are being developed by Seres Therapeutics Inc., formerly Seres Health, Inc., and RBX2660, which is being developed by Rebiotix Inc. Seres reported interim results from a Phase 2 trial in 2016 in which SER-109 missed its primary efficacy endpoint; a Phase 3 clinical trial of SER-109 was commenced in June 2017. SER-262 is currently being evaluated in a Phase 1b clinical trial in CDI patients. In April 2017, Rebiotix reported positive top-line data from an open-label Phase 2 clinical trial of RBX2660 and in August 2017, enrolled the first patient into a Phase 3 clinical trial. Synthetic Biologics, Inc., is developing ribaxamase, an oral enzyme designed to degrade certain IV beta-lactam antibiotics within the GI tract to preserve the natural balance of the microbiome and reduce the risk of colonization by bacterial including C. difficile. In January 2017, it was reported that ribaxamase met its primary endpoint in a Phase 2b clinical trial; Phase 3 clinical trials are currently planned to be initiated in 2019.
Manufacturing
We do not own or operate, and currently have no plans to establish, manufacturing facilities for the production of clinical or commercial quantities of ezutromid, ridinilazole or for the other compounds that we are evaluating in our DMD or infectious diseases programs. We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates and any products that we may develop.
We currently engage a single, third-party manufacturer to provide clinical material of the active pharmaceutical ingredient, or API, and fill and finish services for the final drug product of the F3 formulation of ezutromid that is being used in our ongoing Phase 2 proof of concept clinical trial called PhaseOut DMD. We are engaged with a different drug product manufacturer to provide bulk drug product of the F6 formulation of ezutromid. A different third party manufacturer provides fill and finish services to supply the final drug product of the F6 formulation of ezutromid that is being evaluated in PhaseOut DMD. We are engaged with a different third-party vendor to provide labeling, packaging and distributions services of the F3 and F6 formulations. We are engaged with another third-party manufacturer to provide clinical material of the API of ridinilazole with a different supplier responsible for fill and finish services to supply the final drug product for use in the future Phase 3 clinical trials. We believe these suppliers are suitable for commercial manufacture. We expect to use the same third-party vendor for clinical packaging, labeling and distribution of the finalized ridinilazole drug product that we use for ezutromid. We obtain the supplies of our API and drug products from these manufacturers pursuant to agreements that include specific supply timelines and volume expectations.
We obtain the supplies of our product candidates from these manufacturers under master services contracts and specific work orders. However, we do not have long-term supply arrangements in place. We do not currently have arrangements in place for redundant supply or a second source for API for ezutromid. If any of our current manufacturers should become unavailable to us for any reason, we believe that there are a number of potential replacements, although we might incur some delay in identifying and qualifying such replacements.
All of our product candidates are organic compounds of low molecular weight and are referred to as small molecules. We have selected these compounds based on their potential efficacy and safety, although they are also associated with reasonable cost of goods, ready availability of starting materials and ease of synthesis. We believe that the chemistry for ezutromid and ridinilazole is amenable to scale-up and does not currently require unusual equipment in the manufacturing process. We expect to continue to develop product candidates that can be produced cost-effectively at contract manufacturing facilities.
Intellectual Property
Our success depends in large part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. We strive to protect the proprietary technology that we believe is important to our business by, among other methods, seeking and maintaining patents, where available, that are intended to cover our product candidates, compositions and formulations, their methods of use and processes for their manufacture and any other inventions that are commercially important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary and competitive position.
As of March 15, 2018, we owned or exclusively licensed a total of nine U.S. patents, one U.S. patent application, six European patents and two European patent applications, including original filings, continuations and divisional applications, as well as numerous other foreign counterparts to these U.S. and European patents and patent applications.

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Our DMD patent portfolio includes the following granted patents and patent applications that we own or exclusively license: 
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two granted U.S. patents covering the composition of matter of ezutromid and combinations of ezutromid with ancillary therapeutic agents, which are scheduled to expire in 2029 and 2030, respectively;
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a granted U.S. patent covering methods of manufacture of ezutromid, which is scheduled to expire in 2029;
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a granted U.S. patent covering formulations of ezutromid, which is scheduled to expire in 2033;
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a granted European patent covering the composition of matter of ezutromid that cleared the opposition period in April 2015 with no opposition filed against it at the European Patent Office, and which is scheduled to expire in 2027;
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a granted European patent covering formulations of ezutromid, which is scheduled to expire in 2033;
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a granted European patent covering combinations of ezutromid with ancillary therapeutic agents, which is scheduled to expire in 2028; and
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a number of pending patent applications covering formulations of ezutromid, further methods of use of ezutromid and the composition of matter of second generation utrophin modulator candidates.
Our CDI patent portfolio includes the following granted patents and patent applications that we own or exclusively license: 
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a granted U.S. patent covering the use of ridinilazole in the treatment of CDI, which is scheduled to expire in 2029;
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a corresponding granted European patent covering the use of ridinilazole in the treatment of CDI, which is scheduled to expire in 2029;
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a granted U.S. patent covering hydrates of ridinilazole, which is scheduled to expire in 2029;
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a granted European divisional patent covering hydrates of ridinilazole and pharmaceutical compositions comprising ridinilazole;
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a further granted U.S. patent covering the use of ridinilazole in the treatment of CDI, which is scheduled to expire in 2029; and
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two granted U.S. patents, a granted European patent and a pending European divisional application covering second generation agents for the treatment of CDI, which are scheduled to expire in 2031.
While patent protection is not available for composition of matter claims that only recite the API for ridinilazole, protection may be available for the pharmaceutical compositions comprising ridinilazole as well as other forms thereof such as hydrates (and indeed claims have been secured for the latter in both Europe and the United States).
As of March 15, 2018, we owned a total of two U.S. patents and two European patents and a number of pending patent applications, including original filings, continuations and divisional applications, as well as numerous other foreign counterparts to these U.S. and European patents and patent applications, covering the genetics-based technology platform acquired in connection with the Discuva acquisition. We also have a number of pending patent applications covering potential antibiotic compounds that are being identified using our genetics-based platform.
The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In most countries, including the United States, the patent term is 20 years from the filing date of a non-provisional patent application. In the United States, a patent’s term may, in certain cases, be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or the USPTO, in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier filed patent.
The term of a U.S. patent that covers a drug, biological product or medical device approved pursuant to a pre-market approval, or PMA, may also be eligible for patent term extension when FDA approval is granted, provided that certain statutory and regulatory requirements are met. The length of the patent term extension is related to the length of time the drug is under regulatory review while the patent is in force. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration date set for the patent. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent applicable to each regulatory review period may be granted an extension and only those claims reading on the approved drug may be extended. Similar provisions are available in Europe and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug, provided that statutory and regulatory requirements are met. Thus, in the future, if and when our product candidates receive approval by the FDA or foreign regulatory authorities, we expect to apply for patent term extensions on issued patents covering those products, depending upon the length of the clinical trials for each drug and other factors. The expiration dates of our patents and patent applications referred to above are without regard to potential patent term extension or other market exclusivity that may be available to us.

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In addition to patents, we may rely, in some circumstances, on trade secrets to protect our technology and maintain our competitive position. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, corporate and scientific collaborators, consultants, scientific advisors, contractors and other third parties. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.
Sales and Marketing
In light of our stage of development, we have not yet established a sales and marketing organization or distribution capabilities. Under the terms of our exclusive license and collaboration agreement with Sarepta, we have granted Sarepta the exclusive right to commercialize products in our utrophin modulator pipeline, including our lead candidate ezutromid, in the European Union, Switzerland, Norway, Iceland, Turkey and the Commonwealth of Independent States, which we refer to as the licensed territory. We also granted Sarepta an option to expand the licensed territory to include specified countries in Central and South America. We have retained commercialization rights in the rest of the world including the United States.
If ezutromid receives marketing approval, we intend to commercialize it initially in the United States with our own focused, specialized sales force that we plan to establish. We believe that medical specialists treating DMD are sufficiently concentrated that we will be able to effectively promote ezutromid with a targeted sales team in the United States. We also believe that our relationships with patient advocacy groups will strengthen our ability to market ezutromid. Outside of the United States in the territories where we currently retain commercialization rights, we plan to evaluate the relative merits of marketing ezutromid ourselves and utilizing collaboration, distribution and other marketing arrangements with third parties to commercialize ezutromid.
We continue to evaluate our options for maximizing the commercial opportunity for ridinilazole. Under the terms of our exclusive license and commercialization agreement with Eurofarma, we have granted Eurofarma the exclusive right to commercialize ridinilazole in certain countries in South America, Central America and the Caribbean. We have retained commercialization rights in all other territories, including in the United States and Europe.
We may determine to commercialize the product directly in the United States and Europe with our own specialized sales force or seek third-party collaborators for the commercialization of ridinilazole. We intend to evaluate the relative merits of retaining commercialization rights for ourselves or entering into collaboration arrangements with third parties depending on factors such as the anticipated development costs required to achieve marketing approval, the sales and marketing resources required in each territory in which we receive approval, the relative size of the market opportunity in such territory, the particular expertise of the third party and the proposed financial terms of the arrangement.
We are also in the process of building key capabilities, such as marketing, market access, sales management and medical affairs, to implement marketing and medical strategies for any products that we market through our own sales organization and to oversee and support our sales force. The responsibilities of the marketing organization would include developing educational initiatives with respect to approved products and expanding relationships with thought leaders in relevant fields of medicine.
Government Regulation
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, record keeping, labeling, pricing, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
Review and Approval of Drugs in the United States
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The failure to comply with the FDCA and applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice, or DOJ, or other federal and state governmental entities.

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An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:
 
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completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;
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submission to the FDA of an IND, which must take effect before human clinical trials may begin;
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approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;
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performance of adequate and well-controlled human clinical trials in accordance with current good clinical practices, or GCP, to establish the safety and efficacy of the proposed drug product for each indication;
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preparation and submission to the FDA of a new drug application, or NDA;
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review of the product candidate by an FDA advisory committee, where appropriate or if applicable;
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satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product, or components thereof, are produced to assess compliance with current Good Manufacturing Practices, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;
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satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;
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payment of user fees and securing FDA approval of the NDA; and
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compliance with any post-approval requirements, including Risk Evaluation and Mitigation Strategies, or REMS, where applicable, and any post-approval studies required by the FDA.
Preclinical Studies
Before an applicant begins testing a compound with potential therapeutic value in humans, the product candidate enters the preclinical testing stage. Preclinical studies include laboratory evaluation of the purity and stability of the active pharmaceutical ingredient, or API, and the formulated drug or drug product, as well as in vitro and animal studies to assess the safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, are submitted to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.
Companies usually must complete some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, and must also develop additional information about the chemistry and physical characteristics of the investigational product and 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 candidate product and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the candidate product does not undergo unacceptable deterioration over its shelf life.
The IND and IRB Processes
An IND is an exemption from the FDCA that allows an unapproved drug to be shipped in interstate commerce for use in an investigational clinical trial and a request for FDA authorization to administer an investigational drug to humans. Such authorization must be secured prior to interstate shipment and administration of any new drug that is not the subject of an approved NDA. In support of a request for an IND, applicants must submit a protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, are submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of each IND before clinical trials may begin. This waiting period is designed to allow the FDA to review the IND to determine whether human research subjects will be exposed to unreasonable health risks. At any time during this 30-day period, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND and impose a clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin.

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Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on that trial. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND. For example, a specific protocol or part of a protocol is not allowed to proceed, while other protocols may do so. No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold. Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation can proceed.
A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinical study is conducted under an IND, all FDA IND requirements must be met unless waived. When the foreign clinical study is not conducted under an IND, the sponsor must ensure that the study complies with certain regulatory requirements of the FDA in order to use the study as support for an IND or application for marketing approval. Specifically, on April 28, 2008, the FDA amended its regulations governing the acceptance of foreign clinical studies not conducted under an investigational new drug application as support for an IND or a new drug application. The final rule provides that such studies must be conducted in accordance with good clinical practice, or GCP, including review and approval by an independent ethics committee, or IEC, and informed consent from subjects. The GCP requirements in the final rule encompass both ethical and data integrity standards for clinical studies. The FDA’s regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical studies, as well as the quality and integrity of the resulting data. They further help ensure that non-IND foreign studies are conducted in a manner comparable to that required for IND studies.
In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.
Additionally, some trials are overseen by an independent group of qualified experts organized by the 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 that only the group maintains to available data from the study. Suspension or termination of development during any phase of clinical trials can occur if it is determined that the participants or patients are being exposed to an unacceptable health risk. Other reasons for suspension or termination may be made by us based on evolving business objectives and/or competitive climate.
Information about clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on its ClinicalTrials.gov website.
Human Clinical Trials in Support of an NDA
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the inclusion and exclusion criteria, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
Phase 1. The investigational drug is initially introduced into healthy human subjects or, in certain indications such as cancer, patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.
Phase 2. The investigational drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
Phase 3. The investigational drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product. These clinical trials are commonly referred to as “pivotal” studies, which denotes a study that presents the data that the FDA or other relevant regulatory agency will use to determine whether or not to approve a product candidate.

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Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug; and any clinically important increase in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, 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. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data submitted.
Concurrent with clinical trials, companies often 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, purity, and potency 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.
Submission of an NDA to the FDA
Assuming successful completion of required clinical testing and other requirements, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Under federal law, the submission of most applications is subject to an application user fee, which for federal fiscal year 2018 is $2,421,495 for an application requiring clinical data. The sponsor of an approved application is also subject to an annual program fee, which for fiscal year 2018 is $304,162. Certain exceptions and waivers are available for some of these fees, such as an exception from the application fee for products with orphan designation and a waiver for certain small businesses.

Following submission of an application, the FDA conducts a preliminary review of an NDA within 60 calendar days of its receipt and strives to inform the sponsor by the 74th day after the FDA’s receipt of the submission whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review.
The FDA has agreed to certain performance goals in the review process of NDAs. Under that agreement, 90% of applications seeking approval of new molecular entities, or NMEs, are meant to be reviewed within ten months from the date on which FDA accepts the NDA for filing, and 90% of applications for NMEs that have been designated for “priority review” are meant to be reviewed within six months of the filing date. For applications seeking approval of drugs that are not NMEs, the ten-month and six-month review periods run from the date that FDA receives the application. The review process may be extended by the FDA for three additional months to consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These pre-approval inspections cover all facilities associated with an NDA submission, including drug component manufacturing (such as active pharmaceutical ingredients), finished drug product manufacturing, and control testing laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Under the FDA Reauthorization Act of 2017, the FDA must implement a protocol to expedite review of responses to inspection reports pertaining to certain applications, including applications for products in shortage or those for which approval is dependent on remediation of conditions identified in the inspection report.
In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. REMS use risk minimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and whether the product is a new molecular entity. REMS can include medication guides, physician communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU may include, but are not limited to,

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special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The FDA may require a REMS before approval or post-approval if it becomes aware of a serious risk associated with use of the product. The requirement for a REMS can materially affect the potential market and profitability of a product.
The FDA may refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Fast Track, Breakthrough Therapy, Priority Review and Regenerative Advanced Therapy Designations
The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. These programs are referred to as fast track designation, breakthrough therapy designation, priority review designation and regenerative advanced therapy designation.
Specifically, the FDA may designate a product for fast track review if it is intended, whether alone or in combination with one or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to address unmet medical needs for such a disease or condition. For fast track products, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of a fast track product’s application before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a fast track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period goal for reviewing a fast track application does not begin until the last section of the application is submitted. In addition, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Second, a product may be designated as a breakthrough therapy if it is intended, either alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to breakthrough therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a case- by-case basis, whether the proposed product represents a significant improvement when compared with other available therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a treatment-limiting product reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing application from ten months to six months.
Finally, with passage of the 21st Century Cures Act, or Cures Act, in December 2016, Congress authorized the FDA to accelerate review and approval of products designated as regenerative advanced therapies. A product is eligible for this designation if it is a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or condition. The benefits of a regenerative advanced therapy designation include early interactions with FDA to expedite development and review, benefits available to breakthrough therapies, potential eligibility for priority review and accelerated approval based on surrogate or intermediate endpoints.
Accelerated Approval Pathway
The FDA may grant accelerated approval to a drug for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing treatments based upon a determination that the drug has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant accelerated approval for such a drug when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality, or IMM, and 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. Drugs granted accelerated approval must meet the same statutory standards for safety and effectiveness as those granted traditional approval.

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For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate clinical endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a drug, such as an effect on IMM. The FDA has limited experience with accelerated approvals based on intermediate clinical endpoints, but has indicated that such endpoints generally may support accelerated approval where the therapeutic effect measured by the endpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding that the therapeutic effect is reasonably likely to predict the ultimate clinical benefit of a drug.
The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extended period of time is required to measure the intended clinical benefit of a drug, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. For example, accelerated approval has been used extensively in the development and approval of drugs for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large clinical trials to demonstrate a clinical or survival benefit.
The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug’s clinical benefit. As a result, a drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
Limited Population Antibacterial Drug Pathway
With passage of the Cures Act, Congress authorized the FDA to approve an antibacterial or antifungal drug, alone or in combination with one or more other drugs, as a “limited population drug.” To qualify for this approval pathway, the drug must be intended to treat a serious or life-threatening infection in a limited population of patients with unmet needs; the standards for approval of drugs and biologics under the FDCA and the Public Health Service Act, or PHSA, must be satisfied; and the FDA must receive a written request from the sponsor to approve the drug as a limited population drug pursuant to this provision. The FDA’s determination of safety and effectiveness for such a product must reflect the benefit-risk profile of such drug in the intended limited population, taking into account the severity, rarity, or prevalence of the infection the drug is intended to treat and the availability or lack of alternative treatment in such a limited population.
Any drug or biologic approved under this pathway must be labeled with the statement “Limited Population” in a prominent manner and adjacent to the proprietary name of the drug or biological product. The prescribing information must also state that the drug is indicated for use in a limited and specific population of patients and copies of all promotional materials relating to the drug must be submitted to the FDA at least 30 days prior to dissemination of the materials. If the FDA subsequently approves the drug for a broader indication, the agency may remove any post-marketing conditions, including requirements with respect to labeling and review of promotional materials applicable to the product. Nothing in this pathway to approval of a limited population drug prevents sponsors of such products from seeking designation or approval under other provisions of the FDCA, such as accelerated approval.
The FDA’s Decision on an NDA
On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs.

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After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record keeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual program fee requirements for any marketed products, as well as new application fees for supplemental applications with clinical data.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
 
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restrictions on the marketing or manufacturing of the product, suspension of the approval, complete withdrawal of the product from the market or product recalls;
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fines, warning letters or holds on post-approval clinical trials;
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refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals;
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product seizure or detention, or refusal to permit the import or export of products; or
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injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates the marketing, labeling, advertising and promotion of prescription drug products placed on the market. regulation includes, among other things, standards and regulations for direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet and social media. Promotional claims about a drug’s safety or effectiveness are prohibited before the drug is approved. After approval, a drug product generally may not be promoted for uses that are not approved by the FDA, as reflected in the product’s prescribing information. In the United States, health care professionals are generally permitted to prescribe drugs for such uses not described in the drug’s labeling, known as off-label uses, because the FDA does not regulate the practice of medicine. However, FDA regulations impose rigorous restrictions on manufacturers’ communications, prohibiting the promotion of off-label uses. It may be permissible, under very specific, narrow conditions, for a manufacturer to engage in nonpromotional, non-misleading communication regarding off-label information, such as distributing scientific or medical journal information.

If a company is found to have promoted off-label uses, it may become subject to adverse public relations and administrative and judicial enforcement by the FDA, the Department of Justice, or the Office of the Inspector General of the Department of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. The federal government has levied large civil and criminal fines against companies for alleged improper promotion, and has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

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In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, and its implementing regulations, as well as the Drug Supply Chain Security Act, or DSCA, which regulate the distribution and tracing of prescription drug samples at the federal level, and set minimum standards for the regulation of distributors by the states. The PDMA, its implementing regulations and state laws limit the distribution of prescription pharmaceutical product samples, and the DSCA imposes requirements to ensure accountability in distribution and to identify and remove counterfeit and other illegitimate products from the market.
Section 505(b)(2) NDAs
NDAs for most new drug products are based on two full clinical studies which must contain substantial evidence of the safety and efficacy of the proposed new product for the proposed use. These applications are submitted under Section 505(b)(1) of the FDCA. The FDA is, however, authorized to approve an alternative type of NDA under Section 505(b)(2) of the FDCA. This type of application allows the applicant to rely, in part, on the FDA’s previous findings of safety and efficacy for a similar product, or published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug for which the investigations made to show whether or not the drug is safe for use and effective in use and relied upon by the applicant for approval of the application “were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted.”

Thus, Section 505(b)(2) authorizes the FDA to approve an NDA based on safety and effectiveness data that were not developed by the applicant. NDAs filed under Section 505(b)(2) may provide an alternate and potentially more expeditious pathway to FDA approval for new or improved formulations or new uses of previously approved products. If the 505(b)(2) applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new drug candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.
Abbreviated New Drug Applications for Generic Drugs
In 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress authorized the FDA to approve generic drugs that are the same as drugs previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an abbreviated new drug application, or ANDA, to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug product previously approved under an NDA, known as the reference listed drug, or RLD.
Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form, and the strength of the drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug. Under the statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a significant difference from the rate and extent of absorption of the listed drug.” Upon approval of an ANDA, the FDA indicates whether the generic product is “therapeutically equivalent” to the RLD in its publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists consider a therapeutic equivalent generic drug to be fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s designation of therapeutic equivalence often results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.
Under the Hatch-Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for the RLD has expired. The FDCA provides a period of five years of non-patent data exclusivity for a new drug containing a new chemical entity. A new chemical entity is a drug that contains no active moiety that has previously been approved by the FDA in any other NDA. An active moiety is the molecule or ion responsible for the physiological or pharmacological action of the drug substance. In cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the original product approval. The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailability or bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application. This three-year exclusivity period often protects changes to a previously approved drug product, such as a new dosage form, route of administration, combination or indication. Three-year exclusivity would be available for a drug product that contains a previously approved active moiety, provided the statutory requirement for a new clinical investigation is satisfied. Unlike five-year NCE exclusivity, an award of three-year exclusivity does not block the FDA from accepting ANDAs seeking approval for generic versions of the drug as of the date of approval of the original drug product. The FDA typically makes decisions about awards of data exclusivity shortly before a product is approved.

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The FDA must establish a priority review track for certain generic drugs, requiring the FDA to review a drug application within eight (8) months for a drug that has three (3) or fewer approved drugs listed in the Orange Book and is no longer protected by any patent or regulatory exclusivities, or is on the FDA’s drug shortage list. The new legislation also authorizes FDA to expedite review of ‘‘competitor generic therapies’’ or drugs with inadequate generic competition, including holding meetings with or providing advice to the drug sponsor prior to submission of the application.
Hatch-Waxman Patent Certification and the 30-Month Stay
Upon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published in the Orange Book. When an ANDA applicant files its application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval. To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would.
Specifically, the applicant must certify with respect to each patent that: 
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the required patent information has not been filed;
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the listed patent has expired;
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the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or
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the listed patent is invalid, unenforceable or will not be infringed by the new product.
A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a “Paragraph IV certification.” If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired (other than method of use patents involving indications for which the ANDA applicant is not seeking approval).
If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent or a decision in the infringement case that is favorable to the ANDA applicant.
To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As a result, approval of a Section 505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant.
Pediatric Studies and Exclusivity
Under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the Food and Drug Administration Safety and Innovation Act, or FDASIA, in 2012, sponsors must also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests and other information required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.
For drugs intended to treat a serious or life-threatening disease or condition, the FDA must, upon the request of an applicant, meet to discuss preparation of the initial pediatric study plan or to discuss deferral or waiver of pediatric assessments. In addition, FDA will meet early in the development process to discuss pediatric study plans with sponsors and FDA must meet with sponsors by no later than the end-of-phase 1 meeting for serious or life-threatening diseases and by no later than ninety (90) days after FDA’s receipt of the study plan.

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The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in FDASIA. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.

The FDA Reauthorization Act of 2017 established new requirements to govern certain molecularly targeted cancer indications. Any company that submits an NDA three years after the date of enactment of that statute must submit pediatric assessments with the NDA if the drug is intended for the treatment of an adult cancer and is directed at a molecular target that FDA determines to be substantially relevant to the growth or progression of a pediatric cancer. The investigation must be designed to yield clinically meaningful pediatric study data regarding the dosing, safety and preliminary efficacy to inform pediatric labeling for the product.
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application.
Orphan Drug Designation and Exclusivity
The FDA has granted orphan drug designation to ezutromid for the treatment of DMD. Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the United States for treatment of the disease or condition will be recovered from sales of the product). A company must request orphan product designation before submitting an NDA. If the request is granted, the FDA will disclose the identity of the therapeutic agent and its potential use. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process, although it does convey certain advantages such as tax benefits and exemption from PDUFA application fee.
If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will be receiving orphan product exclusivity. Orphan product exclusivity means that the FDA may not approve any other applications for the same product for the same indication for seven years, except in certain limited circumstances. Competitors may receive approval of different products for the indication for which the orphan product has exclusivity and may obtain approval for the same product but for a different indication. If a drug or drug product designated as an orphan product ultimately receives marketing approval for an indication broader than what was designated in its orphan product application, it may not be entitled to exclusivity.

Orphan drug exclusivity will not bar approval of another product under certain circumstances, including if a subsequent product with the same drug for the same condition is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market demand. This is the case despite an earlier court opinion holding that the Orphan Drug Act unambiguously required the FDA to recognize orphan exclusivity regardless of a showing of clinical superiority.
Rare Pediatric Disease Priority Review Voucher Program
With enactment of the FDASIA in 2012, Congress authorized the FDA to award priority review vouchers to sponsors of certain rare pediatric disease product applications that meet the criteria specified in the law. This provision is designed to encourage development of new drug and biological products for prevention and treatment of certain rare pediatric diseases. Specifically, under this program, a sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. The sponsor of a rare pediatric disease drug product receiving a priority review voucher may transfer (including by sale) the voucher to another sponsor. The voucher may be further transferred any number of times before the voucher is used, as long as the sponsor making the transfer has not yet submitted the application.

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For the purposes of this program, a “rare pediatric disease” is a (a) serious or life-threatening disease in which the serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years, including age groups often called neonates, infants, children, and adolescents; and (b) rare disease or conditions within the meaning of the Orphan Drug Act. A sponsor may choose to request rare pediatric disease designation, but the designation process is entirely voluntary; requesting designation is not a prerequisite to requesting or receiving a priority review voucher. In addition, sponsors who choose not to submit a rare pediatric disease designation request may nonetheless receive a priority review voucher if they request such a voucher in their original marketing application and meet all of the eligibility criteria. Under the Cures Act, the Rare Pediatric Disease Priority Review Voucher program was reauthorized until 2020. However, if a drug is designated before October 1, 2020, it is eligible to receive a voucher if approved before October 2022.
GAIN Exclusivity for Antibiotics
The FDA has designated ridinilazole as a qualified infectious disease product, or QIDP, under the Generating Antibiotic Incentives Now Act, or GAIN Act. Congress passed this legislation to encourage the development of antibacterial and antifungal drug products that treat pathogens that cause serious and life-threatening infections. To that end, the GAIN Act grants an additional five years of exclusivity upon the approval of an NDA for a drug product designated by the FDA as a QIDP. Thus, for a QIDP, the periods of five-year new chemical entity exclusivity, three-year new clinical investigation exclusivity and seven-year orphan drug exclusivity, would become ten years, eight years and 12 years, respectively.
A QIDP is defined in the GAIN Act to mean “an antibacterial or antifungal drug for human use intended to treat serious or life-threatening infections, including those caused by—(1) an antibacterial or antifungal resistant pathogen, including novel or emerging infectious pathogens;” or (2) certain “qualifying pathogens.” A “qualifying pathogen” is a pathogen that has the potential to pose a serious threat to public health (such as resistant gram positive pathogens, multi-drug resistant gram negative bacteria, multi-drug resistant tuberculosis and Clostridium difficile) and that is included in a list established and maintained by the FDA. A drug sponsor may request the FDA to designate its product as a QIDP any time before the submission of an NDA. The FDA must make a QIDP determination within 60 days of the designation request. A product designated as a QIDP will be granted priority review by FDA and can qualify for “fast track” status.
The additional five years of exclusivity under the GAIN Act for drug products designated by the FDA as QIDPs applies only to a drug that is first approved on or after July 9, 2012. Additionally, the five year exclusivity extension does not apply to: a supplement to an application under FDCA Section 505(b) for any QIDP for which an extension is in effect or has expired; a subsequent application filed with respect to a product approved by the FDA for a change that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device or strength; or a product that does not meet the definition of a QIDP under Section 505(g) based upon its approved uses.

Patent Term Restoration and Extension
The term of a U.S. patent that covers a drug, biological product or medical device approved pursuant to a PMA may also be eligible for patent term extension when FDA approval is granted, provided that certain statutory and regulatory requirements are met. The length of the patent term extension is related to the length of time the drug is under regulatory review while the patent is in force. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration date set for the patent. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent applicable to each regulatory review period may be granted an extension and only those claims reading on the approved drug may be extended. Similar provisions are available in Europe and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug, provided that statutory and regulatory requirements are met. The USPTO reviews and approves the application for any patent term extension or restoration in consultation with the FDA.
The 21st Century Cures Act
On December 13, 2016, President Obama signed the 21st Century Cures Act, or Cures Act, into law. The Cures Act is designed to modernize and personalize healthcare, spur innovation and research, and streamline the discovery and development of new therapies through increased federal funding of particular programs. It authorizes increased funding for the FDA to spend on innovation projects. The new law also amends the Public Health Service Act to reauthorize and expand funding for the National Institutes of Health. The Act establishes the NIH Innovation Fund to pay for the cost of development and implementation of a strategic plan, early stage investigators and research. It also charges NIH with leading and coordinating expanded pediatric research. Further, the Cures Act directs the Centers for Disease Control and Prevention to expand surveillance of neurological diseases.
With amendments to the FDCA and PHSA, Title III of the Cures Act seeks to accelerate the discovery, development, and delivery of new medicines and medical technologies. To that end, and among other provisions, the Cures Act reauthorizes the existing priority review voucher program for certain drugs intended to treat rare pediatric diseases until 2020; creates a new priority review voucher program for drug applications determined to be material national security threat medical countermeasure applications; revises the FDCA to streamline review of combination product applications; requires FDA to

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evaluate the potential use of “real world evidence” to help support approval of new indications for approved drugs; provides a new “limited population” approval pathway for antibiotic and antifungal drugs intended to treat serious or life-threatening infections; and authorizes FDA to designate a drug as a “regenerative advanced therapy,” thereby making it eligible for certain expedited review and approval designations.
Regulation Outside the United States
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of drug products. Whether or not it obtains FDA approval for a product, the company would need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimately varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.
Regulation and Marketing Authorization in the European Union
Clinical Trial Approval
The Clinical Trials Directive 2001/20/EC, the Directive 2005/28/EC on Good Clinical Practice, or GCP, and the related national implementing provisions of the individual EU Member States govern the system for the approval of clinical trials in the EU. Under this system, an applicant must obtain prior approval from the competent national authority of the EU Member States in which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical trial at a specific study site after the competent ethics committee has issued a favorable opinion. The clinical trial application must be accompanied by, among other documents, an investigational medicinal product dossier (the Common Technical Document) with supporting information prescribed by Directive 2001/20/EC, Directive 2005/28/EC, where relevant the implementing national provisions of the individual EU Member States and further detailed in applicable guidance documents.
In April 2014, the new Clinical Trials Regulation, (EU) No 536/2014 (Clinical Trials Regulation) was adopted. The Regulation was published on June 16, 2014 but is not expected to apply until 2019. The Clinical Trials Regulation will be directly applicable in all the EU Member States, repealing the current Clinical Trials Directive 2001/20/EC and replacing any national legislation that was put in place to implement the Directive. Conduct of all clinical trials performed in the EU will continue to be bound by currently applicable provisions until the new Clinical Trials Regulation becomes applicable. The extent to which on-going clinical trials will be governed by the Clinical Trials Regulation will depend on when the Clinical Trials Regulation becomes applicable and on the duration of the individual clinical trial. If a clinical trial continues for more than three years from the day on which the Clinical Trials Regulation becomes applicable the Clinical Trials Regulation will at that time begin to apply to the clinical trial.
The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trials in the EU. The main characteristics of the regulation include: a streamlined application procedure via a single entry point, the “EU Portal and Database”; a single set of documents to be prepared and submitted for the application as well as simplified reporting procedures for clinical trial sponsors; and a harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts. Part I is assessed by the appointed reporting Member State, whose assessment report is submitted for review by the sponsor and all other competent authorities of all EU Member States in which an application for authorization of a clinical trial has been submitted (Concerned Member States). Part II is assessed separately by each Concerned Member State. Strict deadlines have been established for the assessment of clinical trial applications. The role of the relevant ethics committees in the assessment procedure will continue to be governed by the national law of the Concerned Member State. However, overall related timelines will be defined by the Clinical Trials Regulation.
PRIME Designation in the EU
In March 2016, the European Medicines Agency, or EMA, launched an initiative to facilitate development of product candidates in indications, often rare, for which few or no therapies currently exist. The PRIority MEdicines, or PRIME, scheme is intended to encourage drug development in areas of unmet medical need and provides accelerated assessment of products representing substantial innovation reviewed under the centralized procedure. Products from small- and medium-sized enterprises, or SMEs, may qualify for earlier entry into the PRIME scheme than larger companies. Many benefits accrue to sponsors of product candidates with PRIME designation, including but not limited to, early and proactive regulatory dialogue with the EMA, frequent discussions on clinical trial designs and other development program elements, and accelerated marketing authorization application assessment once a dossier has been submitted. Importantly, a dedicated Agency contact and rapporteur from the Committee for Human Medicinal Products ('CHMP') or Committee for Advanced Therapies ('CAT') are appointed early in PRIME scheme facilitating increased understanding of the product at EMA’s Committee level. A kick-off meeting initiates these relationships and includes a team of multidisciplinary experts at the EMA to provide guidance on the overall development and regulatory strategies.

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Marketing Authorization
To obtain a marketing authorization for a product under EU regulatory systems, an applicant must submit an MAA either under a centralized procedure administered by the EMA, or one of the procedures administered by competent authorities in the EU Member States (decentralized procedure, national procedure or mutual recognition procedure). A marketing authorization may be granted only to an applicant established in the EU. Regulation (EC) No 1901/2006 provides that prior to obtaining a marketing authorization in the EU, applicants have to demonstrate compliance with all measures included in an EMA-approved Paediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted (1) a product-specific waiver, (2) a class waiver or (3) a deferral for one or more of the measures included in the PIP.
The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid across the European Economic Area (i.e. the EU as well as Iceland, Liechtenstein and Norway). Pursuant to Regulation (EC) No 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, ATMPs and products with a new active substance indicated for the treatment of certain diseases, including products for the treatment of cancer. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional. The centralized procedure may at the request of the applicant also be used in certain other cases. We anticipate that the centralized procedure will be mandatory for the product candidates we are developing.
Under the centralized procedure, the CHMP is also responsible for several post-authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the EU, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. If the CHMP accepts such request, the time limit of 210 days will be reduced to 150 days but it is possible that the CHMP can revert to the standard time limit for the centralized procedure if it considers that it is no longer appropriate to conduct an accelerated assessment. At the end of this period, the CHMP provides a scientific opinion on whether or not a marketing authorization should be granted in relation to a medicinal product. Within 15 calendar days of receipt of a final opinion from the CHMP, the European Commission must prepare a draft decision concerning an application for marketing authorization. This draft decision must take the opinion and any relevant provisions of EU law into account. Before arriving at a final decision on an application for centralized authorization of a medicinal product the European Commission must consult the Standing Committee on Medicinal Products for Human Use. The Standing Committee is composed of representatives of the EU Member States and chaired by a non-voting European Commission representative. The European Parliament also has a related “droit de regard”. The European Parliament's role is to ensure that the European Commission has not exceeded its powers in deciding to grant or refuse to grant a marketing authorization.
The European Commission may grant a so-called “marketing authorization under exceptional circumstances”. Such authorization is intended for products for which the applicant can demonstrate that it is unable to provide comprehensive data on the efficacy and safety under normal conditions of use, because the indications for which the product in question is intended are encountered so rarely that the applicant cannot reasonably be expected to provide comprehensive evidence, or in the present state of scientific knowledge, comprehensive information cannot be provided, or it would be contrary to generally accepted principles of medical ethics to collect such information. Consequently, marketing authorization under exceptional circumstances may be granted subject to certain specific obligations, which may include the following:
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the applicant must complete an identified program of studies within a time period specified by the competent authority, the results of which form the basis of a reassessment of the benefit/risk profile;
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the medicinal product in question may be supplied on medical prescription only and may in certain cases be administered only under strict medical supervision, possibly in a hospital and in the case of a radiopharmaceutical, by an authorized person; and
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the package leaflet and any medical information must draw the attention of the medical practitioner to the fact that the particulars available concerning the medicinal product in question are as yet inadequate in certain specified respects.
A marketing authorization under exceptional circumstances is subject to annual review to reassess the risk-benefit balance in an annual reassessment procedure. Continuation of the authorization is linked to the annual reassessment and a negative assessment could potentially result in the marketing authorization being suspended or revoked. The renewal of a marketing authorization of a medicinal product under exceptional circumstances, however, follows the same rules as a “normal” marketing authorization. Thus, a marketing authorization under exceptional circumstances is granted for an initial five years, after which the authorization will become valid indefinitely, unless the EMA decides that safety grounds merit one additional five-year renewal.

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The European Commission may also grant a so-called “conditional marketing authorization” prior to obtaining the comprehensive clinical data required for an application for a full marketing authorization. Such conditional marketing authorizations may be granted for product candidates (including medicines designated as orphan medicinal products), if (i) the risk-benefit balance of the product candidate is positive, (ii) it is likely that the applicant will be in a position to provide the required comprehensive clinical trial data, (iii) the product fulfills an unmet medical need and (iv) the benefit to public health of the immediate availability on the market of the medicinal product concerned outweighs the risk inherent in the fact that additional data are still required. A conditional marketing authorization may contain specific obligations to be fulfilled by the marketing authorization holder, including obligations with respect to the completion of ongoing or new studies, and with respect to the collection of pharmacovigilance data. Conditional marketing authorizations are valid for one year, and may be renewed annually, if the risk-benefit balance remains positive, and after an assessment of the need for additional or modified conditions and/or specific obligations. The timelines for the centralized procedure described above also apply with respect to the review by the CHMP of applications for a conditional marketing authorization.
The EU medicines rules expressly permit the EU Member States to adopt national legislation prohibiting or restricting the sale, supply or use of any medicinal product containing, consisting of or derived from a specific type of human or animal cell, such as embryonic stem cells. While the products we have in development do not make use of embryonic stem cells, it is possible that the national laws in certain EU Member States may prohibit or restrict us from commercializing our products, even if they have been granted an EU marketing authorization.
Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separate application to, and leads to separate approval by, the competent authorities of each EU Member State in which the product is to be marketed. This application is identical to the application that would be submitted to the EMA for authorization through the centralized procedure. The reference EU Member State prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. The resulting assessment report is submitted to the concerned EU Member States who, within 90 days of receipt, must decide whether to approve the assessment report and related materials. If a concerned EU Member State cannot approve the assessment report and related materials due to concerns relating to a potential serious risk to public health, disputed elements may be referred to the European Commission, whose decision is binding on all EU Member States.
The mutual recognition procedure similarly is based on the acceptance by the competent authorities of the EU Member States of the marketing authorization of a medicinal product by the competent authorities of other EU Member States. The holder of a national marketing authorization may submit an application to the competent authority of an EU Member State requesting that this authority recognize the marketing authorization delivered by the competent authority of another EU Member State.
Regulatory Data Protection in the EU
In the EU, innovative medicinal products approved on the basis of a complete independent data package qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to Directive 2001/83/EC. Regulation (EC) No 726/2004 repeats this entitlement for medicinal products authorized in accordance the centralized authorization procedure. Data exclusivity prevents applicants for authorization of generics of these innovative products from referencing the innovator’s data to assess a generic (abridged) application for a period of eight years. During an additional two-year period of market exclusivity, a generic marketing authorization application can be submitted and authorized, and the innovator’s data may be referenced, but no generic medicinal product can be placed on the EU market until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of 11 years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical entity so that the innovator gains the prescribed period of data exclusivity, another company nevertheless could also market another version of the product if such company obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical tests, preclinical tests and clinical trials.
Periods of Authorization and Renewals
A marketing authorization has an initial validity for five years in principle. The marketing authorization may be renewed after five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the EU Member State. To this end, the marketing authorization holder must provide the EMA or the competent authority with a consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing authorization was granted, at least six months before the marketing authorization ceases to be valid. The European Commission or the competent authorities of the EU Member States may decide, on justified grounds relating to pharmacovigilance, to proceed with one further five-year period of marketing authorization. Once subsequently definitively renewed, the marketing authorization shall be valid for an unlimited period. Any authorization which is not followed by the actual placing of the medicinal product on the EU n market (in case of centralized procedure) or on the market of the authorizing EU Member State within three years after authorization ceases to be valid (the so-called sunset clause).

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Orphan Drug Designation and Exclusivity
Regulation (EC) No. 141/2000, as implemented by Regulation (EC) No. 847/2000 provides that a drug can be designated as an orphan drug by the European Commission if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of (1) a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the EU when the application is made, or (2) a life-threatening, seriously debilitating or serious and chronic condition in the EU and that without incentives it is unlikely that the marketing of the drug in the EU would generate sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the EU or, if such method exists, the drug will be of significant benefit to those affected by that condition.
Once authorized, orphan medicinal products are entitled to 10 years of market exclusivity in all EU Member States and in addition a range of other benefits during the development and regulatory review process including scientific assistance for study protocols, authorization through the centralized marketing authorization procedure covering all member countries and a reduction or elimination of registration and marketing authorization fees. However, marketing authorization may be granted to a similar medicinal product with the same orphan indication during the 10-year period with the consent of the marketing authorization holder for the original orphan medicinal product or if the manufacturer of the original orphan medicinal product is unable to supply sufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if this product is safer, more effective or otherwise clinically superior to the original orphan medicinal product. The period of market exclusivity may, in addition, be reduced to six years if it can be demonstrated on the basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity.
Pediatric Studies
Prior to obtaining a marketing authorization in the European Union, applicants have to demonstrate compliance with all measures included in an EMA-approved Paediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted a product-specific waiver, a class waiver, or a deferral for one or more of the measures included in the PIP. The respective requirements for all marketing authorization procedures are set forth in Regulation (EC) No 1901/2006, which is referred to as the Pediatric Regulation. This requirement also applies when a company wants to add a new indication, pharmaceutical form or route of administration for a medicine that is already authorized. The Pediatric Committee of the EMA, or PDCO, may grant deferrals for some medicines, allowing a company to delay development of the medicine in children until there is enough information to demonstrate its effectiveness and safety in adults. The PDCO may also grant waivers when development of a medicine in children is not needed or is not appropriate, such as for diseases that only affect the elderly population.
Before a marketing authorization application can be filed, or an existing marketing authorization can be amended, the EMA determines that companies actually comply with the agreed studies and measures listed in each relevant PIP.
Regulatory Requirements after a Marketing Authorization has been Obtained
In case an authorization for a medicinal product in the EU is obtained, the holder of the marketing authorization is required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of medicinal products. These include:
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Compliance with the EU’s stringent pharmacovigilance or safety reporting rules must be ensured. These rules can impose post-authorization studies and additional monitoring obligations.

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The manufacturing of authorized medicinal products, for which a separate manufacturer’s license is mandatory, must also be conducted in strict compliance with the applicable EU laws, regulations and guidance, including Directive 2001/83/EC, Directive 2003/94/EC, Regulation (EC) No 726/2004 and the European Commission Guidelines for Good Manufacturing Practice. These requirements include compliance with EU cGMP standards when manufacturing medicinal products and active pharmaceutical ingredients, including the manufacture of active pharmaceutical ingredients outside of the EU with the intention to import the active pharmaceutical ingredients into the EU.

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The marketing and promotion of authorized drugs, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the EU notably under Directive 2001/83EC, as amended, and EU Member State laws. Direct-to-consumer advertising of prescription medicines is prohibited across the EU.
 Brexit and the Regulatory Framework in the United Kingdom
On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the EU (commonly referred to as “Brexit”). Thereafter, on March 29, 2017, the country formally notified the EU of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the United Kingdom from the EU will take effect either on the effective date of the withdrawal agreement or, in the absence of agreement, two years after the United Kingdom provides a notice of withdrawal pursuant to the EU Treaty. Since the regulatory framework for pharmaceutical products in the United Kingdom.

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covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from EU directives and regulations, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the United Kingdom. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products in the United Kingdom.
Pricing Decisions for Approved Products
In the EU, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies or so-called health technology assessments, in order to obtain reimbursement or pricing approval. For example, the EU provides options for its Member States to restrict the range of products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. Member States may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other Member States allow companies to fix their own prices for products, but monitor and control prescription volumes and issue guidance to physicians to limit prescriptions. Recently, many countries in the EU have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage health care expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the EU. The downward pressure on health care costs in general, particularly prescription products, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various Member States, and parallel trade, i.e., arbitrage between low-priced and high-priced Member States, can further reduce prices. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any products, if approved in those countries.
Patent Term Extension
In order to compensate the patentee for delays in obtaining a marketing authorization for a patented product, a supplementary certificate, or SPC, may be granted extending the exclusivity period for that specific product by up to five years. Applications for SPCs must be made to the relevant patent office in each E.U. member state and the granted certificates are valid only in the member state of grant. An application has to be made by the patent owner within six months of the first marketing authorization being granted in the European Union (assuming the patent in question has not expired, lapsed or been revoked) or within six months of the grant of the patent (if the marketing authorization is granted first). In the context of SPCs, the term “product” means the active ingredient or combination of active ingredients for a medicinal product and the term “patent” means a patent protecting such a product or a new manufacturing process or application for it. The duration of an SPC is calculated as the difference between the patent’s filing date and the date of the first marketing authorization, minus five years, subject to a maximum term of five years.
A six month pediatric extension of an SPC may be obtained where the patentee has carried out an agreed pediatric investigation plan, the authorized product information includes information on the results of the studies and the product is authorized in all member states of the European Union.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Sales of products will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to maintain price levels high enough to realize an appropriate return on investment in product development.

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Healthcare Law and Regulation
Health care providers and third-party payors play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse, anti-kickback, false claims laws, patient privacy laws and regulations and other health care laws and regulations that may constrain business and/or financial arrangements. Restrictions under applicable federal and state health care laws and regulations, include the following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid;
•
the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false, fictitious or fraudulent or knowingly making, using or causing to made or used a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government.
•
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal criminal laws that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false statements relating to health care matters;
•
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their respective implementing regulations, including the Final Omnibus Rule published in January 2013, which impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
•
the federal false statements statute, which prohibits knowingly and willfully falsifying, concealing ·or covering up a material fact or making any materially false statement in connection with the delivery of or payment for health care benefits, items or services;
•
the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or the Affordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services, or CMS, within the United States Department of Health and Human Services, information related to payments and other transfers of value made by that entity to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and
•
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that are reimbursed by non-government third-party payors, including private insurers.
Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Pharmaceutical Insurance Coverage and Health Care Reform
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated health care costs. Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Thus, even if a product candidate is approved, sales of the product will depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations, provide coverage and establish adequate reimbursement levels for, the product. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the approved products for a particular indication.

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In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable marketing approvals. Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision by a third-party payor not to cover a product could reduce physician utilization once the product is approved and have a material adverse effect on sales, results of operations and financial condition. Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor.
The containment of health care costs also has become a priority of federal, state and foreign governments and the prices of products have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of any approved products. 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 a company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and biologics and other medical products, government control and other changes to the healthcare system in the United States. A primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the United States. In March 2010, the United States Congress enacted the Affordable Care Act, or ACA, which, among other things, includes changes to the coverage and payment for drug products under government health care programs. Among the provisions of the ACA of importance to our potential product candidates are:
•
    an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;
•
    expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;
•
    expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices;
•
    addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
•
    expanded the types of entities eligible for the 340B drug discount program;
•
    established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% (and 70% starting January 1, 2019) point-of-sale-discount off the negotiated price 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; 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 been proposed and adopted in the United States since the ACA 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 up to 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2027 unless additional Congressional action is taken. 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.
Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires

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most Americans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional Budget Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise. Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. The Congress will likely consider other legislation to replace elements of the ACA during the next Congressional session.
The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In October 2017, the President signed a second Executive Order allowing for the use of association health plans and short-term health insurance, which may provide fewer health benefits than the plans sold through the ACA exchanges. At the same time, the Administration announced that it will discontinue the payment of cost-sharing reduction, or CSR, payments to insurance companies until Congress approves the appropriation of funds for such CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. A bipartisan bill to appropriate funds for CSR payments was introduced in the Senate, but the future of that bill is uncertain.
Further, there have been several recent U.S. congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing.

C. Organizational Structure
The following is a list of our subsidiaries:
 
Name of subsidiary
Country of
registration
Activity
%
holding
Summit Therapeutics Inc.
USA
Research and Development Services
100%
Summit Corporation Limited
England and Wales
Dormant
100%
Summit (Oxford) Limited
England and Wales
Research and Development
100%
Summit (Wales) Limited
England and Wales
Research and Development
100%
Summit (Cambridge) Limited
England and Wales
Dormant
100%
Summit Discovery 1 Limited
England and Wales
Dormant
100%
Summit Corporation Employee Benefit Trust Company Limited
England and Wales
Dormant
100%
MuOx Limited
England and Wales
Dormant
100%
Discuva Limited
England and Wales
Research and Development
100%
Summit Infectious Diseases Limited
England and Wales
Dormant
100%


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D. Property, Plants and Equipment
 
We maintain the following leased properties:
Type/Uses
  
Location
  
Size
  
Lease Expiry
Executive office
  
Oxfordshire, United Kingdom
  
6,781 square feet
  
February 2027
Executive office
  
Cambridge, Massachusetts
  
1,168 square feet
  
Rolling
Laboratory and office
 
Cambridge, United Kingdom
 
8,834 square feet
 
December 2021

Item 4A: Unresolved Staff Comments
Not applicable.

Item 5: Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes thereto appearing at the end of this Annual Report. We present our consolidated financial statements in pounds sterling and in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
Some information included in this discussion and analysis, including statements regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other statements regarding our plans and strategy for our business and related financing, are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. You should read the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Solely for the convenience of the reader, unless otherwise indicated, all pound sterling amounts as of and for the year ended January 31, 2018 have been translated into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York on January 31, 2018, of £1.00 to $1.4190. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate as of that or any other date.
Overview
We were founded in 2003 and are incorporated under the laws of England and Wales with the Registrar of Companies of England and Wales, United Kingdom. Our principal offices are located in the United Kingdom. Our ordinary shares have traded on AIM, which is a sub-market of the London Stock Exchange, since October 2004 and our American Depositary Shares, or ADSs, have traded on the Nasdaq Global Market since March 2015. Our historic business activities have included the research and development of drug candidates across a number of disease areas. We have also in the past provided drug discovery services to other pharmaceutical and biotechnology companies. However, we sold these drug discovery services businesses in 2009 as part of a broader restructuring initiative to focus on identifying and developing medicines in a range of major therapy areas. In 2012, we made a strategic decision to further refine our business focus and concentrate on the development of our clinical stage programs for Duchenne muscular dystrophy, or DMD, and Clostridium difficile infection, or CDI, in order to more efficiently capitalize on the scientific and commercial potential of these programs. Accordingly, we discontinued our in-house discovery efforts relating to the development of an iminosugar technology platform. We expanded our future generation utrophin modulator pipeline effort in November 2013 through the formation of a strategic alliance with the University of Oxford. As part of this transaction, we acquired an exclusive option to license intellectual property that is generated as part of our research with the University of Oxford in utrophin modulation. In 2014, we opened an office in Cambridge, Massachusetts, in order to strengthen our presence in the United States. We expect to undertake a significant proportion of our future development efforts for our clinical programs in the United States. In 2017, we acquired Discuva Limited, a U.K.-based company, providing us with access to a bacterial genetics-based platform.

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To date, we have financed our operations primarily through issuances of our ordinary shares and American Depositary Shares, or ADSs, payments to us under our license and collaboration agreement with Sarepta Therapeutics, Inc., or Sarepta, and our license and commercialization agreement with Eurofarma Laboratórios SA, or Eurofarma, and development funding and other assistance from government entities, including the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. government's Department of Health and Human Services' Office of the Assistant Secretary for Preparedness and Response, philanthropic, non-government and not for profit organizations and patient advocacy groups for our product candidates. In particular, we have received funding from the Wellcome Trust, Innovate UK, Joining Jack, the Muscular Dystrophy Association, Parent Project Muscular Dystrophy, Charley’s Fund, Cure Duchenne, Foundation to Eradicate Duchenne and the Nash Avery Foundation.
We have generated losses since inception. Our net loss was approximately £7.1 million for the year ended January 31, 2018, £21.4 million for the year ended January 31, 2017 and £20.1 million for the year ended January 31, 2016. As of January 31, 2018, we had an accumulated deficit of £80.9 million. We expect to incur significant expenses and increasing operating losses for at least the next several years in connection with conducting clinical trials for our lead product candidates, ezutromid (formerly SMT C1100) for the treatment of DMD and ridinilazole (formerly SMT19969) for the treatment of CDI, conducting preclinical research and development activities and seeking marketing approval for ezutromid in the United States and other territories where we retain commercialization rights, and ridinilazole in the United States and the European Union as well as other geographies where we retain commercialization rights. In addition, subject to obtaining regulatory approval for ezutromid, ridinilazole or any of our future product candidates, we expect to incur significant commercialization expenses for product sales, marketing, distribution and outsourced manufacturing. We also incur additional costs associated with operating as a public company in the United States in addition to in the United Kingdom. Accordingly, we will need additional financing to support our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.
A. Operating Results
Important Financial and Operating Terms and Concepts
Revenue
Revenue currently consists of amounts received under an exclusive license and collaboration agreement with Sarepta Therapeutics, Inc., or Sarepta, entered into in October 2016, and under an exclusive license and commercialization agreement with Eurofarma Laboratories S.A., or Eurofarma, entered into in December 2017, and amounts received from a research collaboration agreement between our subsidiary Discuva Limited and F. Hoffmann-La Roche Ltd, or Roche. The terms of the agreements with Sarepta and Eurofarma have been assessed, and we believe the development services to be indistinguishable from the initial license and as a result the upfront payments have been initially reported as deferred revenue on the Consolidated Statement of Financial Position and are being recognized as revenue over the development period. The terms of the research collaboration agreement with Roche have been assessed, and amounts received are recognized as revenue over the research services period.

Under the terms of the agreement with Sarepta, we received an upfront payment of $40.0 million (£32.8 million) from Sarepta in October 2016. In May 2017, we announced the first dosing of the last patient in PhaseOut DMD, our ongoing Phase 2 clinical trial of ezutromid, which triggered a $22.0 million (£17.2 million) development milestone payment due to us under the agreement. We also are eligible for future ezutromid-related development, regulatory and sales milestone payments totaling up to $500.0 million. This includes $20.0 million in respect of specified development milestones, $150.0 million in respect of specified regulatory milestones and $330.0 million from specified sales milestones. We are also eligible for escalating royalties ranging from a low to high teens percentage of net sales in the territories where we have granted Sarepta commercialization rights.
We also agreed to collaborate with Sarepta on the research and development of the licensed products pursuant to a joint development plan. We were solely responsible for all research and development costs for the licensed products until December 31, 2017. From January 1, 2018, we are responsible for 55.0% of the budgeted research and development costs related to the licensed products in the licensed territory, and Sarepta is responsible for 45.0% of such costs.


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Under the terms of the agreement with Eurofarma, we received an upfront payment of $2.5 million (£1.9 million) from Eurofarma in December 2017. We also will be eligible for future ridinilazole-related development, regulatory and sales milestone payments totaling up to $32.7 million. This includes $3.75 million in development milestones upon the achievement of staged patient enrolment targets in the planned Phase 3 clinical trials of ridinilazole and up to an additional $21.4 million through other development milestones, commercial milestones, and one-time sales milestones based on cumulative net sales up to $100.0 million in the territory where Eurofarma has commercialization rights. Further, the agreement provides for product supply transfer payments expected to provide a return equivalent to a high single digit to low double-digit percentage of net sales. For each incremental $100.0 million in cumulative net sales achieved, we are entitled to a further milestone payment which, when combined with the aforementioned product supply transfer payments, is expected to provide a return equivalent to a mid- to high-teens percentage of net sales in the territories where we have granted Eurofarma commercialization rights.
Other Operating Income
Other operating income includes income received and recognized from philanthropic, non-government and not for profit organizations and patient advocacy groups which are accounted for in accordance with IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance.” Amounts received through these sources are held either as deferred revenue or recognized as accrued income, as appropriate, in the Consolidated Statement of Financial Position. Income is recognized in the Consolidated Statement of Comprehensive Income as the underlying expenditure is incurred and to the extent the conditions of the grant are met.

The BARDA contract provides for a cost-sharing arrangement under which BARDA would fund a specified portion of estimated costs for specified activities related to the continued clinical and regulatory development of ridinilazole for the treatment of CDI. Income is recognized in respect of BARDA as the underlying research and development expenditure is incurred.

Operating Expenses
The majority of our operating expenses since inception have consisted of research and development activities and general and administrative costs.
Research and Development Expenses
Research and development expenses consist of all costs associated with our research and development activities.
These include:
 
•
costs incurred in conducting our preclinical studies and clinical trials through contract research organizations, including preclinical toxicology, pharmacology, formulation and manufacturing work;

•
employee related expenses, which include salary and benefits, for our research and development staff;

•
costs associated with our strategic alliance with the University of Oxford; and

•
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.
We utilize our employee and infrastructure resources across multiple research projects. We track expenses related to our clinical programs and certain preclinical programs on a per project basis. We expect our research and development expenses to continue to increase as compared to prior periods as we initiate and continue clinical trials of ezutromid for the treatment of DMD and ridinilazole for the treatment of CDI and continue our research activities and initiate preclinical programs for future product candidates, including under our bacterial genetics-based platform. The timing and amount of these expenses will depend upon the outcome of our ongoing clinical trials and the costs associated with our planned clinical trials. The timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product candidate manufacturing costs.
The table below summarizes our research and development expenses by category. Our DMD and CDI program expenses include costs paid to contract research organizations, manufacturing costs for our clinical trials, laboratory testing costs and research related expenses incurred in connection with our strategic alliance with the University of Oxford. Other research and development costs include staff and travel costs (including those of our internal DMD and CDI teams), research and development related legal costs, ongoing patent maintenance fees, an allocation of facility-related costs and historically non-core program related expenses.

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Year ended January 31,
 
2018
 
2018
 
2017
 
2016
 
(in thousands)
DMD program
$
22,646

 
£
15,959

 
£
9,480

 
£
7,526

CDI program
7,996

 
5,635

 
4,088

 
5,567

Other research and development costs
10,467

 
7,376

 
5,384

 
3,763

Total
$
41,109

 
£
28,970

 
£
18,952

 
£
16,856

From inception to January 31, 2018, our total DMD program expenses were £43.7 million and our total CDI program expenses were £23.4 million.
The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of ezutromid, ridinilazole or any of our future product candidates.
This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
 
•
the progress, costs and results of clinical trials of ezutromid for DMD and ridinilazole for CDI;

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

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

•
the efficacy and potential advantages of our product candidates compared to alternative treatments, including any standard of care, and our ability to achieve market acceptance for any of our product candidates that receive marketing approval;

•
the costs and timing of commercialization activities, including product sales, marketing, distribution and manufacturing, for any of our product candidates that receive marketing approval and the rate we expand our physical presence; and

•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining, enforcing and protecting our intellectual property rights and defending against any intellectual property-related claims.
A change in the outcome of any of these variables with respect to the development of ezutromid or ridinilazole or any other future product candidate that we may develop could result in a significant change in the costs and timing associated with the development of that product candidate. For example, if the European Medicines Agency, or EMA, the U.S. Food and Drug Administration, or the FDA, or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate will be required for the completion of clinical development of ezutromid or ridinilazole or any other future product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional resources and time on the completion of clinical development of that product candidate.
General and Administration Expenses
General and administration expenses consist primarily of salaries and benefits related to our executive, finance, business development, human resources and support functions. Other general and administration expenses include share-based compensation expenses, facility-related costs, consulting costs and expenses associated with the requirements of being a listed public company in the United Kingdom and the United States, including insurance, legal, professional, audit and taxation services fees.
We anticipate that our general and administration expenses will continue to increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also anticipate continued increased accounting, audit, regulatory, compliance, insurance and investor and public relations expenses associated with being a publicly traded company in the United Kingdom and the United States. Our ADSs have traded on the Nasdaq Global Market since March 5, 2015.

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Taxation
As a U.K. resident trading entity, we are subject to U.K. corporate taxation. Due to the nature of our business, we have generated losses since inception. To date, we have not recognized a deferred tax asset with respect to these tax losses because we do not consider it probable that there will be suitable taxable profits in the foreseeable future based on the evidence available. As a company that carries out extensive research and development activities, we benefit from the U.K. research and development tax credit regime and are able to surrender some of our trading losses that arise from our research and development activities for a cash rebate ranging from 8.91% to 33.35% of eligible research and development expenditure. In the event we generate revenues in the future, we may benefit from the “patent box” initiative that allows profits attributable to revenues from patents or patented products to be taxed at a lower rate than other revenue. This relief applies to profits earned from April 1, 2013 and following the transitional arrangements that will phase in the relief, the rate of tax for relevant streams of revenue for companies receiving this relief will be 10%.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with IFRS as issued by the IASB. In the preparation of these financial statements, we are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates under different assumptions or conditions. Our estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revisions and future periods if the revision affects both current and future periods.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing at the end of this Annual Report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We recognize revenue from licensing fees, collaboration fees, development, regulatory and approval milestone fees, sales milestones and royalties. Agreements generally include a non-refundable up-front fees, milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, as well as royalties on product sales of licensed products, if and when such product sales occur. For these agreements, we are required to apply judgment in the allocation of total agreement consideration to the separately identifiable components on a reliable basis that reasonably reflects the selling prices that might be expected to be achieved in stand-alone transactions. We are required to make a judgment on those components which can be recognized immediately and those to which we apply the percentage of completion revenue recognition method. In relation to the license and collaboration agreements with Sarepta and the license and commercialization agreement with Eurofarma, management has assessed that the development services to be indistinguishable from the license. As a result the upfront payment has been initially reported as deferred revenue in the Consolidated Statement of Financial Position and is being recognized as revenue over the development period. Development and regulatory approval milestone payments associated with these contracts will be recognized to the extent that the milestone event has been completed successfully.
Recognition of Research and Development Expenses
We recognize expenses incurred in carrying out our research and development activities in line with our best estimation of the stage of completion of each separately contracted study or activity. This includes the calculation of research and development accruals at each period to account for expenditure that has been incurred. This requires estimations of the full costs to complete each study or activity and also estimation of the current stage of completion. There have been no material adjustments to estimates based on the actual costs incurred for the periods presented. In all cases, we expense the full cost of each study or activity by the time the final study report or, where applicable, product, has been received.
We will recognize an internally generated intangible asset arising from our development activities only when an asset is created that can be identified, it is probable that the asset created will generate future economic benefits and the development cost of the asset can be measured reliably. We have determined that regulatory approval is the earliest point at which the probable threshold for the creation of an internally generated intangible asset can be achieved. We therefore expense all research and development expenditure incurred prior to achieving regulatory approval as it is incurred. None of our product candidates have yet received regulatory approval.

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Financial Liabilities on Funding Arrangements
When entering into funding agreements with charitable and not for profit organizations, we are required to assess whether, based on the terms of the agreement, we can avoid a transfer of cash only by settling a non-financial obligation. An example of this would be the obligation to transfer the rights to the research to a funding provider. In the circumstances where we cannot avoid the obligation, all or part of the funding agreement should be accounted for as a financial liability rather than as a charitable grant. In calculating the financial liabilities, both at inception and when it is subsequently re-measured, a number of assumptions need to be made by management which include significant estimates. Assumptions used in the model include the following: reported disease prevalence; expected market share based on management’s estimates; drug reimbursement pricing in different territories, potential licensing terms which may be offered to us (for relevant products); expected patent life; and the timing and probabilities of achieving clinical development milestones which are based on industry standards and adjusted for therapy area. Discount factors in the range of 16% to 18% have been used in the model which has been calculated using appropriate measures and rates which could have been obtained in the period that the funding agreement was entered into. Sensitivity analysis is included in the notes to the financial statements and has been calculated based on a range of discount factors, estimated level of revenue and development probabilities of success. The financial liabilities are re-measured, and we are required to apply judgment, when there is a specific significant event that provides evidence of a significant change in the probability of successful development such as the completion of a phase of research or changes in use or market for a product.
Share-based Compensation
We measure share options at fair value at their grant date in accordance with IFRS 2, “Share-based Payment”. We calculate the fair value of the share option using either the Black-Scholes model, or for options with performance conditions, a simulation model. We charge the fair value to the Consolidated Statement of Comprehensive Income over the expected vesting period. In the case of options that are issued below market value, the fair value will be higher than an option granted at market value, and we recognize a larger charge for such options.
Acquired Intangible Assets and Assumed Contingent Liabilities Valuations
When we execute an acquisition resulting in a business combination as accounted under IFRS 3 “Business Combinations”, identifiable intangible assets and assumed contingent liabilities are required to be recognized in the Consolidated Financial Statements at fair value. In determining the fair value of such assets and liabilities a number of assumptions need to be made by management which include significant estimates, which are described in more detail in the notes to our consolidated financial statements.
Results of Operations
Comparison of Years Ended January 31, 2018 and 2017
The following table summarizes the results of our operations for the years ended January 31, 2018 and 2017, together with the changes to those items:
 
 
 
Year ended January 31,
 
Change 2018 vs. 2017
 
 
2018
 
2017
 
Increase/(Decrease)
 
 
(in thousands, except percentages)
Revenue
 
£
25,419

 
£
2,304

 
£
23,115

 
1,003.3
 %
Other operating income
 
2,725

 
72

 
2,653

 
3,684.7

Operating expenses
 
 
 
 
 
 
 
 
Research and development
 
(28,970
)
 
(18,952
)
 
10,018

 
52.9

General and administration
 
(11,999
)
 
(8,277
)
 
3,722

 
45.0

Operating loss
 
(12,825
)
 
(24,853
)
 
(12,028
)
 
(48.4
)
Finance income
 
3,096

 
8

 
3,088

 
38,600.0

Finance cost
 
(1,164
)
 
(862
)
 
302

 
35.0

Loss before income tax
 
(10,893
)
 
(25,707
)
 
(14,814
)
 
(57.6
)
Income tax credit
 
3,762

 
4,336

 
(574
)
 
(13.2
)
Loss for the year
 
£
(7,131
)
 
£
(21,371
)
 
£
(14,240
)
 
(66.6
)%

106

Revenue
Revenue of £25.4 million was recognized during the year ended January 31, 2018 compared to £2.3 million recognized during the year ended January 31, 2017. This increase was principally due to income received pursuant to our exclusive license and collaboration agreement with Sarepta. During the year ended January 31, 2018, £6.9 million relating to the upfront payment of $40.0 million (£32.8 million) from Sarepta received in October 2016 was recognized compared to £2.3 million for the year ended January 31, 2017. To date, an aggregate of £9.2 million of the upfront payment has been recognized while the remaining £23.6 million is classified as deferred revenue and will continue to be recognized as revenue over the development period. Revenue recognized during the year ended January 31, 2018 also reflects the receipt of a development milestone of £17.2 million ($22.0 million) paid by Sarepta which was recognized in full and £0.9 million of income recognized in respect of specified DMD research and development costs funded by Sarepta pursuant to our license and collaboration agreement. In addition, revenue of £0.1 million was recognized during the year ended January 31, 2018 in respect of our exclusive license and commercialization agreement with Eurofarma. Under the terms of the agreement, we received an upfront payment of $2.5 million (£1.9 million) from Eurofarma in December 2017. We have assessed the agreement, and we believe the development services to be indistinguishable from the grant of the license and as a result the upfront payment has been initially reported as deferred revenue on the Consolidated Statement of Financial Position and is being recognized as revenue over the development period. Revenue of £0.3 million was recognized during the year ended January 31, 2018 pursuant to the research collaboration agreement between our subsidiary Discuva Limited and Roche. Under the terms of the agreement, £9.0 million was received by Discuva Limited from Roche in February 2014 and is being recognized over the research services period.
Other Operating Income
Other operating income increased by £2.6 million to £2.7 million during the year ended January 31, 2018 from £0.1 million during the year ended January 31, 2017. This increase resulted primarily from the recognition of £1.8 million pursuant to our contract with BARDA that was awarded in September 2017 and £0.9 million resulting from the derecognition of a part of Summit’s financial liabilities on funding arrangements, which is further discussed in Note 18 – ‘Financial liabilities on funding arrangements’ to our consolidated financial statements.
Operating Expenses
Research and Development Expenses
Research and development expenses increased by £10.0 million, or 52.9%, to £29.0 million for the year ended January 31, 2018 from £19.0 million for the year ended January 31, 2017. This increase was due to increased spending related to both our DMD and CDI programs. During the year ended January 31, 2018, expenses related to our DMD program increased by £6.5 million to £16.0 million from £9.5 million for the year ended January 31, 2017. This increase included £2.6 million related to our ezutromid clinical activities, £1.5 million associated with manufacturing costs for our clinical trials and £2.4 million related to research associated with our future generation utrophin modulator program. During the year ended January 31, 2018, expenses related to our CDI program increased by £1.5 million to £5.6 million from £4.1 million for the year ended January 31, 2017. This increase was primarily due to planning activities relating to the two planned Phase 3 clinical trials of ridinilazole. During the year ended January 31, 2018, other research and development expenses increased by £2.0 million to £7.4 million from £5.4 million for the year ended January 31, 2017. This increase was due to a £1.4 million increase in staffing costs, a £0.3 million increase in internal regulatory costs and a £0.3 million increase in supplier contracting costs relating to research and development.
General and Administration Expenses
General and administration expenses increased by £3.7 million, or 45.0%, to £12.0 million for the year ended January 31, 2018 from £8.3 million for the year ended January 31, 2017. This increase was due to a net negative movement in exchange rate variances of £1.5 million, an increase of £1.3 million in staff related costs, an increase of £0.6 million in overhead and facility related costs and an increase of £0.3 million in share-based payment expense.
Finance Income
Finance income was £3.1 million for the year ended January 31, 2018 and related primarily to the de-recognition of a part of our financial liabilities on funding arrangements, specifically the remeasurements and discounts associated with the liabilities since initial recognition, which is further discussed in Note 18 – ‘Financial liabilities on funding arrangements’ to our consolidated financial statements. Finance income recognized in comparative periods relates to bank interest received.

107

Finance Cost
Finance costs increased by £0.3 million, or 35.0%, to £1.2 million for the year ended January 31, 2018 from £0.9 million for the year ended January 31, 2017 and related to the unwinding of the discount and remeasurements on financial liabilities on funding arrangements.
Income Tax Credit
Our income tax credit decreased by £0.5 million, or 13.2%, to £3.8 million for the year ended January 31, 2018 from £4.3 million for the year ended January 31, 2017. This was driven by our lower level of net loss during the year ended January 31, 2018 as compared to the year ended January 31, 2017, which impacts the level of income tax credit receivable.
Comparison of Years Ended January 31, 2017 and 2016
The following table summarizes the results of our operations for the years ended January 31, 2017 and 2016, together with the changes to those items:
 
 
 
Year ended January 31,
 
Change 2017 vs. 2016
 
 
2017
 
2016
 
Increase/(Decrease)
 
 
(in thousands, except percentages)
Revenue
 
£
2,304

 
£
—

 
£
2,304

 
—

Other operating income
 
72

 
1,281

 
(1,209
)
 
(94.4
)%
Operating expenses
 
 
 
 
 
 
 
 
Research and development
 
(18,952
)
 
(16,856
)
 
2,096

 
12.4

General and administration
 
(8,277
)
 
(4,771
)
 
3,506

 
73.5

Operating loss
 
(24,853
)
 
(20,346
)
 
4,507

 
22.2

Finance income
 
8

 
30

 
(22
)
 
(73.3
)
Finance cost
 
(862
)
 
(2,879
)
 
(2,017
)
 
(70.1
)
Loss before income tax
 
(25,707
)
 
(23,195
)
 
2,512

 
(10.8
)
Income tax credit
 
4,336

 
3,058

 
1,278

 
41.8

Loss for the year
 
£
(21,371
)
 
£
(20,137
)
 
£
1,234

 
(6.1
)%

Revenue
Revenue of £2.3 million was recognized during the year ended January 31, 2017 following our entry into an exclusive license and collaboration agreement with Sarepta. Under the terms of the agreement, we received an upfront payment of $40.0 million (£32.8 million) from Sarepta. We have assessed the agreement, and we believe the development services to be indistinguishable and as a result the upfront payment has been initially reported as deferred revenue on the Consolidated Statement of Financial Position and is being recognized as revenue over the development period.

Other Operating Income
Other operating income decreased by £1.2 million, or 94.4%, to £0.07 million during the year ended January 31, 2017 from £1.3 million during the year ended January 31, 2016. Income attributed to the funding agreement with the Wellcome Trust has been adjusted and is now been recognized in full with the completion of our CoDIFy Phase 2 clinical trial of ridinilazole. Income recognized as part of the funding from Innovate UK for the DMD program decreased by £0.5 million to £0.06 million for the year ended January 31, 2017 from £0.6 million for the year ended January 31, 2016. The decrease in income is in line with the achievement of milestones under the funding agreement. Further, in September 2016, we elected to withdraw from the Innovate UK funding agreement in order to enable us to take advantage of more tax efficient opportunities related to research and development expenditure.


108

Operating Expenses
Research and Development Expenses
Research and development expenses increased by £2.1 million, or 12.4%, to £19.0 million for the year ended January 31, 2017 from £16.9 million for the year ended January 31, 2016. This increase was primarily due to increased spending related to our DMD program. During the year ended January 31, 2017, expenses related to our DMD program increased by £2.0 million to £9.5 million from £7.5 million for the year ended January 31, 2016. This increase included £1.9 million related to our ezutromid clinical activities, £0.9 million associated with manufacturing costs for our clinical trials, and was offset by a decrease of £0.8 million related to research associated with our future generation utrophin modulator program, the development of which was put on hold in September 2016 due to the substantial increase in ezutromid plasma levels achieved with our F6 formulation of ezutromid. During the year ended January 31, 2017, expenses related to our CDI program decreased by £1.5 million to £4.1 million from £5.6 million for the year ended January 31, 2016. This decrease was primarily due to the completion of our CoDIFy Phase 2 clinical trial of ridinilazole. During the year ended January 31, 2017, other research and development expenses increased by £1.6 million to £5.4 million from £3.8 million for the year ended January 31, 2016. This increase was due to a £1.3 million increase in staffing costs, a £0.1 million increase in internal regulatory costs and a £0.1 million increase in the share-based payment charge allocated to research and development expenses, which resulted from increased employee headcount within our DMD and CDI program teams.
General and Administration Expenses
General and administration expenses increased by £3.5 million, or 73.5%, to £8.3 million for the year ended January 31, 2017 from £4.8 million for the year ended January 31, 2016. This increase was due to a £1.5 million increase in legal and professional expenses, an increase of £0.7 million in staff related costs, an increase of £0.2 million in share based payment expense and an increase of £0.1 million in overhead and facility related costs as well as a net negative movement of £1.0 million in exchange rate variance.
Finance Income
Finance income decreased by £0.02 million to £0.01 million for the year ended January 31, 2017 from £0.03 million for the year ended January 31, 2016. This decrease was due to reduced bank interest received on cash deposits as a result of a lower available bank interest rate.
Finance Cost
Following an IFRS Interpretations Committee agenda decision in May 2016 on the application of IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance,” we changed our accounting policy regarding charitable funding arrangements from the Wellcome Trust and U.S. not for profit organizations. Finance costs relate to the subsequent remeasurement of the financial liability recognized in respect of funding arrangements and the unwinding of the discounts associated with the liabilities. Finance costs decreased by £2.0 million, or 70.1%, to £0.9 million for the year ended January 31, 2017 from £2.9 million for the year ended January 31, 2016 as there was not a subsequent re-measurement of the financial liability during the year ended January 31, 2017, with finance costs relating to the unwinding of the discount only. During the year ended January 31, 2016, of the total finance cost of £2.9 million, £2.6 million related to the re-measurement of the financial liability following positive data in the DMD and CDI clinical programs that increased the probabilities of success.
Income Tax Credit
Our income tax credit increased by £1.3 million, or 41.8%, to £4.3 million for the year ended January 31, 2017 from £3.0 million for the year ended January 31, 2016. This increase was the result of our increased expenditure on research and development and a related increase in our research and development tax credit.

B. Liquidity and Capital Resources
Sources of liquidity
Since our inception, we have incurred significant operating losses. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administration expenses will continue to increase in connection with conducting clinical trials for our lead product candidates, ezutromid for the treatment of DMD and ridinilazole for the treatment of CDI, conducting preclinical research and development activities and seeking marketing approval for ezutromid in the United States and other territories where we retain commercialization rights and ridinilazole in the United States and the European Union as well as other geographies where we retain commercialization rights. As a result, we will need additional capital to fund our operations, which we may obtain from additional financings, research funding, collaborations, contract and grant revenue or other sources. Additional capital, when needed, may not be available to us on acceptable terms, or at all.

109

To date, we have financed our operations primarily through issuances of our ordinary shares and American Depositary Shares, or ADSs, payments to us under our license and collaboration agreement with Sarepta and our license and commercialization agreement with Eurofarma and development funding and other assistance from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups for our product candidates. In particular, we have received funding from BARDA, Wellcome Trust, Innovate UK, Joining Jack, the Muscular Dystrophy Association, Parent Project Muscular Dystrophy, Charley’s Fund, Cure Duchenne, Foundation to Eradicate Duchenne and the Nash Avery Foundation.
As of January 31, 2018, we had cash and cash equivalents of £20.1 million.
In March 2014, we received net proceeds of £20.5 million from the issuance and sale of 16,923,077 ordinary shares in a private placement outside the United States. In March 2015, in our initial public offering in the United States, we received net proceeds of $32.7 million (£21.9 million) from the issuance and sale of 3,967,500 American Depositary Shares which represent 19,837,500 ordinary shares. In October 2016, in connection with our entry into an exclusive license and collaboration agreement with Sarepta, we received an up-front payment of $40.0 million (£32.8 million) from Sarepta and we received a further $22.0 million (£17.2 million) in June 2017 as a development milestone from Sarepta following the first dosing of the last patient in our ongoing Phase 2 clinical trial of ezutromid. In September 2017, we received net proceeds of $18.2 million (£13.5 million) from the issuance and sale of 1,677,850 American Depositary Shares which represent 8,389,250 ordinary shares. In December 2017, in connection with our entry into an exclusive license and commercialization agreement with Eurofarma, we received an up-front payment of $2.5 million (£1.9 million) from Eurofarma.
In March 2018, subsequent to our financial year end, we received gross proceeds of £15.0 million (before expenses) from the issuance and sale of 8,333,333 ordinary shares to investors in Europe.
Cash Flows
The following table summarizes the results of our cash flows for the years ended January 31, 2018, 2017 and 2016.
 
 
 
Year ended January 31,
 
 
2018
 
2018
 
2017
 
2016
 
 
(in thousands)
Net cash (outflow) / inflow from operating activities
 
$
(20,843
)
 
£
(14,689
)
 
£
12,141

 
£
(17,182
)
Net cash outflow from investing activities
 
(7,439
)
 
(5,242
)
 
(80
)
 
(36
)
Net cash inflow from financing activities
 
19,731

 
13,905

 
413

 
22,136

Net (decrease) / increase in cash and cash equivalents
 
$
(8,551
)
 
£
(6,026
)
 
£
12,474

 
£
4,918

Operating Activities
For the year ended January 31, 2018, net cash used by operating activities was £14.7 million. This compares to net cash generated from operating activities of £12.1 million for the year ended January 31, 2017. This net movement of £26.8 million was driven by an increase in research and development costs during the year ended January 31, 2018, and the receipt, during the year ended January 31, 2017, of a £32.8 million upfront payment as part of the exclusive collaboration and licensing agreement entered into with Sarepta in October 2016, which was partially offset by the receipt of the development milestone from Sarepta of £17.2 million during the year ended January 31, 2018 as well as the funding received from BARDA and the upfront payment received from Eurofarma during the year ended January 31, 2018.
For the year ended January 31, 2017, we generated £12.1 million in cash from operating activities. This compares to net cash used in operating activities of £17.2 million for the year ended January 31, 2016. This net movement of £29.3 million was driven by our receipt of a $40.0 million (£32.8 million) upfront payment from Sarepta as part of our exclusive license and collaboration agreement with them. This was offset by an increase in research and development expenditure and general and administrative expenditure during the year ended January 31, 2017. There was also a £1.6 million increase in the amount of research and development tax credit received during the year ended January 31, 2017 which was £3.0 million compared to £1.4 million received during the year ended January 31, 2016.

110

Investing Activities
Net cash outflow from investing activities for the year ended January 31, 2018 included £4.8 million used in the acquisition of Discuva Limited in December 2017, net of cash acquired as part of the transaction, and a further £0.5 million used to acquire property, plant and equipment and intangible assets mainly in relation to the relocation of our U.K. office in Oxford.

Net cash outflow for the year ended January 31, 2017 and net cash inflows for the year ended January 31, 2016 include the net amount of bank interest received on cash deposits less amounts paid to acquire property and equipment.
Financing Activities
Net cash inflow from financing activities for the year ended January 31, 2018 includes £13.5 million of proceeds, net of transaction costs, from our underwritten public offering in September 2017, and proceeds following the exercise of warrants and the exercise of share options.
Net cash inflow from financing activities for the year ended January 31, 2017 relates to proceeds from the exercise of warrants and the exercise of share options, and net cash inflow for the year ended January 31, 2016 relates to the proceeds received from the various sales of our equity securities, net of expenses. We received £22.1 million from the sale of equity securities during the year ended January 31, 2016.
C. Funding Requirements
We anticipate that our expenses will increase substantially in connection with conducting clinical trials for our lead product candidates, ezutromid for the treatment of patients with DMD and ridinilazole for the treatment of patients with CDI, conducting preclinical research and development activities and seeking marketing approval for ezutromid in the United States and other territories where we retain commercialization rights and ridinilazole in the United States and the European Union as well as in other geographies where we retain commercialization rights. In addition, if we obtain marketing approval of ezutromid or ridinilazole, we expect to incur significant sales, marketing, distribution and outsourced manufacturing expense, as well as ongoing research and development expenses.
In addition, our expenses will increase if and as we:
 
•
continue the research and development of the F3 formulation of ezutromid, the F6 formulation of ezutromid and future generation utrophin modulators that we are developing in collaboration with the University of Oxford and Sarepta;
•
continue the research and development of ridinilazole;
•
seek to identify and develop additional future product candidates, including through our bacterial genetics-based platform for the discovery and development of new mechanism antibiotics;
•
seek marketing approvals for any product candidates that successfully complete clinical development;
•
ultimately establish a sales, marketing and distribution infrastructure in jurisdictions where we have retained commercialization rights and scale up external manufacturing capabilities to commercialize any product candidates for which we receive marketing approval;
•
acquire or in-license other product candidates and technology;
•
maintain, expand and protect our intellectual property portfolio;
•
hire additional clinical, regulatory and scientific personnel;
•
expand our physical presence; and
•
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.

We believe that our existing cash and cash equivalents, as well as the $32 million we have been awarded under the base period of our contract with BARDA for the development of ridinilazole and the cost-sharing arrangement under our license and collaboration agreement with Sarepta, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through at least April 30, 2019. In our DMD program, while we anticipate that these capital resources will allow us to obtain top-line data for our Phase 2 clinical trial of ezutromid, which we refer to as PhaseOut DMD, we do not expect these capital resources will be sufficient to complete our planned randomized, placebo controlled clinical trial of ezutromid. In addition, in our CDI program, while we also anticipate that these capital resources will allow us to initiate our two, planned Phase 3 clinical trials of ridinilazole, we do not expect to be able to complete these trials without additional capital.

111

We have based the foregoing estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. This estimate assumes, among other things, that we do not obtain any additional funding through grants and clinical trial support or through new collaboration arrangements. Our future capital requirements will depend on many factors, including:
 
•
the progress, costs and results of clinical trials of ezutromid for DMD and ridinilazole for CDI;

•
the scope, progress, costs and results of preclinical development, laboratory testing and clinical trials for our F3 formulation of ezutromid, the F6 formulation of ezutromid and future generation utrophin modulators that we are developing in collaboration with the University of Oxford and Sarepta;

•
the number and development requirements of other future product candidates that we pursue;

•
the costs, timing and outcome of regulatory review of ezutromid, ridinilazole and our other future product candidates;

•
the costs and timing of commercialization activities, including product sales, marketing, distribution and
manufacturing, for any of our product candidates that receive marketing approval;

•
subject to receipt of marketing approval, revenue received from commercial sales of ezutromid, ridinilazole or any of our other future product candidates;

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

•
the amounts we receive from Sarepta under our license and collaboration agreement, including for the achievement of development, regulatory and sales milestones and royalty payments;
•
our contract with BARDA and whether BARDA elects to pursue its designated options beyond the base period;

•
the amounts we receive from Eurofarma under our license and commercialization agreement, including for the achievement of development, commercialization and sales milestones and for product supply transfers;

•
our ability to establish and maintain collaborations, licensing or other arrangements and the financial terms of such arrangements;

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

•
the rate of the expansion of our physical presence; and

•
the costs of operating as a public company in the United States in addition to in the United Kingdom.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, collaborations, strategic alliances, grants and clinical trial support from governmental entities and philanthropic, non-government and not for profit organizations and patient advocacy groups, debt financings, and marketing, distribution or licensing arrangements. We do not have any committed external source of funds other than amounts we may receive from Sarepta, Eurofarma and BARDA under our arrangements with them. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing shareholders, including our ADS holders, will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing shareholders and ADS holders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends or other distributions. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.



112

D. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual commitments and obligations as of January 31, 2018.
 
 
 
Payments due by period
 
 
Total
 
Less than 1
Year
 
Between 1 and 3
Years
 
Between 3 and 5
Years
 
More than 5
Years
 
 
(in thousands)
Operating lease obligations
 
£
1,480

 
£
337

 
£
740

 
£
403

 
—

Contractual obligations
 
1,673

 
981

 
692

 
—

 
—

Total contractual cash obligations
 
£
3,153

 
£
1,318

 
£
1,432

 
£
403

 
—

We enter into operating leases in the normal course of our business.
The contractual obligations in the preceding table reflect our obligation to fund a drug research and discovery program in the University of Oxford laboratories that is described in more detail under “University of Oxford” below.
Under various agreements, including those described below, we will be required to pay royalties and make milestone payments to third parties. See “Business—Our Collaborations and Funding Arrangements” in this Annual Report for additional information regarding these agreements. The preceding table excludes contingent payment obligations, such as royalties and milestones, which are described in more detail below, because the amount, timing and likelihood of payment are not known.
Discuva
Under a collaboration agreement that Discuva Limited, or Discuva, has with Roche, Roche is obligated to pay specified development, commercialization and sales milestone payments related to any compound developed under the platform that is or has been optioned by Roche. In connection with our acquisition of Discuva, we agreed to pay to former Discuva shareholders one-half of the economic benefit of any such payments received from Roche. In addition, certain employees, former employees and former directors of Discuva are eligible for payments from Discuva based on specified development and clinical milestones related to proprietary product candidates developed under the platform.
University of Oxford
In November 2013, we acquired all of the outstanding equity of MuOx Limited, or MuOx, a spin out of the University of Oxford. In connection with that acquisition, we and MuOx entered into a set of agreements with the University of Oxford and its technology transfer division, Isis Innovation Limited, which is now known as Oxford University Innovation Limited, or OUI. Under the research sponsorship agreement that we entered into with the University of Oxford and OUI in November 2013, amended and restated in July 2014 and amended further in November 2015 and September 2017, we have agreed to fund a drug research and discovery program in the University of Oxford laboratories to identify and research utrophin modulators to treat DMD. The University of Oxford is responsible for conducting this program. OUI has no obligations under the research sponsorship agreement. We have agreed to fund up to £4.6 million for this purpose over the initial six-year research period ending in November 2019. If we exercise our right to extend the research period by an additional year, we have agreed to fund an additional £0.8 million, for a total of £5.4 million. As of January 31, 2018, we had paid to the University of Oxford £3.1 million of this amount. Under an option agreement that we, the University of Oxford and OUI entered into in November 2013, which we amended in November 2015, which we refer to as the option agreement, OUI granted us an exclusive option to license certain intellectual property, or IP, arising under the research sponsorship agreement and certain other IP arising from research and development at the University of Oxford, which we refer to as arising IP. We paid OUI £10,000 in connection with entering into the amendment to the option agreement. If we exercise our option to obtain a license under arising IP, we would be obligated to pay OUI a specified sum in option exercise fees. For any arising IP for which we have exercised the option and that comprises new chemical entities or compounds, which we refer to as optioned compounds, we would obtain an exclusive, sublicensable license. We are obligated to pay milestone payments of up to £75,000 upon the achievement of specified development milestones, whether such milestones occur prior to or after our exercise of the option to obtain an exclusive sublicensable license. Following exercise of such an option we would also be obligated to pay milestone payments upon the achievement of specified regulatory milestones with respect to each optioned compound. The specified regulatory milestone payment is due each time the specified regulatory milestone is achieved with respect to an optioned compound and, if each optioned compound achieved each regulatory milestone once, we would be obligated to pay OUI a total of £3.7 million in regulatory milestone payments for each optioned compound.

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We would also be obligated to pay OUI a low single digit royalty of net sales by us, our affiliates or sublicensees of any product containing an optioned compound or on any payments we receive in connection with granting a sublicense under the licensed arising IP. For any arising IP for which we have exercised the option and that does not comprise new chemical entities or compounds, we would obtain an exclusive license, which we could sublicense with Isis’ prior written consent. We and OUI would negotiate the milestone payments and any other payments that we would be obligated to pay to Isis with respect to such IP.
Wellcome Trust
In October 2012, we entered into a translation award funding agreement with The Wellcome Trust Limited, as trustee of the Wellcome Trust, to support a Phase 1 and a Phase 2 clinical trial of ridinilazole for the treatment of CDI. We refer to the translation award funding agreement as the translation award agreement. We refer to any compound or product that is covered by IP rights created under the translation award agreement or our prior agreement with the Wellcome Trust, or that is covered by IP rights to which we had rights prior to October 2009 and that relate to the activities under our agreements with the Wellcome Trust, as the award products.
In October 2017, we entered into a revenue sharing agreement with the Wellcome Trust as was required under the terms of the 2012 translational award agreement. Under the terms of the revenue sharing agreement: i) if we commercialize ridinilazole, the Wellcome Trust is eligible to receive a low-single digit percentage of net revenue (as defined in the translation award agreement), and a one-time milestone payment of a specified amount if cumulative net revenues exceed a specified amount; ii) if a third party commercializes ridinilazole, the Wellcome Trust is eligible to receive a mid-single digit percentage of the net revenues we receive from commercial sales by such third party, and a one-time milestone payment of a specified amount if cumulative net revenues we receive exceed a specified amount. In addition, following the first commercial sale by such third party, the Wellcome Trust is eligible to receive a one-time milestone payment equal to a low-single digit percentage of the aggregate amount of any pre-commercial payments we receive from third-party licensees prior to such commercial sale; and iii) in the event of an assignment or sale of the assets or intellectual property pertaining to ridinilazole, the net proceeds we receive from such assignment or sale would be treated as net revenue under the revenue sharing agreement.
Under the revenue sharing agreement, it was agreed that any development funding or grant funding we receive from BARDA or other third parties, including licensees, would not be classified as net revenue or as a pre-commercial payment. In addition, under the revenue sharing agreement, the Wellcome Trust agreed to terminate all of its rights under the translation award agreement to develop or commercialize the award products or the related intellectual property in specified markets and in specified indications, in the event that we were not developing or commercializing the award products or such intellectual property for such markets or in such indications.
Following the license and commercialization agreement entered into with Eurofarma, an initial payment became due to the Wellcome Trust payable only upon commercialization of ridinilazole. The Wellcome Trust also agreed to terminate all of its rights under the translation award funding agreement pertaining to the exploitation of intellectual property related to the CDI programme.
University College London
On March 23, 2010, we entered into a collaborative research agreement with the School of Pharmacy, University of London which was later novated on November 28, 2011 by the School of Pharmacy to University College London. As part of this agreement, and in consideration of their role in the development of the initial compound series from which ridinilazole was later identified, we agreed to pay the School of Pharmacy (now University College London) a low single-digit share of all revenue received by us in respect of ridinilazole, including any pre-commercial licensing revenue, up to a maximum of £1.0 million. Following the license and commercialization agreement entered into with Eurofarma, an initial payment became due to The School of Pharmacy and has been provided for at the year end date.
U.S. Not for Profit Organizations
Muscular Dystrophy Association
In December 2011, we entered into a grant agreement with the Muscular Dystrophy Association, Inc., or MDA, to partially fund a Phase 1 clinical trial of ezutromid to treat DMD. Under the terms of the grant agreement, we have agreed to make specified milestone payments to MDA during our or our affiliates’ development and commercialization of pharmaceutical products containing the small molecules that can upregulate the utrophin gene, including ezutromid and compounds to which we have rights, which we refer to as the project products. Because we raised more than a specified aggregate amount of funding, we paid a specified sum to MDA under the terms of the grant agreement, which we refer to as the MDA cash infusion milestone payment. We have also agreed to pay MDA a specified lump sum amount, less any previously paid MDA cash infusion milestone payment, following the regulatory approval of any project product for use or sale in the United States or European Union for the treatment of DMD or Becker muscular dystrophy, or BMD, and an additional specified sum upon achievement of a commercial milestone. We would be obligated to pay MDA a low single digit percentage

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royalty of worldwide net sales by us, our affiliates or licensees of any project product. If we assign our rights to any of the compounds subject to the grant agreement or experience specified change in control events, MDA may require our assignee to assume our obligations under the MDA grant agreement with respect to the assigned rights, or require us to pay MDA the greater of a low single digit percentage of the fair market value of the assigned rights, or an amount that would give MDA an internal rate of return of a low double digit percentage on its grant to us.
Duchenne Partners Fund
In December 2011, we entered into a grant agreement with the Duchenne Partners Fund, LLC, or DPF, to partially fund a Phase 1 clinical trial of ezutromid to treat DMD. Under the DPF grant agreement, we have agreed to make specified milestone payments to DPF during our or our affiliates’ development and commercialization of pharmaceutical products containing the small molecules that can upregulate the utrophin gene, including ezutromid and compounds with similar mechanisms of action to which we have rights, which we refer to as project products. Because we raised more than a specified aggregate amount of funding, we paid a specified sum to DPF under the terms of the agreement, which we refer to as the DPF cash infusion milestone payment.
We have also agreed to pay DPF a specified lump sum amount, less any previously paid DPF cash infusion milestone payment, following the regulatory approval of any project product for use or sale in the United States or European Union for the treatment of DMD or BMD and an additional specified sum upon achievement of a commercial milestone. We would be obligated to pay DPF a low single digit percentage royalty of worldwide net sales by us, our affiliates or licensees of any project product. If we assign our rights to any of the compounds subject to the DPF grant agreement or experience specified change in control events, DPF may require our assignee to assume our obligations under the DPF grant agreement with respect to the assigned rights, or require us to pay DPF the greater of a low single digit percentage of the fair market value of the assigned rights, or an amount that would give DPF an internal rate of return of a low double digit percentage on its grant to us.
The total amount payable with respect to regulatory milestones under the U.S. not for profit organization agreements would be $2.5 million if we meet all regulatory milestones.
Other Contracts
In addition, we enter into contracts in the normal course of business with contract research organizations to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancellable contracts and not included in the table of contractual obligations and commitments.
Off-Balance Sheet Arrangements
We do not have any, and during the periods presented we did not have any, off-balance sheet arrangements, other than the contractual obligations and commitments described above.

Jumpstart Our Business Startups Act of 2012
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:
 
•
an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;

•
an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

•
reduced disclosure about the company’s executive compensation arrangements; and

•
exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a shareholder approval of any golden parachute arrangements.

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We may take advantage of these provisions until January 31, 2021 or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of our share capital held by non-affiliates or issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We have taken advantage of some reduced reporting burdens in this Annual Report. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

Item 6: Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the names, ages and positions of our executive officers, key employees and directors as of the date of this Annual Report:
Name
 
Age
 
Position
Executive Officers
 
 
 
 
Glyn Edwards
 
62
 
Chief Executive Officer, Executive Director
Erik Ostrowski
 
45
 
Chief Financial Officer
David Roblin
 
51
 
Chief Operating Officer, Chief Medical Officer and President of Research and Development
Key Employees
 
 
 
 
Jonathon Tinsley
 
59
 
Chief Scientific Officer, DMD
Richard Vickers
 
42
 
Senior Vice President, Anti-Infectives
Non-Employee Directors
 
 
 
 
Frank Armstrong(2)(3)(4)
 
61
 
Non-Executive Chairman
Barry Price(3)(4)
 
74
 
Non-Executive Director
Stephen Davies(2)(3)(4)
 
68
 
Non-Executive Director
Leopoldo Zambeletti (1)(3)(4)
 
49
 
Non-Executive Director
Valerie Andrews(1)(2)(3)(4)
 
58
 
Non-Executive Director
David Wurzer(1)(3)(4)
 
59
 
Non-Executive Director
 
(1)
Member of the Audit Committee.
(2)
Member of the Remuneration Committee.
(3)
Member of the Nominating and Corporate Governance Committee.
(4)
An “independent director” as such term is defined in Rule 10A-3 under the Exchange Act.
 
 
Executive Officers
Glyn Edwards has served as our Chief Executive Officer and a member of our board of directors since April 2012. Prior to joining our company, Mr. Edwards served as interim Chief Executive Officer of the BioIndustry Association, a U.K. trade organization, from November 2011 to June 2012, and Chief Executive Officer at Antisoma plc, a publicly traded biotechnology company specializing in the development of novel drugs for the treatment of cancer, from 1998 to 2011. Mr. Edwards also previously served as Vice President of Business Development at Therapeutic Antibodies Ltd. Mr. Edwards currently serves as a Non-Executive Director for OxSonics Limited, a U.K.-based ultrasound-based drug delivery company. Mr. Edwards received a BSc in Biochemistry from Bristol University and a MSc in Economics from the London Business School. We believe that Mr. Edwards is qualified to serve as a member of our board of directors because of his extensive executive leadership and business development experiences in the life sciences industry.

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Erik Ostrowski has served as our Chief Financial Officer since June 2014. Prior to joining our company, Mr. Ostrowski served as Vice President of Finance at Organogenesis Inc., a biotechnology company, from 2010 to 2014. Prior to that, Mr. Ostrowski worked in investment banking, most recently as a Director with Leerink Partners LLC. Mr. Ostrowski began his career as an accountant with Coopers & Lybrand. Mr. Ostrowski received a BS in Accounting and Economics from Babson College and an MBA from the University of Chicago Booth School of Business.
David Roblin has served as our Chief Operating Officer, Chief Medical Officer and President of Research and Development since May 2017. He previously served as our Chief Operating Officer and President of Research and Development in a part-time capacity beginning in April 2017 and became full-time in June 2017. Dr. Roblin acted as a research and development adviser to us from 2014. Dr. Roblin has served as the Chief Operating Officer and Director of Scientific Translation at the Francis Crick Institute in London from 2014 to 2017. Prior to that, Dr. Roblin was Head of Research, Site Director and Chief Medical Officer for Europe R&D at Pfizer Inc. from 2008 to 2011 and was Head of Therapy Area for Anti-infectives at Bayer AG from 1997 to 1999. After Dr. Roblin left Pfizer Inc., he was Chief Medical Officer to a number of biotechnology companies including Creabilis SA where he held that role from 2011 until 2014. Dr Roblin has a degree in biochemistry from University College London and later qualified in medicine from St George’s Hospital. He is a Fellow of the Royal College of Physicians and a Fellow of the Faculty of Pharmaceutical Medicine. He is an honorary Professor of Medicine at Swansea University and Professor of Translational Medicine at St George’s. He is also a member of the board of directors of MedCity and Destiny Pharma Ltd. Before entering the life sciences industry, Dr Roblin practiced medicine for five years.
Key Employees
Jonathon Tinsley joined our company in April 2005 and has served as our Chief Scientific Officer, DMD, since October 2013. During his time with our company, Dr. Tinsley has overseen the development of our utrophin modulation program for the treatment of DMD from early discovery through to patient clinical trials. Dr. Tinsley previously worked in the laboratories of Professor Kay Davies at the University of Oxford. He is the co-author of over 35 peer reviewed scientific publications related to utrophin biology and the co-inventor on a number of patents related to utrophin biology. Prior to joining our company, Dr. Tinsley was the Head of Biology at Oxagen Limited and a Senior Research Fellow at the Medical Research Council. Dr. Tinsley received a Ph.D. in cancer studies from the University of Birmingham and a B.Sc. in microbiology from the University of Leeds.
Richard Vickers joined our company in 2003 and has served as our Senior Vice President, Anti-Infectives, since February 2018. Prior to this date, and from October 2013, Dr. Vickers had previously served as our Chief Scientific Officer, Antimicrobials. During his time at our company, Dr. Vickers has worked in a variety of roles involved in the development and management of various antibacterial therapeutic programs, including our antibiotic program for the treatment of CDI. Prior to joining our company, Dr. Vickers undertook postdoctoral research studies with Professor Stephen Davies at the University of Oxford and held a Stipendiary Lectureship in organic chemistry at St. Catherine’s College in Oxford. Dr. Vickers received a Ph.D. in organic chemistry from the University of Reading and a B.Sc. in chemistry from King’s College London.
Non-Employee Directors
Frank Armstrong has served as a member of our board of directors since November 2012 and Non-Executive Chairman since June 2013. Dr. Armstrong is currently President of Dr. Frank M Armstrong Consulting Limited, a position he has held since 2012. Prior to this, Dr. Armstrong led Medical Science and Innovation at Merck Serono, the biopharmaceutical division of Merck KGaA, from 2010 to 2011. Dr. Armstrong was also Head of Worldwide Product Development at Bayer AG from 1998 to 2001 and held various positions at ICI plc and Zeneca plc, now AstraZeneca plc, from 1985 to 1998. Dr. Armstrong has served as the Chief Executive Officer at five biotechnology companies, including Fulcrum Pharma plc, which is listed on AIM, CuraGen Corporation, a Nasdaq-listed company that was acquired by Celldex Therapeutics, Inc., Bioaccelerate Holdings Inc., Provensis Ltd. and Phoqus Pharmaceuticals plc. Dr. Armstrong is the Non-Executive Chairman of Faron Pharmaceuticals Oy and Caldan Therapeutics Ltd; a Non-Executive Director of Mereo Biopharma Group plc; and a Member of the Strategic Advisory Board of HealthCare Royalty Partners and Epidarex Capital. Dr. Armstrong served as Non-Executive Director of Juniper Pharmaceuticals Inc. from 2013 to 2017. Dr. Armstrong received an honors degree in Biochemistry and an MBChB(MD) in Medicine from the University of Edinburgh in Scotland. He is a Fellow of the Royal College of Physicians, Edinburgh and a Fellow of the Faculty of Pharmaceutical Physicians. We believe that Dr. Armstrong is qualified to serve on our board of directors because of his extensive experience in the biotechnology industry and his medical background.

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Barry Price has served as a member of our board of directors since September 2006. Dr. Price spent 28 years with the Glaxo Group of companies, where he held several executive positions including, Managing Director of Glaxochem Ltd. from 1993 to 1995 and Research Director of Glaxo Group Research from 1989 to 1993. Dr. Price also served as a Non-Executive Director of Shire plc, a biopharmaceutical company that is listed on the London Stock Exchange and Nasdaq, from 1996 to 2009, during which time he was involved in developing the company into one of the U.K.’s largest life sciences companies. Dr. Price has previously held directorships at Chiroscience plc, Celltech Group plc, Pharmagene plc, Antisoma plc, and BioWisdom Ltd. Dr. Price received a BSc in chemistry and a Ph. D. in chemistry from the University of Sheffield, and he is a Fellow of the Royal Society of Chemistry. We believe Dr. Price is qualified to serve on our board of directors because of his extensive experience in the pharmaceutical and life sciences industries.
Stephen Davies has served as a member of our board of directors since November 2013 and previously served as a member of our board of directors from 2004 to February 2013. Professor Davies has been a professor at the University of Oxford since 1996 and was appointed Waynflete Professor of Organic Chemistry and Fellow of Magdalen College in 2006. Professor Davies’ areas of expertise include medicinal and asymmetric chemistry. He has published extensively and received numerous awards in his field. Professor Davies co-founded our company, as well as other University of Oxford spin-out companies. He was the founder and Non-Executive Chairman of MuOx Limited and OxRay Ltd and Non-Executive Chairman of Scientific Research Capital Ltd.; is a founder and Non-Executive Director of the Oxstem group of companies; and is a Non-Executive Director of Oxford University Innovation Ltd. Professor Davies received a BA in Chemistry from the University of Oxford, a D.Phil in Organic Chemistry from the University of Oxford, and a D.Sc. in Organic Chemistry from the University of Paris. We believe Professor Davies is qualified to serve on our board of directors because of his extensive experience as an academic and entrepreneur in the biopharmaceutical industry.
Leopoldo Zambeletti has served as a member of our board of directors since May 2014. Mr. Zambeletti has served as an independent strategic advisor to life sciences companies since 2013, focusing on mergers and acquisitions, out-licensing deals and financing strategy. Prior to this, Mr. Zambeletti worked in investment banking for 19 years, during which time he led the European Healthcare Investment teams at JP Morgan and at Credit Suisse. He is a Non-Executive Director of Nogra Pharma Ltd., Faron Pharmaceuticals Oy, DS Biopharma Ltd (formerly known as Dignity Services Ltd), Overjoy S.R.L and Tiziana Life Sciences plc and an advisor and co-founder to the US medtech company Qardio. Mr. Zambeletti began his career as an accountant at KPMG. He received his degree in Business Administration from Bocconi University. We believe Mr. Zambeletti is qualified to serve on our board of directors because of his extensive experience in the finance and life sciences industries.
Valerie Andrews has served as a member of our board of directors since September 2014. Most recently, Ms. Andrews served from May 2011 until May 2014 as General Counsel at Vertex Pharmaceuticals Incorporated, a biopharmaceutical company focused on small molecule therapies for cystic fibrosis and other indications. From 2002 to May 2011, Ms. Andrews served in various legal roles at Vertex, including as Deputy General Counsel and Chief Compliance Officer. Prior to joining Vertex, Ms. Andrews was the Executive Director of Licensing for Massachusetts General Hospital and Brigham and Women’s Hospital from September 2001 to March 2002. From 1989 to 2001, Ms. Andrews served as a corporate lawyer at Hill & Barlow PC, where she became a partner in 1997. In her professional roles, Ms. Andrews has garnered expertise in areas including corporate strategy, strategic transactions, corporate governance, executive compensation, risk management, and compliance. Ms. Andrews served as a Non-Executive Director of Juniper Pharmaceuticals Inc. (formerly Columbia Laboratories) from 2005 until 2015. Ms. Andrews received a B.A. in Chemistry and Psychology from Duke University and a J.D. from Boston College. We believe Ms. Andrews is qualified to serve on our board of directors because of her extensive skills in business and legal matters related to the pharmaceuticals industry.
David M. Wurzer has served as a member of our board of directors since February 2015. Mr. Wurzer is currently the Executive Vice President and Chief Investment Officer at Connecticut Innovations, a state-funded venture capital fund, where he previously served as Senior Managing Director and Managing Director. Prior to joining Connecticut Innovations in November 2009, Mr. Wurzer served as Executive Vice President, Treasurer and Chief Financial Officer at CuraGen Corporation from 1997 to 2008. He also held numerous positions at Value Health Inc. from 1991 to 1997, including Senior Vice President, Treasurer and Chief Financial Officer. Mr. Wurzer is a Non-Executive Director of Standard Diversified Opportunities, Inc., Thetis Pharmaceutical LLC, My Gene Counsel LLC, Natural Polymer Devices Inc. and ReNetX Bio, Inc. (formerly known as Axerion Therapeutics, Inc.); from 2010 to 2012 he was a Non-Executive Director of DUSA Pharmaceuticals, Inc. and from 2010 to 2015 he was a Non-Executive Director of Response Genetics Inc. Mr. Wurzer is a Certified Public Accountant and began his career with Coopers & Lybrand, which is now part of PricewaterhouseCoopers. He received a B.B.A. from the University of Notre Dame. We believe Mr. Wurzer is qualified to serve on our board of directors because of his extensive experience in the pharmaceutical and biotechnology industries and his finance and accounting background.



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B. Compensation
The following discussion provides the amount of compensation paid, and benefits in kind granted, by us and our subsidiaries to our current directors and executive officers for services provided in all capacities to us or our subsidiaries for the year ended January 31, 2018, as well as the amount contributed by us into money purchase plans for the year ended January 31, 2018 to provide pension benefits to our current directors and executive officers.
Directors’ and Executive Management Compensation
For the year ended January 31, 2018, the table below sets out the compensation paid to our current directors and executive officers.
Compensation for Year Ended January 31, 2018 for Current Directors and Executive Management
Name
 
Salary and
Bonus /
Fees
 
Taxable
Benefits(1)
 
Pension
Benefit
 
Total
Glyn Edwards
 
£
 
609,000

 
£
 
1,359

 
£
 
18,270

 
£
 
628,629

Chief Executive Officer and Executive Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Erik Ostrowski
 
$
 
640,000

 
 
 
—

 
$
 
17,741

 
$
 
657,741

Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
David Roblin
 
£
 
436,442

 
£
 
 
 
£
 
14,100

 
£
 
450,542

Chief Operating Officer, Chief Medical Officer and President of Research & Development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Frank Armstrong
 
£
 
75,000

 
£
 
2,804

 
 
 
—

 
£
 
77,804

Non-Executive Chairman
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Barry Price
 
£
 
38,195

 
£
 
2,793

 
 
 
—

 
£
 
40,988

Non-Executive Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stephen Davies
 
£
 
40,000

 
 
 
—

 
 
 
—

 
£
 
40,000

Non-Executive Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Leopoldo Zambeletti
 
£
 
36,805

 
£
 
587

 
 
 
—

 
£
 
37,392

Non-Executive Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Valerie Andrews
 
£
 
58,587

 
£
 
2,108

 
 
 
—

 
£
 
60,695

Non-Executive Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
David Wurzer
 
£
 
50,978

 
£
 
2,484

 
 
 
—

 
£
 
53,462

Non-Executive Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Taxable benefits represent the value of the personal benefits granted, which include private medical insurance and life assurance for executive officers and travel costs (and associated income tax and national insurance contributions which were settled on behalf of the Non-Executive Directors) for attendance at board meetings for the Non-Executive Directors. Amounts included are based on the taxable benefits reported in the year ended January 31, 2018 to HM Revenue & Customs.
Total compensation set out in the table above does not include any amounts for the value of options to acquire our ordinary shares or restricted stock units granted to or held by the directors and executive management, which is described in “Compensation—Outstanding Equity Awards, Grants and Option Exercise” in this Annual Report.
Bonuses
Our Executive Director, Chief Financial Officer and Chief Operating Officer, Chief Medical Officer and President of R&D are eligible for annual bonuses at the discretion of our board and, in the case of our Executive Director, our remuneration committee. Annual bonuses are based on achievement of strategic and financial measures and personal performance objectives. Our Executive Director, Mr. Edwards is eligible for annual bonus potential of 150% of his gross base salary to be paid in share options, cash or a combination of both at the discretion of our board. On January 31, 2018, Mr. Edwards was awarded a bonus representing 100% of his gross base salary, which was paid in cash in February 2018. Mr. Ostrowski, our Chief Financial Officer, is eligible for a discretionary annual bonus in an amount up to 50% of his annual base salary, as determined by our board of directors. On January 31, 2018, Mr. Ostrowski was awarded a bonus representing 60% of his annual base salary at the discretion of the board. The bonus was paid in cash in February 2018. Dr. Roblin, our Chief Operating Officer, Chief Medical Officer and President of R&D, is eligible for a discretionary annual bonus in an amount up to 50% of his annual base salary, as determined by our board of directors. On January 31, 2018, Dr. Roblin was awarded a bonus representing 60% of his annual base salary at the discretion of the board. The bonus was paid in cash in February 2018.

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Outstanding Options As of January 31, 2018 for Current Directors and Executive Management
Outstanding Equity Awards, Grants and Option Exercise
During the year ended January 31, 2018, options to purchase 1,752,283 ordinary shares were awarded to our current directors and executive officers. The table below sets out information on outstanding options granted to our current directors and executive officers as of January 31, 2018.
 
Name
 
Date of grant
 
At February 1, 2017
 
Granted
during
the
period
 
Lapsed
during
the
period
 
At January 31, 2018
 
Price
per
share
(£)
 
Date from
which
exercisable
 
Expiration
date
Glyn Edwards
 
May 10, 2012
 
150,046

 
—

 
—

 
150,046

 
0.60

 
Note 1
 
May 10, 2022
Chief Executive  Officer and  Executive Director
 
May 10, 2012
 
657,500

 
—

 
(657,500
)
 
—

 
0.60

 
Note 2
 
May 10, 2022
January 31, 2013
 
72,973

 
—

 
—

 
72,973

 
0.20

 
Note 3
 
January 31, 2023
 
December 18, 2013
 
76,364

 
—

 
—

 
76,364

 
0.20

 
Note 4
 
December 18, 2023
 
 
July 15, 2014
 
600,000

 
—

 
—

 
600,000

 
1.26

 
Note 5
 
July 15, 2024
 
 
June 16, 2015
 
887,333

 
—

 
—

 
887,333

 
1.43

 
Note 6
 
June 16, 2025
 
 
June 23, 2016
 
110,576

 
—

 
—

 
110,576

 
0.01

 
Note 7
 
June 23, 2026
 
 
April 11, 2017
 
—

 
762,764

 
—

 
762,764

 
1.85

 
Note 8
 
April 11, 2027
 
 
July 18, 2017
 
—

 
135,478

 
—

 
135,478

 
1.83

 
Note 9
 
July 18, 2027
 
 
October 24, 2017
 
—

 
198,776

 
—

 
198,776

 
1.80

 
Note 10
 
October 24, 2027
 
 
 
 
2,554,792

 
1,097,018

 
(657,500
)
 
2,994,310

 
 
 
 
 
 
Erik Ostrowski
 
June 23, 2014
 
400,000

 
—

 
—

 
400,000

 
1.48

 
Note 11
 
June 23, 2024
Chief Financial Officer
 
June 16, 2015
 
400,000

 
—

 
—

 
400,000

 
1.43

 
Note 6
 
June 16, 2025
 
June 23, 2016
 
250,000

 
—

 
—

 
250,000

 
1.05

 
Note 12
 
June 23, 2026
 
 
July 18, 2017
 
—

 
68,062

 
—

 
68,062

 
1.83

 
Note 9
 
July 18, 2027
 
 
October 24, 2017
 
—

 
98,495

 
—

 
98,495

 
1.80

 
Note 10
 
October 24, 2027
 
 
 
 
1,050,000

 
166,557

 
—

 
1,216,557

 
 
 
 
 
 
David Roblin
 
July 15, 2014
 
100,000

 
—

 
—

 
100,000

 
0.80

 
Note 5
 
July 15, 2024
Chief Operating Officer, Chief Medical Officer and President of R&D
 
June 16, 2015
 
25,000

 
—

 
—

 
25,000

 
1.43

 
Note 6
 
June 16, 2025
 
June 23, 2016
 
17,500

 
—

 
—

 
17,500

 
1.05

 
Note 7
 
June 23, 2026
 
April 11, 2017
 
—

 
324,324

 
—

 
324,324

 
1.85

 
Note 8
 
April 11, 2027
 
July 18, 2017
 
—

 
164,384

 
—

 
164,384

 
1.83

 
Note 9
 
July 18, 2027
 
 
 
 
142,500

 
488,708

 
—

 
631,208

 
 
 
 
 
 
Barry Price
 
April 7, 2011
 
13,981

 
 
 
 
 
13,981

 
0.65

 
Note 13
 
April 7, 2021
Non-Executive Director
 
July 15, 2014
 
17,500

 
—

 
—

 
17,500

 
1.26

 
Note 5
 
July 15, 2024
 
June 16, 2015
 
25,000

 
—

 
—

 
25,000

 
1.43

 
Note 6
 
June 16, 2025
 
 
 
 
56,481

 
—

 
—

 
56,481

 
 
 
 
 
 
Frank Armstrong
 
July 15, 2014
 
37,500

 
—

 
—

 
37,500

 
1.26

 
Note 5
 
July 15, 2024
Non-Executive Director
 
June 16, 2015
 
50,000

 
—

 
—

 
50,000

 
1.43

 
Note 6
 
June 16, 2025
 
 
 
87,500

 
—

 
—

 
87,500

 
 
 
 
 
 
Stephen Davies
 
July 15, 2014
 
17,500

 
—

 
—

 
17,500

 
1.26

 
Note 5
 
July 15, 2024
Non-Executive Director
 
June 16, 2015
 
25,000

 
—

 
—

 
25,000

 
1.43

 
Note 6
 
June 16, 2025
 
 
 
42,500

 
—

 
—

 
42,500

 
 
 
 
 
 
Leopoldo Zambeletti
 
June 23, 2014
 
25,000

 
—

 
(25,000
)
 
—

 
1.48

 
Note 14
 
June 23, 2024
Non-Executive Director
 
June 16, 2015
 
25,000

 
—

 
—

 
25,000

 
1.43

 
Note 6
 
June 16, 2025
 
 
 
50,000

 
—

 
(25,000
)
 
25,000

 
 
 
 
 
 
Valerie Andrews Non-Executive Director
 
December 23, 2014
 
25,000

 
—

 
(25,000
)
 
—

 
1.37

 
Note 15
 
December 23, 2024
 
June 16, 2015
 
25,000

 
—

 
—

 
25,000

 
1.43

 
Note 6
 
June 16, 2025
 
 
 
50,000

 
—

 
(25,000
)
 
25,000

 
 
 
 
 
 
David Wurzer
Non-Executive Director
 
June 16, 2015
 
25,000

 
—

 
—

 
25,000

 
1.43

 
Note 6
 
June 16, 2025
 
 
 
25,000

 
—

 
—

 
25,000

 
 
 
 
 
 


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During the year ended January 31, 2018, restricted stock units in the form of nominal cost options, or RSUs, to purchase 278,577 ordinary shares were awarded to our current non-executive directors. The table below sets out information on outstanding RSUs granted to our current non-executive directors as of January 31, 2018.
Name
 
Date of grant
 
At February 1, 2017
 
Granted
during
the
period
 
Lapsed
during
the
period
 
At January 31, 2018
 
Price
per
share
(£)
 
Date from
which
exercisable
 
Expiration
date
Barry Price
 
June 18, 2017
 
—

 
19,179

 
—

 
19,179

 
0.01

 
Note 16
 
December 31, 2018
Non-Executive Director
 
October 24, 2017
 
—

 
19,444

 
—

 
19,444

 
0.01

 
Note 17
 
December 31, 2018
 
 
 
—

 
38,623

 
—

 
38,623

 
 
 
 
 
 
Frank Armstrong
 
June 18, 2017
 
—

 
41,096

 
—

 
41,096

 
0.01

 
Note 16
 
December 31, 2018
Non-Executive Director
 
October 24, 2017
 
—

 
41,666

 
—

 
41,666

 
0.01

 
Note 17
 
December 31, 2018
 
 
 
—

 
82,762

 
—

 
82,762

 
 
 
 
 
 
Stephen Davies
 
June 18, 2017
 
—

 
19,179

 
—

 
19,179

 
0.01

 
Note 16
 
December 31, 2018
Non-Executive Director
 
October 24, 2017
 
—

 
19,444

 
—

 
19,444

 
0.01

 
Note 17
 
December 31, 2018
 
 
 
—

 
38,623

 
—

 
38,623

 
 
 
 
 
 
Leopoldo Zambeletti
 
June 18, 2017
 
—

 
19,179

 
—

 
19,179

 
0.01

 
Note 16
 
December 31, 2018
Non-Executive Director
 
October 24, 2017
 
—

 
19,444

 
—

 
19,444

 
0.01

 
Note 17
 
December 31, 2018
 
 
 
—

 
38,623

 
—

 
38,623

 
 
 
 
 
 
Valerie Andrews
 
June 18, 2017
 
—

 
19,179

 
—

 
19,179

 
0.01

 
Note 16
 
December 31, 2018
Non-Executive Director
 
October 24, 2017
 
—

 
19,444

 
—

 
19,444

 
0.01

 
Note 17
 
December 31, 2018
 
 
 
—

 
38,623

 
—

 
38,623

 
 
 
 
 
 
David Wurzer
 
June 18, 2017
 
—

 
19,179

 
—

 
19,179

 
0.01

 
Note 16
 
December 31, 2018
Non-Executive Director
 
October 24, 2017
 
—

 
19,444

 
—

 
19,444

 
0.01

 
Note 17
 
December 31, 2018
 
 
 
—

 
38,623

 
—

 
38,623

 
 
 
 
 
 

1.
These options became exercisable on May 10, 2015 due to the satisfaction of the performance conditions relating to the share price. In order to vest in full, the average closing share price needed to be equal to or greater than £2.20 for the two months preceding the third anniversary of the date of the grant, 25% would vest where the average closing share price was £1.40 and pro-rated where the average closing share price was between £1.41 and £2.19. The options lapsed if the performance condition relating to our average closing share price was not met by the third anniversary of the date of grant. On measurement, 150,046 options have vested and 77,454 options have lapsed. No options were exercised in the year.
2.
These options were split into four tranches with varying performance conditions and would only vest if the average closing share price had been equal to or greater than the specified condition in any period of 60 consecutive calendar days, ending on or before the fifth anniversary of the date of grant. Details of the tranches are as follows: 207,500 with a performance condition based on an average closing share price of £4.00; 200,000 with a performance condition based on an average closing share price of £6.00; 150,000 with a performance condition based on an average closing share price of £8.00; and 100,000 with a performance condition based on an average closing share price of £10.00. The options lapsed as the performance conditions were not met by the fifth anniversary of the date of grant.
3.
These deferred bonus options vested and became exercisable on July 31, 2013. These options were awarded as a bonus for the financial year ended January 31, 2013.
4.
These deferred bonus options vested and became exercisable on June 18, 2014. These options were awarded as a bonus for the financial year ended January 31, 2014 representing 70% of Mr. Glyn Edwards’ gross basic salary for that financial year.
5.
These options vested on March 13, 2017 as the average closing share price was equal to or greater than £1.89 in a period of 30 consecutive days during the period from the date of the grant to the third anniversary of the date of the grant. One third of the options became exercisable on March 13, 2017, following the second anniversary of the date of grant and the remaining options became exercisable on July 15, 2017, the third anniversary of the date of grant.
6.
These options vest if the average closing share price is equal to or greater than £2.145 in any period of 30 consecutive days during the period from the date of the grant to June 16, 2018. Once vested, a third of the options can be exercised on or after June 16, 2017 and all of the options, if vested, can be exercised on or after June 16, 2018. These options will lapse if the performance condition is not met by June 16, 2018. In April 2018, all Non-Executive Directors surrendered these awards.
7.
These deferred bonus options vested and became exercisable on July 21, 2016. These options were awarded in part settlement of the bonus for the financial year ended January 31, 2016 representing 50% of Mr. Glyn Edwards’ gross basic salary for that financial year.

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8.
These options achieved the performance conditions during the financial year pertaining to corporate and program development milestones. Accordingly, these options will vest in full on June 23, 2019.
9.
These options are subject to achievement of performance conditions pertaining to corporate and program development milestones. These options will vest in full on the third anniversary of the date of grant.
10.
These options are subject to achievement of performance conditions pertaining to corporate and program development milestones. These options will vest in full on the third anniversary of the date of grant.
11.
These options vest and become exercisable in the following proportions, assuming the average closing share price of our ordinary shares on AIM during the two months prior to each relevant vesting date is £2.213 or higher: 25% on the second anniversary of the date of grant, 75% on the third anniversary of the date of grant and 100% on the fourth anniversary of the date of grant. These options will lapse if the performance condition is not met by the fourth anniversary of the date of grant.
12.
These options will vest in full on June 23, 2019 subject to achievement of performance conditions pertaining to certain corporate and program development milestones. These options will lapse in full if the performance conditions are not met by June 23, 2019.
13. These options were capable of vesting and exercise on or after April 8, 2014 subject to the satisfaction of performance conditions relating to our share price. In order to vest in full, the average closing share price would have had to exceed £3.00 over the two months ending April 7, 2014. If the performance conditions were not satisfied in full, or in part, the options would lapse in respect of those option shares that did not vest. The performance period has now passed and, accordingly, only 13,981 options have vested and 11,019 options lapsed. These options were awarded to Dr. Price whilst he was interim Executive Chairman.
14. These options failed to meet the performance condition being (i) completion of Phase 2 proof of concept trials in both the Duchenne muscular dystrophy and Clostridium difficile infection programmes or the third anniversary of the date of grant, whichever was sooner and (ii) the average closing share price being equal to or greater than £2.213 in any period of 30 consecutive days ending on or before the third anniversary of the date of grant. These options have now lapsed.
15. These options failed to meet the performance condition being the average closing share price being equal to or greater than £2.055 in any period of 30 consecutive days during the period from the date of the grant to September 18, 2017. These options have now lapsed as the performance condition was not met by September 18, 2017.
16. These RSUs are in the form of nominal cost options with no performance conditions and no risk of forfeiture. These RSUs vest and become exercisable on the first anniversary of the date of grant. Amount awarded represents a face value with one times the base fee for Non-Executive Directors (the flat fee for the Chairman). The amount represented in the table is the face value of the award calculated on the day of the award (which can differ slightly to the point at which the amount was calculated if the award was made the following day) minus the exercise price of £0.01 per share. Award expires on December 31, 2018, unless this falls within a restricted trading period, in which case it is expected that the award would be exercised in the next available trading period and no later than December 31, 2019.
17. These RSUs are in the form of nominal cost options with no performance conditions and no risk of forfeiture. These RSUs vest and become exercisable on the first anniversary of the date of grant. Amount awarded represents a face value with one times the base fee for Non-Executive Directors (the flat fee for the Chairman). The amount represented in the table is the face value of the award calculated on the day of the award (which can differ slightly to the point at which the amount was calculated if the award was made the following day) minus the exercise price of 1 penny per share. Award expires on 31 December 2018, unless this falls within a restricted trading period, in which case it is expected that the award would be exercised in the next available trading period and no later than December 31, 2019. This is the postponed equity award from the financial year ended January 31, 2017 as we ended our practice of making annual share option awards to Non-Executive Directors.

We periodically grant share options to employees, including executive officers, to incentivize employees, and align their interests with shareholders. We intend to grant additional options subject to a cap, as previously agreed with shareholders, of up to 15% of total issued share capital in any ten-year period.
Pension Benefits
We operate a defined contribution pension scheme which is available to all employees of our group. For the year ended January 31, 2018, we paid a total of £32,370 in lieu of pension contributions in respect of our Executive Director. In addition, for the year ended January 31, 2018, we made payments of $17,741 into our Chief Financial Officer’s 401(k) plan.
Employment Agreements and Letters of Appointment
Non-Executive Directors
Our non-executive directors have each entered into a letter of appointment with us. Each non-executive director’s letter of appointment provides for a continuous term for each non-executive director until termination of the letter of appointment. The letters of appointment automatically terminate if the relevant non-executive director is not re-elected to office by the

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shareholders, is removed from office by a resolution of the shareholders, vacates his or her office, is adjudged bankrupt or enters into any composition or arrangement with his or her creditors, is guilty of misconduct or commits a serious persistent breach of his or her appointment letter, or is unable to perform his or her duties under the appointment for 90 days in aggregate in any period of 12 months. The letters of appointment may also be terminated by mutual agreement or effective immediately upon written notice by one party to the other at any time. Each letter of appointment also includes confidentiality provisions for the protection our confidential information.
Each non-executive director, with the exception of Dr. Armstrong, Mr. Wurzer and Ms. Andrews, received £35,000 per annum for payment for services provided to us. Dr. Armstrong receives £75,000 per annum, which includes payment for services as chairman of our board of directors. Mr. Wurzer receives $67,000 per annum and Ms. Andrews receives $77,000 per annum, in each case, as payment for services provided to us and includes payment for services as chair of the audit and remuneration committees. respectively. Mr. Zambeletti and Professor Davies each receive an additional £5,000 per annum for each committee they sit on. Under the letters of appointment, each non-executive director is also entitled to reimbursement for all reasonable expenses incurred in connection with his or her duties as a non-executive director and that are in line with our expense policy.
Executive Director
Glyn Edwards, Chief Executive Officer
Mr. Edwards was appointed as the chief executive officer by a service agreement dated April 4, 2012 which continues unless terminated by us with six months’ written notice or by Mr. Edwards with six months’ written notice. We may also terminate the agreement with immediate effect by paying a sum in lieu of notice equal to the basic fixed salary which Mr. Edwards would have been entitled to receive during the notice period (and which shall not include payment in respect of benefits). We may otherwise terminate the agreement with immediate effect at any time without notice or payment in lieu of notice for certain circumstances including material breach of the agreement, serious misconduct, serious incompetence or negligence, criminal convictions or bankruptcy. The agreement includes a garden leave clause for a maximum of two months and there is no provision for compensation in addition to the contractual notice period.
Under his service agreement, Mr. Edwards initially received a salary of £200,000 per annum payable in arrears by equal monthly installments plus reasonable expenses. Effective in February 2018, Mr. Edwards’ salary increased to £313,635 per annum. Mr. Edwards’ service agreement also provides for a monthly pension contribution equal to 7.0% of salary, private medical cover (including cover for his spouse) and life assurance (for four times his gross salary). A share option package, as agreed by the chairman of our remuneration committee, will be awarded to Mr. Edwards subject to the rules of our share option scheme. Under his service agreement Mr. Edwards is prohibited from engaging in any type of business in competition with the business of our group, procuring orders from or doing business with any person who has done or proposed to do business with our group, and endeavouring to entice away from our group any senior manager or director engaged by our group, for a period of 12 months from the date of termination of his agreement. Mr. Edwards is also subject to confidentiality and protection of intellectual property provisions.
Executive Management
Erik Ostrowski, Chief Financial Officer
Mr. Ostrowski was appointed as the chief financial officer pursuant to a letter of employment with Summit Therapeutics Inc. dated May 29, 2014 which continues unless terminated by either party at any time with or without notice. Under his letter of employment, Mr. Ostrowski initially received a salary of $330,000 per annum and also received a signing bonus of $50,000. Effective in February 2018, Mr. Ostrowski’s salary increased to $412,000 per annum.
Mr. Ostrowski is eligible to receive a discretionary bonus in an amount up to 50% of his annual base salary, as determined by our board of directors. Under his letter of employment, Mr. Ostrowski is reimbursed for medical, dental, vision, life and disability insurance coverage up to an aggregate monthly sum of $1,667 until such time as a group insurance policy is established and is paid a monthly bonus amount of $1,650 until such time as a retirement savings plan for the employees of Summit Therapeutics Inc. is established. As Summit Therapeutics Inc. has implemented a group insurance policy and a retirement savings plan for its employees, Mr. Ostrowski is no longer entitled to these reimbursements. In the event that Mr. Ostrowski’s employment is terminated without good cause, he shall receive a severance payment equal to six months of his then-annual base salary plus the value of six months of benefits. Good cause includes willful misconduct, willful or gross neglect of job duties and unauthorized use or disclosure of the group’s confidential information.
Mr. Ostrowski has also entered into a confidentiality, inventions, non-compete and non-solicitation agreement dated June 16, 2014 in favor of our group for the protection of our confidential information and intellectual property. Pursuant to that agreement Mr. Ostrowski has also agreed to non-compete and non-solicitation obligations for a period of 12 months following termination of his employment.

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David Roblin, Chief Operating Officer, Chief Medical Officer and President of Research and Development
Dr. Roblin was appointed as the chief operating officer and president of research and development pursuant to a letter of employment with Summit (Oxford) Limited dated November 25, 2016 which became effective on December 16, 2017 and continues unless terminated by either party at any time with or without notice. In May 2017 Dr. Roblin assumed the role of Chief Medical Officer. Under his letter of employment, Dr. Roblin initially received a salary of £300,000 per annum, and he is also entitled to an additional £30,000 per annum for the purposes of assuring a second place of residence near Oxford. Effective in February 2018, Dr. Roblin's salary increased to £309,000 per annum.
Dr. Roblin’s employment agreement provides for a monthly pension contribution (or payments in lieu thereof) equal to 7.0% of salary, private medical coverage for him and his spouse and life insurance coverage equal to an amount that is four times his gross base salary. Pursuant to the employment agreement, a share option package equal to twice his base salary, as agreed by the chairman of our remuneration committee, was awarded to Dr. Roblin after he began working for us full-time . Under his employment agreement Dr. Roblin is prohibited from engaging in any type of business in competition with the business of our group, procuring orders from or doing business with any person who has done or proposed to do business with our group, and endeavouring to entice away from our group any senior manager or director engaged by our group, for a period of 6 months from the date of termination of his letter of employment. Dr. Roblin is also subject to confidentiality and protection of intellectual property obligations under his employment letter.
Dr. Roblin is eligible to receive a discretionary bonus in an amount up to 50% of his annual base salary and an annual share option award subject to performance conditions, in each case, as determined by our board of directors.
Equity Compensation Arrangements
2016 Long Term Incentive Plan
Our 2016 Long Term Incentive Plan, which we refer to as the Incentive Plan, was adopted on January 21, 2016. Under the Incentive Plan our board may grant conditional awards, options, cash conditional awards and cash options to any of our employees, including executive directors, and the employees of our subsidiaries. The Incentive Plan is administered by our board, which has full authority, consistent with the Incentive Plan, to administer the Incentive Plan, including the authority to interpret and construe any provision of the Incentive Plan and to adopt regulations for administering the Incentive Plan. Decisions of the board are final and binding on all parties. References to our board in this summary shall include any duly authorized committee of our board.
Our board may grant awards to any employees eligible to receive awards under the Incentive Plan in its discretion, subject to the rules of the Incentive Plan and such additional terms as the board may determine. However, the grant of an award is subject to obtaining any approval or consent required by any relevant authority and any other applicable laws or regulations. Awards must be granted by deed (or in such other written form as the board determines) and, as soon as reasonably practicable after the date on which an award is granted, the participant must be notified of the terms of his or her award.
A conditional award is a right to acquire shares subject to and in accordance with the rules of the Incentive Plan with no exercise period. An option is a right to acquire shares subject to and in accordance with the rules of the Incentive Plan during a specified exercise period not to exceed ten years from the date the option is granted. A cash conditional award is a right to receive a cash payment equal to the market value (as determined by the board) of a number of notional shares underlying the vested portion of the award on the vest date. A cash option is a right to receive a cash payment equal to the market value (as determined by the board) of a number of notional shares underlying the vested portion of the award the date of exercise less the aggregate exercise price payable (if any).
Vesting of Awards
Unless the board determines otherwise, the vesting of an award granted under the Incentive Plan is subject to the satisfaction of a performance condition. Subject to the terms of the Incentive Plan that apply upon a cessation of a participant’s employment and upon certain corporate events, the performance condition will be measured over the performance period which, unless the board determines otherwise, will be at least three years. Performance conditions may be amended or substituted by the board if one or more events occur which cause the board to consider that an amended or substituted performance condition would be more appropriate and would not be materially less difficult to satisfy than the original performance condition to which the award was subject.
As soon as reasonably practicable after the end of the performance period relating to an award that is subject to a performance condition, our board will determine if and to what extent the performance condition has been satisfied. To the extent that the performance condition has not been satisfied in full, the remainder of the award will lapse immediately. Subject to the terms of the Incentive Plan that apply upon a cessation of a participant’s employment and upon certain corporate events, an award that is subject to a performance condition will vest on the later of the date on which the board

124

determines that the performance condition has been satisfied and the third anniversary of the date of grant of the award (or such other date determined by the board and communicated to the participant). An award that is not subject to the satisfaction of a performance condition will vest on the third anniversary of the date of grant (or such other date determined by the board and communicated to the participant). We refer to the date on which an award would normally vest, whether or not it is subject to the achievement of a performance condition, as the normal vesting date. Notwithstanding the foregoing, if there are share dealing restrictions (imposed by the company’s share dealing code, the rules of the London Stock Exchange, or any other applicable laws or regulations) on the applicable normal vesting date, the award will vest on the date the dealing restrictions are lifted.
The Incentive Plan provides that if a participant dies prior to the date on which an award vests, a number of shares subject to such award will, unless the board determines otherwise, vest as soon as practicable following the participant’s death. The number of shares that vest in such circumstance will depend, unless the board determines otherwise, on the extent to which any applicable performance condition has been satisfied at the date of death and the period of time that has elapsed since the start of the applicable performance period or, if the award is not subject to a performance condition, since the date of grant of the award, or such other period as the board determines. To the extent that an award does not vest in full, the remainder will lapse immediately.
In addition, the Incentive Plan provides that if a participant ceases to hold office or employment with any group member (as such term is defined in the Incentive Plan) prior to the date on which an award vests as a result of ill-health, injury or disability; redundancy or retirement; upon the company for which the participant works ceasing to be a group member or the transfer of an undertaking or part-undertaking in which the participant is employed to a company not in our group; or any other reason at the board’s discretion (except where a participant is summarily dismissed), the board may determine that an award will vest as soon as practicable following the date of the participant’s cessation of office or employment (or on such other date as determined by the board). Otherwise, the award will vest on the normal vesting date. In either case, the number of shares that will vest will depend, unless the board determines otherwise, on the extent to which any applicable performance condition has been satisfied at the date of cessation of office or employment and the period of time that has elapsed since the start of the applicable performance period or, if the award is not subject to a performance condition, since the date of grant of the award, or such other period as the board determines. To the extent that an award does not vest in full, the remainder will lapse immediately. If a participant ceases to hold office or employment with a group member for any other reason prior to the vesting date, his or her award will lapse at such time.
Exercise of Options
Generally, options must be exercised while the participant holds office or employment with a member of our group. In the event, however, that a participant ceases to hold office or employment with a member of our group as a result of ill-health, injury or disability; redundancy or retirement; upon the company for which the participant works ceasing to be a member of our group or the transfer of an undertaking or part-undertaking in which the participant is employed to a company not in our group; or any other reason at the board’s discretion (except where a participant is summarily dismissed) prior to the date on which the award becomes exercisable, the option may be exercised, subject to it lapsing upon certain corporate events, for a period of six months (or such other period as the board may determine) commencing on the date the award vests (as described above). If a participant ceases to hold office or employment with a member of our group on or after the vesting date of the option as a result of the participant’s resignation or an event described in the preceding sentence on or after the date on which the award becomes exercisable, the option may be exercised, subject to it lapsing upon certain corporate events, for a period of six months (or such other period as the board may determine) from the date of such cessation.
If a participant dies before his or her vested option has been exercised, the participant’s personal representatives may exercise the option for 12 months (or such other period as the board may determine) after the later of the date of the participant’s death and the date on which the award becomes exercisable.
All awards lapse in prescribed circumstances, including upon the tenth anniversary of the date of grant; the expiry of the period (if any) allowed for the satisfaction of any performance condition without such condition having been satisfied; on the day on which a participant ceases to hold office or employment with a group member (with the exception of the carve outs detailed in the Incentive Plan and described above); the expiry of the period during which an option may be exercised following the participant’s death or cessation of office or employment with a group member; on the bankruptcy of the participant; or at such time the participant attempts to transfer, assign, charge or otherwise dispose of his or her award in any way (other than in the event of the participant’s death, to his personal representatives).
Dividend Equivalent
The board may decide at any time prior to the issue or transfer of the shares in respect of an award that has vested that the participant will receive an amount (in cash and/or additional shares) equal in value to any dividends that would have been paid on those shares on such terms and over such period (ending no later than the vesting date of the award) as the board may determine. This amount may assume the reinvestment of dividends (on such basis as the board may determine) and may exclude or include special dividends.

125

Cash Equivalent/Net Settlement
Unless our board has determined that this rule will not apply to all or any portion of an award, at any time prior to the date on which shares in respect of an award that has been vested or exercised have been issued or transferred to a participant, the board may determine that the participant will receive (i) in lieu of ordinary shares, a cash payment equal to the market value (as determined by the board) of the number of shares that would otherwise have been issued or transferred to the participant, less, in the case of an option, the aggregate exercise price payable (if any) or (ii) a reduced number of shares, which reduced number of shares will be equal to the market value (as determined by the board) of the number of shares that would otherwise have been issued or transferred to the participant, less (if the board so determines) any deductions (including, but not limited to any tax or similar liabilities) as may be required by law in respect of the award and, in the case of an option, the aggregate exercise price payable (if any).
Limits
The board may not grant an award that would cause the number of ordinary shares allocated under the Incentive Plan and under any other employee share plan adopted by the company (including the 2005 EMI Scheme described below) to exceed a number equal to 15% of our ordinary share capital in issue at that time. The Incentive Plan sets forth rules for determining when shares are treated as allocated under the Incentive Plan and makes clear that the number of shares allocated does not include shares in respect of which the right to acquire such shares lapses or is released or shares allocated in respect of awards which are then satisfied in cash.
The Incentive Plan also includes an individual participant limit: no eligible employee may be granted an award which would, at the time of grant, cause the market value (as determined by the board) of all the shares subject to awards granted to the participant in a particular financial year of the company to exceed ten times the participant’s annual base salary. If any award exceeds this limit, it will be scaled back accordingly.
Reduction of Awards and Clawback
The board may, in its discretion, determine at any time prior to the vesting of an award to reduce (including to zero) the number of shares to which an award relates and/or impose further conditions on an award where there has been a material misstatement of our group’s audited financial results; a material failure of risk management by us; serious reputational damage to us, any member of our group or a relevant business unit; material misconduct on the part of the participant or any other circumstances which the board considers to be similar in their nature or effect.
The board may also, in its discretion, determine that at any time after the vesting of an award prior to the later of the second anniversary of vesting and the fifth anniversary of the date of grant (or such longer period as is required by SEC rules that are applicable to us) to take the action described in the preceding paragraph (if an option has not yet been exercised or if shares or cash have not yet been delivered to the participant following the vesting of a conditional award or exercise of an option); require a participant or former participant to make a cash payment to us in respect of some or all of the shares or cash delivered to him or her under the award; and/or require a participant or former participant to transfer for no consideration some or all of the shares delivered to him or her under the award, where there has been a material misstatement of our group’s audited financial results or material misconduct on the part of the participant. The board will have discretion to determine the basis on which the amount of cash or shares is calculated including whether, and the extent to which, any tax or social security liability is applicable to the award.
The board may decide to reduce (including to zero) the number of shares to which an award relates or may relate; impose further conditions on an award; and/or require a participant to transfer for no consideration some or all of the shares delivered to such participant under an award or make a cash payment to us in respect of some or all of the shares delivered to such participant under an award to effect the recovery of sums paid or shares delivered under any provisions similar to the rules described in the preceding paragraphs which are included in any bonus plan or share plan (other than the Incentive Plan) operated by any member of our group.
Corporate Events
In certain specified circumstances involving a change of control of our company, all awards which have not yet vested will vest at the time of the change of control or an earlier date, to the extent determined by the board in its discretion, taking into account, unless the board determines otherwise, the extent to which any performance condition has, in the board’s opinion, been satisfied and the period of time that has elapsed from the grant date to the date of the change of control (or the date of cessation of office or employment, if earlier). To the extent an award does not vest (or is not exchanged, as described below) it will lapse immediately. Vested options will be exercisable for three months (or such other period as our board may determine) from the date of the change of control, after which time all options will lapse. Notwithstanding the foregoing, an award will not vest but will be exchanged for a new award which, in the opinion of the board, is equivalent to the original award, but relates to shares in a different company, if an offer to exchange the award is made and accepted by the participant; there is an Internal Reorganisation (as that term is defined in the Incentive Plan) unless the board determines that the award should nevertheless vest as described above upon the Internal Reorganisation; or the board decides (before the relevant event) that an existing award will automatically be exchanged.

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Awards may also vest upon or become exercisable for a specified period following the occurrence of certain other corporate events, including, for example, if a person becomes bound or entitled to acquire shares pursuant to certain provisions of U.K. company law; if the company is affected by a demerger, delisting, special dividend or other event. The board may also provide for the vesting of awards that have not yet vested or permit exercise of vested options within a specified period following the date on which we pass a resolution for a voluntary winding up of our company.
Variation of Share Capital
In the event of any variation of the share capital of the company or a demerger, delisting, special dividend or other event which may, in the opinion of the board, affect the current or future value of shares, the number of shares that may be allocated under the Incentive Plan, the number of shares subject to an award, any performance condition and/or the exercise price of an option may be adjusted in such manner as the board determines.
Amendments
The board may at any time amend the rules of the Incentive Plan or, except as otherwise provided in the Incentive Plan, the terms of any award. An amendment that is to the material disadvantage of the existing rights
of a participant will not be made unless the participant has approved the amendment and no amendment will be made that would prevent the Incentive Plan from being an employees’ share scheme under U.K. law.
Termination
The Incentive Plan will terminate, and no award may be granted under the Incentive Plan, after the tenth anniversary of adoption by the Board. The Incentive Plan may also be terminated at any earlier time by the passing of a resolution by the board or an ordinary resolution of the company in general meeting. Termination of the Incentive Plan will be without prejudice to the existing rights of participants.
Schedule 2—Company Share Option Plan
The purpose of the Company Share Option Plan, or CSOP, is to enable us to grant CSOP options to eligible U.K. employees in accordance with the Income Tax (Earnings and Pensions) Act 2003, Schedule 4 (commonly known as the Enterprise Management Incentive Scheme provisions). Substantially all the rules of the Incentive Plan apply to CSOP options but there are a number of differences, including that there is no cash or dividend equivalent or ability to net settle a CSOP option; the eligibility rules are more limited; and the value of awards under the CSOP is subject to lower limits than those in the Incentive Plan.
Schedule 3—U.S. Participants
We have in place rules governing awards granted to our U.S. employees which have been adapted from the Incentive Plan. The rules are substantially the same as the Incentive Plan, but are designed to ensure that awards granted under the Incentive Plan comply with or are exempt from Section 409A of the U.S. Internal Revenue Code.
Non-Executive Director Restricted Stock Unit Awards
On July 18, 2017 at our annual general meeting of shareholders, our shareholders approved our Directors’ Remuneration Policy, which provided for an annual grant of restricted stock units, or RSUs, to our non-executive directors. This annual grant of RSUs to our non-executive directors was designed to replace our prior practice of making annual awards of share options to non-executive directors. Following approval of the policy at our 2017 annual general meeting, we entered into a restricted stock unit agreement, or RSU agreement, with each of our non-executive directors. Each of these agreements provides for a grant of RSUs in the form of nominal cost options to purchase our ordinary shares.
Vesting and Settlement
Under the RSU agreements, the RSUs vest in full on the first anniversary of the date of grant. Vested RSUs will lapse and be forfeited if not exercised by December 31 of the calendar year in which they vested in full, subject to certain limited exceptions.
At any time prior to the date on which shares in respect of an RSU have been issued or transferred, the board may determine that the holder will receive, in lieu of ordinary shares, a cash payment equal to the market value of the number of shares that would otherwise have been issued or transferred to the holder or American Depositary Shares, or ADSs, equal to the market value of the number of shares that would otherwise have been issued or transferred to the holder, in each case, less any deductions (including, but not limited to any tax or similar liabilities) as may be required by law in respect of the RSU and the aggregate exercise price payable.

127

If a holder dies prior to the date on which the RSU vests, the RSU will vest in full as of the date of such holder’s death. If a holder dies before his or her vested RSU has been exercised, the holder’s personal representatives may exercise the RSU on or before December 31 in the calendar year in which it vested, after which time it will lapse. If the holder ceases to be a non-executive director of the company for any reason other than death, the RSU will continue to vest and become exercisable, and subject to forfeiture, in accordance with its terms.
Dividend Equivalent
The board may decide at any time prior to the issue or transfer of the shares following the exercise of an RSU that the holder will receive an amount (in cash and/or additional shares and/or additional ADSs) equal in value to any dividends that would have been paid on those shares on such terms and over such period (ending no later than the vesting date of the RSU) as the board may determine. This amount may assume the reinvestment of dividends (on such basis as the board may determine) and may exclude or include special dividends.
Reduction of RSU Award and Clawback
The board may, in its discretion, determine at any time prior to the vesting of an RSU to reduce (including to zero) the number of shares to which the RSU relates and/or impose further conditions on the RSU where there has been a material misstatement of our group’s audited financial results; a material failure of risk management by us, any member of our group or a relevant business unit; serious reputational damage to us, any member of our group or a relevant business unit; material misconduct on the part of the holder or any other circumstances which the board considers to be similar in their nature or effect.
The board may also, in its discretion, determine that at any time after the vesting of an RSU prior to the later of the second anniversary of vesting and the fifth anniversary of the date of grant (or such longer period as is required by SEC rules that are applicable to us) to take the action described in the preceding paragraph (if a vested RSU has not yet been exercised or if shares or cash have not yet been delivered to the holder following the exercise of the RSU); require the holder to make a cash payment to us in respect of some or all of the shares or cash delivered to him or her under the RSU; and/or require the holder to transfer for no consideration some or all of the shares delivered to him or her under the RSU, where there has been a material misstatement of our group’s audited financial results or material misconduct on the part of the holder. The board will have discretion to determine the basis on which the amount of cash or shares is calculated including whether, and the extent to which, any tax or social security liability is applicable to the RSU.
Corporate Events
In certain specified circumstances involving a change of control of our company, all RSUs which have not yet vested will vest at the time of the change of control. To the extent an RSU does not vest (or is not exchanged, as described below) it will lapse immediately. A vested RSU will be exercisable until December 31 of the calendar year in which it vested after which time it will lapse. Notwithstanding the foregoing, an RSU will not vest but will be exchanged for a new RSU which, in the opinion of the board, is equivalent to the original RSU, but relates to shares in a different company, if an offer to exchange the RSU is made and accepted by the holder; there is an Internal Reorganisation (as that term is defined in the RSU agreement) unless the board determines that the RSU should nevertheless vest as described above upon the Internal Reorganisation; or the board decides (before the relevant event) that an existing RSU will automatically be exchanged.
RSUs may also vest upon or become exercisable for a specified period following the occurrence of certain other corporate events, including, for example, if a person becomes bound or entitled to acquire shares pursuant to certain provisions of U.K. company law; or if the company is affected by a demerger, delisting, special dividend or other event. The board may also provide for the vesting of RSUs that have not yet vested or change the period of time during which any vested RSUs may be exercised (provided such period does not end later than December 31 of the calendar year of the vesting) following the date on which we pass a resolution for a voluntary winding up of our company.
Variation of Share Capital
In the event of any variation of the share capital of the company or a demerger, delisting, special dividend or other event which may, in the opinion of the board, affect the current or future value of shares, the number of shares subject to the RSU and/or the exercise price of the RSU, the RSU may be adjusted in such manner as the board determines.
Amendments
The board may at any time amend the terms of the RSU by written agreement with the holder of the RSU.

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2005 EMI Scheme Rules
Our 2005 EMI Scheme Rules were adopted on December 1, 2005. Under the scheme we may grant enterprise management incentive options, known as approved options, to those eligible bona fide employees and directors who qualify under applicable U.K. tax law and, to the extent that our employees and directors do not qualify for approved options, unapproved options may be granted to such eligible bona fide employees and directors. Options can no longer be granted under this scheme.
Exercise of Options
Vesting of options is subject to such performance conditions as shall be set out in the agreement granting an option pursuant to the scheme and shall be otherwise determined by the board in accordance with the scheme. An approved option must be capable of being exercised within the period of ten years from the date of grant. Performance conditions may be amended, relaxed or waived by us if an event occurs which would cause us to consider that an amended performance condition would be a fairer measure of performance provided that such amended targets are no more and no less difficult to satisfy than they were prior to amendment.
Generally, options must be exercised while the participant is an eligible employee or director. In the event, however, that a participant ceases to be an eligible employee or director as a result of ill-health, injury, or disability; redundancy, retirement or pregnancy; upon the company for which the participant works ceasing to be a member of our group; or the transfer of an undertaking or part-undertaking in which the participant is employed to a company not in our group, the option may be exercised during the period commencing on the date he ceases to be an eligible employee or director and ending on 12 months thereafter. If a participant dies while he is an eligible employee or director, the participant’s personal representatives may exercise the option for 12 months after the participant’s death. All options lapse in prescribed circumstances, including: upon the tenth anniversary of the date of grant; the expiry of the period (if any) allowed for the satisfaction of any performance condition without such condition having been satisfied or becomes, in our opinion, incapable of being satisfied; on the day on which a participant ceases to be an eligible employee or director (with the exception of the carve outs detailed in the scheme); on the bankruptcy of the participant; or on the occurrence of a takeover.
Ordinary shares allotted under the scheme rank equally with the ordinary shares in issue at the date of allotment of the option shares. If and for so long as the ordinary shares are listed on AIM or any other exchange, we shall apply for ordinary shares allotted under the scheme to be admitted to the relevant exchange.
Limits
The maximum number of ordinary shares which may on any day be placed under option under the scheme, when added to the number of ordinary shares allocated for subscription for the preceding ten years under any employee share scheme, shall not exceed 15% of our ordinary share capital immediately prior to that day. Approved options are also subject to individual participant limits in accordance with the scheme and as provided for under relevant U.K. tax law. Lapsed options shall be disregarded for these purposes.
Takeovers and Liquidations
In certain specified circumstances involving a change of control, as specified in accordance with U.K. tax law, an option may automatically vest or otherwise be determined to vest by our board of directors. Where an option vests by reason of a change of control, the exercise of the option shall be conditional upon the change of control occurring. Our board of directors may, in certain circumstances, determine that an option shall lapse upon the change of control or six months thereafter.
Options may also be exercisable for the relevant period in the event of certain court sanctioned restructurings or amalgamations of us or if another company becomes bound or entitled to acquire our ordinary shares pursuant to certain provisions of U.K. companies law. Our board of directors may also permit exercise of the options within a period following the date on which we pass a resolution for voluntary winding up.
In the event of a person obtaining control of us as a result of a takeover offer or court sanctioned restructuring or amalgamation or qualifying exchange of shares within the relevant U.K. laws, the participant may, by agreement with the acquiring company, release options in consideration for the grant of a new option with respect to the acquiring company’s shares.

129

Variation of Share Capital
In the event of any capitalization, rights issue, consolidation, subdivision, reduction or other variation of our share capital the number of ordinary shares comprised in an option and the exercise price in respect of the ordinary shares shall be varied as the directors determine and our auditors confirm to be fair and reasonable. Limitations apply to the extent to which any such adjustments may reduce the price at which ordinary shares may be purchased pursuant to the exercise of an option and no adjustment will take effect until it has been approved by the United Kingdom tax authorities in accordance with applicable U.K. tax law.
Amendments
Our board of directors may waive or amend the scheme subject to certain limitations which require approval of our shareholders.
Scheme Rules Governing Options Awarded to U.S. Employees
We have in place rules governing options awarded to our U.S. employees which have been adapted from our 2005 EMI Scheme Rules. The rules of the scheme are substantially the same as the 2005 EMI Scheme Rules.

Options Granted Outside the 2005 EMI Scheme Rules
Certain of our consultants who are not eligible employees of companies in our group for the purposes of our option scheme rules, and therefore, are not eligible to participate in our option schemes as detailed above, have been granted options to acquire our shares pursuant to separate unapproved option agreements. These options are generally on comparable terms to options granted under the 2005 EMI Scheme Rules.
Limitations on Liability and Indemnification Matters
To the extent permitted by the U.K. Companies Act 2006, we are empowered to indemnify our directors against any liability they incur by reason of their directorship. We maintain directors’ and officers’ insurance to insure such persons against certain liabilities. We have entered into a deed of indemnity with each of our directors and executive officers.

C. Board Practices
Board Composition
Our board of directors currently consists of seven members, a non-executive chairman, one executive director and five non-executive directors.
Under Nasdaq listing standards, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that all of our directors, other than Mr. Edwards, qualify as independent directors under Rule 5605(a)(2) of the Nasdaq listing standards.
Corporate Governance and Committees of the Board
Corporate Governance
Our board of directors is responsible for overall corporate governance and for supervising the general affairs and business of our company and its subsidiaries. As an AIM-listed company, we are subject to the continuing requirements of the AIM Rules for Companies as published by the London Stock Exchange plc from time to time. We are not required to comply with the U.K. Corporate Governance Code by virtue of being an AIM-listed company. Our board, however, seeks to apply the highest standards of corporate governance appropriate for the size and stage of development of the company.
Our board is responsible to our shareholders for the proper management of our company and its subsidiaries and setting the overall direction and strategy of our group, reviewing scientific, operational and financial performance, and advising on management appointments. All key operational and investment decisions are subject to board approval.
There is a clear separation of the roles of chief executive officer and non-executive chairman. The chairman is responsible for overseeing the running of our board, ensuring that no individual or group dominates our board’s decision-making and ensuring that the non-executive directors are properly briefed on matters. The chief executive officer has the responsibility for implementing the strategy of our board and managing the day-to-day business activities of our group.

130

Under our articles of association, all of our directors are subject to election by shareholders at the first annual general meeting after their appointment to our board and to re-election by shareholders at least once every three years. Accordingly we plan to put one-third of the directors up for re-election each year and plan to put two of the directors up for re-election at the 2018 annual general meeting. The board considers a classified board structure and the practice of retiring by rotation every three years to be appropriate given that, as a biopharmaceutical company, the nature of our business is to carry out long-term research and development. Further details regarding the directors to be proposed for re-election will be detailed in the 2018 notice of annual general meeting that will be distributed to shareholders in accordance with our articles of association.
Committees of the Board
We have established an audit committee, a remuneration committee and a nominating and corporate governance committee and have adopted a charter for each of these committees.
Audit Committee
The members of our audit committee are Mr. Wurzer, Mr. Zambeletti and Ms. Andrews. Mr. Wurzer is the chair of the audit committee. Our audit committee’s responsibilities include:
 
•
appointing, approving the compensation of, and assessing the independence, objectivity and effectiveness of our registered public accounting firm;

•
overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from that firm;

•
monitoring the integrity of our financial statements by reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

•
reviewing and monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct;

•
reviewing and monitoring the effectiveness of our internal audit function;

•
overseeing our risk assessment and risk management policies;

•
establishing policies regarding procedures for the receipt and retention of accounting related complaints and concerns;

•
meeting independently with our internal auditing staff, if any, our independent registered public accounting firm and management; and

•
reviewing and approving or ratifying any related person transactions.
All audit and non-audit services, other than de minimis non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our audit committee.
Our board of directors has determined that Mr. Wurzer is an “audit committee financial expert” as defined in Item 16A of Form 20-F.
In order to satisfy the independence criteria for audit committee members set forth in Rule 10A-3(b)(1) under the Exchange Act, each member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries. We believe that the composition of our audit committee meets the requirements for independence under current Nasdaq and SEC rules and regulations.


131

Remuneration Committee
The members of our remuneration committee are Dr. Armstrong, Ms. Andrews and Professor Davies. Ms. Andrews is the chair of the remuneration committee. Our remuneration committee’s responsibilities include:
 
•
reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our directors and executive management;

•
overseeing an evaluation of our executive management; and

•
overseeing and administering our employee share option scheme or equity incentive plans in operation from time to time.
In order to satisfy the independence criteria for remuneration committee members set forth in Rule 10C-1 under the Exchange Act, all factors specifically relevant to determining whether a director has a relationship to such company which is material to that director’s ability to be independent from management in connection with the duties of a remuneration committee member must be considered, including, but not limited to: (1) the source of compensation of the director, including any consulting advisory or other compensatory fee paid by such company to the director; and (2) whether the director is affiliated with the company or any of its subsidiaries or affiliates. We believe the composition of our remuneration committee meets the requirements for independence under current Nasdaq and SEC rules and regulations.
Nominating and Corporate Governance Committee
The members of our nominating and corporate governance committee are Dr. Armstrong, Dr. Price, Professor Davies, Mr. Zambeletti, Ms. Andrews and Mr. Wurzer. Dr. Armstrong is the chair of the nominating and corporate governance committee. Our nominating and corporate governance committee’s responsibilities include:
 
•
identifying individuals qualified to become members of our board;

•
recommending to our board the persons to be nominated for election as directors and to each of our board’s committees;

•
overseeing a periodic evaluation of our board;

•
reviewing and making recommendations to our board with respect to our board leadership structure;

•
reviewing and making recommendations to our board with respect to management succession planning; and

•
developing and recommending to our board corporate governance principles.
D. Employees
The number of our employees by geographic location and function as of the end of the period for our fiscal years ended January 31, 2018, 2017 and 2016 was as follows:
 
    
 
 
2018
 
2017
 
2016
By Geography
 
 
 
 
 
 
United Kingdom
 
54

 
28

 
25

North America
 
22

 
12

 
12

Total
 
76

 
40

 
37


    
 
 
2018
 
2017
 
2016
By Function
 
 
 
 
 
 
Research & Development
 
52

 
24

 
22

General & Administrative
 
24

 
16

 
15

Total
 
76

 
40

 
37

Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good.

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Item 7: Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of April 1, 2018 by: 
•
each of the members of our board of directors;
•
each of our other executive officers; and
•
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our ordinary shares.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our ordinary shares. Our ordinary shares subject to options or warrants that are currently exercisable or exercisable within 60 days of April 1, 2018 are considered outstanding and beneficially owned by the person holding the options or warrants for the purpose of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as otherwise noted, the persons and entities in this table have sole voting and investing power with respect to all of the ordinary shares beneficially owned by them. Except as otherwise indicated in the table below, addresses of named beneficial owners are c/o Summit Therapeutics plc, 136a Eastern Avenue, Milton Park, Abingdon, Oxfordshire OX14 4SB, United Kingdom. All holders of our ordinary shares, including those shareholders listed below, have the same voting rights with respect to such shares.
     
 
 
Ordinary shares
beneficially owned
Name of beneficial owner
 
Shares
 
%
Executive officers and directors
 
 
 
 
Glyn Edwards(1)
 
1,243,292

 
1.50
%
Erik Ostrowski
 
—

 
—

David Roblin (2)
 
107,770

 
*

Frank Armstrong(3)
 
51,942

 
*

Barry Price(4)
 
107,211

 
*

Stephen Davies(5)
 
602,481

 
*

Leopoldo Zambeletti
 
—

 
—

Valerie Andrews
 
10,500

 
*

David Wurzer
 
7,500

 
*

All executive officers and directors as a group (9 persons)(6)
 
2,130,696

 
2.56
%
5% shareholders
 
 
 
 
Lansdowne Partners (UK) LLP(7)
 
21,143,500

 
25.82
%
Robert Keith(8)
 
4,294,816

 
5.24
%
_________
*
Less than one percent.

(1)
Consists of (a) 1,009,959 ordinary shares underlying options that are exercisable as of April  1, 2018 or will become exercisable within 60 days after such date and (b) 233,333 ordinary shares.
(2)
Consists of 107,770 ordinary shares underlying options that are exercisable as of April  1, 2018 or will become exercisable within 60 days after such date.
(3)
Consists of (a) 37,500 ordinary shares underlying options that are exercisable as of April 1, 2018 or will become exercisable within 60 days after such date and (b) 14,442 ordinary shares.
(4)
Consists of (a) 31,481 ordinary shares underlying options that are exercisable as of April 1, 2018 or will become exercisable within 60 days after such date and (b) 75,730 ordinary shares.
(5)
Consists of (a) 17,500 ordinary shares underlying options that are exercisable as of April 1, 2018 or will become exercisable within 60 days after such date and (b) 584,981 ordinary shares.
(6)
Consists of (a) 1,204,210 ordinary shares underlying options that are exercisable as of April 1, 2018 or will become exercisable within 60 days after such date and (b) 926,486 ordinary shares.
(7)
These shares are registered in the name of HSBC Client Holdings Nominee (UK) Limited. Lansdowne Partners (UK) LLP may be deemed to have voting and dispositive power over the ordinary shares. Investment decisions with respect to the ordinary shares held by Lansdowne Partners (UK) LLP can be made by Stuart Roden, Peter Davies and Jonathan Regis. The address of Lansdowne Partners (UK) LLP is 15 Davies Street, London, W1K 3AG.
(8)
This information is based on information contained in a TR-1 Notification sent to us on January 25, 2017 by Robert Keith.

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Bank of New York Mellon, or BNY Mellon, is the holder of record for the company’s ADR program, pursuant to which each ADS represents five ordinary shares. As of April 1, 2018, BNY Mellon held 30,713,240 ordinary shares representing 37.5% of the issued share capital held at that date. As of April 1, 2018, we had one holder of record with an address in the United States, and such holder held less than one percent of our outstanding ordinary shares. As a result, the number of holders of record or registered holders in the United States is not representative of the number of beneficial holders or of the residence of beneficial holders.
To our knowledge, there has been no significant change in the percentage ownership held by the principal shareholders listed above since April 1, 2018.
B. Related Party Transactions
Since February 1, 2017, we have engaged in the following transactions with our directors, executive officers or holders of 5% or more of our ordinary shares, or affiliates of our directors, executive officers or holders of more than 5% of our ordinary shares that are required to be described in this Annual Report pursuant to Item 7.B. of Form 20-F.
In September 2017, we completed an underwritten public offering for the sale of 1,677,850 American Depositary Shares, or ADSs, representing our ordinary shares. In connection with such offering, Lansdowne Partners (UK) LLP, a holder of more than 5% of our ordinary shares, purchased an aggregate of 666,666 ADSs at a purchase price of $12.00 per ADS.
In March 2018, we completed a placement of an aggregate of 8,333,333 ordinary shares to investors in Europe at a purchase price of 180 pence per share. In connection with such placement, an affiliate of Lansdowne Partners (UK) LLP, a holder of more than 5% of our ordinary shares, subscribed for 2,083,000 ordinary shares.
C. Interests of Experts and Counsel
Not applicable.
Item 8: Financial Information
A. Consolidated Financial Statements and Other Financial Information.
See “Item 18. Financial Statements.”

B. Significant Changes.
See Note 28 of our consolidated financial statements at the end of this Annual Report for a description of the significant changes since January 31, 2018.
C. Dividends
We have never declared or paid any dividends and currently intend to retain all available earnings generated by our operations for the development and growth of our business. We do not currently anticipate paying any cash dividends on our shares.


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Item 9: The Listing
A. Listing Details
Our ordinary shares have been trading on AIM, a market operated by the London Stock Exchange plc, or AIM, under the symbol “SUMM” since October 14, 2004.
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on AIM in pounds sterling and U.S. dollars. Price per ordinary share in U.S. dollars amounts below have been translated into U.S. dollars at the noon buying rate of the Federal Reserve Bank of New York on January 31, 2018 of £1.00 to $1.4190.
 
    
 
 
Price Per Ordinary Share
 
Price Per Ordinary Share
 
 
£
 
$
 
 
High        
 
Low        
 
High        
 
Low        
Annual (Fiscal Year Ended January 31):
 
 
 
 
 
 
 
 
2014
 
3.90

 
0.78

 
5.53

 
1.11

2015
 
2.20

 
1.04

 
3.12

 
1.48

2016
 
1.84

 
1.17

 
2.61

 
1.66

2017
 
2.53

 
0.91

 
3.59

 
1.29

2018
 
2.43

 
1.43

 
3.45

 
2.03

Quarterly:
 
 
 
 
 
 
 
 
First Quarter 2017
 
1.33

 
0.94

 
1.89

 
1.33

Second Quarter 2017
 
1.26

 
1.00

 
1.88

 
1.42

Third Quarter 2017
 
2.53

 
0.91

 
2.59

 
1.29

Fourth Quarter 2017
 
1.95

 
1.43

 
2.77

 
2.03

First Quarter 2018
 
2.20

 
1.75

 
3.12

 
2.48

Second Quarter 2018
 
2.03

 
1.73

 
2.88

 
2.45

Third Quarter 2018
 
2.43

 
1.53

 
3.45

 
2.17

Fourth Quarter 2018
 
2.15

 
1.43

 
3.05

 
2.03

Monthly:
 
 
 
 
 
 
 
 
October 2017
 
1.98

 
1.53

 
2.81

 
2.17

November 2017
 
1.80

 
1.43

 
2.55

 
2.03

December 2017
 
1.80

 
1.63

 
2.55

 
2.41

January 2018
 
2.15

 
1.65

 
3.05

 
2.34

February 2018
 
1.98

 
1.63

 
2.81

 
2.31

March 2018
 
1.95

 
1.70

 
2.77

 
2.41

April 2018 (through April 6, 2018)
 
1.90

 
1.75

 
2.70

 
2.48

On April 6, 2018, the last reported sales price of our ordinary shares on AIM was £1.75 per ordinary share ($2.48 per ordinary share).


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Our American Depositary Shares, or ADSs, have been trading on the Nasdaq Global Market under the symbol “SMMT” since March 5, 2015. The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ADSs on the Nasdaq Global Market in U.S. dollars.
 
    
 
 
Price Per ADS
 
 
$
 
 
High
 
Low
Annual (Fiscal Year Ended January 31):
 
 
 
 
2016
 
13.68

 
8.25

2017
 
14.35

 
5.50

2018
 
16.00

 
9.05

Quarterly:
 
 
 
 
First Quarter 2017
 
10.97

 
6.35

Second Quarter 2017
 
9.84

 
7.00

Third Quarter 2017
 
14.35

 
5.50

Fourth Quarter 2017
 
12.08

 
8.12

First Quarter 2018
 
13.28

 
10.36

Second Quarter 2018
 
13.98

 
10.53

Third Quarter 2018
 
16.00

 
9.73

Fourth Quarter 2018
 
14.77

 
9.05

Monthly:
 
 
 
 
 
 
 
 
 
October 2017
 
12.79

 
9.73

November 2017
 
11.96

 
9.05

December 2017
 
12.02

 
9.89

January 2018
 
14.77

 
11.08

February 2018
 
13.64

 
10.60

March 2018
 
13.90

 
11.36

April 2018 (through April 6, 2018)
 
13.11

 
11.84

On April 6, 2018, the last reported sales price of our ADSs on the Nasdaq Global Market was $12.29 per ADS.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are listed on AIM under the symbol “SUMM” and our ADSs are listed on the Nasdaq Global Market under the symbol “SMMT.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.


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Item 10: Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this Annual Report the description of our amended articles of association contained in our Registration Statement on Form F-1 (File No. 333-201807) originally filed with the SEC on January 30, 2015, as amended.
C. Material Contracts
Except as otherwise disclosed in this Annual Report (including the exhibits hereto), we are not currently, and have not been in the last two years, party to any material contract, other than contracts entered into in the ordinary course of business.
D. Exchange Controls
There are no governmental laws, decrees, regulations or other legislation in the United Kingdom that may affect the import or export of capital, including the availability of cash and cash equivalents for use by us, or that may affect the remittance of dividends, interest, or other payments by us to non-resident holders of our ordinary shares or ADSs, other than withholding tax requirements. There is no limitation imposed by English law or our articles of association on the right of non-residents to hold or vote shares.
E. Taxation
Taxation in the United Kingdom
The following is a general summary of certain U.K. tax considerations relating to the ownership and disposal of our ordinary shares or ADS and does not address all possible tax consequences relating to an investment in our ordinary share or ADS. It is based on U.K. tax law and generally published HM Revenue & Customs, or HMRC, practice as of the date of this Annual Report, both of which are subject to change, possibly with retrospective effect. A U.K. tax year runs from April 6th in any year to April 5th in the following year.
Save as provided otherwise, this summary applies only to a person who is the absolute beneficial owner of our ordinary share or ADS and who is resident (and, in the case of an individual, domiciled) in the United Kingdom for tax purposes and who is not resident for tax purposes in any other jurisdiction and does not have a permanent establishment or fixed base in any other jurisdiction with which the holding of our ordinary share or ADS is connected (“U.K. Holders”). A person (a) who is not resident (or, if resident, is not domiciled) in the United Kingdom for tax purposes, including an individual and company who trades in the United Kingdom through a branch, agency or permanent establishment in the United Kingdom to which an ordinary share or ADS is attributable, or (b) who is resident or otherwise subject to tax in a jurisdiction outside the United Kingdom, is recommended to seek the advice of professional advisors in relation to their taxation obligations.
This summary is for general information only and is not intended to be, nor should it be considered to be, legal or tax advice to any particular investor. It does not address all of the tax considerations that may be relevant to specific investors in light of their particular circumstances or to investors subject to special treatment under U.K. tax law. In particular:
 
•
this summary only applies to an absolute beneficial owner of ordinary share or ADS and any dividend paid in respect of the ordinary share where the dividend is regarded for U.K. tax purposes as that person’s own income (and not the income of some other person); and
•
this summary: (a) only addresses the principal U.K. tax consequences for an investor who holds ordinary share or ADS as a capital asset, (b) does not address the tax consequences that may be relevant to certain special classes of investor such as a dealer, broker or trader in shares or securities and any other person who holds ordinary share or ADS otherwise than as an investment, (c) does not address the tax consequences for a holder that is a financial institution, insurance company, collective investment scheme, pension scheme, charity or tax-exempt organization, (d) assumes that a holder is not an officer or employee of the company (nor of any related company) and has not (and is not deemed to have) acquired the ordinary share or ADS by virtue of an office or employment, and (e) assumes that a holder does not control or hold (and is not deemed to control or hold), either alone or together with one or more associated or connected persons, directly or indirectly (including through the holding of an ADS), an interest of 10% or more in the issued share capital (or in any class thereof), voting power, rights to profits or capital of the company, and is not otherwise connected with the company.

137

This summary further assumes that a holder of ADSs is the beneficial owner of the underlying ordinary share for U.K. direct tax purposes.
POTENTIAL INVESTORS IN THE ADSs SHOULD SATISFY THEMSELVES PRIOR TO INVESTING AS TO THE OVERALL TAX CONSEQUENCES, INCLUDING, SPECIFICALLY, THE CONSEQUENCES UNDER U.K. TAX LAW AND HMRC PRACTICE OF THE ACQUISITION, OWNERSHIP AND DISPOSAL OF THE ORDINARY SHARES OR ADSs, IN THEIR OWN PARTICULAR CIRCUMSTANCES BY CONSULTING THEIR OWN TAX ADVISERS.
Taxation of Dividends
Withholding Tax
A dividend payment in respect of an ordinary share may be made without withholding or deduction for or on account of U.K. tax.
Income Tax
A dividend received by individual U.K. Holders will be subject to U.K. income tax. The system of grossing up dividends has been abolished from April 2016 and replaced with a simple rate of tax on dividends referred to below.
An individual holder of an ordinary share or ADS who is not a U.K. Holder will not be chargeable to U.K. income tax on a dividend paid by the company, unless such holder carries on (whether solely or in partnership) a trade, profession or vocation in the United Kingdom through a branch or agency in the United Kingdom to which the ordinary share or ADS is attributable. In these circumstances, such holder may, depending on his or her individual circumstances, be chargeable to U.K. income tax on a dividend received from the company.
The rate of U.K. income tax that is chargeable on dividends received in the tax years 2017/2018 or 2018/19 by (i) an additional rate taxpayer is 38.1%, (ii) a higher rate taxpayer is 32.5%, and (iii) a basic rate taxpayer is 7.5%. An individual U.K. Holder may be entitled to a tax-free dividend allowance (in addition to their personal allowance) of £5,000 reduced to £2,000 for the tax year 2018/9. An individual’s dividend income is treated as the top slice of their total income that is chargeable to U.K. income tax. Dividends which fall within an individual’s personal income tax allowance do not form part of the dividend tax-free allowance.
Corporation Tax
A U.K. Holder within the charge to U.K. corporation tax may be entitled to exemption from U.K. corporation tax in respect of dividend payments. If the conditions for the exemption are not satisfied, or such U.K. Holder elects for an otherwise exempt dividend to be taxable, U.K. corporation tax will be chargeable on the gross amount of a dividend. If potential investors are in any doubt as to their position, they should consult their own professional advisers.
A corporate holder of an ordinary share or ADS that is not a U.K. Holder will not be subject to U.K. corporation tax on a dividend received from the company, unless it carries on a trade in the United Kingdom through a permanent establishment to which the ordinary share or ADS is attributable. In these circumstances, such holder may, depending on its individual circumstances and if the exemption from U.K. corporation tax discussed above does not apply, be chargeable to U.K. corporation tax on dividends received from the company.
Taxation of Disposals
U.K. Holders
A disposal or deemed disposal of an ordinary share or ADS by an individual U.K. Holder may, depending on his or her individual circumstances, give rise to a chargeable gain or to an allowable loss for the purpose of U.K. capital gains tax. The principal factors that will determine the capital gains tax position on a disposal of an ordinary share or ADS are the extent to which the holder realizes any other capital gains in the tax year in which the disposal is made, the extent to which the holder has incurred capital losses in that or any earlier tax year and the level of the annual exemption for tax-free gains in that tax year (the “annual exemption”). The annual exemption for the 2017/2018 tax year is £11,300 increasing to £11,700 for the 2018/19 tax year. If, after all allowable deductions, an individual U.K. Holder’s total taxable income for the year exceeds the basic rate income tax limit, a taxable capital gain accruing on a disposal of an ordinary share or an ADS is taxed at the rate of 20%. In other cases, a taxable capital gain accruing on a disposal of an ordinary share or ADS may be taxed at the rate of 10% or the rate of 20% or at a combination of both rates.

138

An individual U.K. Holder who ceases to be resident in the United Kingdom (or who fails to be regarded as resident in a territory outside the United Kingdom for the purposes of double taxation relief) for a period of five tax years or less than five years and who disposes of an ordinary share or ADS during that period of temporary non-residence may be liable to U.K. capital gains tax on a chargeable gain accruing on such disposal on his or her return to the United Kingdom (or upon ceasing to be regarded as resident outside the United Kingdom for the purposes of double taxation relief) (subject to available exemptions or reliefs).
A disposal (or deemed disposal) of an ordinary share or ADS by a corporate U.K. Holder may give rise to a chargeable gain or an allowable loss for the purpose of U.K. corporation tax. Such a holder should be entitled to an indexation allowance, which applies to reduce a capital gain to the extent that such a gain arises due to inflation. The allowance may reduce a chargeable gain but will not create or increase an allowable loss.
Any gain or loss in respect of currency fluctuations over the period of holding an ordinary share or an ADS are also brought into account on a disposal.
Non-U.K. Holders
An individual holder who is not a U.K. Holder will not be liable to U.K. capital gains tax on capital gains realized on the disposal of an ordinary share or ADS unless such holder carries on (whether solely or in partnership) a trade, profession or vocation in the United Kingdom through a branch or agency in the United Kingdom to which the ordinary share or ADS is attributable. In these circumstances, such holder may, depending on his or her individual circumstances, be chargeable to U.K. capital gains tax on chargeable gains arising from a disposal of his or her ordinary share or ADS.
A corporate holder of an ordinary share or ADS that is not a U.K. Holder will not be liable for U.K. corporation tax on chargeable gains realized on the disposal of an ordinary share or ADS unless it carries on a trade in the United Kingdom through a permanent establishment to which the ordinary share or ADS is attributable. In these circumstances, a disposal (or deemed disposal) of an ordinary share or ADS by such holder may give rise to a chargeable gain or an allowable loss for the purposes of U.K. corporation tax.

Inheritance Tax
If for the purposes of the Double Taxation Relief (Taxes on Estates of Deceased Persons and on Gifts) Treaty United States of America Order 1979 (SI 1979/1454) between the United States and the United Kingdom an individual holder is domiciled at the time of their death or at the time of a transfer made during their lifetime, in the United States and is not a national of the United Kingdom, any ordinary share or ADS beneficially owned by that holder should not generally be subject to U.K. inheritance tax, provided that any applicable United States federal gift or estate tax liability is paid, except where (i) the ordinary share or ADS is part of the business property of a U.K. permanent establishment or pertain to a U.K. fixed base used for the performance of independent personal services; or (ii) the ordinary share or ADS is comprised in a settlement unless, at the time the settlement was made, the settlor was domiciled in the United States and not a national of the U.K. (in which case no charge to U.K. inheritance tax should apply).
Stamp Duty and Stamp Duty Reserve Tax
The stamp duty and stamp duty reserve tax, or SDRT, treatment of the issue and transfer of, and the agreement to transfer, an ordinary share outside a depositary receipt system or a clearance service are discussed in the paragraphs under “General” below. The stamp duty and SDRT treatment of such transactions in relation to such systems are discussed in the paragraphs under “Depositary Receipt Systems and Clearance Services” below.
General
An agreement to transfer an ordinary share will normally give rise to a charge to SDRT at the rate of 0.5% of the amount or value of the consideration payable for the transfer. SDRT is, in general, payable by the purchaser.
A transfer of an ordinary share or ADS will generally be subject to stamp duty at the rate of 0.5% of the consideration given for the transfer (rounded up to the next £5). The purchaser normally pays the stamp duty.
If a duly stamped transfer completing an agreement to transfer is produced within six years of the date on which the agreement is made (or, if the agreement is conditional, the date on which the agreement becomes unconditional) any SDRT already paid is generally repayable, normally with interest, and any SDRT charge yet to be paid is cancelled to avoid a double charge as the stamp duty has been paid.

139

Under current HMRC guidance, no U.K. stamp duty should be payable on a written instrument transferring an ADS or on a written agreement to transfer an ADS, on the basis that an ADS is not regarded as either “stock” or a “marketable security” for U.K. stamp duty purposes.
Depositary Receipt Systems and Clearance Services
Following the ECJ decision in C-569/07 HSBC Holdings Plc, Vidacos Nominees Limited v The Commissioners of Her Majesty’s Revenue & Customs and the First-tier Tax Tribunal decision in HSBC Holdings Plc and the Bank of New York Mellon Corporation v The Commissioners of Her Majesty’s Revenue & Customs, HM Revenue & Customs has confirmed that 1.5% SDRT is no longer payable when shares are issued or transferred to a clearance service (such as, in our understanding, DTC) or depositary receipt system as an integral part of a raising of capital.
Where an ordinary share or ADS is otherwise transferred (i) to, or to a nominee or an agent for, a person whose business is or includes the provision of clearance services or (ii) to, or to a nominee or an agent for a person whose business is or includes issuing depositary receipts, stamp duty or SDRT will generally be payable at the higher rate of 1.5% of the amount or value of the consideration given or, in certain circumstances, the value of the shares.
There is an exception from the 1.5% charge on the transfer to, or to a nominee or agent for, a clearance service where the clearance service has made and maintained an election under section 97A(1) of the Finance Act 1986, which has been approved by HM Revenue & Customs. In these circumstances, SDRT at the rate of 0.5% of the
amount or value of the consideration payable for the transfer will arise on any transfer of ordinary share into such an account and on subsequent agreements to transfer such shares within such account. It is our understanding that DTC has not made an election under section 97A(1) of the Finance Act of 1986.
Any liability for stamp duty or SDRT in respect of a transfer into a clearance service or depositary receipt system, or in respect of a transfer within such a service, which does arise will strictly be accountable by the clearance service or depositary receipt system operator or their nominee, as the case may be, but will, in practice, be payable by the participants in the clearance service or depositary receipt system.
The Proposed Financial Transactions Tax
The European Commission has published a proposal for a Directive for a common Financial Transactions Tax, or FTT, in Belgium, Germany, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (described below as the “participating Member States”).
The proposed FTT has very broad scope and could, if introduced in its current form, apply to certain dealings in ordinary shares (including secondary market transactions) in certain circumstances.
Under current proposals the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in ordinary shares where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstance, including (i) by transacting with a person established in a participating Member State or (ii) where the financial instrument which is subject to the dealings is issued in participating Member State.
The FTT proposal remains subject to negotiation between the participating Member States. Further, the legality of the FTT proposals is at present uncertain. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate. The FTT proposal remains only a proposal and little progress has been made in recent years; the impact of an FTT on us and holders of our ordinary shares and ADS is made more uncertain following the U.K.’s decision to withdraw from the European Union. Prospective holders of an ordinary share or ADS are advised to seek their own professional advice in relation to the FTT.
Taxation in the United States
The following summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of the ADSs is based upon current law and does not purport to be a comprehensive discussion of all the tax considerations that may be relevant to a particular U.S. holder, as defined below, of the ADSs. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, existing, final, temporary and proposed U.S. Treasury Regulations, administrative rulings and judicial decisions, in each case as available on the date of this Annual Report. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

140

This section summarizes the material U.S. federal income tax consequences to U.S. holders, as defined below, of an investment in the ADSs. This summary addresses only the U.S. federal income tax considerations for U.S. holders that acquire and hold the ADSs as capital assets. Each prospective investor should consult a professional tax advisor with respect to the tax consequences of the acquisition, ownership or disposition of the ADSs. This summary does not address tax considerations applicable to a holder of ADSs that may be subject to special tax rules including, without limitation, the following:
 
•
banks or other financial institutions;
•
insurance companies;
•
brokers, dealers or traders in securities, currencies, or notional principal contracts;
•
grantor trusts;
•
tax-exempt entities, including an “individual retirement account” or “Roth IRA” retirement plan;
•
regulated investment companies or real estate investment trusts;
•
persons that hold the ordinary shares as part of a hedge, straddle, conversion, constructive sale or similar transaction involving more than one position;
•
persons required to accelerate the recognition of any item of gross income with respect to the ADSs as a result of such income being recognized on an applicable financial statement
•
an entity classified as a partnership and persons that hold the ordinary shares through partnerships or certain other pass-through entities;
•
holders (whether individuals, corporations or partnerships) that are treated as expatriates for some or all U.S. federal income tax purposes;
•
persons who acquired the ADSs as compensation for the performance of services;
•
persons who are resident, or ordinarily resident, in a foreign country;
•
persons holding the ADSs in connection with a trade or business conducted outside of the United States;
•
a U.S. holder who holds the ADSs through a financial account at a foreign financial institution that does not meet the requirements for avoiding withholding with respect to certain payments under Sections 1471 through 1474 of the Internal Revenue Code of 1986, as amended, or the Code;
•
holders that own (or are deemed to own) 10% or more of our voting shares; and
•
holders that have a “functional currency” other than the U.S. dollar.
Further, this summary does not address alternative minimum tax, gift or estate considerations, U.S. state or local tax matters or the indirect effects on the holders of equity interests in entities that own the ADSs. In addition, this discussion does not consider the U.S. tax consequences to holders of ADSs that are not “U.S. holders” (as defined below).
For the purposes of this summary, a “U.S. holder” is a beneficial owner of ordinary shares or ADSs that is (or is treated as), for U.S. federal income tax purposes:
 
•
an individual who is either a citizen or a tax resident of the United States;
•
a corporation, or other entity that is treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state of the United States or the District of Columbia;
•
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•
a trust, if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of the substantial decisions of such trust or has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person.
If a partnership holds ordinary shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership; those rules are not discussed in this summary.
We will not seek a ruling from the U.S. Internal Revenue Service, or IRS, with regard to the U.S. federal income tax treatment of an investment in our ordinary shares or ADSs, and we cannot assure you that the IRS will agree with the conclusions set forth below.
The discussion below assumes that the representations contained in the deposit agreement governing the ADSs are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms.
Ownership of ADSs
For U.S. federal income tax purposes, a holder of ADSs generally will be treated as the owner of the ordinary shares represented by such ADSs. Gain or loss will generally not be recognized on account of exchanges of ordinary shares for ADSs, or of ADSs for ordinary shares. References to ordinary shares in the discussion below are deemed to include ADSs, unless context otherwise requires.


141

Distributions
Subject to the discussion under “Passive Foreign Investment Company Considerations” below, the gross amount of any distribution actually or constructively received by a U.S. holder with respect to ordinary shares will be taxable to the U.S. holder as a dividend to the extent of such U.S. holder’s pro rata share of our current and accumulated earnings and profits as determined under U.S. federal income tax principles. Distributions in excess of such pro rata share of our earnings and profits will be non-taxable to the U.S. holder to the extent of, and will be applied against and reduce, the U.S. holder’s adjusted tax basis in the ordinary shares. Distributions in excess of the sum of such pro rata share of our earnings and profits and such adjusted tax basis will generally be taxable to the U.S. holder as capital gain from the sale or exchange of property. However, since we do not calculate our earnings and profits under U.S. federal income tax principles, it is expected that any distribution will be reported as a dividend, even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution. A corporate U.S. holder will not be eligible for any dividends-received deduction in respect of a dividend received with respect to ordinary shares.
Subject to the discussion below regarding the “Medicare tax,” qualified dividends received by non-corporate U.S. holders (i.e., individuals and certain trusts and estates) are currently subject to a maximum income tax rate of 20%. This reduced income tax rate is applicable to dividends paid by “qualified foreign corporations” to non-corporate U.S. holders that meet the applicable requirements, including a minimum holding period (generally, at least 61 days without protection from the risk of loss during the 121-day period beginning 60 days before the ex-dividend date). A non-United States corporation (other than a corporation that is classified as a "passive foreign investment company," or PFIC, for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information provision, or (b) with respect to any dividend it pays on shares of stock which are readily tradable on an established securities market in the United States. Our ADSs are listed on the Nasdaq Global Market, which is an established securities market in the United States, and we expect the ADSs to be readily tradable on the Nasdaq Global Market. However, there can be no assurance that the ADSs will be considered readily tradable on an established securities market in the United States in later years. The Company, which is incorporated under the laws of the United Kingdom, believes that it qualifies as a resident of the United Kingdom for the purposes of, and is eligible for the benefits of, the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed on July 24, 2001, or the U.S.-U.K. Tax Treaty, although there can be no assurance in this regard. Further, the IRS has determined that the U.S.-U.K. Tax Treaty is satisfactory for purposes of the qualified dividend rules and that it includes an exchange-of-information program. Based on the foregoing, we expect to be considered a qualified foreign corporation under the Code. Accordingly, dividends paid by us to non-corporate U.S. holders with respect to shares that meet the minimum holding period and other requirements are expected to be treated as “qualified dividend income.” However, as discussed above, dividends paid by us will not qualify for the 20% maximum U.S. federal income tax rate if we are treated, for the tax year in which the dividends are paid or the preceding tax year, as a PFIC for U.S. federal income tax purposes, as discussed below.
The U.S. Treasury Department has announced its intention to issue rules regarding when and to what extent holders of ADSs will be permitted to rely on certifications from issuers to establish that dividends paid on shares to which such ADSs relate are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them.
Dividends received by a U.S. holder with respect to ordinary shares generally will be treated as foreign source income for the purposes of calculating that holder’s foreign tax credit limitation. For these purposes, dividends distributed by us generally will constitute “passive category income” (but, in the case of some U.S. holders, may constitute “general category income”).

Sale or Other Disposition of Ordinary Shares
A U.S. holder will generally recognize gain or loss for U.S. federal income tax purposes upon the sale or exchange of ordinary shares in an amount equal to the difference between the U.S. dollar value of the amount realized from such sale or exchange and the U.S. holder’s tax basis for those ordinary shares. Subject to the discussion under “Passive Foreign Investment Company Considerations” below, this gain or loss will generally be a capital gain or loss and will generally be treated as from sources within the United States. Such capital gain or loss will be treated as long-term capital gain or loss if the U.S. holder has held the ordinary shares for more than one year at the time of the sale or exchange. Long-term capital gains of non-corporate U.S. holders may be eligible for a preferential tax rate; the deductibility of capital losses is subject to limitations. For a cash basis taxpayer, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on the settlement date of the purchase or sale. In that case, no foreign currency exchange gain or loss will result from

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currency fluctuations between the trade date and the settlement date of such a purchase or sale. An accrual basis taxpayer, however, may elect the same treatment required of cash basis taxpayers with respect to purchases and sales of the ADSs that are traded on an established securities market, provided the election is applied consistently from year to year. Such election may not be changed without the consent of the IRS. For an accrual basis taxpayer who does not make such election, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on the trade date of the purchase or sale. Such an accrual basis taxpayer may recognize exchange gain or loss based on currency fluctuations between the trade date and settlement date. Any foreign currency gain or loss a U.S. holder realizes will be U.S. source ordinary income or loss.
Medicare Tax
An additional 3.8% tax, or “Medicare Tax”, is imposed on all or a portion of the “net investment income” (which includes taxable dividends and net capital gains, adjusted for deductions properly allocable to such dividends or net capital gains) received by (i) U.S. holders that are individuals with modified adjusted gross income of over $200,000 ($250,000 in the case of joint filers, $125,000 in the case of married individuals filing separately) and (ii) certain trusts or estates.
Passive Foreign Investment Company Considerations
A corporation organized outside the United States generally will be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in any taxable year in which, after applying the applicable look-through rules, either: (i) at least 75% of its gross income is passive income, or (ii) on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. In arriving at this calculation, a pro rata portion of the income and assets of each corporation in which we own, directly or indirectly, at least a 25% interest, as determined by the value of such corporation, must be taken into account. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions.
We believe that we were not a PFIC for any previous taxable year. Based on our estimated gross income, the average value of our gross assets, and the nature of the active businesses conducted by our “25% or greater” owned subsidiaries, we do not believe that we will be classified as a PFIC in the current taxable year. Our status for any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. The market value of our assets may be determined in large part by reference to the market price of the ADSs and our ordinary shares, which is likely to fluctuate after the offering (and may fluctuate considerably given that market prices of life sciences companies can be especially volatile). In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering.
If we were a PFIC for any taxable year during which a U.S. holder held ordinary shares, under the “default PFIC regime” (i.e., in the absence of one of the elections described below) gain recognized by the U.S. holder on a sale
or other disposition (including a pledge) of the ordinary shares would be allocated ratably over the U.S. holder’s holding period for the ordinary shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for that taxable year. Similar rules would apply to the extent any distribution in respect of ordinary shares exceeds 125% of the average of the annual distributions on ordinary shares received by a U.S. holder during the preceding three years or the holder’s holding period, whichever is shorter.
In the event we were treated as a PFIC, the tax consequences under the default PFIC regime described above could be avoided by either a “mark-to-market” or “qualified electing fund” election. A U.S. holder making a mark-to-market election (if the eligibility requirements for such an election were satisfied) generally would not be subject to the PFIC rules discussed above, except with respect to any portion of the holder’s holding period that preceded the effective date of the election. Instead, the electing holder would include in ordinary income, for each taxable year in which we were a PFIC, an amount equal to any excess of (a) the fair market value of the ordinary shares as of the close of such taxable year over (b) the electing holder’s adjusted tax basis in such ordinary shares. In addition, an electing holder would be allowed a deduction in an amount equal to the lesser of (a) the excess, if any, of (i) the electing holder’s adjusted tax basis in the ordinary shares over (ii) the fair market value of such ordinary shares as of the close of such taxable year or (b) the excess, if any, of (i) the amount included in ordinary income because of the election for prior taxable years over (ii) the amount allowed as a deduction because of the election for prior taxable years. The election would cause adjustments in the electing holder’s tax basis in the ordinary shares to reflect the amount included in gross income or allowed as a deduction because of the election. In addition, upon a sale or other taxable disposition of ordinary shares, an electing holder would recognize ordinary income or loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of the election for prior taxable years over (b) the amount allowed as a deduction because of the election for prior taxable years).

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Alternatively, a U.S. holder making a valid and timely “QEF election” generally would not be subject to the default PFIC regime discussed above. Instead, for each PFIC year to which such an election applied, the electing holder would be subject to U.S. federal income tax on the electing holder’s pro rata share of our net capital gain and ordinary earnings, regardless of whether such amounts were actually distributed to the electing holder. However, because we do not intend to prepare or provide the information that would permit the making of a valid QEF election, that election will not be available to U.S. holders.
If we were considered a PFIC for the current taxable year or any future taxable year, a U.S. holder would be required to file annual information returns for such year, whether or not the U.S. holder disposed of any ordinary shares or received any distributions in respect of ordinary shares during such year.
Backup Withholding and Information Reporting
U.S. holders generally will be subject to information reporting requirements with respect to dividends on ordinary shares and on the proceeds from the sale, exchange or disposition of ordinary shares that are paid within the United States or through U.S.-related financial intermediaries, unless the U.S. holder is an “exempt recipient.” In addition, U.S. holders may be subject to backup withholding (at a 24% rate) on such payments, unless the U.S. holder provides a taxpayer identification number and a duly executed IRS Form W-9 or otherwise establishes an exemption. Backup withholding is not an additional tax, and the amount of any backup withholding will be allowed as a credit against a U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Foreign Account Tax Compliance Act, or FATCA, and Related Provisions
Under certain circumstances, the Company or its paying agent may be required, pursuant to the FATCA provisions of the Code (or analogous provisions of non-U.S. law ) and regulations or pronouncements thereunder, any “intergovernmental agreement” entered into pursuant to those provisions or any U.S. or non-U.S. fiscal or regulatory legislation, rules, guidance notes or practices adopted pursuant to any such agreement, to withhold U.S. tax at a rate of 30% on all or a portion of payments of dividends or other corporate distributions which are treated as “foreign passthru payments” made on or after the earlier of (i) January 1, 2019 and (ii) the date of publication of final regulations defining the term “foreign passthru payment,” if such payments are not exempt from such withholding. The Company believes, and this discussion assumes, that the Company is not a “foreign financial institution” for purposes of FATCA. The rules regarding FATCA and “foreign pass-thru payments,” including the treatment of proceeds from the disposition of ordinary shares, are not completely clear, and further guidance may be issued by the IRS that would clarify how FATCA might apply to dividends or other amounts paid on or with respect to ordinary shares.
Foreign Asset Reporting
In addition, certain individuals who are U.S. Holders may be required to file IRS Form 8938 to report the ownership of “specified foreign financial assets” if the total value of those assets exceeds an applicable threshold amount (subject to certain exceptions). For these purposes, a specified foreign financial asset may include not only a financial account (as defined for these purposes) maintained by a non-U.S. financial institution, but also stock or securities issued by a non-U.S. corporation (such as the Company). Certain U.S. entities may also be required to file IRS Form 8938 in the future.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We also make available on our website, free of charge, our Annual Report and the text of our reports on Form 6-K, including any amendments to these reports, as well as certain other SEC filings, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website address is “www.summitplc.com.” The information contained on our website is not incorporated by reference in this Annual Report.

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Item 11: Quantitative and Qualitative Disclosures About Market Risk
Our activities expose us to a variety of financial risks: foreign currency risk, interest rate risk, credit risk and liquidity risk. Our principal financial instrument comprises cash and cash equivalents, and this is used to finance our operations. We have various other financial instruments such as other receivables and trade and other payables that arise directly from our operations. The category of loans and receivables contains only other receivables, shown on the face of the Statement of Financial Position, all of which mature within one year. We have compared fair value to book value for each class of financial asset and liability and no difference was identified, other than in respect of financial liabilities on funding arrangements. The fair value at January 31, 2018 was calculated to be £4.7 million. Further information is included in note 19 to our consolidated financial statements appearing at the end of this Annual Report. We have a policy, which has been consistently followed, of not trading in financial instruments.
Foreign Currency Risk
Foreign currency risk refers to the risk that the value of a financial commitment or recognized asset or liability will fluctuate due to changes in foreign currency rates. Our net income and financial position, as expressed in pounds sterling, are exposed to movements in foreign exchange rates against the U.S. dollar and the euro. The main trading currencies are pounds sterling, the U.S. dollar, and the euro. We are exposed to foreign currency risk as a result of operating transactions, capital raises in the United States, payment in U.S. dollars under our license and collaboration agreement with Sarepta, our license and commercialization agreement with Eurofarma and our funding agreement with BARDA, and the translation of foreign bank accounts. We monitor our exposure to foreign exchange risk. Exposures are generally managed through natural hedging via the currency denomination of cash balances and any impact currently is not material to us.
Interest Rate Risk
We do not hold any derivative instruments to manage interest rate risk.
Credit Risk
Our credit risk with respect to customers is limited and we did not have any trade receivables outstanding as of January 31, 2018. Financial instruments that potentially expose us to concentrations of credit risk consist primarily of short-term cash investments and trade accounts receivable.
Liquidity Risk
We have funded our operations since inception primarily through the issuance of equity securities. We have also received funding from our license and collaboration agreement with Sarepta and our license and commercialization agreement with Eurofarma, as well as philanthropic, non-government and not for profit organizations and patient advocacy groups and grant funding from government entities. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
Item 12: Description of Securities other than Equity Securities
A. Debt Securities.
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.


145

D. American Depositary Shares.
Fees and Expenses
The following table shows the fees and charges that a holder of our ADSs may have to pay, either directly or indirectly. The majority of these costs are set by the depositary and are subject to change: 
Persons depositing or withdrawing shares or ADS
holders must pay:
  
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
  
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
 
 
$.05 (or less) per ADS
  
Any cash distribution to ADS holders
 
 
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs
  
Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders
 
 
$.05 (or less) per ADS per calendar year
  
Depositary services
 
 
Registration or transfer fees
  
Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
 
 
Expenses of the depositary
  
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
Converting foreign currency to U.S. dollars
 
 
Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes
  
As necessary
 
 
Any charges incurred by the depositary or its agents for servicing the deposited securities
  
As necessary
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers or other service providers that are affiliates of the depositary and that may earn or share fees or commissions.
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until those taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your American Depositary Shares to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.

146

PART II
Item 13: Defaults, Dividend Arrearages and Delinquencies
None.
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
A. Not applicable.
B. Not applicable.
C. Not applicable.
D. Not applicable.
E. Not applicable.

Item 15: Controls and Procedures
A. Disclosure Controls and Procedures.
We have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) under the supervision and the participation of the company’s management, which is responsible for the management of the internal controls, and which includes our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation of our disclosure controls and procedures as of January 31, 2018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable level of assurance.
B. Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed, under the supervision of the Chief Executive Officer and the Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with International Financial Reporting Standards.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Moreover, projections of any evaluation of the effectiveness of internal control to future periods are subject to a risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Our management has assessed the effectiveness of internal control over financial reporting as of January 31, 2018 based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013. Based on this assessment, our management has concluded that our internal control over financial reporting as of January 31, 2018 was effective.
C. Attestation Report of the Registered Public Accounting Firm
This report does not include an attestation report of our registered public accounting firm as we are an emerging growth company.


147

D. Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal year ended January 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16A: Audit Committee Financial Expert
The members of our audit committee are Mr. Wurzer, Mr. Zambeletti and Ms. Andrews. Mr. Wurzer is the chair of the audit committee. Each of our audit committee members satisfies the independence requirements of Rule 5605(a)(2) of the Nasdaq Stock Market Marketplace Rules and the independence requirements of Rule 10A-3(b)(1) under the Exchange Act. Our board of directors has determined that Mr. Wurzer is an “audit committee financial expert” as defined in Item 16A of Form 20-F.
Item 16B: Code of Ethics
Our Code of Business Conduct and Ethics is applicable to all of our employees, officers and directors and is available on our website at http://www.summitplc.com. Our Code of Business Conduct and Ethics provides that our directors and officers are expected to avoid any action, position or interest that conflicts with the interests of our company or gives the appearance of a conflict. Our directors and officers have an obligation under our Code of Business Conduct and Ethics to advance our company’s interests when the opportunity to do so arises. We expect that any amendment to this code, or any waivers of its requirements, will be disclosed on our website. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report, and you should not consider information on our website to be part of this Annual Report.
Item 16C: Principal Accountant Fees and Services
The following table sets forth, for each of the years indicated, the aggregate fees billed to us for services rendered by PricewaterhouseCoopers LLP, our independent registered public accounting firm.
 
    
 
 
Year Ended January 31,
 
 
2018
 
2017
 
 
(in thousands)
Audit Fees
 
£
341

 
£
230

Audit-Related Fees (1)
 
118

 
166

Tax Fees (2)
 
23

 
62

All Other Fees (3)
 
—

 
—

Total
 
£
482

 
£
458

 
(1)
For the year ended January 31, 2018, audit-related fees includes assurance reporting in connection with our underwritten public offering in September 2017. These amounts were recognized directly in share premium. For the year ended January 31, 2017, audit-related fees includes assurance reporting in connection with our registration statement on Form F-3 that was originally filed with the U.S. Securities and Exchange Commission on May 12, 2016.
(2)
Fees relate to the aggregated fees for services rendered on tax compliance, tax advice and tax planning.
(3)
No fees incurred in this category.
Item 16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.

Item 16F: Change in Registrant’s Certifying Accountant
Not applicable.

148

Item 16G: Corporate Governance
The Sarbanes-Oxley Act of 2002, as well as related rules subsequently implemented by the SEC, requires foreign private issuers, including our company, to comply with various corporate governance practices. In addition, Nasdaq rules provide that foreign private issuers may follow home country practice in lieu of the Nasdaq corporate governance standards, subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws. The home country practices followed by our company in lieu of Nasdaq rules are described below:
 
•
We do not follow Nasdaq’s quorum requirements applicable to meetings of shareholders. Such quorum requirements are not required under U.K. law. In accordance with generally accepted business practice, our articles of association provide alternative quorum requirements that are generally applicable to meetings of shareholders.

•
We do not follow Nasdaq’s requirements that non-management directors meet on a regular basis without management present. Our board of directors may choose to meet in executive session at their discretion.

•
We do not follow Nasdaq’s requirements to seek shareholder approval for the implementation of certain equity compensation plans, the issuances of ordinary shares under such plans, or in connection with certain private placements of equity securities. In accordance with U.K. law, we are not required to seek shareholder approval to allot ordinary shares in connection with applicable employee equity compensation plans. We will follow U.K. law with respect to any requirement to obtain shareholder approval prior to any private placements of equity securities.
We intend to take all actions necessary for us to maintain compliance as a foreign private issuer under the applicable corporate governance requirements of the Sarbanes-Oxley Act of 2002, the rules adopted by the SEC and Nasdaq’s listing standards.
Because we are a foreign private issuer, our directors and senior management are not subject to short-swing profit and insider trading reporting obligations under Section 16 of the U.S. Securities Exchange Act of 1934, as amended, or Exchange Act. They are, however, subject to the obligations to report changes in share ownership under Section 13 of the Exchange Act and related SEC rules.
Item 16H: Mine Safety Disclosure
Not applicable.
PART IIIs

Item 17: Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18: Financial Statements
The financial statements are filed as part of this Annual Report beginning on page F-1.


149

Item 19: Exhibits
 
Exhibit No.
 
Description
 
 
 
 
Articles of Association of Summit Therapeutics plc (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 20, 2015)
 
 
 
 
Specimen certificate evidencing ordinary shares of Summit Therapeutics plc (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Form of Deposit Agreement among Summit Therapeutics plc, The Bank of New York Mellon, as depositary, and all Owners and Holders of ADSs issued thereunder (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 20, 2015)
 
 
 
 
Form of American Depositary Receipt (included in Exhibit 2.2) (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 20, 2015)
 
 
 
 
Warrant Instrument, dated April 4, 2012, creating warrant to subscribe for shares in Summit Therapeutics plc issued to Singer Capital Markets Limited (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Warrant Instrument, dated November 22, 2013, relating to Warrants in Registered Form to Subscribe for Ordinary Shares in Summit Therapeutics plc (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.1†
 
Grant Agreement, entered into as of December 15, 2011, by and between Duchenne Partners Fund and Summit Therapeutics plc (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.2†
 
MDA Venture Philanthropy Grant Contract, entered into as of December 15, 2011, by and between Muscular Dystrophy Association, Inc. and Summit Therapeutics plc (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.3†
 
Translation Award Funding Agreement, entered into as of October 19, 2012, by and between the Wellcome Trust Limited and Summit Therapeutics plc (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 27, 2015)
 
 
 
4.4†
 
Agreement for the Sponsorship of a Research Programme, dated November 22, 2013, by and between The Chancellor Masters and Scholars of the University of Oxford; Isis Innovation Limited; and Summit Therapeutics plc (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.5†
 
Deed of License of Know-How, dated November 22, 2013, by and between Isis Innovation Limited and MuOx Limited (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.6†
 
Supplemental Variation Deed, dated July 24, 2014, by and between Isis Innovation Limited and MuOx Limited (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.7†
 
Option Agreement, dated November 22, 2013, by and between The Chancellor Masters and Scholars of the University of Oxford, Isis Innovation Limited and Summit Therapeutics plc (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
4.8†
 
Variation Agreement, dated July 16, 2014, by and between The Chancellor Masters and Scholars of the University of Oxford, Isis Innovation Limited and Summit Therapeutics plc (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Lease, dated June 21, 2013, by and between MEPC Milton Park No. 1 Limited and MEPC Milton Park No. 2 Limited on behalf of MEPC Milton LP and Summit Therapeutics plc (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 

150

Exhibit No.
 
Description
 
 
 
 
Service Agreement, effective as of January 14, 2015, by and between Cambridge Innovation Center and Summit Therapeutics Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 20, 2015)
 
 
 
 
2005 Enterprise Management Incentive Scheme (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Letter of Appointment, dated November 20, 2014, by and between Summit Therapeutics Inc. and Valerie Andrews (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Letter of Appointment, dated November 21, 2012, by and between Summit Therapeutics plc and Frank Armstrong (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Letter of Appointment, dated December 19, 2013, by and between Summit Therapeutics plc and Stephen Davies (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Letter of Appointment, dated August 8, 2013, by and between Summit Therapeutics plc and Barry Price (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Letter of Appointment, dated April 16, 2014, by and between Summit Therapeutics plc and Leopoldo Zambeletti (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), filed with the Securities and Exchange Commission on January 30, 2015)
 
 
 
 
Letter of Appointment, dated February 18, 2015, by and between Summit Therapeutics plc and David Wurzer (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 20, 2015)
 
 
 
 
Form of Deed of Indemnity (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form F-1 (File No. 333-201807), as amended, filed with the Securities and Exchange Commission on February 20, 2015)
 
 
 
 
Deed of Variation, dated November 16, 2015, relating to the Warrant Instrument, dated November 22, 2013 (incorporated by reference to Exhibit 4.19 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on May 12, 2016)
 
 
 
4.20†
 
Variation Agreement, dated November 16, 2015, relating to the Option Agreement, dated November 22, 2013, by and between the University of Oxford, Isis Innovation Limited and Summit Therapeutics plc (incorporated by reference to Exhibit 4.20 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on May 12, 2016)
 
 
 
4.21†
 
Second Variation Agreement, dated November 16, 2015, relating to the Agreement for the Sponsorship of a Research Programme, dated November 22, 2013, by and between the Chancellor Masters and Scholars of the University of Oxford, Isis Innovation Limited and Summit Therapeutics plc (incorporated by reference to Exhibit 4.21 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on May 12, 2016)
 
 
 
 
2016 Long Term Incentive Plan (incorporated by reference to Exhibit 4.22 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on May 12, 2016)
 
 
 
4.23†
 
License and Collaboration Agreement, dated October 3, 2016, by and between Summit (Oxford) Ltd. and Sarepta Therapeutics, Inc. (incorporated by reference to Exhibit 4.23 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on March 30, 2017)
 
 
 
4.24†
 
Deed of Novation and Variation, dated March 3, 2017, among MuOx Limited, Oxford University Innovation Limited (formerly Isis Innovation Limited) and Summit (Oxford) Limited (incorporated by reference to Exhibit 4.24 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on March 30, 2017)
 
 
 
 
Lease, dated February 17, 2017, by and among MEPC Milton Park No. 1 Limited, MEPC Milton Park No. 2 Limited and Summit Therapeutics plc (incorporated by reference to Exhibit 4.25 to the Company’s Annual Report on Form 20-F (File No. 001-36866), filed with the Securities and Exchange Commission on March 30, 2017)
 
 
 
 
Agreement, dated September 5, 2017, by and between Summit (Oxford) Limited and the U.S. Department of Health and Human Services Biomedical Advanced Research and Development Authority (BARDA)
 
 
 

151

Exhibit No.
 
Description
 
 
 
 
License and Commercialization Agreement, dated December 18, 2017, by and between Summit (Oxford) Ltd. and Eurofarma Laboratórios S.A.

 
 
 
 
Share Purchase Agreement, dated December 23, 2017, by and among Summit Therapeutics plc and the shareholders of Discuva Limited (1)
 
 
 
 
Transfer Incentive Agreement, dated December 23, 2017, by and among Discuva Limited and certain of its managers.
 
 
 
 
Third Variation Agreement, dated September 20, 2017, by and among the Chancellor Masters and Scholars of the University of Oxford, Oxford University Innovation Limited and Summit Therapeutics plc
 
 
 
 
Lease, dated December 22, 2017, by and between Merrifield Centre Ltd and Discuva Limited
 
 
 
 
Equity and Revenue Sharing Agreement, dated October 16, 2017, by and between Summit (Oxford) Limited and the Wellcome Trust Limited
 
 
 
 
Form of Non-Executive Director Restricted Stock Unit (RSU) Agreement
 
 
 
 
Subsidiaries of Summit Therapeutics plc
 
 
 
 
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Consent of PricewaterhouseCoopers LLP
 
 
 
 
XBRL Instance Document
 
 
 
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
*
 
Filed herewith.
†
 
Confidential treatment has been granted as to certain portions of the exhibit. Confidential materials omitted and filed separately with the Securities and Exchange Commission.
+
 
Confidential treatment has been requested as to certain portions of the exhibit. Confidential materials omitted and filed separately with the Securities and Exchange Commission.
(1)
 
The schedules and exhibits to the Share Purchase Agreement have been omitted. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request.




152

SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
 
SUMMIT THERAPEUTICS PLC
 
 
By:
 
/s/ Glyn Edwards
Name:
Title:
 
Glyn Edwards
Chief Executive Officer
Date: April 13, 2018


153

SUMMIT THERAPEUTICS PLC
Index to Financial Statements


F-1

pwcimage.jpg
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Summit Therapeutics plc

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial position of Summit Therapeutics plc and its subsidiaries as of January 31, 2018 and January 31, 2017, and the related consolidated statements of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended January 31, 2018 including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2018 and January 31, 2017, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.




/s/ PricewaterhouseCoopers LLP
Reading, United Kingdom
April 11, 2018

We have served as the Company's auditor since 2013.




F-2

Consolidated Statement of Financial Position
At January 31, 2018 and 2017
 
 
 
Note
 
January 31, 2018
 
January 31, 2017
 
 
 
 
£000
 
£000
ASSETS
 
 
 
 
 
 
Non-current assets
 
 
 
 
 
 
Goodwill
 
12
 
2,478

 
664

Intangible assets
 
13
 
14,785

 
3,470

Property, plant and equipment
 
14
 
809

 
116

 
 
 
 
18,072

 
4,250

Current assets
 
 
 
 
 
 
Prepayments and other receivables
 
15
 
11,134

 
1,027

Current tax receivable
 
 
 
4,654

 
4,248

Cash and cash equivalents
 
 
 
20,102

 
28,062

 
 
 
 
35,890

 
33,337

Total assets
 
 
 
53,962

 
37,587

LIABILITIES
 
 
 
 
 
 
Non-current liabilities
 
 
 
 
 
 
Deferred revenue
 
17
 
(18,033
)
 
(23,615
)
Financial liabilities on funding arrangements
 
18
 
(3,090
)
 
(5,919
)
Provisions for other liabilities and charges
 
20
 
(1,641
)
 
(85
)
Deferred tax liability
 
21
 
(2,379
)
 
(565
)
 
 
 
 
(25,143
)
 
(30,184
)
Current liabilities
 
 
 
 
 
 
Trade and other payables
 
16
 
(8,932
)
 
(3,984
)
Deferred revenue
 
17
 
(10,012
)
 
(6,912
)
 
 
 
 
(18,944
)
 
(10,896
)
Total liabilities
 
 
 
(44,087
)
 
(41,080
)
Net assets / (liabilities)
 
 
 
9,875

 
(3,493
)
EQUITY
 
 
 
 
 
 
Share capital
 
22
 
736

 
618

Share premium account
 
 
 
60,237

 
46,420

Share-based payment reserve
 
 
 
6,743

 
5,136

Merger reserve
 
 
 
3,027

 
(1,943
)
Special reserve
 
 
 
19,993

 
19,993

Currency translation reserve
 
 
 
37

 
50

Accumulated losses reserve
 
 
 
(80,898
)
 
(73,767
)
Total equity / (deficit)
 
 
 
9,875

 
(3,493
)
 
The accompanying notes form an integral part of these Consolidated Financial Statements.


F-3

Consolidated Statement of Comprehensive Income
For the year ended January 31, 2018, 2017 and 2016
 
 
 
Note
 
Year ended January 31, 2018
 
 
Year ended January 31, 2017
 
 
Year ended January 31, 2016
 
 
 
 
 
£000
 
 
£000
 
 
£000
 
Revenue
 
5
 
25,419

 
 
2,304

 
 
—

 
Other operating income
 
7
 
2,725

 
 
72

 
 
1,281

 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
7
 
(28,970
)
 
 
(18,952
)
 
 
(16,856
)
 
General and administration
 
7
 
(11,999
)
 
 
(8,277
)
 
 
(4,771
)
 
Total operating expenses
 
 
 
(40,969
)
 
 
(27,229
)
 
 
(21,627
)
 
Operating loss
 
 
 
(12,825
)
 
 
(24,853
)
 
 
(20,346
)
 
Finance income
 
9
 
3,096

 
 
8

 
 
30

 
Finance cost
 
9
 
(1,164
)
 
 
(862
)
 
 
(2,879
)
 
Loss before income tax
 
 
 
(10,893
)
 
 
(25,707
)
 
 
(23,195
)
 
Income tax
 
10
 
3,762

 
 
4,336

 
 
3,058

 
Loss for the year
 
 
 
(7,131
)
 
 
(21,371
)
 
 
(20,137
)
 
Other comprehensive (loss) / income
 
 
 
 
 
 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss
 
 
 
 
 
 
 
 
 
 
 
Exchange differences on translating foreign operations
 
 
 
(13
)
 
 
29

 
 
(41
)
 
Total comprehensive loss
 
 
 
(7,144
)
 
 
(21,342
)
 
 
(20,178
)
 
Basic and diluted earnings per Ordinary Share from operations
 
11
 
(11
)
p
 
(35
)
p
 
(34
)
p
 
The accompanying notes form an integral part of these Consolidated Financial Statements.

F-4

Consolidated Statement of Cash Flows
For the year ended January 31, 2018, 2017 and 2016
 
 
 
Note
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
 
 
£000s
 
£000s
 
£000s
Cash flows from operating activities
 
 
 
 
 
 
 
 
Loss before income tax
 
 
 
(10,893
)
 
(25,707
)
 
(23,195
)
 
 
 
 
(10,893
)
 
(25,707
)
 
(23,195
)
Adjusted for:
 
 
 
 
 
 
 
 
Other operating income on derecognition of financial liabilities on funding
arrangements

 
18
 
(908
)
 
—

 
—

Finance income
 
9
 
(3,096
)
 
(8
)
 
(30
)
Finance cost
 
9
 
1,164

 
862

 
2,879

Foreign exchange loss / (gain)
 
 
 
1,960

 
711

 
(169
)
Depreciation
 
14
 
140

 
48

 
38

Amortization of intangible fixed assets
 
13
 
106

 
10

 
10

Loss on disposal of assets
 
13,14
 
40

 
—

 
—

Movement in provisions
 
20
 
(60
)
 
12

 
28

Research and development expenditure credit
 
7
 
(23
)
 
(3
)
 
(44
)
Share-based payment
 
6
 
1,607

 
1,379

 
1,160

Adjusted loss from operations before changes in working capital
 
 
 
(9,963
)
 
(22,696
)
 
(19,323
)
(Increase) / decrease in prepayments and other receivables
 
 
 
(8,993
)
 
492

 
1,106

(Decrease) / increase in deferred revenue
 
 
 
(2,482
)
 
30,527

 
—

Increase / (decrease) in trade and other payables
 
 
 
3,375

 
813

 
(366
)
Cash (used by) / generated from operations
 
 
 
(18,063
)
 
9,136

 
(18,583
)
Taxation received
 
 
 
3,374

 
3,005

 
1,401

Net cash (used by) / generated from operating activities
 
 
 
(14,689
)
 
12,141

 
(17,182
)
Investing activities
 
 
 
 
 
 
 
 
Acquisition of subsidiaries net of cash acquired
 
27
 
(4,775
)
 
—

 
—

Purchase of property, plant and equipment
 
 
 
(360
)
 
(81
)
 
(66
)
Purchase of intangible assets
 
 
 
(119
)
 
(7
)
 
—

Interest received
 
 
 
12

 
8

 
30

Net cash used in investing activities
 
 
 
(5,242
)
 
(80
)
 
(36
)
Financing activities
 
 
 
 
 
 
 
 
Proceeds from issue of share capital
 
 
 
14,931

 
—

 
26,101

Transaction costs on share capital issued
 
 
 
(1,428
)
 
—

 
(4,187
)
Proceeds from exercise of warrants
 
 
 
10

 
107

 
—

Proceeds from exercise of share options
 
 
 
392

 
283

 
222

Cash received from funding arrangements accounted for as financial liabilities
 
18
 
—

 
23

 
—

Net cash generated from financing activities
 
 
 
13,905

 
413

 
22,136

(Decrease) / increase in cash and cash equivalents
 
 
 
(6,026
)
 
12,474

 
4,918

Effect of exchange rates on cash and cash equivalents
 
 
 
(1,934
)
 
(716
)
 
121

Cash and cash equivalents at beginning of the year
 
 
 
28,062

 
16,304

 
11,265

Cash and cash equivalents at end of the year
 
 
 
20,102

 
28,062

 
16,304


The accompanying notes form an integral part of these Consolidated Financial Statements.

F-5

Consolidated Statement of Changes in Equity
Year ended January 31, 2018, 2017 and 2016
Year ended January 31, 2018
 
 
Share
capital
 
Share
premium
account
 
Share-
based
payment
reserve
 
Merger
reserve
 
Special
reserve
 
Currency
translation
reserve
 
Accumulated
losses
reserve
 
Total
Equity
Group
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
At February 1, 2017
 
618

 
46,420

 
5,136

 
(1,943
)
 
19,993

 
50

 
(73,767
)
 
(3,493
)
Loss for the year
 
—

 
—

 
—

 
—

 
—

 
—

 
(7,131
)
 
(7,131
)
Currency translation adjustment
 
—

 
—

 
—

 
—

 
—

 
(13
)
 


 
(13
)
Total comprehensive loss for the year
 
—

 
—

 
—

 
—

 
—

 
(13
)
 
(7,131
)
 
(7,144
)
New share capital issued
 
84

 
14,847

 
—

 
—

 
—

 
—

 
—

 
14,931

Transaction costs on share capital issued
 
—

 
(1,428
)
 
—

 
—

 
—

 
—

 
—

 
(1,428
)
Issue of ordinary shares as consideration for a business combination
 
30

 
—

 
—

 
4,970

 
—

 
—

 
—

 
5,000

New share capital issued from exercise of warrants
 
1

 
9

 
—

 
—

 
—

 
—

 
—

 
10

Share options exercised
 
3

 
389

 
—

 
—

 
—

 
—

 
—

 
392

Share-based payment
 
—

 
—

 
1,607

 
—

 
—

 
—

 
—

 
1,607

At January 31, 2018
 
736

 
60,237

 
6,743

 
3,027

 
19,993

 
37

 
(80,898
)
 
9,875

Year ended January 31, 2017
 
 
Share
capital
 
Share
premium
account
 
Share-
based
payment
reserve
 
Merger
reserve
 
Special
reserve
 
Currency
translation
reserve
 
Accumulated
losses
reserve
 
Total
Equity
Group
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
At February 1, 2016
 
613

 
46,035

 
3,757

 
(1,943
)
 
19,993

 
21

 
(52,396
)
 
16,080

Loss for the year
 
—

 
—

 
—

 
—

 
—

 
—

 
(21,371
)
 
(21,371
)
Currency translation adjustment
 
—

 
—

 
—

 
—

 
—

 
29

 
—

 
29

Total comprehensive loss for the year
 
—

 
—

 
—

 
—

 
—

 
29

 
(21,371
)
 
(21,342
)
New share capital issued from exercise of warrants
 
2

 
105

 
—

 
—

 
—

 
—

 
—

 
107

Share options exercised
 
3

 
280

 
—

 
—

 
—

 
—

 
—

 
283

Share-based payment
 
—

 
—

 
1,379

 


 
—

 
—

 
—

 
1,379

At January 31, 2017
 
618

 
46,420

 
5,136

 
(1,943
)
 
19,993

 
50

 
(73,767
)
 
(3,493
)
Year ended January 31, 2016
 
 
Share
capital
 
Share
premium
account
 
Share-
based
payment
reserve
 
Merger
reserve
 
Special
reserve
 
Currency
translation
reserve
 
Accumulated
losses
reserve
 
Total
Equity
Group
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
 
£000s
At February 1, 2015
 
411

 
24,101

 
2,597

 
(1,943
)
 
19,993

 
62

 
(32,259
)
 
12,962

Loss for the year
 
—

 
—

 
—

 
—

 
—

 
—

 
(20,137
)
 
(20,137
)
Currency translation adjustment
 
—

 
—

 
—

 
—

 
—

 
(41
)
 


 
(41
)
Total comprehensive loss for the year
 
—

 
—

 
—

 
—

 
—

 
(41
)
 
(20,137
)
 
(20,178
)
New share capital issued
 
198

 
25,903

 
—

 
—

 
—

 
—

 
—

 
26,101

Transaction costs on share capital issued
 
—

 
(4,187
)
 
—

 
—

 
—

 
—

 
—

 
(4,187
)
Share options exercised
 
4

 
218

 
—

 
—

 
—

 
—

 
—

 
222

Share-based payment
 
—

 
—

 
1,160

 


 
—

 
—

 
—

 
1,160

At January 31, 2016
 
613

 
46,035

 
3,757

 
(1,943
)
 
19,993

 
21

 
(52,396
)
 
16,080


The accompanying notes form an integral part of these Consolidated Financial Statements.

F-6


Share capital and premium
When shares are issued, the nominal value of the shares is credited to the share capital reserve. Any premium paid above the nominal value is credited to the share premium reserve. Ordinary Shares of Summit Therapeutics plc have a nominal value of one penny per share.
Share-based payment reserve
The share-based payment reserve arises as the expense of issuing share-based payments is recognized over time (share option grants). The reserve will fall as share options vest and are exercised, and the impact of the subsequent dilution of earnings crystallizes, but the reserve may equally rise or might see any reduction offset, as new potentially dilutive share options are issued.
Merger reserve
A merger reserve arises as a result of certain requirements in the United Kingdom relating to business combination accounting. The merger reserve brought forward relates to the difference between the nominal value of Summit (Oxford) Limited and fair value of shares issued in business combinations using the acquisition method of accounting arising from the Group reconstruction in 2004. The merger reserve arising during the financial year relates to the difference between the nominal value of Discuva Limited and fair value of shares issued in business combinations using the acquisition method of accounting arising from the acquisition.
Accumulated losses reserve
The accumulated losses reserve records the accumulated profits and losses, less any subsequent elimination of losses, of the Group since inception of the business. Where businesses or companies are acquired, only the profits or losses arising from the date of acquisition are included.
Special reserve
The special reserve was created during the consolidation and subdivision of the Company’s share capital as part of a capital reorganization completed in September 2014. It represents the net balance of the cancellation of the Deferred Shares, the reduction of the share premium account and elimination of current losses from the accumulated deficit.
Currency translation reserve
The currency translation reserve records the foreign exchange difference that arises on the translation of the US subsidiary, Summit Therapeutics Inc.

F-7

Notes to the Financial Statements
1. Basis of accounting
The principal accounting policies adopted by Summit Therapeutics plc and its subsidiaries in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and IFRS Interpretations Committee interpretations ('IFRS') as issued by the IASB. The Consolidated Financial Statements have been prepared on a going concern basis and under the historical cost convention. These consolidated financial statements were authorized by the Board of Directors on April 11, 2018.
Going concern
The financial information in these financial statements has been prepared on a going concern basis which assumes that the Group will continue in operational existence for the foreseeable future.
The Group expects it will need to raise additional funding in the future in order to support research and development efforts, potential commercialization-related activities if any of its product candidates receive marketing approval, as well as to support activities associated with operating as a public company in both the United States and the United Kingdom. Management expects to finance its cash needs through a combination of some, or all, of the following: equity offerings, collaborations, strategic alliances, grants and clinical trial support from government entities, philanthropic, non-government and not for profit organizations and patient advocacy groups, debt financings, and marketing, distribution or licensing arrangements.
After review of the future operating costs of the business in conjunction with the cash held at January 31, 2018, management is confident about the Group’s ability to continue as a going concern.
Use of estimates
The preparation of the financial statements, in conformity with IFRS, requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. The areas involving higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2 ‘Critical accounting judgements and key sources of estimation uncertainty’.
Basis of consolidation
The Consolidated Financial Statements incorporate the financial statements of the Group and entities controlled by the Group made up to the reporting date. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiary undertakings acquired or disposed of in the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business net of value added tax and other sales-related taxes. The Group recognizes revenue when the amount can be reliably measured; when it is probable that future economic benefits will flow to the Group; and when specific criteria have been met for each of the Group’s activities.
Licensing agreements may consist of multiple elements and provide for varying consideration terms, such as upfront, development, regulatory and sales milestones, and sales royalties and similar payments. Where such arrangements can be divided into separate units of accounting (each unit constituting a separate earnings process), the arrangement consideration is allocated to the different units based on their relative fair values and recognized over the respective performance period.

F-8

1.
Basis of accounting (continued)
Revenues from non-refundable, upfront payments are assessed as to whether they relate to the provision of a license or development services. Upfront payments classified as the provision of a license are recognized in full immediately while revenue related to further development services are initially reported as deferred revenue on the Consolidated Statement of Financial Position and are recognized as revenue over the development period.
Development and regulatory approval milestone payments are recognized as revenue based on the percentage of completion method on the assumption that all stages will be completed successfully. The cumulative revenue recognized is limited to non-refundable amounts already received or reasonably certain to be received.
Revenues attributable to the development cost share element of a contract are recognized on an accruals basis as the underlying expenditure is incurred in accordance with the terms of the relevant agreement.
Royalty revenue is recognized on an accrual basis in accordance with the substance of the relevant agreement, provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably.
Sales related milestone payments are recognized in full in the period in which the relevant milestone is achieved.
Business Combinations
The cost of an acquisition is measured as the fair value of the assets exchanged, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired together with liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the identifiable net assets is recorded as goodwill. Goodwill is not amortized but is reviewed for impairment at least annually and more frequently whenever there is an indication of impairment. See Note 27 Business combinations for details.
Intangible Assets
In-process research and development that is separately acquired as part of a company acquisition or in-licensing agreement is capitalized even if they have not yet demonstrated technical feasibility, which is usually signified by regulatory approval. Amortization will commence when either products underpinned by the intellectual property rights or the rights themselves become available for use.
The intangible asset relating to intellectual property rights for the utrophin program capitalized as part of the acquisition of MuOx Limited in November 2013 is considered to be not yet available for use. As such, it will not be subject to amortization and will be tested for impairment at least annually or whenever there is an indicator of impairment. Amortization will commence when either products underpinned by the intellectual property rights or the rights themselves become available for use.
The intangible asset relating to the acquired discovery and development platform capitalized as part of the acquisition of Discuva Limited in December 2017 is considered to be available for use. As such, it will be subject to amortization over the period of the relevant associated patents.
Other intangible assets are amortized in equal installments over their useful estimated lives as follows:
 
All patents (once filed)
Over the period of the relevant patents (assumed to be 20 years)
Option over non-financial assets
Over the period of the relevant agreement

Impairment of assets
At each year end date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
An impairment loss is recognized for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Impairment losses recognized for cash-generating units is charged pro rata to the other assets in the cash generating unit. All tangible and intangible assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. See Note 13 ‘Intangible assets’ for details.

F-9

1.
Basis of accounting (continued)
Property, plant and equipment
Property, plant and equipment are stated at cost less depreciation. Cost comprises the purchase price plus any incidental costs of acquisition and commissioning. Depreciation is calculated to write-off the cost, less residual value, in equal annual installments over their estimated useful lives as follows:
Leasehold improvements
Over the period of the remaining lease
Laboratory equipment
3-10 years
Office and IT equipment
3-5 years
The residual value, if not insignificant, is reassessed annually.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, where it is probable that an outflow of resources will be required to settle the obligation, and where a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, the expected future cash flows will be discounted using a pre-tax discount rate, adjusted for risk where it is inherent in a specific liability.
Other operating income
Other operating income includes income received and recognized from government agencies, philanthropic, non-government, not for profit organizations and patient advocacy groups which are accounted for in accordance with IAS 20, ‘Accounting for Government Grants and Disclosure of Government Assistance’. Monies received through these means are held as deferred revenue in the Consolidated Statement of Financial Position and are released to the Consolidated Statement of Comprehensive Income as the underlying expenditure is incurred and to the extent the conditions of the grant are met.
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the year end date. All differences are taken to the Consolidated Statement of Comprehensive Income.
Assets and liabilities of subsidiaries that have a functional currency different from the presentation currency (Pound Sterling), are translated at the closing rate at the date of each statement of financial position presented. Income and expenses are translated at average exchange rates. Any resulting differences are recognized in other comprehensive (loss)/income in the Consolidated Statement of Comprehensive Income.
Employee benefits
All employee benefit costs, notably holiday pay, bonuses and contributions to Company or personal defined contribution pension schemes are charged to the Consolidated Statement of Comprehensive Income on an accruals basis.
Operating leases
Costs in respect of operating leases are charged to the Consolidated Statement of Comprehensive Income on a straight line basis over the lease term. Assets relating to lease incentives are depreciated over the life of the lease and are included in property, plant and equipment as leasehold improvements.
Research and development
All ongoing research expenditure is currently expensed in the period in which it is incurred. Due to the regulatory environment inherent in the development of the Group’s products, the criteria for development costs to be recognized as an asset, as set out in IAS 38 ‘Intangible Assets’, are not met until a product has received regulatory approval, and it is probable that future economic benefit will flow to the Group. The Group currently has no qualifying expenditure.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held on call with the bank.

F-10

1.
Basis of accounting (continued)
Share-based payments
In accordance with IFRS 2 ‘Share-based Payment’, share options and restricted stock units are measured at fair value at their grant date. The fair value for the majority of the options is calculated using the Black-Scholes formula and charged to the Consolidated Statement of Comprehensive Income on a straight-line basis over the expected vesting period. For those options issued with vesting conditions other than remaining in employment (for example, those conditional upon the Group achieving certain predetermined financial criteria) either a Monte-Carlo model or a Hull White trinomial lattice model have been used. At each year end date, the Group revises its estimate of the number of options that are expected to become exercisable. This estimate is not revised according to estimates of changes in market based conditions.
Current taxation
Income tax is recognized or provided at amounts expected to be recovered or paid using the tax rates and tax laws that have been enacted or substantively enacted at the year end date.
Current tax includes research and development tax credits which are calculated in accordance with the UK research and development tax credit regime applicable to small and medium sized companies. Research and development expenditure which is not eligible for reimbursement under the small and medium sized companies regime, such as expenditure incurred on projects for which we receive income, may be reimbursed under the UK Research and Development Expenditure Credit (‘RDEC’) scheme. Receipts under the RDEC scheme are presented within other operating income as they are similar in nature to grant income.
Deferred taxation
Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability in the Consolidated Statement of Financial Position differs from its tax base, except for differences arising on:
 
•
the initial recognition of goodwill;
•
the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and
•
investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference, and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilized.
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).
Financial instruments
The Group holds financial assets and liabilities in the respective categories ‘Loans and receivables’ and ‘Financial liabilities measured at amortized cost’. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to the debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the year end date, which are classified as non-current assets. Other liabilities consist of trade and other payables, being balances arising in the course of normal business with suppliers, contractors and other service providers, and borrowings, being loans and hire purchase funds advanced for the refit of leasehold premises and the purchase of laboratory equipment, fixtures and fittings. Loans and receivables, and other liabilities are initially recorded at fair value, and thereafter at amortized cost, if the timing difference is deemed to impact the fair value of the asset or liability.
The Group assesses at each year end date whether there is objective evidence that a financial asset or a group of financial assets is impaired.
The Group does not hold or trade in derivative financial instruments.
Warrants
Warrants issued by the Group are recognized and classified as equity when upon exercise, the Company would issue a fixed amount of its own equity instruments (Ordinary Shares) in exchange for a fixed amount of cash or another financial asset.
Consideration received, net of incremental costs directly attributable to the issue of such new warrants, is shown in equity. Such warrants are not re-measured at fair value in subsequent reporting periods.

F-11

2. Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Consolidated Financial Statements requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from those estimates.
Critical Judgements in Applying the Group’s Accounting Policies
The following are the critical judgements, apart from those involving estimations, that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognized in the Consolidated Financial Statements.
Financial liabilities on funding arrangements
When entering into funding agreements with charitable and not for profit organizations, management is required to assess whether, based on the terms of the agreement, they can avoid a transfer of cash by settling using a non-financial obligation. An example of this would be the obligation to transfer the rights to the research to a funding provider. In the circumstances where the Group cannot avoid the obligation, all or part of the funding agreement should be accounted for as a financial liability rather than as a charitable grant. The financial liabilities are re-measured, and the Group is required to apply judgement, when there is a specific significant event that provides evidence of a significant change in the probability of successful development such as the completion of a phase of research or changes in use or market for a product. See Note 18 ‘Financial liabilities on funding arrangements’.
Revenue Recognition
The Group recognizes revenue from licensing fees, collaboration fees, development, regulatory and approval milestone fees, sales milestones and royalties. Agreements generally include a non-refundable up-front fee, milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, as well as royalties on product sales of licensed products, if and when such product sales occur. For these agreements, the Group is required to apply judgement in the allocation of total agreement consideration to the separately identifiable components on a reliable basis that reasonably reflects the selling prices that might be expected to be achieved in stand-alone transactions. The Group is required to make a judgement on those components which can be recognized immediately and those to which it applies the percentage of completion revenue recognition method. In relation to the license and collaboration agreement with Sarepta and the license and commercialization agreement with Eurofarma, management has assessed that the development services to be indistinguishable from the license. As a result the upfront payment has been initially reported as deferred revenue in the Consolidated Statement of Financial Position and is being recognized as revenue over the development period. Development and regulatory approval milestone payments associated with these contracts will be recognized to the extent that the milestone event has been completed successfully. See Note 17 ‘Deferred revenue’.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the year end date that may have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are noted below.
Recognition of research expenditure
The Group recognizes expenditure incurred in carrying out its research and development activities in line with management’s best estimation of the stage of completion of each separately contracted study or activity. This includes the calculation of research and development accruals at each period to account for expenditure that has been incurred. This requires estimations of the full costs to complete each study or activity and also estimation of the current stage of completion. In all cases, the full cost of each study or activity is expensed by the time the final report or where applicable, product, has been received.
Acquired intangible assets and assumed contingent liabilities valuations
When the Group executes an acquisition resulting in a business combination as accounted under IFRS 3 Business Combinations, identifiable intangible assets and assumed contingent liabilities are required to be recognized in the Consolidated Financial Statements at fair value. In determining the fair value of such assets and liabilities a number of assumptions need to be made by management which include significant estimates. See Note 27 'Business combinations'.

F-12

2. Critical accounting judgements and key sources of estimation uncertainty (continued)
Financial liabilities on funding arrangements
In calculating the financial liability, both at inception and when it is subsequently re-measured, a number of assumptions need to be made by management which include significant estimates. Assumptions included in the model include the following: reported disease prevalence; expected market share based on management’s estimates; drug reimbursement pricing in different territories, potential licensing terms which may be offered to the Group (for relevant products); expected patent life; the timing and probabilities of achieving clinical development milestones which are based on industry standards and adjusted for therapy area and; the appropriate discount rate to be used. See Note 18 ‘Financial liabilities on funding arrangements’.
Share-based payment
The Group measures share options at fair value at their grant date in accordance with IFRS 2, ‘Share-based Payment.’ The Group calculates the fair value of the share option using either the Black-Scholes model, or for options with performance conditions, a simulation model. The Group charges the fair value to the Consolidated Statement of Comprehensive Income over the expected vesting period. See Note 23 ‘Share option scheme and Restricted Stock Units’.
3. Changes to accounting policies
During the year ended January 31, 2018 the following new standards, amendments to standards or interpretations became effective for the first time. The adoption of these interpretations, standards or amendment to standards were either not relevant for the Group or have not led to any significant impact on the Group’s financial statements.
 
International Accounting Standards (IAS/IFRS)
  
Effective Date
Amendments resulting from Annual Improvements 2014–2016 Cycle (clarifying scope)
 
January 1, 2017
Amendment to IAS 7, Disclosure Initiative
 
January 1, 2017
Amendment to IAS 12, Recognition of Deferred Tax Assets for Unrealised Losses
 
January 1, 2017

At the date of signing these Consolidated Financial Statements, the following standards, amendments and interpretations, which have not been applied in these financial statements, were in issue but not yet effective:
 
International Accounting Standards (IAS/IFRS)
  
Effective Date
IFRS 9, Financial Instruments (as revised in 2014)
 
January 1, 2018
IFRS 15, Revenue from Contracts with Customers
 
January 1, 2018
Amendment to IFRS 2 Share Based Payments, Classification and Measurement of Share-based Payment Transactions
 
January 1, 2018
Amendments resulting from Annual Improvements 2014–2016 Cycle
 
January 1, 2018
IFRIC 22 Foreign Currency Transactions and Advance Consideration
 
January 1, 2018
IFRS 16, Leases
 
January 1, 2019
Amendments to IFRS 3 Business Combinations, Remeasurement of previously held interest
 
January 1, 2019
Amendments to IAS 12 Income Taxes, Income tax consequences of dividends
 
January 1, 2019
Amendments to IAS 19 Employee Benefits, Plan amendments, curtailments or settlements
 
January 1, 2019
Amendments to IAS 23 Borrowing Costs, Borrowing costs eligible for capitalisation
 
January 1, 2019
Amendments resulting from Annual Improvements 2015–2017 Cycle
 
January 1, 2019
IFRIC 23 Uncertainty over Income Tax Treatments
 
January 1, 2019
Amendment to IFRS 10 and IAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
 
To be determined
IFRS 15 establishes comprehensive guidelines for determining when to recognize revenue and how much revenue to recognize. The standard is effective for reporting periods beginning on or after 1 January 2018 and replaces the accounting standard IAS 18 Revenue. Two adoption methods are permitted for transition: retrospectively to all prior reporting periods presented in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, with certain practical expedients permitted; or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.

F-13

3. Changes to accounting policies (continued)
The core principle in that framework is that a company should recognize revenue to depict the transfer of control of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that a company determines are within the scope of IFRS 15, a company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the company satisfies a performance obligation. The standard also requires disclosure of qualitative and quantitative information about its contracts with customers, the significant judgements made in applying the Standard and any assets recognized from the costs to obtain or fulfil a contract.

The Group has elected to adopt this new standard effective February 1, 2018 as required, using the full retrospective transition method in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Under this method, the Group will adjust its results for the years ended January 31, 2017 and 2018, and applicable interim periods within those years, as if IFRS 15 had been effective for those periods. To date, the Group has assessed the effect of adoption of this standard as it relates to the license and collaboration agreement with Sarepta Therapeutics Inc. (‘Sarepta’), the license and commercialization agreement with Eurofarma Laboratórios SA ('Eurofarma') and the research collaboration agreement with F. Hoffmann - La Roche Limited ('Roche'). Currently, the Group anticipates the effects of adoption of IFRS 15 to be as described below. Estimated impacts from the adoption could differ upon the final adoption and implementation of the standard. The Group will continue to monitor interpretations released by the IFRS Interpretations Committee and amendments to IFRS 15, and will adopt these from the effective dates as appropriate.

The Group expects the accounting for contingent milestone payments and development cost share income to be the most significant change in the accounting for its license and collaboration agreements. IFRS 15 requires an entity to identify goods or services (or a bundle of goods of goods or services) that are distinct where the customer can benefit from the good or service either on its own or together with other resources and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Group expects this assessment to result in the license and the development services elements of the Group’s licensing agreements being identified as one performance obligation as these elements are not considered to be distinct, and this represents a critical accounting judgement for the Group. The impact of this assessment would result in the contingent milestone payments and development cost share income being recognized over the estimated development services period, with initial recognition occurring when it becomes highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

The Group has performed an evaluation of the expected effect of adoption on the accounting for the license and collaboration agreement with Sarepta, the license and commercialization with Eurofarma and the research collaboration agreement with Roche. The Group currently estimates the following cumulative effect to total license and collaboration agreements revenues and research collaboration agreement revenue for the year ended January 31, 2018 after the adoption of IFRS 15:
 
Year ended January 31, 2018
 
£000
Estimated decrease in revenue by category:
 
Licensing agreements
13,059

Research collaboration agreement
—

The estimated decrease in collaboration and license agreement revenues for the year ended January 31, 2018 relates to the difference between the accounting treatment of the Sarepta development milestone payment and development cost share income under IAS 18 and IFRS 15 as described above, which has been recognized as revenue in full during the year ended January 31, 2018 under IAS 18. The difference will be reported as deferred revenue in the Consolidated Statement of Financial Position and recognized as revenue over the development period.

In addition to the effects on collaboration and license agreement revenues described above, the Group expects to revise balances of working capital components associated with collaboration and license agreement revenues, such as accounts receivable and deferred revenue. Overall, the Company currently expects current and non-current liabilities to increase as a result of these changes by £3.8 million and £9.2 million as of January 31, 2018 (2017: nil), respectively.
 

F-14

3. Changes to accounting policies (continued)

The quantitative amount provided above is an estimate of the expected effects of the Group’s adoption of IFRS 15. This amount represents management’s best estimates of the effects of adopting IFRS 15 at the time of the preparation of these financial statements. The actual quantitative effects of the adoption of IFRS 15 are subject to change from these estimates and such change may be significant, pending the completion of the Group’s assessment in the first quarter to April 30, 2018.
 
Finally, IFRS 15 requires more robust disclosures than required by previous guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.

IFRS 9 'Financial Instruments' will replace IAS 39 for accounting period beginning on or after January 1, 2018. The key changes are the classification and measurement of financial assets and financial liabilities after initial recognition, impairment of financial assets and a new criteria for reclassification. The Group has elected to adopt this new standard effective February 1, 2018 as required. The Group has performed an evaluation of the expected effect of adoption of IFRS 9 for all financial instruments within the scope of the standard and it is expected that there will be no impact on the Group’s net results or net assets. The expected effects of the Group’s adoption of IFRS 9 is based on management’s assessment at the time of the preparation of these financial statements. The actual effects of the adoption of IFRS 9 are subject to change from this assessment and such changes may be significant, pending the completion of the Group’s assessment in the first quarter to April 30, 2018.
IFRS 16 ‘Leases’ will replace IAS 17 for accounting periods beginning on or after January 1, 2019. In so doing, it will eliminate the distinction between classification of leases as finance or operating leases for lessees. The adoption of IFRS 16 is not expected to have a significant impact on the Group’s net results or net assets, although the full impact will be subject to further assessment following the conclusion of the ongoing consultations.
The Directors do not expect that the adoption of the remaining standards and interpretations in future periods will have a material impact on the financial statements of the Group.
4. Segmental reporting
The Summit Group comprises eleven legal entities, of which four are trading. These included the ten subsidiary companies and the Group holding company, Summit Therapeutics plc. The Group operates in one reportable segment: Drug Development. The chief operating decision-maker has been identified as the Executive Management Team consisting of the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. The Executive Management Team reviews the consolidated operating results regularly to make decisions about the financial and organizational resources and to assess overall performance.
The Drug Development segment covers Summit’s research and development activities carried out by the Group, primarily comprising the DMD and the CDI programs.
The corporate and other activities of Summit Therapeutics plc, Summit (Oxford) Limited, Summit Therapeutics Inc and Discuva Limited, which comprise the costs incurred in providing the facilities, finance, human resource and information technology services, are incurred by the main segment of the Group.
Substantially all of the Group’s assets are held in the United Kingdom.


F-15

5. Revenue
 
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Analysis of revenue by category:
 
 
 
 
 
 
Licensing agreements
 
25,109

 
2,304

 
—

Research collaboration agreement
 
310

 
—

 
—

 
 
25,419

 
2,304

 
—

Revenue recognized in the year consists of amounts received from the license and collaboration agreement with Sarepta Therapeutics, Inc., the license and commercialization agreement with Eurofarma Laboratórios S.A., and amounts received from a research collaboration agreement with F. Hoffmann-La Roche Ltd. See Note 17 ‘Deferred revenue’ for further details.
 
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Analysis of revenue by geography:
 
 
 
 
 
 
United States
 
25,067

 
2,304

 
—

Latin America
 
42

 
—

 
—

Europe
 
310

 
—

 
—

 
 
25,419

 
2,304

 
—

The analysis of revenue by geography has been identified on the basis of the customer’s geographical location.

6. Directors and employees
The average monthly number of employees of the Group, including Executive Directors, during the year was:
     
 
 
January 31, 2018
 
January 31, 2017
 
January 31, 2016
Technical, research and development
 
34

 
23

 
19

Corporate and administration
 
26

 
21

 
18

 
 
60

 
44

 
37

Their aggregate remuneration comprised: 
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Wages and salaries
 
7,493

 
5,932

 
3,876

Social security costs
 
643

 
434

 
247

Other pension costs
 
350

 
332

 
90

Share-based payment
 
1,607

 
1,379

 
1,160

 
 
10,093

 
8,077

 
5,373



F-16

6. Directors and employees (continued)

Key management of the Group are members of the Executive Management Team. The aggregate amounts of key management compensation are set out below:  
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Short-term employee benefits
 
 
 
 
 
 
Wages and salaries
 
1,520

 
1,252

 
934

Social security costs
 
162

 
98

 
58

 
 
1,682

 
1,350

 
992

Post-employment benefits
 
 
 
 
 
 
Amounts paid in lieu of employer pension contributions
 
32

 
17

 
17

Other pension costs
 
14

 
11

 
—

 
 
46

 
28

 
17

Share-based payment
 
705

 
327

 
626

Total remuneration
 
2,433

 
1,705

 
1,635


7. Loss before income tax
 
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Other operating income
 
 
 
 
 
 
Income recognized in respect of BARDA
 
1,772

 
—

 
—

Income on derecognition of the Wellcome Trust financial liability
 
908

 
—

 
—

Income recognized in respect of the Wellcome Trust
 
—

 
13

 
592

Grant income
 
13

 
56

 
645

Research and development credit
 
23

 
3

 
44

Other income
 
9

 
—

 
—

 
 
2,725

 
72

 
1,281

Research and development
 
 
 
 
 
 
Employee benefit expense
 
5,616

 
4,218

 
2,848

Share-based payment expense
 
327

 
374

 
356

Program related costs
 
21,810

 
13,605

 
13,093

Amortization of intangible assets
 
105

 
10

 
10

Other research and development costs
 
1,112

 
745

 
549

 
 
28,970

 
18,952

 
16,856

General and administration
 
 
 
 
 
 
Employee benefit expense
 
2,870

 
2,480

 
1,365

Share-based payment expense
 
1,280

 
1,005

 
804

Foreign exchange loss
 
1,986

 
533

 
(501
)
Depreciation of property, plant and equipment
 
141

 
48

 
38

Loss on disposal of assets
 
42

 
—

 
—

Operating lease rentals
 
289

 
213

 
131

Other general and administration costs
 
5,322

 
3,998

 
2,934

Royalty expense
 
69

 
—

 
—

 
 
11,999

 
8,277

 
4,771

 

F-17

7. Loss before income tax (continued)

In September 2017 the Group was awarded a funding contract from the Biomedical Advanced Research and Development Authority ('BARDA'), an agency of the US government's Department of Health and Human Services' Office of the Assistant Secretary for Preparedness and Response, worth up to $62 million. The BARDA contract provides for a cost-sharing arrangement under which BARDA funds a specified portion of estimated costs for specified activities related to the continued clinical and regulatory development of ridinilazole for the treatment of CDI. Under the terms of the contract, Summit is initially eligible to receive $32 million from BARDA to fund, in part, obtaining regulatory approval for and commencing enrollment and dosing into Summit's two planned Phase 3 clinical trials of ridinilazole. In addition, Summit is eligible for additional funding under the contract pursuant to three independent option work segments, which if exercised in full by BARDA would provide for an additional $30 million of funding from BARDA and would support the development of ridinilazole through to potential submission of applications for marketing approval. During the year ended January 31, 2018 the Group recognized funding income from BARDA of £1.8 million for the CDI program (year ended January 31, 2017: nil), income is recognized in respect of BARDA as the underlying research and development expenditure is incurred.

During the year ended January 31, 2018, the Group also recognized £0.9 million of other operating income related to the derecognition of the Wellcome Trust financial liability (year ended January 31, 2017: nil). See Note 18 ‘Financial liabilities on funding arrangements’ for further details.


8. Auditors’ remuneration
Services provided by the Group’s auditors
During the year the Group obtained the following services from the Group’s auditors at the cost detailed below:
 
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000

 
£000

Fees payable to the auditors and its associates for the audit of the Company and Consolidated Financial Statements
 
132

 
110

 
44

Fees payable to the auditors and its associates for other services:
 
 
 
 
 
 
       - Audit of the Company’s subsidiaries(2)
 
209

 
120

 
71

- Audit-related assurance services
 
—

 
3

 
6

       - Other assurance services(1)
 
118

 
163

 
158

- Tax advisory services
 
2

 
15

 
9

- Tax compliance services
 
21

 
47

 
11

Total fees payable
 
482

 
458

 
299

 
(1)
For the year ended January 31, 2018, other assurance services includes assurance reporting on information included in information used for the Company's underwritten public offering completed on 18 September 2017. These amounts were recognized directly in share premium. For the year ended January 31, 2017, other assurance services includes assurance reporting on information included in the Company’s registration statement on Form F-3 that was originally filed with the U.S. Securities and Exchange Commission on May 12, 2016.
(2)
For the year ended January 31, 2018, fees payable for the Consolidated Financial Statements and fees payable for the Company's subsidiaries includes audit services relating to the initial audit and business combination accounting for Discuva Limited. These amounts will be non recurring fees.



F-18

9. Finance income and costs
    
    
 
Note
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
 
£000
 
£000
 
£000
Finance income
 
 
 
 
 
 
 
Derecognition of financial liabilities
18
 
3,085

 
—

 
—

Interest income on deposits
 
 
11

 
8

 
30

Finance income
 
 
3,096

 
8

 
30


 
 
 
 
 
 
 
Finance costs
 
 
 
 
 
 
 
Unwinding of discount factor
18
 
(754
)
 
(862
)
 
(268
)
Re-measurement of financial liabilities on funding arrangements
18
 
(410
)
 
—

 
(2,611
)
Finance costs
 
 
(1,164
)
 
(862
)
 
(2,879
)

 
 
 
 
 
 
 
Net finance income / (costs)
 
 
1,932

 
(854
)
 
(2,849
)

10. Income tax
 

    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Analysis of credit in the period
 
 
 
 
 
 
Current tax:
 
 
 
 
 
 
Current tax income
 
3,767

 
4,245

 
2,971

Adjustments in respect of prior years
 
(5
)
 
(9
)
 
87

Total current tax
 
3,762

 
4,236

 
3,058

Total deferred tax
 
—

 
100

 
—

Total tax
 
3,762

 
4,336

 
3,058


The difference between the total tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the loss before tax is as follows:
 
    
 
 
Year ended January 31, 2018
 
Year ended January 31, 2017
 
Year ended January 31, 2016
 
 
£000
 
£000
 
£000
Loss before tax
 
(10,893
)
 
(25,707
)
 
(23,195
)
Loss multiplied by the standard rate of corporation tax in the United Kingdom (Current tax) 19.17% (2017: 20%)
 
(2,088
)
 
(5,141
)
 
(4,678
)
Change in unrecognized tax losses
 
751

 
2,169

 
2,691

Non-deductible expenses
 
402

 
331

 
184

Tax relief for qualifying research and development expenditure
 
(3,043
)
 
(1,699
)
 
(1,170
)
Prior year adjustments
 
5

 
9

 
(87
)
Share options exercised
 
(40
)
 
(84
)
 
(45
)
Overseas profits taxed at different rates
 
251

 
179

 
47

Change in rate of deferred tax
 
—

 
(100
)
 
—

Total tax
 
(3,762
)
 
(4,336
)
 
(3,058
)


F-19

10. Income tax (continued)
There are no current tax liabilities as at January 31, 2018 (2017: Nil; 2016: Nil).
Tax credits relate to UK research and development tax credits claimed under the Finance Act 2015.
The Finance (No 2) Act 2015, which provides for reductions in the main rate of corporation tax from 20% to 19% effective from April 1, 2017, and to 18% effective from April 1, 2020, was substantively enacted on October 26, 2015. Subsequently, the Finance Act 2016, which provides for a further reduction in the main rate of corporation tax to 17% effective from April 1, 2020, was substantively enacted on September 6, 2016. These rate reductions have been reflected in the calculation of deferred tax at the year end date.
The closing deferred tax liability at January 31, 2018 has been calculated at 17% reflecting the tax rate at which the deferred tax liability is expected to be reversed in future periods. Unrecognized deferred tax has been calculated at 17% reflecting the latest enacted rate. In respect of unrecognized deferred tax on losses, the new loss restriction rules effective from April 1, 2017 limit the amount of brought forward losses available to use against future taxable profits on a year by year basis to the extent that taxable profits exceed £5m in year. However, the losses will not lapse and therefore the full amount will be relieved over time provided there are sufficient profits against which the losses can be utilized.
Please see Note 21 ‘Deferred tax liability’ for information on the unrecognized tax losses carried forward.


11. Loss per share

The loss per share has been calculated using the loss for the year of £7,131,000 (year ended January 31, 2017: loss of £21,371,000; year ended January 31, 2016: loss of £20,137,000) and dividing this by the weighted average number of Ordinary Shares in issue during the year to January 31, 2018: 65,434,294 (year ended January 31, 2017: 61,548,557; year ended January 31, 2016: 59,102,292).
Since the Group has reported a net loss, diluted loss per share is equal to basic loss per share.
Potentially dilutive shares capable of vesting under the share options currently in issue totaled 8,577,236 as at January 31, 2018 (January 31, 2017: 7,383,401; year ended January 31, 2016: 7,006,306).

12. Goodwill
 
Discuva Limited £000
 
MuOx Limited
£000
 
Total
£000
Cost
 
 
 
 
 
At February 1, 2017
—

 
664

 
664

Additions
1,814

 
—

 
1,814

At January 31, 2018
1,814

 
664

 
2,478

Accumulated impairment
 
 
 
 
 
At February 1, 2017
—

 
—

 
—

At January 31, 2018
—

 
—

 
—

Net book amount
 
 
 
 
 
At February 1, 2017
—

 
664

 
664

At January 31, 2018
1,814

 
664

 
2,478



F-20

12. Goodwill (continued)

 
Discuva Limited £000
 
MuOx Limited
£000
 
Total
£000
Cost
 
 
 
 
 
At February 1, 2016
—

 
664

 
664

At January 31, 2017
—

 
664

 
664

Accumulated impairment
 
 
 
 
 
At February 1, 2016
—

 
—

 
—

At January 31, 2017
—

 
—

 
—

Net book amount
 
 
 
 
 
At February 1, 2016
—

 
664

 
664

At January 31, 2017
—

 
664

 
664

Goodwill represents the difference between the fair value of the identifiable assets acquired and liabilities assumed and the amount paid in consideration. In accordance with IAS 36 ‘Goodwill’ has been reviewed for impairment and no provision is considered necessary. The impairment review is included as part of the intangible assets impairment review in Note 13 ‘Intangible assets’. Goodwill relating to Muox Limited forms part of the same cash-generating unit as the utrophin program acquired. Goodwill relating to Discuva Limited forms part of the same cash-generating unit as the bacterial genetics-based platform acquired.
On December 23, 2017, the Group acquired 100% of the share capital of Discuva Limited a privately held UK-based company, resulting in the recognition of £1.8 million of goodwill. See Note 27 'Business combinations' for details. Goodwill recognized in respect of Discuva Limited is attributable to the synergies expected with the Group's ongoing business as a result of the acquisition and the existing Discuva Limited workforce (which cannot be separately valued under IFRS accounting standards).
Goodwill recognized in respect of MuOx Limited is attributable to synergies expected from the Group’s collaboration with the University of Oxford and other founders of MuOx Limited.


F-21

13. Intangible assets
 
Iminosugar
related
programs
acquired
£000

Utrophin
program
acquired
£000

Bacterial genetics-based platform acquired
£000

Option over non-financial assets
£000

Other
patents and
licenses
£000

Total
£000
Cost
 
 
 
 
 
 
 
 
 
 
 
At February 1, 2017
1,380

 
3,321

 
—

 
—

 
204

 
4,905

Acquisition of subsidiary (Note 27)
—

 
—

 
10,670

 
668

 
—

 
11,338

Additions
—

 
—

 
—

 
—

 
119

 
119

Disposals
(1,380
)
 
—

 
—

 
—

 
(58
)
 
(1,438
)
At January 31, 2018
—

 
3,321

 
10,670

 
668

 
265

—

14,924

Accumulated amortization
 
 
 
 
 
 
 
 
 
 
 
At February 1, 2017
(1,380
)
 
—

 
—

 
—

 
(55
)
—

(1,435
)
Charge for the year
—

 
—

 
(79
)
 
(4
)
 
(23
)
 
(106
)
Disposals
1,380

 
—

 
—

 
—

 
22

 
1,402

At January 31, 2018
—

 
—

 
(79
)
 
(4
)
 
(56
)
—

(139
)
Net book amount
 
 
 
 
 
 
 
 
 
 
 
At February 1, 2017
—

 
3,321

 
—

 
—

 
149

 
3,470

At January 31, 2018
—

 
3,321

 
10,591

 
664

 
209

 
14,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Iminosugar
related
programs
acquired
£000
 
Utrophin
program
acquired
£000
 
Bacterial genetics-based platform acquired
£000
 
Option over non-financial assets
£000
 
Other
patents and
licenses
£000
 
Total
£000
Cost
 
 
 
 
 
 
 
 
 
 
 
At February 1, 2016
1,380

 
3,321

 
—

 
—

 
197

 
4,898

Additions
—

 
—

 
—

 
—

 
7

 
7

At January 31, 2017
1,380

 
3,321

 
—

 
—

 
204

 
4,905

Accumulated amortization
 
 
 
 
 
 
 
 
 
 
 
At February 1, 2016
(1,380
)
 
—

 
—

 
—

 
(45
)
 
(1,425
)
Charge for the year
—

 
—

 
—

 
—

 
(10
)
 
(10
)
At January 31, 2017
(1,380
)
 
—

 
—

 
—

 
(55
)
 
(1,435
)
Net book amount
 
 
 
 
 
 
 
 
 
 
 
At February 1, 2016
—

 
3,321

 
—

 
—

 
152

 
3,473

At January 31, 2017
—

 
3,321

 
—

 
—

 
149

 
3,470

Amortization of intangible assets is included in the line ‘Research and development’ shown on the face of the Consolidated Statement of Comprehensive Income.
On December 23, 2017, the Group recognized £10.6 million of identified intangible assets related to the bacterial genetics-based platform and £1.8 million of goodwill upon acquisition of Discuva Limited. See Note 27 'Business combinations' for further details.
In accordance with IAS 38, intangible assets not subject to amortization and the associated goodwill have been reviewed for impairment.
The key assumptions used in the valuation model to determine the value in use are as follows:
•
expected research and development costs based on management’s past experience and knowledge;
•
probabilities of achieving development milestones based on industry standards;
•
reported disease prevalence;
•
expected discovery pipeline;
•
expected market share based on management’s estimates;
•
drug reimbursement, costs of goods and marketing estimates; and
•
expected patent life.


F-22

13. Intangible assets (continued)
The valuation models cover periods significantly longer than five years which is based on expected patent life, once filed, due to the length of the development cycle for assets of this nature.
A discount factor of 18% has been used over the forecast period for the valuation model used to determine the value in use of the utrophin program acquired and the associated goodwill amounts recognized.
Based on sensitivity analysis, no reasonably possible change in assumptions would cause the carrying value of this asset to exceed its recoverable amount.

14. Property, plant and equipment
Cost
Leasehold
improvements
£000
 
Laboratory
equipment
£000
 
Office and IT
equipment
£000
 
Total
£000
At February 1, 2017
9

 
19

 
284

 
312

Acquisition of subsidiary (Note 27)
—

 
280

 
49

 
329

Additions
340

 
—

 
173

 
513

Disposals
(9
)
 


 
(14
)
 
(23
)
Revaluation
—

 
—

 
(6
)
 
(6
)
At January 31, 2018
340

 
299

 
486

 
1,125

Accumulated depreciation
 
 
 
 
 
 
 
At February 1, 2017
(9
)
 
(17
)
 
(170
)
 
(196
)
Charge for the year
(31
)
 
(19
)
 
(90
)
 
(140
)
Disposals
9

 
—

 
10

 
19

Revaluation
—

 
—

 
1

 
1

At January 31, 2018
(31
)
 
(36
)
 
(249
)
 
(316
)
Net book value
 
 
 
 
 
 
 
At February 1, 2017
—

 
2

 
114

 
116

At January 31, 2018
309

 
263

 
237

 
809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost
Leasehold
improvements
£000
 
Laboratory
equipment
£000
 
Office and IT
equipment
£000
 
Total
£000
At February 1, 2016
9

 
137

 
228

 
374

Additions
—

 
—

 
81

 
81

Disposals
—

 
(118
)
 
(25
)
 
(143
)
At January 31, 2017
9

 
19

 
284

 
312

Accumulated depreciation
 
 
 
 
 
 
 
At February 1, 2016
(7
)
 
(135
)
 
(149
)
 
(291
)
Charge for the year
(2
)
 
—

 
(46
)
 
(48
)
Disposals
—

 
118

 
25

 
143

At January 31, 2017
(9
)
 
(17
)
 
(170
)
 
(196
)
Net book value
 
 
 
 
 
 
 
At February 1, 2016
2

 
2

 
79

 
83

At January 31, 2017
—

 
2

 
114

 
116


15. Prepayments and other receivables
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Other receivables
3,600

 
342

Prepayments
6,498

 
685

Accrued income
1,036

 
—

 
11,134

 
1,027



F-23

16. Trade and other payables
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Trade payables
4,414

 
906

Other taxes and social security
164

 
94

Accruals
4,078

 
2,884

Other creditors
276

 
100

 
8,932

 
3,984


17. Deferred revenue
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Due within one year
10,012

 
6,912

Due more than one year
18,033

 
23,615


Sarepta Therapeutics Inc.
On October 4, 2016, Summit announced its entry into an exclusive license and collaboration agreement with Sarepta Therapeutics Inc. (‘Sarepta’), pursuant to which Summit granted Sarepta the exclusive right to commercialize products in the Group’s utrophin modulator pipeline in the European Union, Switzerland, Norway, Iceland, Turkey and the Commonwealth of Independent States. Such products include the Group’s lead product candidate, ezutromid, for the treatment of Duchenne muscular dystrophy and its pipeline of second generation and future generation small molecule utrophin modulators. The Group also granted Sarepta an option to expand the licensed territory to include specified countries in Central and South America. The Group retains commercialization rights in the rest of the world.
Under the license and collaboration agreement with Sarepta, Summit received an upfront payment of $40.0 million (£32.8 million) from Sarepta. The terms of the contract have been assessed, and the Group believes the development services to be indistinguishable from the license and as a result the upfront payment was initially reported as deferred revenue in the Consolidated Statement of Financial Position and is being recognized as revenue over the development period. In May 2017, the Group announced the first dosing of the last patient in PhaseOut DMD, its ongoing Phase 2 clinical trial of ezutromid, which triggered a $22 million (£17.2 million) development milestone payment to Summit. The Group believes this development milestone has been achieved, hence the payment has met the recognition criteria of International Accounting Standard 18 ‘Revenue’ and has been recognized as revenue in full during the year ended January 31, 2018. In addition, the Group will be eligible to receive up to an additional $20 million from Sarepta in specified development milestones for ezutromid and up to $150 million from Sarepta in specified regulatory milestones related to ezutromid in the licensed territory. The Group are also eligible to receive up to $65 million in specified development milestones and up to $225 million in specified regulatory milestones from Sarepta for our future generation small molecule utrophin modulators in the licensed territory. In addition, the Group are also eligible to receive up to $330 million from Sarepta in specified sales milestones on a product-by-product basis, as well as tiered, escalating royalties ranging from a low to high teens percentage of net sales on a product-by-product basis in the licensed territory.
 
Under the license and collaboration agreement with Sarepta, the Group have agreed to collaborate with Sarepta on the research and development of the licensed products pursuant to a joint development plan through a joint steering committee comprised of an equal number of representatives from each party. The Group have been solely responsible for all research and development costs for the licensed products until December 31, 2017. From January 1, 2018, the Group is responsible for 55.0% of the budgeted research and development costs related to the licensed products in the licensed territory, and Sarepta is responsible for 45.0% of such costs. Any costs in excess of 110.0% of the budgeted amount are borne by the party that incurred such costs. The Group is also obligated to spend a specified minimum amount on the research and development of certain licensed products prior to the end of 2019.
    

F-24

17. Deferred revenue (continued)
Eurofarma Laboratórios S.A.
On December 21, 2017, Summit announced it had entered into an exclusive license and commercialization agreement with Eurofarma Laboratórios S.A. ('Eurofarma'), pursuant to which the Group granted Eurofarma the exclusive right to commercialize ridinilazole in specified countries in South America, Central America and the Caribbean. The Group has retained commercialization rights in the rest of the world.
Under the terms of the license agreement with Eurofarma, the Group received an upfront payment of $2.5 million (£1.9 million) from Eurofarma. The terms of the contract have been assessed, and the Group believes the development services to be indistinguishable from the license and as a result the upfront payment was initially reported as deferred revenue in the Consolidated Statement of Financial Position and is being recognized as revenue over the development period. In addition, the Group will be entitled to receive an additional $3.75 million in development milestones upon the achievement of staged patient enrollment targets in the licensed territory in one of our two planned Phase 3 clinical trials of ridinilazole. The Group is eligible to receive up to $21.5 million in development, commercial and sales milestones when cumulative net sales equal or exceed $100.0 million in the Eurofarma licensed territory. Each subsequent achievement of an additional $100.0 million in cumulative net sales will result in the Group receiving additional milestone payments, which, when combined with anticipated product supply transfer payments from Eurofarma paid to the Group in connection with a commercial supply agreement to be entered into between the two parties, will provide payments estimated to range from a mid- to high-teens percentage of cumulative net sales in the Eurofarma licensed territory. The Group estimate such product supply transfer payments from Eurofarma will range from a high single-digit to low double-digit percentage of cumulative net sales in the licensed territory.

18. Financial liabilities on funding arrangements
The Group has entered into charitable funding arrangements with the Wellcome Trust and the US not for profit organizations, the Muscular Dystrophy Association (‘MDA’) and Duchenne Partners Fund (‘DPF’). In exchange for the funding provided, these arrangements require the Group to pay royalties on potential future revenues generated from the CDI and DMD programs respectively. Under IFRS, when such arrangements also give the counterparties rights over unexploited intellectual property, this results in a financial liability, recognized in the Statement of Financial Position. The estimated financial liability is initially recognized at fair value using a discounted cash flow model with the difference between the fair value of the liability and the cash received considered to represent a charitable grant.
The financial liabilities are subsequently measured at amortized cost using discounted cash flow models which calculate the risk adjusted net present values of estimated potential future cash flows for the respective projects related to the Wellcome Trust and MDA and DPF agreements. The financial liabilities are re-measured when there is a specific significant event that provides evidence of a significant change in the probability of successful development such as the completion of a phase of research or public reporting of significant interim data and changes in use or market for a product. The models will be updated for changes in the clinical probability of success and other associated assumptions with the discount factor to remain unchanged within the model. Discount factors have been calculated using appropriate measures and rates which could have been obtained in the period that the funding agreements were entered into and are in the range of 16% to 18%.
In October 2017, the Company and the Wellcome Trust entered into an equity and revenue sharing agreement (‘RS Agreement’). This was a follow-on to Summit’s October 2012 Translational Award funding agreement with the Wellcome Trust ('TA Agreement'), which provided funding for the now completed Phase 1 and Phase 2 clinical trials for ridinilazole. The commercial terms in the RS Agreement replaced those detailed in the TA Agreement. Under the RS Agreement, the Wellcome Trust also agreed to terminate all of its rights under the TA Agreement pertaining to the exploitation of intellectual property related to the CDI program, meaning the arrangement no longer meets the definition of a financial liability under IFRS. Therefore, the portion of the financial liability on the Group’s Statement of Financial Position related to the Wellcome Trust funding has been derecognized in full as a credit to the Statement of Comprehensive Income, with £0.9 million classified as Other income and £3.1 million classified as Finance income. The portion of the derecognized financial liability presented as Other income represents the component of the funding received from the Wellcome Trust not previously credited to the Statement of Comprehensive Income upon initial recognition of the financial liability. The portion of the derecognized financial liability presented as Finance income relates to previous re-measurements and discounts associated with the financial liability which were recognized as finance costs.
The value of the estimated financial liabilities for funding arrangements as of January 31, 2018 amounted to £3.1 million (January 31, 2017: £5.9 million) relating to the charitable funding arrangements with MDA and DPF. Since initial recognition, the remaining estimated financial liabilities were re-measured following significant successful events in the DMD and CDI clinical programs. The financial liabilities were re-measured in the year ended January 31, 2018 following positive interim 24-week data in the Phase 2 clinical trial of ezutormid for DMD which increased the probability of success.
    

F-25

18. Financial liabilities on funding arrangements (continued)
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
At February 1
5,919

 
5,034

Unwinding of discount factor
754


862

Derecognition of financial liabilities – Finance income
(3,085
)
 
—

Re-measurement of financial liabilities on funding arrangements
410


—

Net finance income / (costs) on funding arrangements accounting for as financial liabilities
(1,921
)
 
862

Derecognition of financial liabilities – Other operating income
(908
)
 
—

Cash received from funding arrangements accounted for as financial liabilities
—

 
23

At January 31
3,090

 
5,919

Changing one or more assumptions to reasonable possible alternative assumptions would not materially change the fair value. The table below describes the value of the liability as at January 31, 2018 of £3.1 million compared to what the total value would be following the presented variations to the underlying assumptions in the model:
    
 
January 31, 2018
 
£000
Estimated financial liabilities on funding arrangements
3,090

1% lower discount rate
3,354

1% higher discount rate
2,850

10% lower revenue assumptions
2,818

10% higher revenue assumptions
3,362

10% lower probability of success
1,005

10% higher probability of success
5,123


Summary of milestone payments and royalty arrangements contained in the funding arrangements
US Not for Profit Organizations
Muscular Dystrophy Association
The Group has agreed to pay the Muscular Dystrophy Association (‘MDA’) a specified lump sum amount, less the previously paid MDA cash infusion milestone payment, following the regulatory approval of any project product for use in the United States or European Union in the treatment of DMD or Becker muscular dystrophy (‘BMD’) and an additional specified sum upon achievement of a commercial milestone. The Group would be obligated to pay MDA a low single-digit percentage royalty of worldwide net sales by the Group, its affiliates or licensees of any project product.
Duchenne Partners Fund Inc.
The Group has agreed to pay Duchenne Partners Fund Inc., (‘DPF’) a specified lump sum amount, less the previously paid DPF cash infusion milestone payment, following the regulatory approval of any project product for use in the United States or European Union in the treatment of DMD or BMD and an additional specified sum upon achievement of a commercial milestone. The Group would be obligated to pay DPF a low single-digit percentage royalty of worldwide net sales by the Group, its affiliates or licensees of any project product.
The total amount payable with respect to regulatory milestones under the two agreements with the US not for profit organizations would be $2.5 million if the Group meets all regulatory milestones.



F-26

19. Financial instruments
    
 
 
 
January 31, 2018
 
January 31, 2017
 
Note
 
£000
 
£000
Loans and receivables
 
 
 
 
 
Other receivables(1)
15
 
3,600

 
342

Cash and cash equivalents
 
 
20,102

 
28,062

 
 
 
23,702

 
28,404

Financial liabilities measured at amortized cost
 
 
 
 
 
Trade and other payables
16
 
8,932

 
3,984

Financial liabilities on funding arrangements
18
 
3,090

 
5,919

 
 
 
12,022

 
9,903

(1)
Prepayments and accrued income have been excluded as they are not considered to be a financial instrument.

The Group’s activities expose it to a variety of financial risks: foreign currency risk; interest rate risk; credit risk; and liquidity risk.
The Group’s principal financial instrument comprises cash and cash equivalents, and this is used to finance the Group’s operations. Other financial instruments include other receivables and trade and other payables that arise directly from its operations. The category of other receivables all mature within one year.
The Group has compared fair value to book value for each class of financial asset and liability: no difference was identified other than in respect of financial liabilities on funding arrangements. The Group has a policy, which has been consistently followed, of not trading in financial instruments.
The Group considers the financial liabilities on funding arrangements to be a level 3 financial instrument, and the fair value as at January 31, 2018 was calculated to be £4.7 million. The key inputs to the model are described more fully within Note 2 ‘Critical accounting judgements and key sources of estimation uncertainty’.

Foreign currency risk
Foreign currency risk refers to the risk that the value of a financial commitment or recognized asset or liability will fluctuate due to changes in foreign currency rates. The Group’s net income and financial position, as expressed in Pounds Sterling, are exposed to movements in foreign exchange rates against the US Dollar and the Euro. The main trading currencies of the Group are Pounds Sterling, the US Dollar, and the Euro. The Group is exposed to foreign currency risk as a result of trading transactions, including the receipt of potential payments related to the Group’s agreements with Sarepta, Eurofarma and BARDA, capital raises in the US and the translation of foreign bank accounts.
The exposure to foreign exchange is monitored by the Group’s finance function. Exposures are generally managed through natural hedging via the currency denomination of cash balances and any realized impact currently is not material to the Group.
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Cash at bank and in hand
 
 
 
Pounds Sterling
5,535

 
8,969

US Dollar
14,567

 
19,093

 
20,102

 
28,062


Interest rate risk
One of the risks arising from the Group’s financial instruments is interest rate risk. The Group holds no derivative instruments to manage interest rate risk; instead the Group placed deposits surplus to short-term working capital requirements with a variety of reputable UK- and US-based banks and building societies. There were no amounts on short term deposits at the year end. These balances are placed at fixed rates of deposit with maturities between one month and three months.

F-27

19. Financial instruments (continued)
The Group’s cash and short-term deposits were as follows:
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
On current account
20,102

 
28,062

 
20,102

 
28,062


The interest rates for dated deposits were dependent on the rates offered by the Group’s borrowers. The interest rate for short-term deposits is variable dependent on the rates offered by the Group’s banks. During the year to January 31, 2018, the banking facilities returned an average rate after fees of 0.02% (2017: 0.04%).
The Group’s exposure to interest rate risk is illustrated with regard to the opening and closing cash balances and the difference that an increase or decrease of 1% in interest rates would have made based on the average cash balance of £24,082,000 (2017: £22,183,000) in the year:
    
Year ended January 31, 2018
(1)%
 
Actual
 
1%
Interest rate
—

 
0.02

 
1.02

Interest received (£000)
—

 
5

 
246

Year ended January 31, 2017
(1)%
 
Actual
 
1%
Interest rate
—

 
0.04

 
1.04

Interest received (£000)
—

 
8

 
230


Credit risk
The credit risk with respect to customers is limited and the Group had no trade receivables outstanding at January 31, 2018.
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of short-term cash investments and trade accounts receivable. Excess cash is invested in short-term money market instruments, including bank term deposits, money market and liquidity funds, and other debt securities provided by a variety of financial institutions with strong credit ratings; these investments typically bore minimal credit risk in the year.
Cash balances maintained during the year have been principally held with reputable UK- and-US based banks and building societies. The Group does not believe that this constituted a major credit risk.
As of January 31, 2018 and January 31, 2017, the majority of cash and cash equivalents were placed with HSBC Bank plc.

Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities.
The Group ordinarily finances its activities through cash generated from operating activities, and private and public offerings of equity securities. The Group anticipates that its operating cash flow together with available cash and cash equivalents will be sufficient to meet its anticipated needs. See Note 1 ‘Going concern’.
All of the financial liability categories at each balance sheet date, excluding the financial liabilities on funding arrangements, have maturity dates of less than twelve months from the year end date. Provisions are amounts contingent upon events taking place and the recognition of deferred taxation is dependent upon future profits arising.

Capital management
The primary aim of the Group’s capital management, defined as its share capital and share premium, is to safeguard the Group’s ability to continue as a going concern, to support its programs and maximize shareholder value.
The Group monitors its capital structure and makes adjustments, as and when it is deemed necessary and appropriate to do so, using such methods as the issuing of new ordinary shares. The capital structure of the Group has come entirely from equity issues.


F-28

20. Provisions for other liabilities and charges and contingent liabilities
    
 
Assumed contingent liabilities £000s

Dilapidations £000s

Royalties £000s

Total
£000s
At February 1, 2017
—

 
85

 
—

 
85

Additions
1,466

 
150

 
25

 
1,641

Used during the year
—

 
(85
)
 
—

 
(85
)
At January 31, 2018
1,466

 
150

 
25

 
1,641

 
Assumed contingent liabilities £000s
 
Dilapidations £000s
 
Royalties £000s
 
Total
£000s
At February 1, 2016
—

 
73

 
—

 
73

Additions
—

 
12

 
—

 
12

Used during the year
—

 


 
—

 
—

At January 31, 2017
—

 
85

 
—

 
85


Dilapidations
Management has made a provision in respect of the dilapidation costs associated with the reinstatement obligations on their current lease based on best estimates. It is management’s intention to utilize the provision at the end of the lease term. During the year ended January 31, 2018, the Group utilized the provisions classified as falling due within one year to settle its obligations in respect of the Group’s expired lease in Oxford, UK.

Royalties
The provision in respect of royalties relates to the amounts due to the Wellcome Trust being a share of the cumulative net revenue that the Group or its affiliates receive from exploiting the exploitation intellectual property or award products. The provision has been discounted to take account of the effect of the time value of money, applying an discount rate of 13%. Further information on the contingencies included in the Wellcome Trust arrangement are detailed below.

Assumed contingent liability
On December 23, 2017, the Group acquired Discuva Limited for total consideration of £11.1 million comprising £6.1 million of cash (being £5.0 million plus the value of net cash acquired by the Group as part of the acquisition) and £5.0 million of new ordinary shares of Summit of one penny nominal value issued to Discuva shareholders at a price of 170.4 pence per share. In addition, the Group assumed certain contingent liabilities as, certain employees, former employees and former directors of Discuva are eligible for payments from Discuva based on specified development and clinical milestones related to proprietary product candidates developed under the bacterial genetics-based platform. The timing of these potential payments is uncertain.
On the date of acquisition the fair value of the assumed contingent liability was estimated using the expected value of the payments. The assumed contingent liabilities are subsequently measured at amortized cost using discounted cash flow models which calculate the risk adjusted net present values of estimated potential future cash flows of the payments. The assumed contingent liabilities are re-measured when there is a specific significant event that provides evidence of a significant change in the probability of successful development and clinical milestones being achieved. The models will be updated for changes in the probability of successful development and clinical milestones being achieved and other associated assumptions with the discount factor to remain unchanged within the model. A discount factor of 13% has been used to discount the contingent liabilities back to net present value. This discount factor has been calculated using appropriate measures and rates which could have been obtained in the period that the contingent liabilities were assumed.
The estimated initial fair value of the assumed contingent liability as at January 31, 2018 is £1.5 million. The contingent liability has not been re-measured during the period.

F-29

20. Provisions for other liabilities and charges and contingent liabilities (continued)
The table below describes the value of the assumed contingent liabilities as at January 31, 2018 of £1.5 million compared to what the total value would be following the presented variations to the underlying assumptions in the model:
 
January 31, 2018
 
£000
Estimated assumed contingent liabilities
1,466

1% lower discount rate
1,579

1% higher discount rate
1,368

10% lower probability of success
1,208

10% higher probability of success
1,705


In addition to those items provided for above, the Group also has the following contingencies:
MuOx Limited
Under the research sponsorship agreement that the Group and Oxford University Innovation Limited, formerly known as Isis Innovation Limited, (‘OUI’) entered into in November 2013, amended and restated in July 2014 and amended in November 2015, the Group agreed to fund a drug research and discovery program in the University of Oxford laboratories to identify and research utrophin modulators to treat DMD. The Group will fund up to £4.6 million for this purpose over the initial six-year research period ending in November 2019. If the Group exercises its right to extend the research period by an additional year, the Group would be obliged to pay OUI an additional £0.8 million, for a total of £5.4 million.
Under the option agreement that the Group and OUI entered into in November 2013, and as amended in November 2015, OUI granted to the Group an exclusive option to license the intellectual property (‘IP’) arising from the research carried out under the sponsored research agreement within specified periods. If the Group exercises its option to obtain a license under arising IP, the Group would be obliged to pay OUI up to a specified sum in option exercise fees.
For any IP arising from the research carried out under the sponsored research agreement and for which the Group has exercised the option and that comprises new chemical entities or compounds, the Group would obtain an exclusive, sub licensable license. The Group is obligated to pay milestone payments of up to £75,000 upon the achievement of specified development milestones, whether such milestones occur prior to or after the Group’s exercise of the option to obtain an exclusive sub- licensable license. Following exercise of such an option, the Group would also be obligated to pay milestone payments upon the achievement of specified regulatory milestones with respect to each optioned compound. The specified regulatory milestone payment is due each time the specified regulatory milestone is achieved with respect to an optioned compound and, if each optioned compound achieved each regulatory milestone, the Group would be obligated to pay OUI a total of £3.7 million in regulatory milestone payments for each optioned compound.
The Group would also be obligated to pay OUI a low single-digit royalty of net sales by the Group, its affiliates or sub-licensees of any product containing an optioned compound.
The School of Pharmacy, University of London
The Group has agreed to pay The School of Pharmacy, University of London, a low single-digit share of all revenue, pre and post commercialization, received by the Group in respect of ridinilazole up to a maximum of £1.0 million in consideration of their role in the development of the initial compound series from which ridinilazole was later identified. Following the license and commercialization agreement entered into with Eurofarma Laboratórios S.A., an initial payment became due to The School of Pharmacy and has been provided for at the year end date.
Wellcome Trust
Under the renewed terms of the funding arrangement the Wellcome Trust are entitled to a share of the cumulative net revenue that the Group or its affiliates receive from exploiting the exploitation IP or award products. If Summit undertakes the commercialization of ridinilazole, the Wellcome Trust would be eligible to receive a low-single digit percentage share of net revenues. If a third-party undertakes the commercialization of ridinilazole, the Wellcome Trust would be eligible to receive a mid-single digit percentage share of net revenues received by Summit from sales by the third-party and a milestone payment of a low-single digit percentage of any cumulative pre-commercial payments received by Summit from third-party licensees. In both instances outlined above the Group would also be obligated to pay the Wellcome Trust a milestone of a specified amount if cumulative net revenue exceeds a specified amount. Following the license and commercialization agreement entered into with Eurofarma, an initial payment became due to the Wellcome Trust upon commercialization of ridinilazole. The payment has been provided for by the Group as at the year end date and has been discounted back to net present value relative to the expected timing of commercialization of ridinilazole.

F-30

21. Deferred tax liability
The Group's deferred tax liability includes amounts recognized upon acquisition of MuOx Limited, which took place in the year ended January 31, 2014, and amounts recognized upon acquisition of Discuva Limited, which took place in the year ended January 31, 2018.
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Amounts falling due after more than one year
 
 
 
At February 1
565

 
664

Acquisition of subsidiary (Note 27)
1,814

 
—

Credited to the income statement
—

 
(99
)
At January 31
2,379

 
565

There is an unrecognized deferred tax asset in relation to the trading losses carried forward of £11,944,000 (2017: £10,882,000), £26,000 in relation to provisions (2017: £14,000) and £588,000 (2017: £230,000) in relation to future exercisable shares. There is a deferred tax liability of £71,000 (2017: £3,000) in respect of accelerated capital allowances, which has been offset against the deferred tax asset in relation to trading losses carried forward.
The unrecognized deferred tax asset would be recovered against future company taxable profits. In the opinion of the Directors, there is insufficient evidence that the asset will be recovered, and as such the deferred tax asset has not been recognized in the financial statements.

22. Share capital
    
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Allotted, called up and fully paid
 
 
 
73,563,624 (2017: 61,841,566) Ordinary shares of 1p each
736

 
618

 
736

 
618


Changes to the number of Ordinary Shares in issue have been as follows:
    
 
Number of Shares

Total Nominal Value £000

Total Share Premium £000

Total Consideration £000
At February 1, 2016
61,290,740
 
613

 
46,035

 
46,648

New share capital issued from exercise of warrants
177,045
 
2

 
105

 
107

Share options exercised
373,781
 
3

 
280

 
283

At January 31, 2017
61,841,566
 
618

 
46,420

 
47,038

 
 
 
 
 
 
 
 
At February 1, 2017
61,841,566
 
618

 
46,420

 
47,038

New share capital issued (net of transaction costs)
8,389,250
 
84

 
13,419

 
13,503

Issue of Ordinary Shares as consideration for a business combination (1)
2,934,272
 
30

 
—

 
30

New share capital issued from exercise of warrants
50,000
 
1

 
9

 
10

Share options exercised
348,536
 
3

 
389

 
392

At January 31, 2018
73,563,624
 
736

 
60,237

 
60,973


(1)
The difference between the nominal value of the share capital acquired in Discuva Limited and fair value of shares issued in the business combination using the acquisition method of accounting was recognized as part of the Group's merger reserve arising as a result of certain requirements in the United Kingdom.


F-31

22. Share capital (continued)
On February 22, 2017, warrants over 50,000 Ordinary Shares were exercised at a price of 20 pence per share. The issue of shares raised net proceeds of £10,000.

On September 18, 2017, the Group completed an underwritten public offering on the Nasdaq Global Market issuing 1,459,000 American Depositary Shares (‘ADS’) at a price of $12.00 per ADS. The underwriters also exercised in full their over-allotment option to purchase an additional 218,850 ADSs on the same terms which was also completed on September 18, 2017. Each ADS represents five Ordinary Shares of one penny nominal value each in the capital of the Company, meaning 8,389,250 new Ordinary Shares were issued. Total gross proceeds of $20.1 million (£14.9 million) were raised and directly attributable transaction costs of £1.4 million were incurred and accounted as a deduction from equity.
On December 23, 2017, the Group acquired 100% of the share capital of Discuva Limited, a privately held UK-based company. As part of the consideration the Group issued £5.0 million in new Ordinary Shares of Summit of one penny nominal value to Discuva shareholders at a price of 170.4 pence per share, meaning 2,934,272 Ordinary Shares were issued. See note 27 'Business combinations' for details.
During the year to January 31, 2018, the following exercises of share options took place:
    
Date
Number of
options exercised
April 10, 2017
16,667

June 27, 2017
19,425

September 28, 2017
32,500

September 29, 2017
94,425

October 2, 2017
97,199

October 4, 2017
88,320

 
348,536

The total net proceeds from exercised share options during the year was £0.39 million.

All new Ordinary Shares rank pari passu with existing Ordinary Shares.

Following the public offering and exercise of the over-allotment option, the issuance of shares as consideration for a business combination and the exercise of the above share options and warrants, the number of Ordinary Shares in issue was 73,563,624.

Dividends
No dividends were paid or declared in the year ended January 31, 2018 (year ended January 31, 2017: £nil).

23. Share option scheme and Restricted Stock Units
At January 31, 2018, the outstanding share options, which include the share options granted to Directors, are shown below: 
    
Date of grant
 
Exercise
price (£)
 
Number of
shares
 
Date from which
exercisable
 
Expiry date
Approved EMI scheme
 
 
 
 
 
 
 
 
April 7, 2011
 
0.65

 
5,873

 
April 8, 2014
 
April 7, 2021
May 10, 2012
 
0.60

 
150,046

 
May 10, 2014
 
May 10, 2022
December 24, 2012
 
0.85

 
21,500

 
December 24, 2015
 
December 24, 2022
January 31, 2013
 
0.20

 
72,973

 
July 31, 2013
 
January 31, 2023
July 15, 2014
 
1.26

 
249,621

 
July 15, 2016
 
July 15, 2024
January 21, 2015
 
1.23

 
25,000

 
January 21, 2017
 
January 21, 2025
June 23, 2016
 
1.05

 
560,343

 
June 23, 2017
 
June 23, 2026
 
 
 
 
1,085,356

 
 
 
 

F-32

23. Share option scheme and Restricted Stock Units (continued)
    
Date of grant
 
Exercise
price (£)
 
Number of
shares
 
Date from which
exercisable
 
Expiry date
Unapproved scheme
 
 
 
 
 
 
 
 
April 7, 2011
 
0.65

 
13,981

 
April 8, 2014
 
April 8, 2021
December 18, 2013
 
0.20

 
76,364

 
June 19, 2013
 
June 19, 2023
June 23, 2014
 
1.48

 
400,000

 
June 23, 2015
 
June 23, 2024
July 15, 2014
 
1.26

 
847,500

 
July 15, 2016
 
July 15, 2024
July 15, 2014
 
0.80

 
100,000

 
May 30, 2015
 
May 30, 2023
January 21, 2015
 
1.23

 
75,000

 
January 21, 2017
 
January 21, 2025
June 16, 2015
 
1.43

 
2,252,333

 
June 16, 2017
 
June 16, 2025
October 15, 2015
 
1.31

 
50,000

 
October 15, 2017
 
October 15, 2025
June 23, 2016
 
0.01

 
110,576

 
July 21, 2016
 
June 23, 2026
June 23, 2016
 
1.05

 
250,000

 
June 23, 2019
 
June 23, 2026
June 23, 2016
 
1.05

 
363,092

 
June 23, 2017
 
June 23, 2026
April 11, 2017
 
1.85

 
150,436

 
April 11, 2018
 
April 11, 2027
April 11, 2017
 
1.85

 
324,324

 
April 11, 2020
 
April 11, 2027
April 11, 2017
 
1.85

 
762,764

 
June 23, 2019
 
April 11, 2027
June 27, 2017
 
1.80

 
34,711

 
June 27, 2017
 
June 27, 2027
July 18, 2017
 
1.83

 
533,629

 
June 18, 2018
 
June 18, 2027
July 18, 2017
 
1.83

 
367,924

 
July 18, 2020
 
July 18, 2027
October 24, 2017
 
1.80

 
481,975

 
October 24, 2018
 
October 24, 2027
October 24, 2017
 
1.80

 
297,271

 
October 24, 2020
 
October 24, 2027
 
 
 
 
7,491,880

 
 
 
 
 
 
 
 
8,577,236

 
 
 
 
The Group has no legal or constructive obligation to repurchase or settle the options in cash.
The movement in the number of share options is set out below: 
    
 
Weighted
average
exercise price
£
 
Year ended January 31, 2018
 
Weighted
average
exercise price
£
 
Year ended January 31, 2017
Outstanding at February 1,
1.17

 
7,383,401

 
1.29

 
7,006,306

Granted during the year
1.83

 
2,972,903

 
0.98

 
1,667,576

Lapsed during the year
0.99

 
(1,430,532
)
 
1.90

 
(916,700
)
Exercised during the year
1.13

 
(348,536
)
 
0.76

 
(373,781
)
Number of outstanding options at January 31,
1.43

 
8,577,236

 
1.17

 
7,383,401

As at January 31, 2018, 2,042,546 share options were capable of being exercised with a weighted average exercise price per option of 100 pence (2017: 1,972,654 with a weighted average exercise price per option of 84 pence). The options outstanding at January 31, 2018 had a weighted average exercise price per option of 143 pence (2017: 117 pence), and a weighted average remaining contractual life of 7.9 years (2017: 8.9 years).

F-33

23. Share option scheme and Restricted Stock Units (continued)
The fair value per share option award granted and the assumptions used in the calculations are as follows:
Date of grant
 
Type of
award
 
Number of
shares
 
Exercise
price (£)
 
Share price
at grant
date (£)
 
Fair value
per option
(£)
 
Award
life
(years)
 
Risk free
rate
April 07, 2011
 
EMI
 
5,873

 
0.65

 
0.65

 
0.47

 
5.00
 
2.70
%
April 07, 2011
 
Unapproved
 
13,981

 
0.65

 
0.65

 
0.47

 
5.00
 
2.70
%
May 10, 2012
 
EMI
 
150,046

 
0.60

 
0.52

 
0.24

 
5.00
 
1.00
%
December 24, 2012
 
EMI
 
21,500

 
0.85

 
0.85

 
0.59

 
5.00
 
0.90
%
January 31, 2013
 
EMI
 
72,973

 
0.20

 
0.94

 
0.74

 
5.00
 
1.00
%
December 18, 2013
 
Unapproved
 
76,364

 
0.20

 
1.85

 
1.65

 
5.00
 
1.00
%
June 23, 2014
 
Unapproved
 
400,000

 
1.48

 
1.50

 
0.92

 
3.80
 
1.30
%
July 15, 2014
 
EMI
 
249,621

 
1.26

 
1.26

 
0.65

 
3.00
 
1.30
%
July 15, 2014
 
Unapproved
 
847,500

 
1.26

 
1.26

 
0.65

 
3.00
 
1.30
%
July 15, 2014
 
Unapproved
 
100,000

 
0.80

 
0.81

 
0.65

 
1.90
 
0.50
%
January 21, 2015
 
EMI
 
25,000

 
1.23

 
1.22

 
0.64

 
3.00
 
0.60
%
January 21, 2015
 
Unapproved
 
75,000

 
1.23

 
1.22

 
0.64

 
3.00
 
0.60
%
June 15, 2015
 
Unapproved
 
2,252,333

 
1.43

 
1.44

 
0.65

 
3.00
 
0.91
%
October 15, 2015
 
Unapproved
 
50,000

 
1.31

 
1.36

 
0.57

 
3.00
 
0.70
%
June 23, 2016
 
EMI
 
560,343

 
1.05

 
1.05

 
0.25

 
3.00
 
0.30
%
June 23, 2016
 
Unapproved
 
110,576

 
0.01

 
1.05

 
1.04

 
0.50
 
0.30
%
June 23, 2016
 
Unapproved
 
250,000

 
1.05

 
1.05

 
0.24

 
3.00
 
0.30
%
June 23, 2016
 
Unapproved
 
363,092

 
1.05

 
1.05

 
0.25

 
3.00
 
0.30
%
April 11, 2017
 
Unapproved
 
150,436

 
1.85

 
1.85

 
0.68

 
3.00
 
0.07
%
April 11, 2017
 
Unapproved
 
324,324

 
1.85

 
1.85

 
0.72

 
3.00
 
0.13
%
April 11, 2017
 
Unapproved
 
762,764

 
1.85

 
1.85

 
0.76

 
2.20
 
0.07
%
June 27, 2017
 
Unapproved
 
34,711

 
1.80

 
1.78

 
0.64

 
3.00
 
0.23
%
July 18, 2017
 
Unapproved
 
533,629

 
1.83

 
1.83

 
0.66

 
3.00
 
0.26
%
July 18, 2017
 
Unapproved
 
367,924

 
1.83

 
1.83

 
0.74

 
3.00
 
0.31
%
October 24, 2017
 
Unapproved
 
481,975

 
1.80

 
1.70

 
0.57

 
3.00
 
0.46
%
October 24, 2017
 
Unapproved
 
297,271

 
1.80

 
1.70

 
0.66

 
3.00
 
0.55
%
 
 
 
 
8,577,236

 
 
 
 
 
 
 
 
 
 
The key assumptions used in calculating the share-based payments are as follows:
a.
Black-Scholes valuation methodology was used for all share options issued since 2016.
b.
The majority of share option awards made before 2016 are performance related and have been modeled using the Monte-Carlo methodology. The options granted on January 31, 2013 and December 18, 2013 at an exercise price of 20 pence respectively, and 16,667 of the unapproved options granted on June 23, 2014 are not performance related.
c.
Figures in the range of 39%-134% have been used for expected volatility. This has been derived from historic share price performance, weighted to exclude periods of unusually high volatility.
d.
Expected dividend yield is nil, consistent with the Directors’ view that the Group’s business model is to generate value through capital growth rather than the payment of dividends.
e.
The risk free rate is equal to the prevailing UK Gilts rate at grant date that most closely matches the expected term of the grant.
f.
Share options are assumed to be exercised immediately on vesting.
g.
The fair value of share options awarded where there are different vesting installments is the average of the fair values calculated per installment.


F-34

23. Share option scheme and Restricted Stock Units (continued)
At January 31, 2018, the outstanding Restricted Stock Units (‘RSUs’) in the form of nominal-cost options, which have been granted to Non-Executive Directors, are shown below: 
    
Date of grant
Exercise
price (£)
 
Number of
shares
 
Date from which
exercisable
 
Expiry date
July 18, 2017
0.01

 
136,991

 
July 18, 2018
 
December 31, 2018
October 24, 2017
0.01

 
138,886

 
October 24, 2018
 
December 31, 2018
 
 
 
275,877

 
 
 
 

The movement in the number of RSUs is set out below:
    
 
Weighted
average
exercise price
£
 
Year ended January 31, 2018
 
Weighted
average
exercise price
£
 
Year ended January 31, 2017
Outstanding at February 1,
—

 
—

 
—

 
—

Granted during the year
0.01

 
275,877

 
—

 
—

Number of outstanding RSUs at January 31,
0.01

 
275,877

 
—

 
—

As at January 31, 2018, nil RSUs were capable of being exercised (2017: nil). The RSUs outstanding at January 31, 2018 had a weighted average exercise price per RSU of 1 penny (2017: nil), and a weighted average remaining contractual life of 0.9 years.
The fair value per RSU's award granted and the assumptions used in the calculations are as follows:
    
Date of grant
 
Number of
shares
 
Exercise
price (£)
 
Share price
at grant
date (£)
 
Fair value
per option
(£)
 
Award
life
(years)
 
Risk free
rate
July 18, 2017

136,991


0.01


1.83


1.82


1.00

0.24
%
October 24, 2017

138,886


0.01


1.70


1.69


1.00

0.40
%
 
 
275,877

 
 
 
 
 
 
 
 
 
 
The key assumptions used in calculating the share-based payments are as follows:
a.
Black-Scholes valuation methodology was used for all RSUs.
b.
Figures in the range of 47%-84% have been used for expected volatility. This has been derived from historic share price performance, weighted to exclude periods of unusually high volatility.
c.
Expected dividend yield is nil, consistent with the Directors’ view that the Group’s business model is to generate value through capital growth rather than the payment of dividends.
d.
The risk free rate is equal to the prevailing UK Gilts rate at grant date that most closely matches the expected term of the grant.
e.
RSUs are assumed to be exercised immediately on vesting.

24. Fixed assets purchase commitments
At January 31, 2018, the Group had no capital commitments (January 31, 2017: nil).



F-35

25. Leasing and other commitments
The Group’s total commitments under non-cancelable operating leases are as follows: 
    
 
Land & Buildings
 
January 31, 2018
 
January 31, 2017
 
£000
 
£000
Leases which expire
 
 
 
Not later than one year
337

 
88

Later than one year and not later than five years
1,143

 
122

 
1,480

 
210


On February 17, 2017, the Group signed a ten year lease for new UK office premises. The total commitment of the new lease from the year end January 31, 2018 up until the break clause is £687,000.
In addition to land and buildings, the Group enters into contracts in the normal course of business with contract research organizations to assist in the performance of research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not reflected in the table above.

26. Related party transactions
Dr. Frank Armstrong was a member of the board of Directors of Juniper Pharmaceuticals Inc., during the year until September 2017. During the year £nil (2017: £65,000) was paid to Juniper Pharma Services Limited, a wholly owned subsidiary of Juniper Pharmaceuticals Inc, in respect of clinical manufacturing services. Of this amount £nil was outstanding at the year end (2017: £nil).

Professor Stephen Davies is a member of the board of directors of Oxford University Innovation Limited. During the year £24,000 (2017: £36,000) was charged by Oxford University Innovation Limited in connection with payments due in respect of the strategic alliance between the Group and Oxford University that was entered into in November 2013. Of this amount £12,000 was outstanding at the year end (2017: £nil).
See Note 6 ‘Directors and employees’ for details of key management emoluments.

27. Business combinations

On December 23, 2017, the Group acquired 100% of the share capital of Discuva Limited ('Discuva'), a privately held UK-based company. As part of the acquisition the Group has obtained a bacterial genetics-based platform to generate new mechanism antibiotics.

Under the terms of the acquisition, the consideration to Discuva shareholders comprised of £6.1 million in cash (being £5.0 million plus the value of net cash acquired by the Group as part of the acquisition) and £5.0 million in new ordinary shares of Summit of one penny nominal value issued to Discuva shareholders at a price of 170.4 pence per share, representing 2,934,272 Ordinary Shares.

The Group recognized £1.8 million of goodwill upon the acquisition of Discuva. Goodwill represents the difference between the fair value of the identifiable assets acquired and liabilities assumed for Discuva and the amount paid in consideration and is attributable to the existing Discuva workforce (which cannot be separately valued under accounting standards). The goodwill recognized will not be deductible for tax purposes.


F-36

27. Business combinations (continued)

The consideration paid for Discuva and the identifiable assets acquired and liabilities assumed are as follows:

    
 
 
£000
Consideration
 

Cash
 
6,091

2,934,272 new Summit Therapeutics plc Ordinary Shares issued
 
5,000

Total consideration
 
11,091


    
 
Book value £000
 
Fair value adjustment £000
 
Fair value £000
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
 
 

Cash and cash equivalents
1,316

 
—

 
1,316

Property, plant and equipment
329

 
—

 
329

Intangible assets - option over non-financial assets
668

 
—

 
668

Intangible assets - bacterial genetics-based platform
—

 
10,670

 
10,670

Trade and other receivables
1,129

 
—

 
1,129

Trade and other payables
(1,555
)
 
—

 
(1,555
)
Assumed contingent liabilities
—

 
(1,466
)
 
(1,466
)
Deferred tax liabilities
—

 
(1,814
)
 
(1,814
)
Book and fair value of identifiable net assets
1,887

 
7,390

 
9,277

Goodwill
—

 
1,814

 
1,814

Total consideration
1,887

 
9,204

 
11,091


The Group has recognized £10.7 million of identified intangible assets acquired related to the bacterial genetics-based platform. See Note 13 'Intangible assets' for further details.

The Group has assumed £1.5 million of contingent liabilities as part of the acquisition as, certain employees, former employees and former directors of Discuva are eligible for payments from Discuva based on specified development and clinical milestones related to proprietary product candidates developed under the platform. The timing of these potential payments is uncertain. See Note 20 'Provisions for other liabilities and charges and contingent liabilities' for further details.

The gross contractual amount for trade and other receivables due is £1.1 million, all of which is expected to be collectible.

The results of Discuva have been included in the Group’s Consolidated Income Statement from December 23, 2017, contributing £0.3 million (1.2%) of Group revenues for the year ending January 31, 2018. Discuva contributed a gain of £0.02 million to the Group's total comprehensive loss for the year ended January 31, 2018.

If the acquisition had occurred on February 1, 2017, unaudited pro forma combined revenue for the year ended January 31, 2018 would have been £28.1 million, unaudited pro forma combined total comprehensive loss for the year ended January 31, 2018 would have been £7.3 million and unaudited pro forma combined basic and diluted loss per Ordinary Share from operations for the year ended January 31, 2018 would have been 11 pence. These amounts have been calculated using Discuva's results and adjusting them for costs associated with the acquisition, differences in the accounting policies between the Group and Discuva and amounts restated in Discuva's financial information.

Transaction costs

Acquisition related costs of £0.4 million have been excluded from the consideration transferred and recognized as a general and administration expense in the Consolidated Statement of Comprehensive Income for the year ended January 31, 2018.

28. Subsequent events

On March 29, 2018, the Group completed a placing on the AIM market of the London Stock Exchange, issuing 8,333,333 new Ordinary Shares at a price of 180 pence per share. Total proceeds of £15.0 million were raised (before expenses). Following the placing the number of Ordinary Shares in issue was 81,901,173.


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