S-1 1 d358280ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 2, 2012

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

GlobeImmune, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

2834

(Primary Standard Industrial
Classification Code Number)

 

84-1353925

(I.R.S. Employer
Identification Number)

1450 Infinite Drive

Louisville, CO 80027

(303) 625-2700

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

area code, of registrant’s principal executive offices)

 

 

Timothy C. Rodell, M.D.

Chief Executive Officer and President

GlobeImmune, Inc.

1450 Infinite Drive

Louisville, CO 80027

(303) 625-2700

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

 

 

Copies to:

Brent D. Fassett

Francis R. Wheeler

Matthew P. Dubofsky

Cooley LLP

380 Interlocken Crescent, Suite 900

Broomfield, Colorado 80021

Tel: (720) 566-4000

Fax: (720) 566-4099

 

Mitchell S. Bloom

Michael D. Maline

Bradley C. Weber

Goodwin Procter LLP

The New York Times Building

620 Eighth Avenue

New York, New York 10018

Tel: (212) 813-8800

Fax: (212) 355-3333

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) check the following box.  ¨

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (Check one):

 

Large Accelerated Filer  ¨   Accelerated Filer  ¨   

Non-accelerated Filer    x

(Do not check if a smaller
reporting company)

  Smaller Reporting Company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities

to be Registered

 

Proposed Maximum

Aggregate Offering

Price(1)

 

Amount of

Registration

Fee(2)

Common Stock, $0.001 par value per share

  $69,000,000   $7,908

 

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. Includes the offering price of additional shares that the underwriters have the option to purchase.

 

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

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED JULY 2, 2012

PROSPECTUS

 

LOGO

            Shares

Common Stock

 

 

This is an initial public offering of GlobeImmune, Inc. We are offering             shares of our common stock. We currently estimate that the initial public offering price of our common stock will be between $            and $            per share.

Prior to this offering there has been no public market for our common stock. We have filed an application for our common stock to be listed on The NASDAQ Global Market under the symbol “GBIM”.

 

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.

 

       Per Share        Total  

Initial price to public

       $                       $               

Underwriting discounts and commissions

       $                       $               

Proceeds, before expenses, to GlobeImmune, Inc.

       $                       $               

We have granted the underwriters an option to purchase up to             additional shares of our common stock to cover over-allotments, if any, exercisable at any time until 30 days after the date of this prospectus.

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

The underwriters expect to deliver the shares on or about                     , 2012.

 

 

 

Wells Fargo Securities   Piper Jaffray

 

 

JMP Securities

Prospectus dated                     , 2012.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     10   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     46   

USE OF PROCEEDS

     47   

DIVIDEND POLICY

     47   

CAPITALIZATION

     48   

DILUTION

     50   

SELECTED FINANCIAL DATA

     52   

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

     54   

BUSINESS

     75   

MANAGEMENT

     104   

EXECUTIVE AND DIRECTOR COMPENSATION

     110   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     127   

PRINCIPAL STOCKHOLDERS

     129   

DESCRIPTION OF CAPITAL STOCK

     132   

SHARES ELIGIBLE FOR FUTURE SALE

     137   

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     140   

UNDERWRITING

     144   

LEGAL MATTERS

     151   

EXPERTS

     151   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     151   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus and any related free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither this prospectus nor any related free writing prospectus is an offer to sell, nor are they seeking an offer to buy, these securities in any jurisdiction where the offer or solicitation is not permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus, and information may have changed since those dates.

For investors outside the United States: neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary does not contain all of the information you should consider. Before investing in our common stock, you should read the entire prospectus carefully, including the “Risk Factors” beginning on page 10 and the financial statements and related notes beginning on page F-1. Unless the context indicates otherwise, as used in this prospectus, the terms “GlobeImmune”, “the Company”, “we”, “us” and “our” refer to GlobeImmune, Inc.

Overview

We are a biopharmaceutical company focused on developing therapeutic products for cancer and infectious diseases based on our proprietary Tarmogen® platform. Tarmogens activate the immune system by stimulating cellular immunity, known as T cell immunity, in contrast to traditional vaccines, which predominately stimulate antibody production. We have four Tarmogen product candidates in five ongoing clinical trials. Our lead cancer product candidate, GI-4000, is being evaluated in combination with gemcitabine in a fully-enrolled, placebo-controlled Phase 2b trial in resected pancreas cancer. Our lead infectious disease product candidate, GI-5005, has completed a randomized, active-control Phase 2b trial in chronic hepatitis C virus, or HCV, infection. Collaborations with biopharmaceutical companies and research institutions have allowed us to advance the development of our Tarmogen product candidates while managing our own investment in these product candidates. We have two strategic collaborations, one with Celgene Corporation for all oncology product candidates and one with Gilead Sciences, Inc. for chronic hepatitis B virus, or HBV, infection.

Our Tarmogen platform technology has characteristics that we believe will enable us, in collaboration with our strategic collaborators and independently, to develop and commercialize a portfolio of Tarmogen products. Highlights of our Tarmogen technology include:

 

   

Tarmogens activate the cellular immune response: Each Tarmogen consists of intact, heat-inactivated yeast containing the target protein. The cellular immune system has evolved to protect against yeast and fungal infections, among other threats. As a result, we believe our data demonstrate that immunization with a Tarmogen primarily results in cellular immune responses against the target protein and reduction in the number of abnormal cells containing the same target protein.

 

   

Broad applicability: We have evaluated Tarmogens in both oncology and infectious diseases in randomized, controlled Phase 2 clinical trials. We have successfully created Tarmogens to express over 100 different proteins. In eight Phase 1 and 2 clinical trials, we have treated more than 300 patients, including some who have received monthly dosing for over four years, with a tolerability profile that we believe will allow the Tarmogens to be added to other therapeutic regimens without leading to additional toxicity.

 

   

Proven preclinical development capability: We have advanced seven Tarmogens from concept into human clinical trials in approximately 6 to 18 months.

 

   

Efficient manufacturing: We manufacture Tarmogens through a process that yields a stable, off-the-shelf product that is disease- or protein-specific. We believe that the productivity of our manufacturing process compares favorably to the productivity reported by other biotechnology companies for their manufacturing processes. We have an approximately 22,000 square foot manufacturing facility that we believe has the capacity and equipment for commercial-scale production of Tarmogens.

Tarmogens target the molecular profile that distinguishes a diseased cell from a normal cell. We have designed Tarmogens to target specific antigens that play a role in oncology and infectious diseases that represent unmet medical needs.

 

 

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GI-4000 targets cancers with Ras mutations. We estimate that Ras mutations are found in approximately 180,000 new cancer cases each year in the United States across a spectrum of tumor types, including pancreas, non-small cell lung cancer, or NSCLC, colorectal, endometrial and ovarian cancers, as well as melanoma and multiple myeloma. Studies have shown that tumors with Ras mutations are generally less responsive than tumors with normal Ras to conventional chemotherapy as well as approved targeted agents. However, there are no approved products that are specifically directed towards Ras mutations. We are conducting a Phase 2b clinical trial for GI-4000 in resected pancreas cancer patients in collaboration with Celgene. We are also evaluating GI-4000 in two investigator-sponsored Phase 2a clinical trials in NSCLC and colorectal cancer.

 

   

GI-6207 targets carcinoembryonic antigen, or CEA, a protein that is over-expressed in a large number of epithelial cancers, which we estimate represent approximately 500,000 new cancer cases in the United States each year. The National Cancer Institute, or NCI, has completed a Phase 1 clinical trial of GI-6207.

 

   

GI-6301 targets cancers expressing the brachyury protein, which plays a role in metastatic progression of certain cancers. The NCI is currently conducting a dose escalation Phase 1 trial of GI-6301 in patients with advanced cancer.

 

   

GI-5005 contains a fusion of two hepatitis C proteins, NS3 and Core, which are highly conserved across HCV genotypes and are recognized by T cells. The World Health Organization estimates that up to 170 million people globally are infected with HCV, with three to four million new infections each year. We believe that GI-5005 is the first therapeutic vaccine to demonstrate a clinically meaningful outcome in patients with a chronic infectious disease. We are evaluating the potential role of GI-5005 in difficult-to-treat chronic HCV patients.

 

   

GI-13000 is our series of Tarmogens being evaluated for the treatment of chronic HBV infection. HBV is the most common liver infection and the major cause of liver cancer worldwide. Globally, 350 million people have chronic HBV infection. While approved anti-viral drugs can suppress the virus, they rarely result in cures and must be taken indefinitely. Our development strategy will be to combine GI-13000 with Gilead’s Viread, an approved antiviral drug, to determine if the combination can reduce or eliminate HBV infection.

 

 

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The following tables summarize the status of our pipeline:

 

ONCOLOGY PRODUCT CANDIDATES

Product

Candidate

  Indication   Target   Stage of
Development
  Worldwide Commercial
Rights
       

GI-4000

 

Resected pancreas

cancer

  Mutated Ras   Phase 2b   Celgene Option
       

GI-4000

 

Non-small cell lung

cancer

  Mutated Ras   Phase 2a   Celgene Option
       

GI-4000

 

Colorectal

cancer

  Mutated Ras   Phase 2a   Celgene Option
       

GI-6207

 

Medullary thyroid

cancer

 

Carcinoembryonic

Antigen

  Phase 1 complete   Celgene Option
       

GI-6301

 

Multiple solid

tumors

  Brachyury   Phase 1   Celgene Option

 

INFECTIOUS DISEASE PRODUCT CANDIDATES

Product

Candidate

  Indication   Target   Stage of
Development
  Worldwide Commercial
Rights
       

GI-5005

  Chronic hepatitis C infection   NS3 / Core   Phase 2b   GlobeImmune
       

GI-13000

  Chronic hepatitis B infection   HBV antigens   Preclinical   Gilead

We have generated clinical data in two randomized, controlled clinical trials with Tarmogen product candidates.

GI-4000-02 is a fully-enrolled, Phase 2b randomized double-blind, active-control multi-center study of 176 subjects with resected pancreas cancer. Thirty-nine of these subjects had microscopic residual disease after surgery, or R1 subjects, and were randomized separately from the subjects with no microscopic residual disease after surgery, or R0 subjects. Of the 39 R1 subjects, the 19 who were assigned to the GI-4000 plus gemcitabine group had a 2.7 month advantage in median overall survival compared to the 20 R1 subjects assigned to the placebo plus gemcitabine group (17.7 vs. 15.0 months). Further, in the 15 R1 subjects in the GI-4000 plus gemcitabine group who we were able to test for an immune response, seven were identified as immune responders to mutated Ras and had a 5.1 month advantage in median survival compared to the 20 R1 subjects in the placebo plus gemcitabine group (20.1 vs. 15.0 months). Of the 12 placebo-treated subjects who we were able to test for an immune response, only 1 of 12 was identified as having an immune response to mutated Ras. The study is also designed to assess GI-4000 in R0 subjects. We continue to monitor the recurrence and mortality events in the 137 R0 subjects, and plan to conduct a complete unblinded analysis in the R0 subgroup when sufficient deaths have occurred to allow us to make meaningful conclusions.

In HCV, we have conducted a randomized, active-control 140-patient Phase 2b clinical trial with GI-5005 plus pegylated-interferon and ribavirin, or pegIFN/ribavirin, in patients with genotype 1 HCV, the most common type of HCV in the United States. In 96 subjects who had not previously been treated, GI-5005 demonstrated a 21% relative advantage in sustained virologic response at 24 weeks following completion of therapy, or SVR24, which is generally considered a cure; 58% of subjects who received GI-5005 plus pegIFN/ribavirin compared to 48% of subjects who received pegIFN/ribavirin alone. The trial also demonstrated a three-fold advantage in

 

 

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SVR24 in 37 subjects who previously had received, but not responded to, interferon plus ribavirin therapy; 17% for subjects who received GI-5005 plus pegIFN/ribavirin compared to 5% for subjects who only received pegIFN/ribavirin. GI-5005 was generally well tolerated in this study. We believe that the GI-5005 HCV data demonstrate the potential value of the Tarmogen platform for other chronic infectious diseases.

In May 2009, we entered into a worldwide strategic collaboration with Celgene focused on the discovery, development and commercialization of product candidates for the treatment of cancer and we received an initial $30 million fee. Celgene also made a $10 million equity investment. We are responsible for initial development of product candidates. Celgene has the option to license each product candidate at specific development milestones and continue to either fund our development or assume development responsibility. If certain development and regulatory milestones are achieved, we would be eligible to receive up to $441 million in milestone payments, and if products are commercialized, up to an additional $60 million of milestone payments plus tiered royalties based on net sales of each licensed product candidate.

In October 2011, we entered into a worldwide strategic collaboration with Gilead to develop GI-13000 product candidates for chronic HBV infection under which we received a $10 million upfront payment and Gilead also agreed to fund a Phase 1a clinical trial of GI-13000. Gilead is responsible for all clinical development beyond the Phase 1a clinical trial. We are eligible to receive additional proceeds of up to $135 million in development and regulatory milestones, and if products are commercialized, tiered royalties and up to $40 million of sales milestone payments based on net sales of the licensed product candidates.

Our Strategy

Our strategy is to develop and commercialize Tarmogens targeting diseases representing significant unmet medical needs while leveraging our collaborations to manage our expenses. The key components of our strategy include advancing the clinical development of GI-4000 and our other oncology Tarmogens in collaboration with Celgene and the NCI, and progressing our Tarmogens targeting infectious diseases, including our HBV collaboration with Gilead, while retaining certain development and commercialization rights to proprietary product candidates.

Our executive management team has more than 60 years of combined drug development and regulatory experience. We seek to manage our expenses by limiting corporate overhead and outsourcing appropriate functions. We intend to continue to use corporate and research collaborations to advance the development of many of our product candidates. In addition, we plan to advance at least one of our preclinical infectious disease product candidates through a Phase 2 clinical trial with a portion of the proceeds from this offering while maintaining cash resources sufficient to allow us to fund our operations through                         .

Investment Highlights

 

   

Our Tarmogen technology is a differentiated product development platform with applicability to a range of diseases.

 

   

We have achieved clinical proof-of-concept for our lead oncology and infectious disease product candidates.

 

   

Tarmogens enable personalized molecular targeting of large patient populations in cancer and infectious diseases.

 

   

We have entered into strategic collaborations with Celgene and Gilead.

 

   

We have established low-cost manufacturing capabilities for our Tarmogen product candidates.

 

 

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Our Risks

Our business and our future results of operations and financial condition are subject to a number of risks and uncertainties. These risks and uncertainties could adversely affect our actual results and performance, as well as the successful implementation of our business strategy. These risks and uncertainties are discussed more fully in the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections of this prospectus. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in deciding whether to invest in our common stock. Among these important risks and uncertainties that could adversely affect our results of operations and business condition are the following:

 

   

If we fail to successfully complete clinical trials, fail to obtain regulatory approval or fail to successfully commercialize our Tarmogen product candidates, our business would be harmed and the value of our securities would likely decline.

 

   

We have a history of net losses. We expect to continue to incur increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

 

   

We may face delays in completing our clinical trials, and we may not be able to complete them at all.

 

   

Results of earlier studies and clinical trials may not be predictive of future clinical trial results.

 

   

Our Tarmogen product candidates are based on a novel technology, which may raise development issues we may not be able to resolve, regulatory issues that could delay or prevent approval, or personnel issues that may keep us from being able to develop our product candidates.

 

   

If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doing so, we may not realize the full commercial potential of our therapeutics.

 

   

Competitive products for treatment of HCV may reduce or eliminate the commercial opportunity for GI-5005.

 

   

We expect to depend on existing and future collaborations with third parties for the development of some of our product candidates. If those collaborations are not successful, we may not be able to complete the development of these product candidates.

 

   

We will require substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

 

   

We have limited experience manufacturing our product candidates at commercial scale, and there can be no assurance that our product candidates can be manufactured in compliance with regulations at a cost or in quantities necessary to make them commercially viable. Our manufacturing facility has not been inspected by regulatory agencies and there can be no assurance that it will be acceptable for licensure by regulatory authorities or that we can contract or build acceptable facilities.

 

   

We rely on relationships with third-party contract manufacturers, which limits our ability to control the availability of, and manufacturing costs for, our product candidates.

 

   

If we are unable to protect our proprietary rights or to defend against infringement claims, we may not be able to compete effectively or operate profitably.

 

   

Other factors identified elsewhere in this prospectus, including those set forth under “Risk Factors”.

 

 

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Corporate Information

We were incorporated as Ceres Pharmaceuticals, Ltd. in Colorado on February 10, 1995. We changed our name to GlobeImmune, Inc. on May 26, 2001, and reincorporated in Delaware on June 5, 2002. Our principal executive offices are located at 1450 Infinite Drive, Louisville, CO 80027, and our telephone number is (303) 625-2700. Our website address is www.globeimmune.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase our common stock.

GlobeImmune®, Tarmogen®, Targeted Molecular Immunotherapy® and the GlobeImmune logo are our registered trademarks. This prospectus also includes references to trademarks and tradenames for other entities, and those trademarks and tradenames are the property of their respective owners. Except as set forth above and solely for convenience, the trademarks and tradenames in this prospectus are referred to without the ® and TM symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

 

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The Offering

 

Common stock offered

            shares (                 shares if the underwriters’ over-allotment option is exercised in full)

 

Common stock to be outstanding after this offering

            shares (                 shares if the underwriters’ over-allotment option is exercised in full)

 

Use of proceeds

We intend to use the net proceeds from this offering to advance one or more of our preclinical infectious disease product candidates through a Phase 2 clinical trial; to prepare our manufacturing facility and process for commercial-scale manufacturing; to support manufacturing for our clinical trials; and for working capital and other general corporate purposes. See the section entitled “Use of Proceeds”.

 

Risk factors

You should read the “Risk Factors” section of this prospectus beginning on page 10 for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

GBIM

The number of shares of common stock to be outstanding after this offering is based on 89,296,879 shares of common stock outstanding as of April 30, 2012, after giving effect to the conversion of all of our outstanding preferred stock into shares of common stock upon completion of this offering, and excludes:

 

   

12,168,449 shares of common stock issuable upon the exercise of outstanding options under our 2002 stock incentive plan, at a weighted average exercise price of $0.25 per share;

 

   

3,469,512 shares of common stock issuable upon the exercise of outstanding warrants to purchase preferred stock, which will convert into warrants to purchase common stock upon completion of this offering, at a weighted average exercise price of $1.42 per share;

 

   

59,796 shares of common stock issuable upon the exercise of an outstanding warrant to purchase common stock at an exercise price of $0.15 per share, which warrant expires upon completion of this offering;

 

   

            shares of common stock reserved for future issuance under our 2012 equity incentive plan, plus annual increases in the number of shares of common stock reserved for future issuance pursuant to the “evergreen provision” of such plan, as more fully described in “Executive and Director Compensation—Employee Benefit Plans—2012 Equity Incentive Plan”; and

 

   

            shares of common stock reserved for future issuance under our 2012 employee stock purchase plan, plus annual increases in the number of shares of common stock reserved for future issuance pursuant to the “evergreen provision” of such plan, as more fully described in “Executive and Director Compensation—Employee Benefit Plans—2012 Employee Stock Purchase Plan”.

Unless otherwise indicated, the information in this prospectus assumes:

 

   

the conversion of all our outstanding shares of preferred stock into an aggregate of 86,538,194 shares of common stock automatically upon the completion of this offering;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws effective upon completion of this offering; and

 

   

no exercise of the underwriters’ over-allotment option to purchase additional shares.

 

 

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Summary Financial Data

The following tables summarize certain of our financial data. The summary statement of operations data for the years ended December 31, 2009, 2010 and 2011 are derived from our audited financial statements included elsewhere in this prospectus. The summary statement of operations data for the three months ended March 31, 2011 and 2012 and the balance sheet data as of March 31, 2012 are derived from our unaudited interim financial statements included elsewhere in this prospectus. The unaudited interim financial information has been prepared on a basis consistent with our audited financial statements included elsewhere in this prospectus and includes all adjustments, consisting only of normal recurring adjustments, that, in the opinion of management, are necessary for a fair presentation of such financial information. Our historical results are not necessarily indicative of our future results and our interim results are not necessarily indicative of results to be expected for the full year. The summary financial data set forth below should be read together with our financial statements and related notes, “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The pro forma net loss attributable to common stockholders per share and pro forma weighted average common shares outstanding assume the conversion of all our outstanding preferred stock into an aggregate of 86,538,194 shares of common stock as of December 31, 2011 and March 31, 2012. The pro forma balance sheet data as of March 31, 2012 gives effect to such conversion as well as the reclassification of our preferred stock warrant liability to additional paid-in capital, which will occur upon completion of this offering. The pro forma as adjusted balance sheet data as of March 31, 2012 gives further effect to our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2009     2010     2011     2011     2012  
                      (unaudited)  
    (in thousands, except shares and per share data)  

Statement of Operations Data:

         

Revenue

  $ 2,542       4,068       5,108       1,017       2,647  

Operating expenses:

         

Research and development

    16,016       14,130       12,063       3,277       3,131  

General and administrative

    5,048       4,362       4,686       992       919  

Depreciation and amortization

    1,853       1,331       952       253       230  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    22,917       19,823       17,701       4,522       4,280  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (20,375     (15,755     (12,593     (3,505     (1,633

Other income (expense)

    (1,453     959       (1,132     321       (618

Interest expense

    (312                            

Interest income

    3       4                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (22,137     (14,792     (13,725     (3,184     (2,251

Preferred stock dividends and accretion of offering costs to redemption value

    (8,405     (10,564     (11,316     (2,829     (3,026
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

  $ (30,542     (25,356     (25,041     (6,013     (5,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss attributable to common stockholders per share(1)

         

Historical

  $ (11.60     (9.43     (9.08     (2.22     (1.91
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma

      $ (0.14       (0.02
     

 

 

     

 

 

 

Weighted-average common shares outstanding(1)

         

Historical

    2,632,265       2,690,025       2,758,332       2,713,669       2,758,685  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma

        89,296,526         89,296,879  
     

 

 

     

 

 

 

 

(1) See Note 3 to our financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the historical and pro forma net loss attributable to common stockholders per share and the number of common shares used in the computation of historical and pro forma per share amounts.

 

 

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     As of March 31, 2012
           (Unaudited)      
     Actual     Pro Forma(1)     Pro Forma  as
Adjusted(2)
     (in thousands)

Balance Sheet Data:

      

Cash and cash equivalents

   $ 10,703       10,703    

Working capital

     (839     (839  

Total assets

     13,140       13,140    

Total liabilities

     35,086       29,163    

Redeemable convertible preferred stock

     165,663           

Accumulated deficit

     (187,612     (187,612  

Total stockholders’ deficit

     (187,609     (16,023  

 

(1) The unaudited pro forma balance sheet as of March 31, 2012 reflects the automatic conversion of all outstanding shares of preferred stock as of that date into 86,538,194 shares of common stock and the reclassification of the preferred stock warrant liability of $5,922,163 to additional paid-in capital, which will occur upon completion of this offering. The preferred stock converts to common stock on an assumed one-for-one basis for all series of preferred stock.
(2) The pro forma as adjusted balance sheet data as of March 31, 2012 gives further effect to our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. In evaluating our business, investors should carefully consider the following risk factors. These risk factors contain, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. The order in which the following risks are presented is not intended to reflect the magnitude of the risks described. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and prospects. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment.

Business Risks

Risks Relating to Clinical Development and Commercialization of Our Product Candidates

If we fail to successfully complete clinical trials, fail to obtain regulatory approval or fail to successfully commercialize our Tarmogen product candidates, our business would be harmed and the value of our securities would likely decline.

We must be evaluated in light of the uncertainties and complexities affecting a pre-commercial biopharmaceutical company. We have not completed clinical development for any of our product candidates. Our lead oncology Tarmogen product candidate is GI-4000, which is in Phase 2b clinical testing. Regulatory agencies, including the U.S. Food and Drug Administration, or FDA, must approve GI-4000 and any of our other product candidates before they can be marketed or sold. Our ability to obtain regulatory approval of GI-4000 and our other product candidates depends on, among other things, completion of additional clinical trials, whether our clinical trials demonstrate statistically significant efficacy with safety issues that do not potentially outweigh the therapeutic benefit of the product candidates, and whether the regulatory agencies agree that the data from our future clinical trials are sufficient to support approval for any of our product candidates. The final results of our current and future clinical trials may not meet FDA or other regulatory agencies’ requirements to approve a product candidate for marketing, and the regulatory agencies may otherwise determine that our manufacturing processes or facilities are insufficient to support approval. We may need to conduct more clinical trials than we currently anticipate. Even if we do receive FDA or other regulatory agency approval, we or our collaborators may not be successful in commercializing approved product candidates. If any of these events occur, our business could be materially harmed and the value of our common stock would likely decline.

We may face delays in completing our clinical trials, and we may not be able to complete them at all.

We have not completed the clinical trials necessary to support an application for approval to market any of our product candidates. Our current and future clinical trials may be delayed, unsuccessful, or terminated as a result of many factors, including:

 

   

delays in designing an appropriate clinical trial protocol and reaching agreement on trial design with investigators and regulatory authorities;

 

   

delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites;

 

   

governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy or guidelines;

 

   

adding new clinical trial sites;

 

   

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

 

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the actual performance of CROs and clinical trial sites in ensuring the proper and timely conduct of our clinical trials;

 

   

developing and validating companion diagnostics on a timely basis;

 

   

manufacturing sufficient quantities of product candidates for use in clinical trials; and

 

   

delays in achieving study endpoints and completing data analysis for a trial.

In addition to these factors, our trials may be delayed, unsuccessful or terminated because:

 

   

regulators or institutional review boards, or IRBs, may not authorize us to commence a clinical trial;

 

   

regulators or IRBs may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety;

 

   

we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;

 

   

patients may not complete clinical trials due to safety issues, side effects, such as injection site discomfort, a belief that they are receiving placebo instead of our product candidates, or other reasons;

 

   

patients with serious diseases included in our clinical trials may die or suffer other adverse medical events for reasons that may not be related to our product candidates;

 

   

in those trials where our product candidate is being tested in combination with one or more other therapies, deaths may occur that may be attributable to the other therapies;

 

   

we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol;

 

   

product candidates may demonstrate a lack of efficacy during clinical trials; and

 

   

personnel conducting clinical trials may fail to properly administer our product candidates.

We could encounter delays if our clinical trials are suspended or terminated by us, by IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Boards for such trials or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including inspection of the clinical trial operations or trial site resulting in the imposition of a clinical hold, changes in governmental regulations or administrative actions, or lack of adequate funding to continue the clinical trial.

In addition, we rely on academic institutions, physician practices and CROs to conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. For example, the clinical trial of GI-4000-03 for non-small cell lung cancer, or NSCLC, at Memorial Sloan Kettering Cancer Center, or MSKCC, and the GI-4000-05 trial for metastatic, or Stage IV, colorectal cancer with Ras mutations at the Lombardi Cancer Center at Georgetown University are investigator-initiated trials. We have less control over the timing and other aspects of these clinical trials than if we conducted the monitoring and supervision entirely on our own. Third parties may not perform their responsibilities for our clinical trials on our anticipated schedule or consistent with a clinical trial protocol or applicable regulations. We also may rely on CROs to perform our data management and analysis. They may not provide these services as required or in a timely or compliant manner, and we may be held legally responsible for any or all of their performance failures or inadequacies.

Moreover, our development costs will increase because we will be required to complete additional or larger clinical trials for our Tarmogen product candidates prior to FDA or other regulatory approval. If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or eliminated. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our

 

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ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

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

Clinical trials for our product candidates require us to identify and enroll a large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients, or those with required or desired characteristics, in a timely manner. Patient enrollment is affected by factors including:

 

   

severity of the disease under investigation;

 

   

design of the trial protocol;

 

   

the size and nature of the patient population;

 

   

eligibility criteria for the study in question;

 

   

lack of a sufficient number of patients who meet the enrollment criteria for our clinical trials;

 

   

delays required to characterize tumor types to allow us to select the proper product candidate, which may lead patients to seek to enroll in other clinical trials or seek alternative treatments;

 

   

perceived risks and benefits of the product candidate under study;

 

   

availability of competing therapies and clinical trials;

 

   

efforts to facilitate timely enrollment in clinical trials;

 

   

scheduling conflicts with participating clinicians;

 

   

patient referral practices of physicians;

 

   

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

 

   

proximity and availability of clinical trial sites for prospective patients.

In particular, the availability of newly-approved and other investigational drugs for the hepatitis C virus, or HCV, market may make it difficult to enroll clinical trials for our GI-5005 product candidate. We have experienced difficulties enrolling patients in our smaller clinical trials due to lack of referrals and may experience similar difficulties in the future. For example, the GI-4000-05 trial being conducted at the Lombardi Cancer Center at Georgetown University commenced enrollment in August 2010. Five patients have been enrolled as of April 30, 2012. This enrollment rate is slower than we had anticipated.

If we have difficulty enrolling a sufficient number or diversity of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have an adverse effect on our business.

Our Tarmogen product candidates are based on a novel technology, which may raise development issues we may not be able to resolve, regulatory issues that could delay or prevent approval, or personnel issues that may keep us from being able to develop our product candidates.

Our product candidates are based on our novel Tarmogen technology platform. There can be no assurance that development problems related to our novel technology will not arise in the future that cause significant delays or that we are not able to resolve.

Regulatory approval of novel product candidates such as ours can be more expensive and take longer than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical product candidates due to our

 

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and regulatory agencies’ lack of experience with them. Only one therapeutic vaccine that stimulates the immune system to target diseased cells has been approved. The novelty of our platform may lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. For example, the FDA could require additional studies or characterization related to our use of heat-inactivated yeast that may be difficult or impossible to perform.

The novel nature of our product candidates also means that fewer people are trained in or experienced with product candidates of this type, which may make it difficult to find, hire and retain capable personnel, particularly for research, development, commercial and manufacturing positions. For example, study personnel may administer the wrong version of our product candidates or assign study therapy to the wrong treatment group, resulting in potential disqualification of subjects from data analysis. These factors could potentially cause a trial to fail for a reason unrelated to the efficacy of our product candidates. If we are unable to hire and retain the necessary personnel, the rate and success at which we can develop and commercialize product candidates will be limited. Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doing so, we may not realize the full commercial potential of our product candidates.

An important component of our business strategy is to use molecular profiling of patients to target our Tarmogen product candidates to those patients we believe may be most likely to benefit from them, including profiling necessary to determine which version of our GI-4000 series should be given to a patient with Ras mutated cancer and identifying the IL28B genotype of HCV patients. There has been limited experience in our industry in prospective development of companion diagnostics required to perform the required molecular profiling. To be successful, we will need to address a number of scientific, technical and logistical challenges related to the use of companion diagnostics in the development and regulatory approval of our product candidates.

The FDA and similar regulatory authorities outside the United States regulate companion diagnostics. Companion diagnostics require separate or coordinated regulatory approval prior to commercialization. The regulatory pathway for co-development of therapeutics and companion diagnostics is uncertain. Changes to regulatory advice could delay our development programs or delay or prevent eventual marketing approval for our product candidates that may otherwise be approvable. For our lead oncology product candidate, GI-4000 we will, and for our most advanced infectious disease product candidate, GI-5005, we may, require an in vitro companion diagnostic that will help identify patients we believe may be likely to benefit from our product candidates.

In July 2011, the FDA issued draft guidance that stated that if safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDA generally will not approve the therapeutic unless the FDA approves or clears this “in vitro companion diagnostic device” at the same time that the FDA approves the therapeutic. The approval or clearance of the companion diagnostic would occur through the FDA’s Center for Devices and Radiological Health Office of In Vitro Diagnostic Device Evaluation and Safety. It is unclear whether the FDA will finalize this guidance in its current form, or when it will do so. Even if the FDA does finalize the guidance, it is difficult to predict how it will implement the guidance. For example, the draft guidance allows for flexibility by the FDA in the case of disease indications with serious unmet medical needs, but it is unclear how this discretion will be applied by the agency. Therefore, even with the issuance of the draft guidance, the FDA’s expectations for companion diagnostics remain unclear. The FDA’s evolving position on the topic of companion diagnostics could affect our clinical development programs that utilize companion diagnostics. In particular, the FDA may limit our ability to use retrospective data, otherwise disagree with our approaches to trial design, biomarker qualification, clinical and analytical validity, and clinical utility, or make us repeat aspects of a trial or initiate new trials.

 

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Assays that can be used as companion diagnostics for detecting Ras mutations and for identifying the IL28B genotype are commercially available, but they do not yet have regulatory approval for use as companion diagnostics. In future clinical trials, we may use commercially available companion diagnostics or we may co-develop companion diagnostics ourselves or with collaborators. We have limited experience in the development of diagnostics and may not be successful in developing necessary diagnostics to pair with those product candidates that require a companion diagnostic.

Given our limited experience in developing diagnostics, we expect to rely in part on third parties for their design and manufacture. If we, or any third parties that we engage to assist us, are unable to successfully develop companion diagnostics for our product candidates that require such diagnostics, or experience delays in doing so, the development of our product candidates may be adversely affected, our product candidates may not receive marketing approval and we may not realize the full commercial potential of any products that receive marketing approval. As a result, our business could be materially harmed.

Results of earlier studies and clinical trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the design or results of later-stage clinical trials. The positive results generated to date in clinical trials for our Tarmogen product candidates do not ensure that later clinical trials will demonstrate similar results. For example, we have only evaluated the responses of 19 R1 subjects randomized to the GI-4000 plus gemcitabine group in our GI-4000-02 clinical trial compared to 20 R1 subjects randomized to the placebo plus gemcitabine group. The results we have observed in the GI-4000 group of R1 subjects may not be representative of the response in R0 subjects in GI-4000-02 or predictive of the outcome in future studies where significantly more subjects are required to be enrolled. While we have observed statistically significant improvements in the outcomes of some of our clinical trials, many of the improvements we have seen have not reached statistical significance. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. Early clinical trials frequently enroll patient populations that are different from the patient populations in later trials, resulting in different outcomes in later clinical trials from those in earlier stage clinical trials. In addition, adverse events may not occur in early clinical trials and only emerge in larger, late-stage clinical trials or after commercialization. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials. If later stage clinical trials do not demonstrate efficacy and safety of our product candidates we will not be able to market them and our business will be materially harmed.

Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.

We have discussions with and obtain guidance from regulatory authorities regarding certain aspects of our clinical development activities. These discussions are not binding commitments on the part of regulatory authorities. Under certain circumstances, regulatory authorities may revise or retract previous guidance during the course of our clinical activities or after the completion of our clinical trials. A regulatory authority may also disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product for commercial sale or otherwise deny approval of that product. Prior to regulatory approval, a regulatory authority may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications under a regulatory authority review. In the United States, these outside experts are convened through the FDA’s Advisory Committee process, which would report to the FDA and make recommendations that may differ from the views of the FDA. Should an Advisory Committee be convened, it would be expected to lengthen the time for obtaining regulatory approval, if such approval is obtained at all.

The FDA and foreign regulatory agencies may delay, limit or deny marketing approval for many reasons, including:

 

   

a product candidate may not be considered safe or effective;

 

   

our manufacturing processes or facilities may not meet the applicable requirements;

 

 

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changes in the agencies’ approval policies or adoption of new regulations may require additional work on our part, for example, the FDA may require us to submit a separate Biologics License Application, or BLA, for each product version of GI-4000;

 

   

different divisions of the FDA are reviewing different product candidates and those divisions may have different requirements for approval; and

 

   

changes in regulatory law, FDA or foreign regulatory agency organization, or personnel may result in different requirements for approval than anticipated.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

Any delay in or failure to receive or maintain approval for any of our product candidates could prevent us from ever generating revenues or achieving profitability.

We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive, or the trials are not well designed.

Clinical trials must be conducted in accordance with FDA regulations governing clinical studies, or other applicable foreign government guidelines, and are subject to oversight by the FDA, other foreign governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under current Good Manufacturing Practices, or cGMP, and may require large numbers of test subjects. Clinical trials may be suspended by the FDA, other foreign governmental agencies or us for various reasons, including:

 

   

deficiencies in the conduct of the clinical trials, including failure to conduct the clinical trial in accordance with regulatory requirements or clinical protocols;

 

   

deficiencies in the clinical trial operations or trial sites;

 

   

the product candidate may have unforeseen adverse side effects;

 

   

the time required to determine whether the product candidate is effective may be longer than expected;

 

   

deaths or other adverse events arising during a clinical trial due to medical problems that may not be related to clinical trial treatments;

 

   

the product candidate may not appear to be more effective than current therapies;

 

   

the quality or stability of the product candidate may fall below acceptable standards; and

 

   

insufficient quantities of the product candidate might be available to complete the trials.

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. Due to these and other factors, our Tarmogen product candidates could take a significantly longer time to gain regulatory approval than we expect or we may never gain approval for any product candidates, which could reduce or eliminate our revenue by delaying or terminating the commercialization of our Tarmogen product candidates.

Certain of our product candidates are being and will be studied in clinical trials conducted by the NCI, and in investigator-initiated clinical trials, the conduct of which we do not control.

Our GI-6207 and GI-6301 product candidates are being developed in collaboration with the National Cancer Institute, or NCI. In addition, there are two investigator-initiated clinical trials ongoing with our GI-4000 product

 

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candidate, a Phase 2a clinical trial in NSCLC at MSKCC and a Phase 2a clinical study in colorectal cancer at the Lombardi Cancer Center at Georgetown University. We also expect to continue to supply and otherwise support similar trials in the future. We do not control the protocols, administration or conduct of these trials and, as a result, we are subject to risks associated with the way these types of trials are conducted, in particular should any problems arise. These risks include difficulties or delays in communicating with investigators or administrators, procedural delays and other timing issues, and difficulties or differences in interpreting data. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials or the trials not being conducted according to protocols may ultimately lead to the denial of regulatory approval of our product candidates, which would adversely affect our business and lead to a decline in the trading price of our common stock.

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

Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information, reports, registration and listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use. If we market our products outside of their approved indications, we will be subject to enforcement action for off-label marketing.

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

 

   

restrictions on such products, manufacturers or manufacturing processes;

 

   

restrictions on the labeling or marketing of a product;

 

   

restrictions on product distribution or use;

 

   

requirements to conduct post-marketing clinical trials;

 

   

warning or untitled letters;

 

   

withdrawal of the products from the market;

 

   

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

 

   

recall of products, fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of marketing approvals;

 

   

refusal to permit the import or export of our products;

 

   

product seizure; and

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain

 

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regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability.

If we are unable to comply with foreign regulatory requirements or obtain foreign regulatory approvals, our ability to develop foreign markets for our products could be impaired.

Sales of our products outside the United States will be subject to foreign regulatory requirements governing clinical trials, marketing approval, manufacturing, product licensing, pricing and reimbursement. These regulatory requirements vary greatly from country to country. As a result, the time required to obtain approvals outside the United States may differ from that required to obtain FDA approval and we may not be able to obtain foreign regulatory approvals on a timely basis or at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA and foreign regulatory authorities could require additional testing. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to develop foreign markets for our products.

Developing product candidates in combination with other therapies may lead to unforeseen side effects or failures in our clinical trials.

We are studying our product candidates in clinical trials in combination with approved therapies, including chemotherapies and antivirals, and we anticipate that if any of our product candidates are approved for marketing, they will be approved to be used only in combination with other therapies. Our development programs and planned studies carry all the risks inherent in drug development activities, including the risk that they will fail to demonstrate meaningful efficacy or acceptable safety. In addition, our development programs are subject to additional regulatory, commercial, manufacturing and other risks because of the use of other therapies in combination with our product candidates. For example, the other therapies may lead to toxicities that are improperly attributed to our product candidates or the combination of our product candidates with other therapies may result in toxicities that the product candidate or other therapy does not produce when used alone. The other therapies we are using in combination may be removed from the market and thus be unavailable for testing or commercial use with any of our approved products. Testing product candidates in combination with other therapies may increase the risk of significant adverse effects or test failures. The timing, outcome and cost of developing products to be used in combination with other therapies is difficult to predict and dependent on a number of factors that are outside our reasonable control. If we experience safety or toxicity issues in our clinical trials or with any approved products, we may not receive approval to market any products, which could prevent us from ever generating revenues or achieving profitability.

Competitive products for treatment of HCV may reduce or eliminate the commercial opportunity for GI-5005.

The clinical and commercial landscape for chronic HCV is rapidly changing. New data from commercial and clinical-stage products continue to emerge. It is possible that these data may alter current standards of care, completely precluding us from further developing GI-5005 for chronic HCV. Further, it is possible that we may initiate a clinical trial or trials for GI-5005, only to find that data from competing products make it impossible for us to complete enrollment in these trials, resulting in our inability to file for marketing approval with regulatory agencies. Even if GI-5005 is approved for marketing, it may have limited sales due to particularly intense competition in the HCV market.

We expect to depend on existing and future collaborations with third parties for the development of some of our product candidates. If those collaborations are not successful, we may not be able to complete the development of these product candidates.

We currently have collaboration agreements with Celgene Corporation, or Celgene, for the development of our oncology product candidates and with Gilead Sciences, Inc., or Gilead, for hepatitis B virus, or HBV, Tarmogens. We plan to seek third-party collaborators for the development of certain other Tarmogen product candidates.

Under our current arrangements with Celgene and Gilead, we have limited control over the amount and timing of resources that our collaborators dedicate to the development of our product candidates. This is also likely to be true in any future collaborations with third parties. Our ability to generate revenues from these

 

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arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

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

 

   

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

 

   

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

 

   

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

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our 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;

 

   

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

 

   

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

 

   

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;

 

   

collaborators may elect to take over manufacturing rather than retain us as manufacturers and may encounter problems in starting up or gaining approval for their manufacturing facility and so be unable to continue development of product candidates;

 

   

we may be required to undertake the expenditure of substantial operational, financial and management resources in connection with any collaboration;

 

   

we may be required to issue equity securities to collaborators that would dilute our existing stockholders’ percentage ownership;

 

   

we may be required to assume substantial actual or contingent liabilities;

 

   

collaborators may not commit adequate resources to the marketing and distribution of our product candidates, limiting our potential revenues from these products; and

 

   

collaborators may experience financial difficulties.

We face a number of challenges in seeking additional collaborations. Collaborations are complex and any potential discussions may not result in a definitive agreement for many reasons. For example, 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, such as the design or results of our clinical trials, the potential market for our product candidates, the costs and complexities of manufacturing and delivering our product candidates to patients, the potential of competing products, the existence of uncertainty with respect to ownership or the coverage of our intellectual property, and industry and market conditions generally. If we were to

 

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determine that additional collaborations for our Tarmogen product candidates are necessary and were unable to enter into such collaborations on acceptable terms, we might elect to delay or scale back the development or commercialization of our product candidates in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and systems and expertise ourselves.

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

We will need to develop or acquire additional manufacturing and distribution capabilities in order to commercialize any product candidates that obtain marketing approval, and we may encounter unexpected costs or difficulties in doing so.

If we independently develop and commercialize one or more of our product candidates, we will need to invest in acquiring or building additional capabilities and effectively manage our operations and facilities to successfully pursue and complete future research, development and commercialization efforts. We will require additional investment and validation process development in order to qualify our commercial-scale manufacturing process to manufacture clinical trial materials and commercial material if any of our products are approved for marketing. This investment and validation process development may be expensive and time-consuming. We will require additional personnel with experience in commercial-scale manufacturing, managing of large-scale information technology systems and managing a large-scale distribution system. We will need to add personnel and expand our capabilities, which may strain our existing managerial, operational, regulatory compliance, financial and other resources. To do this effectively, we must:

 

   

recruit, hire, train, manage and motivate a growing employee base;

 

   

accurately forecast demand for our products;

 

   

assemble and manage the supply chain to ensure our ability to meet demand; and

 

   

expand existing operational, manufacturing, financial and management information systems.

We may seek FDA approval for our production process and facilities simultaneously with seeking approval for sale of our product candidates. Should we not complete the development of adequate capabilities, including manufacturing capacity, or fail to receive timely approval of our manufacturing process and facilities, our ability to supply clinical trial materials for planned clinical trials or supply products following regulatory approval for sale could be delayed, which would further delay our clinical trials or the period of time when we would be able to generate revenues from the sale of such products, if we are even able to obtain approval or generate revenues at all. Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

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

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. To date, patients treated with Tarmogens have experienced drug-related side effects, including local skin reactions and systemic and constitutional symptoms including muscle aches, fever and fatigue. Subjects have also reported developing a taste in their mouths similar to yeast following injection of our product candidates. In one instance, a patient in the GI-6207 clinical trial who had pleural and pericardial metastases, or cancer in the spaces surrounding the heart and lungs, experienced pleural and pericardial effusions, or fluid buildup in those areas of the body,

 

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following immunization with GI-6207. GI-6207 had to be discontinued in this patient because of this adverse event. For this reason, we have excluded patients with pericardial metastases from current and future clinical trials.

Our Tarmogen product candidates are intended to stimulate the immune system. As such, results of our clinical trials could reveal an unacceptable severity and prevalence of side effects, including, but not limited to, adverse immune responses that lead to previously unobserved autoimmune complications or yeast allergies. As a result of any side effects, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development, or deny approval, of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

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

 

   

regulatory authorities may withdraw approvals of such product;

 

   

regulatory authorities may require additional warnings on the label;

 

   

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

 

   

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

 

   

our reputation may suffer.

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

If we cannot demonstrate an acceptable toxicity profile for our product candidates in non-clinical studies, we will not be able to initiate or continue clinical trials or obtain approval for our product candidates.

In order to move a product candidate into human clinical trials, we must first demonstrate an acceptable toxicity profile in preclinical testing. Furthermore, in order to obtain approval, we must also demonstrate safety in various non-clinical tests. For example, we are conducting preclinical testing for GI-13000 in anticipation of filing an investigational new drug application, or IND. We may not have conducted or may not conduct the types of non-clinical testing ultimately required by regulatory authorities, or future non-clinical tests may indicate that our product candidates are not safe for use. Preclinical and non-clinical testing is expensive, time-consuming and has an uncertain outcome. In addition, success in initial non-clinical testing does not ensure that later non-clinical testing will be successful. We may experience numerous unforeseen events during, or as a result of, the non-clinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:

 

   

our preclinical and non-clinical testing may produce inconclusive or negative safety results, which may require us to conduct additional non-clinical testing or to abandon product candidates;

 

   

our product candidates may have unfavorable pharmacology or toxicity characteristics;

 

   

our product candidates may cause undesirable side effects such as negative immune responses that lead to autoimmune complications;

 

   

our enrolled patients may have yeast allergies that lead to complications after treatment; and

 

   

the FDA or other regulatory authorities may determine that additional safety testing is required.

Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

 

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

We do not have a sales or marketing infrastructure or any experience in the sales, marketing or distribution of pharmaceutical products. We currently have collaboration agreements with Celgene for the development and commercialization of our oncology product candidates and with Gilead for HBV Tarmogens. We may seek additional third-party collaborators for the commercialization of our other product candidates. In the future, we may choose to build a focused sales and marketing infrastructure to market or co-promote some of our product candidates if and when they are approved, which would be expensive and time-consuming. Alternatively, we may elect to outsource these functions to third parties. Either approach carries significant risks. For example, recruiting and training a sales force is expensive and time-consuming and, if done improperly, could delay a product launch and result in limited sales. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

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

 

   

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

 

   

the inability of marketing personnel to develop effective marketing materials;

 

   

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

 

   

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

 

   

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

As a result of our arrangements with Celgene and Gilead, as well as any other arrangements with third parties we may enter into to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues 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 additional arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

The availability and amount of reimbursement for our product candidates, if approved, and the manner in which government and private payors may reimburse for our potential product, are uncertain.

In both U.S. and foreign markets, sales of our products will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers and other organizations. The future magnitude of our revenues and profitability may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care. We cannot predict the effect that private sector or governmental health care reforms may have on our business, and there can be no assurance that any such reforms will not have a material adverse effect on our business, financial condition and results of operations.

In addition, in both the United States and elsewhere, sales of prescription drugs are dependent in part on the availability of reimbursement to the consumer from third-party payors, such as government and private insurance plans. The ability to obtain reimbursement of our products from these parties is a critical factor in the commercial success for any of our products. Failure to obtain appropriate reimbursement could result in reduced or no sales of our products.

 

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Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly-approved health care products. There can be no assurance that our products will be considered cost-effective or that adequate third-party reimbursement will be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Legislation and regulations affecting the pricing of pharmaceuticals may change before any of our products are approved for marketing. Adoption of such legislation could further limit reimbursement for medical products and services. As a result, we may elect not to market future products in certain markets.

Failure to attract and retain key personnel could impede our ability to develop our products and to obtain new collaborations or other sources of funding.

Because of the specialized scientific nature of our business and the unique properties of our Tarmogen platform, our success is highly dependent upon our ability to attract and retain qualified scientific and technical personnel, consultants and advisors. We are dependent on the principal members of our scientific and management staff, particularly Drs. Timothy C. Rodell, David Apelian and John H. Frenz. The loss of their services might significantly delay or prevent the achievement of our research, development and business objectives. We currently maintain key-man life insurance on Drs. Rodell, Apelian and Frenz. However, we may not continue to maintain such insurance in the future or the proceeds of such insurance may not be adequate.

We will need to recruit a significant number of additional personnel in order to achieve our operating goals. In order to pursue our product development and marketing and sales plans, we will need to hire additional qualified scientific personnel to perform research and development, as well as personnel with expertise in clinical testing, government regulation, manufacturing, marketing and sales, which may strain our existing managerial, operational, regulatory compliance, financial and other resources. We also rely on consultants and advisors to assist in formulating our research and development strategy and adhering to complex regulatory requirements. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions. There can be no assurance that we will be able to attract and retain such individuals on acceptable terms, if at all. Additionally, our facilities are located in Colorado, which may make attracting and retaining qualified scientific and technical personnel from outside of Colorado difficult. The failure to attract and retain qualified personnel, consultants and advisors could have a material adverse effect on our business, financial condition and results of operations.

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

Because we have limited financial and managerial resources, we focus on research programs and product candidates for the indications that we believe are the most scientifically and commercially promising. Our resource allocation decisions may cause us to fail to capitalize on viable scientific or commercial products or profitable market opportunities. In addition, we may spend valuable time and managerial and financial resources on research programs and product candidates for specific indications that ultimately do not yield any scientifically or commercially viable products. If we do not accurately evaluate the scientific and 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 situations where it would have been more advantageous for us to retain sole rights to development and commercialization.

Financial Risks

We have a history of net losses. We expect to continue to incur increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

We are not profitable and have incurred significant net losses in each year since our inception in February 1995, including net losses of $2.3 million, $13.7 million, $14.8 million and $22.1 million for the three months

 

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ended March 31, 2012, and the years ended December 31, 2011, 2010 and 2009, respectively. As of March 31, 2012, we had an accumulated deficit of $187.6 million. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that our operating losses will substantially increase over the next several years as we expand our discovery, research and development activities, including the clinical development of our Tarmogen product candidates.

Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of future expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity securities, upfront payments pursuant to our collaboration agreements, government grants and capital lease and equipment financing. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Our ability to achieve profitability is dependent on our ability, alone or with others, to complete the development of our products successfully, obtain the required regulatory approvals, manufacture and market our proposed products successfully or have such products manufactured and marketed by others, and gain market acceptance for such products. There can be no assurance as to whether or when we will achieve profitability.

We will require substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

Development of our Tarmogen product candidates and any other future product candidates will require substantial additional funds to conduct research, development and clinical trials necessary to bring such product candidates to market and to establish manufacturing, marketing and distribution capabilities. Our future capital requirements will depend on many factors, including, among others:

 

   

the scope, rate of progress, results and costs of our preclinical and non-clinical studies, clinical trials and other research and development activities;

 

   

the scope, rate of progress and costs of our manufacturing development and commercial manufacturing activities;

 

   

the cost, timing and outcomes of regulatory proceedings (including FDA review of any BLA or New Drug Application, or NDA, that we file);

 

   

payments required with respect to development milestones we achieve under our in-licensing agreements, including any such payments to University of Colorado, or CU, pursuant to our license agreement with them;

 

   

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

 

   

the costs associated with commercializing our product candidates, if they receive regulatory approval;

 

   

the cost and timing of establishing sales and marketing capabilities;

 

   

competing technological efforts and market developments;

 

   

changes in our existing research relationships;

 

   

our ability to establish collaborative arrangements to the extent necessary;

 

   

revenues received from any future products; and

 

   

payments received under any future strategic collaborations.

We anticipate that we will continue to generate significant losses for the next several years as we incur expenses to complete our clinical trial programs for our product candidates, build commercial capabilities, develop our pipeline and expand our corporate infrastructure. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will allow us to fund our operating plan through at least the next twelve months. However, our operating plan may change as a result of factors currently unknown to us.

 

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There can be no assurance that our revenue and expense forecasts will prove to be accurate, and any change in the foregoing assumptions could require us to obtain additional financing earlier than anticipated. There is a risk of delay or failure at any stage of developing a product candidate, and the time required and costs involved in successfully accomplishing our objectives cannot be accurately predicted. Actual drug research and development costs could substantially exceed budgeted amounts, which could force us to delay, reduce the scope of or eliminate one or more of our research or development programs.

We may never be able to generate a sufficient amount of product revenue to cover our expenses. Until we do, we expect to seek additional funding through public or private equity or debt financings, collaborative relationships, capital lease transactions or other available financing transactions. However, there can be no assurance that additional financing will be available on acceptable terms, if at all, and such financings could be dilutive to existing stockholders. Moreover, in the event that additional funds are obtained through arrangements with collaborators, such arrangements may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves.

If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs. Our failure to obtain adequate financing when needed and on acceptable terms would have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Manufacturing Activities

We have limited experience manufacturing our product candidates at commercial scale, and there can be no assurance that our product candidates can be manufactured in compliance with regulations at a cost or in quantities necessary to make them commercially viable. Our manufacturing facility has not been inspected by regulatory agencies and there can be no assurance that it will be acceptable for licensure by regulatory authorities or that we can contract to build acceptable facilities.

We have limited experience in commercial-scale manufacturing of Tarmogens. We may develop our manufacturing capacity in part by expanding our current facility or building additional facilities. This activity would require substantial additional funds and we would need to hire and train significant numbers of qualified employees to staff these facilities. We may not be able to develop commercial-scale manufacturing facilities that are adequate to produce materials for additional later-stage clinical trials or commercial use. Since our product candidates are produced by a biological process, we may find that our recombinant yeast strains will not grow at sites other than our facility, or do not result in a comparable product. All of our manufacturing of Tarmogen product candidates is currently performed in our Colorado facility. Damage to, or other impairment of, this facility could limit or eliminate our ability to manufacture Tarmogens.

We rely on contract manufacturing organizations for sterile fill and finish of our products, and these contractors currently fill our product candidates at a scale that is not adequate for commercial supply. Failure to find and maintain satisfactory commercial-scale fill and finish contractors could impair our ability to supply product for clinical and commercial needs. Failure of these contractors to maintain compliance with cGMPs and other regulatory and legal requirements could result in government actions that would limit or eliminate clinical trial and commercial product supply.

The equipment and facilities employed in the manufacture of pharmaceuticals are subject to stringent qualification requirements by regulatory agencies, including validation of equipment, systems and processes. We may be subject to lengthy delays and expense in conducting validation studies, if we can meet the requirements at all. Our manufacturing facility has not been inspected by regulatory agencies and there can be no assurance that it will be acceptable for licensure by regulatory authorities.

If we are unable to manufacture or contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in our manufacturing processes or our relationships with other manufacturers, our preclinical and clinical testing schedule would be delayed. This in turn would delay the submission of product candidates for regulatory approval and thereby delay the market introduction and

 

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subsequent sales of any products that receive regulatory approval, which would have a material adverse effect on our business, financial condition and results of operations. Furthermore, we or our contract manufacturers must supply all necessary documentation in support of our regulatory approval applications on a timely basis and must adhere to cGMP regulations enforced by the FDA and other regulatory bodies through their facilities inspection programs. If these facilities cannot pass a pre-approval plant inspection, the approval by the FDA or other regulatory bodies of the products will not be granted. If the FDA or a comparable foreign regulatory authority does not approve our facilities and processes for the manufacture of our product candidates or if they withdraw any such approval in the future, we may need to correct the issues or find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

We and our contract manufacturers are subject to significant regulation with respect to manufacturing of our products.

All entities involved in the preparation of a product candidate for clinical trials or commercial sale, including our manufacturing facility and our contract manufacturing organizations used for filling and finishing of our bulk product, are subject to extensive regulation. Components of a finished product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures, including record keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Our facilities and quality systems and the facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of any regulatory approval of our product candidates. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates or the associated quality systems for compliance with the regulations applicable to the activities being conducted. The regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities or those of our third-party contractors or raw material suppliers. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Our third-party contractors or raw material suppliers may refuse to implement remedial measures required by regulatory authorities. Any failure to comply with applicable manufacturing regulations or failure to implement required remedial measures imposed upon us or third parties with whom we contract could materially harm our business.

We rely on relationships with third-party contract manufacturers, which limits our ability to control the availability of, and manufacturing costs for, our product candidates.

Problems with any of our contract manufacturers’ or raw material suppliers’ facilities or processes, could prevent or delay the production of adequate supplies of finished Tarmogens. This could delay clinical trials or delay and reduce commercial sales and materially harm our business. Any prolonged delay or interruption in the operations of our collaborators’ facilities or contract manufacturers’ facilities could result in cancellation of shipments, loss of components in the process of being manufactured or a shortfall in availability of a product candidate or products. A number of factors could cause interruptions, including:

 

   

the inability of a supplier to provide raw materials;

 

   

equipment malfunctions or failures at the facilities of our collaborators or suppliers;

 

   

high process failure rates;

 

   

damage to facilities due to natural or man-made disasters;

 

   

changes in regulatory requirements or standards that require modifications to our or our collaborators’ and suppliers’ manufacturing processes;

 

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action by regulatory authorities or by us that results in the halting or slowdown of production of components or finished product at our facilities or the facilities of our collaborators or suppliers;

 

   

problems that delay or prevent manufacturing technology transfer to another facility, contract manufacturer or collaborator with subsequent delay or inability to start up a commercial facility;

 

   

a contract manufacturer or supplier going out of business, undergoing a capacity shortfall or otherwise failing to produce product as contractually required;

 

   

employee or contractor misconduct or negligence;

 

   

shipping delays, losses or interruptions; and

 

   

other similar factors.

Because manufacturing processes are highly complex and are subject to a lengthy regulatory approval process, alternative qualified production capacity and sufficiently trained or qualified personnel may not be available on a timely or cost-effective basis or at all. Difficulties or delays in our contract manufacturers’ production of drug substances could delay our clinical trials, increase our costs, damage our reputation and cause us to lose revenue and market share if we are unable to timely meet market demand for any products that are approved for sale.

The manufacturing process for our Tarmogen product candidates has several components that are sourced from a single manufacturer. If we utilize an alternative manufacturer or alternative component, we may be required to demonstrate comparability of the drug product before releasing the product for clinical use and we may not be to find an alternative supplier. For example, the stoppers used to seal the vials of our products are made by a single supplier using a proprietary formula and process. Any change to the stopper would require us to carry out lengthy studies to verify that our product remains stable with the replacement stopper. The loss of any of our current suppliers could result in manufacturing delays for the component substitution, and we may need to accept changes in terms or price from our existing supplier in order to avoid such delays.

Further, if our contract manufacturers are not in compliance with regulatory requirements at any stage, including post-marketing approval, we may be fined, forced to remove a product from the market and/or experience other adverse consequences, including delays, which could materially harm our business.

We use and generate hazardous materials in our business and must comply with environmental laws and regulations, which can be expensive.

Our research, development and manufacturing involves the controlled use of hazardous materials, chemicals, various active microorganisms and volatile organic compounds, and we may incur significant costs as a result of the need to comply with numerous laws and regulations. For example, as a pharmacologically-active material, any residual Tarmogen in process-waste streams must be disposed of as hazardous waste. We are subject to laws and regulations enforced by the FDA, the Drug Enforcement Agency, foreign health authorities and other regulatory requirements, including the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other current and potential federal, state, local and foreign laws and regulations governing the use, manufacture, storage, handling and disposal of our products, materials used to develop and manufacture our product candidates, and resulting waste products. Although we believe that our safety procedures for handling and disposing of such materials, and for killing any unused microorganisms before disposing of them, comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources.

We replicate all yeast cells for our products internally and utilize a single manufacturing site to manufacture our clinical product candidates. Any disruption in the operations of our manufacturing facility would have a significant negative impact on our ability to manufacture products for clinical testing and would result in increased costs and losses.

We grow all yeast cells for our products internally using a complex process. Any disruption of our operations could result in manufacturing delays due to the inability to purchase the cell lines from outside sources. We have only one

 

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manufacturing facility in which we can manufacture clinical products. In the event of a physical catastrophe at our manufacturing or laboratory facilities, we could experience costly delays in reestablishing manufacturing capacity due to a lack of redundancy in manufacturing capability.

Consistent manufacture of our products relies on maintenance of a master yeast bank, or MYB, as an essential starting material for all production. We currently store our MYB in ultra-low temperature freezers at two geographically distinct locations. We may discover storage stability problems that prevent use of the MYB. We may also suffer catastrophic events at the two storage locations that would destroy all available stocks of the MYB. Should we lose the MYB of any of our products we would experience significant delays in producing and gaining regulatory approval to use a replacement MYB. We may not be able to replicate the original MYB with sufficient fidelity to convince regulatory authorities that we are able to produce a comparable product, which could require us to perform clinical trials to gain approval of product made with the replacement MYB. This could result in a lengthy period in which we are unable to manufacture product candidates for clinical trials or, if any of our product candidates are approved, for sale.

Our manufacturing facility contains highly specialized equipment and utilizes complicated production processes developed over a number of years, which would be difficult, time-consuming and costly to replace. Any prolonged disruption in the operations of our manufacturing facility would have a significant negative impact on our ability to manufacture products for clinical testing on our own and would cause us to seek additional third-party manufacturing contracts, thereby increasing our development costs. We may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or any losses may be excluded under our insurance policies. Certain events, such as natural disasters, fire, political disturbances, sabotage or business accidents, which could impact our current or future facilities, could have a significant negative impact on our operations by disrupting our product development efforts until such time as we are able to repair our facility or put in place third-party contract manufacturers to assume this manufacturing role.

During the course of the product life cycle we will make process changes to scale up manufacturing to commercial manufacture or transfer the production to alternate sites or contract manufacturers. Our ability to successfully implement these changes will depend on our ability to demonstrate, to the satisfaction of the FDA and other regulatory agencies, that the product made by the new process or at the new site is comparable to the original product.

In the event that manufacturing process changes are necessary for the further development of a product candidate, we may not be able to reach agreement with regulatory agencies on the criteria for demonstrating comparability to the original product, which would require us to repeat clinical studies performed with the original product. This could result in lengthy delays in implementing the new process or site and substantial lost sales as a result of our inability to meet commercial demand. If we reach agreement with regulatory agencies on the criteria for establishing comparability, we may not be able to meet these criteria or may suffer lengthy delays in meeting these criteria. This may result in significant lost sales due to inability to meet commercial demand with the original product. Furthermore, studies to demonstrate comparability, or any other studies on the new process or site such as validation studies, may uncover findings that result in regulatory agencies delaying or refusing to approve the new process or site.

Risks Relating to Regulation of Our Industry

The biopharmaceutical industry is subject to significant regulation and oversight in the United States, in addition to approval of products for sale and marketing.

In addition to FDA restrictions on marketing of biopharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the biopharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes.

The federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to

 

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arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Recently, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of marketing of the product for unapproved, and thus non-reimbursable, uses. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws, which could have a material adverse effect on our business, financial condition and results of operations.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal anti-kickback statute. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

   

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

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with

 

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manufacturing standards we have established, comply with federal and state health-care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. 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. We have adopted a Code of Business Conduct and Ethics, which will be effective as of the completion of this offering, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent misconduct 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 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.

Health care reform measures could adversely affect our business.

In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs. Most recently, in March 2010 the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the PPACA, was enacted, which includes measures to significantly change the way health care is financed by both governmental and private insurers. Among the provisions of the PPACA of greatest importance to the pharmaceutical and biotechnology industry are the following:

 

   

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, that began in 2011;

 

   

new requirements to report certain financial arrangements with physicians and others, including reporting any “transfer of value” made or distributed to prescribers and other healthcare providers and reporting any investment interests held by physicians and their immediate family members;

 

   

a licensure framework for follow-on biologic products;

 

   

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;

 

   

creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to the Medicare program that could result in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congress does not act on the recommendations; and

 

   

establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending that began on January 1, 2011.

Many of the details regarding the implementation of the PPACA are yet to be determined, and at this time, the full effect that the PPACA would have on our business remains unclear. The United States Supreme Court heard a constitutional challenge to the PPACA in 2012. If the Supreme Court rules that the PPACA is unconstitutional, we could require new expenditures to adjust to the new competitive environment, and new legislation could later become law that could adversely affect the pharmaceutical industry. In particular, there is uncertainty surrounding the applicability of the biosimilars provisions under the PPACA to our Tarmogen product candidates. The FDA is only now soliciting public comment and conducting hearings to assist them in drafting regulations under the

 

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PPACA. It is not certain that we will receive 12 years of biologics marketing exclusivity for any of our products. The regulations that are ultimately promulgated and their implementation are likely to have considerable impact on the way we conduct our business and may require us to change current strategies.

Individual states have become 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 designed to encourage importation from other countries and bulk purchasing. Legally-mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare 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 healthcare programs. This could reduce ultimate demand for our products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.

In addition, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and biologics and the reform of the Medicare and Medicaid programs. While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and biologics, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to generate revenues. In addition, legislation has been introduced in Congress that, if enacted, would permit more widespread importation or re-importation of pharmaceutical products from foreign countries into the United States, including from countries where the products are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could put competitive pressure on our ability to profitably price our products, which, in turn, could adversely affect our business, results of operations, financial condition and prospects. Alternatively, in response to legislation such as this, we might elect not to seek approval for or market our products in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we generate from our product sales. It is also possible that other legislative proposals having similar effects will be adopted.

Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing and leadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects. For example, average review times at the FDA for marketing approval applications have fluctuated over the last ten years, and we cannot predict the review time for any of our submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes.

Risks Relating to Competitive Factors

We compete in an industry characterized by extensive research and development efforts and rapid technological progress. New discoveries or commercial developments by our competitors could render our potential products obsolete or non-competitive.

New developments occur and are expected to continue to occur at a rapid pace in our industry, and there can be no assurance that discoveries or commercial developments by our competitors will not render some or all of our potential products obsolete or non-competitive, which could have a material adverse effect on our business, financial condition and results of operations. For example, the HCV market changed dramatically with the approval of two new small molecule agents in 2011 and the recent emergence of clinical data indicating the potential for a future interferon-free treatment regimen. These factors present challenges in the continued development of GI-5005 and could ultimately limit its sales potential.

We expect to compete with fully integrated and well-established pharmaceutical and biotechnology companies in the near- and long-term. Most of these companies have substantially greater financial, research and

 

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development, manufacturing and marketing experience and resources than we do and represent substantial long-term competition for us. Such companies may succeed in discovering and developing pharmaceutical products more rapidly than we do or pharmaceutical products that are safer, more effective or less costly than any that we may develop. Such companies also may be more successful than we are in manufacturing, sales and marketing. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and established biotechnology companies. Academic institutions, governmental agencies and other public and private research organizations also conduct clinical trials, seek patent protection and establish collaborative arrangements for the development of product candidates.

We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, reimbursement coverage, price and patent position. There can be no assurance that our competitors will not develop safer and more effective products, commercialize products earlier than we do, or obtain patent protection or intellectual property rights that limit our ability to commercialize our products.

There can be no assurance that our issued patents or pending patent applications, if issued, will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with proprietary protection or a competitive advantage.

Our competitors may develop and market products that are less expensive, more effective, safer or reach the market sooner than our product candidates, which may diminish or eliminate the commercial success of any products we may commercialize.

The biopharmaceutical industry is highly competitive. There are many public and private biopharmaceutical companies, public and private universities and research organizations actively engaged in the discovery and research and development of products for cancer and infectious disease. Given the significant unmet patient need for new therapies, oncology is an area of focus for large and small companies as well as research institutions. As a result, there are and will likely continue to be extensive research and substantial financial resources invested in the discovery and development of new oncology products. In addition, there are a number of multinational pharmaceutical companies and large biotechnology companies currently marketing or pursuing the development of products or product candidates targeting the same cancer indications as our product candidates, and several large public biopharmaceutical companies have approved or are developing cancer immunotherapy products, including Dendreon Corporation, Bristol-Myers Squibb Company, GlaxoSmithKline plc, Merck & Co. and Merck KGaA.

There are several marketed products indicated for pancreas cancer, including Astellas Pharma Inc.’s erlotinib, Teva Pharmaceutical Industries Limited’s streptozocin, and gemcitabine, fluorouracil, or 5-FU, and mitomycin that are marketed by several generic pharmaceutical firms. In addition, there are multiple companies or institutions conducting clinical trials of immunotherapy products in pancreas cancer including NCI, Bavarian Nordic, NewLink Genetics Corporation, Aduro BioTech Inc., Sidney Kimmel Comprehensive Cancer Center, Providence Health & Services, Duke University, Advantagene, Inc. and AlphaVax, Inc.

There are numerous marketed therapeutics indicated for NSCLC, including Roche Holding AG’s bevacizumab, Eli Lilly’s pemetrexed, Astellas Pharma’s erlotinib, AstraZeneca PLC’s gefitinib, as well as generically available gemcitabine, platinum-based chemotherapeutics (cisplatin, oxaliplatin and carboplatin) and mitotic inhibitors (paclitaxel and vinorelbine), which are marketed by several generic pharmaceutical firms. In addition, there are a multiple companies or institutions with clinical trials of immunotherapy products in lung cancer, including Merck KGaA, NCI, Duke University, Innogene Kalbiotech Pte. Ltd., H. Lee Moffitt Cancer Center, University of Miami Sylvester Comprehensive Cancer Center, Transgene S.A., Heat Biologics, AVAX Technologies, Antigenics, Laboratory Elea S.A.C.I.F., Roswell Park Cancer Institute, Baylor College of Medicine, Institut Gustave Roussy, Celldex Therapeutics and Immunovative Therapies, Ltd.

There are numerous marketed therapeutics indicated for colorectal cancer, including Roche Holding AG’s bevacizumab, Bristol Myers-Squibb’s cetuximab, Amgen’s panitumumab, as well as irinotecan, oxalipatin, leucovorin and 5-FU, which are marketed by several generic pharmaceutical firms. In addition, there are multiple companies or institutions with clinical trials of immunotherapy products in colorectal cancer including National

 

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Cancer Institute, Instituto Cientifico y Tecnological de Navara, Stanford University, Radboud University, University of Michigan Cancer Center, AlphaVax Inc., Duke University, Immunovative Therapies Ltd. and Ohio State University Comprehensive Cancer Center.

In April 2011, AstraZeneca’s vandetanib was the first FDA approved treatment of late-stage, or metastatic, medullary thyroid cancer, or MTC, in adult patients who are ineligible for resection. Additionally, there a several companies or institutions with clinical trials of immunotherapy products generally targeting carcinoembryonic antigen, or CEA, including Bavarian Nordic, NCI and Radboud University.

There are several marketed therapeutics indicated for the treatment of chronic HCV infection, including Roche Holding AG’s pegylated interferon 2a, Merck’s pegylated interferon 2b and boceprevir, Vertex’s telaprevir, and ribavirin, which is marketed by several generic pharmaceutical firms. In addition, there are many companies or institutions with clinical trials of immunotherapy or antiviral products for the treatment of chronic HCV infection including Intercell, Novartis, Tripep, Inovio, Dynavax Technologies Corporation, Okairos, Transgene, Gilead, Abbott, Bristol Myers-Squibb, Biolex and Achillion.

There are several marketed therapeutics indicated for the treatment of chronic HBV infection, including Roche Holding AG’s pegylated interferon 2a, Gilead Sciences’ tenofovir and adefovir, Bristol Myers-Squibb’s entecavir, Novartis’ telbivudine, and lamivudine, which is marketed by several generic pharmaceutical firms. In addition, there are several companies or institutions with clinical trials of immunotherapy products for the treatment of chronic HBV infection including Chongqing Jiachen Biotechnology, Emergent Biosolutions, Shanghai Medical University, Dynavax Technologies Corporation, Institut Pasteur, Pohang University of Science and Technology and Vaxine Pty. Ltd.

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

There are many different approaches to using immunotherapies to treat cancer, including anti-idiotype, whole cell, DNA, peptide/antigen, viral, tumor lysate, shed antigens, and dendritic cell. Cancer immunotherapies are also distinguished by whether or not they are derived from autologous or allogeneic sources. Each of the various approaches to cancer immunotherapy have potential advantages and disadvantages based on factors such as their immunostimulatory mechanisms, formulation characteristics and manufacturing requirements.

We also compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result in breakthroughs that render our product candidates obsolete even before they begin to generate any revenue.

In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of any of our product candidates that receive marketing approval. If the FDA approves the commercial sale of any of our product candidates, we will also be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience. We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, product price, reimbursement coverage by government and private third-party payors, and patent position. Our profitability and financial position will suffer if our products receive regulatory approval, but cannot compete effectively in the marketplace.

 

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If any of our product candidates are approved and commercialized, we may face competition from biosimilars. The route to market for biosimilars was established with the passage of the PPACA in March 2010, providing 12 years of marketing exclusivity for reference products and an additional six months of exclusivity if pediatric studies are conducted. In Europe, the European Medicines Agency has issued guidelines for approving products through an abbreviated pathway, and biosimilars have been approved in Europe. If a biosimilar version of one of our potential products were approved in the United States or Europe, it could have a negative effect on sales and gross profits of the potential product and our financial condition.

Even if we achieve market acceptance for our products, we may experience downward pricing pressure on the price of our drugs because of generic and biosimilar competition and social pressure to lower the cost of drugs.

Several of the FDA-approved products for HBV face patent expiration in the next several years. As a result, generic versions and biosimilars of these drugs and biologicals may become available. We expect to face competition from these products, including price-based competition. Pressure from patient awareness and other social activist groups to reduce drug prices may also put downward pressure on the prices of drugs, including our product candidates, if they are commercialized.

Our product candidates may not be accepted in the marketplace; therefore, we may not be able to generate significant revenue, if any.

Even if our Tarmogen product candidates are approved for sale, physicians and the medical community may not ultimately use them or may use them only in applications more restricted than we expect. Our product candidates, if successfully developed, will compete with a number of traditional products and immunotherapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Our product candidates will also compete with new products currently under development by such companies and others. Physicians will prescribe a product only if they determine, based on experience, clinical data, side effect profiles, reimbursement for their patients and other factors, that it is beneficial as compared to other products currently in use. Many other factors influence the adoption of new products, including marketing and distribution restrictions, course of treatment, adverse publicity, product pricing, the views of thought leaders in the medical community and reimbursement by government and private third-party payors.

For our products that are developed in combination with other therapies, changes in standard of care or use patterns could make those combinations obsolete. For example, we are developing GI-4000 for pancreas cancer in combination with gemcitabine. If GI-4000 is approved for marketing in combination with gemcitabine and use of another therapy becomes more prevalent than gemcitabine, sales of the combination of GI-4000 with gemcitabine could be negatively impacted and our financial results and stock price would be adversely affected.

Risks Relating to Our Arrangements with Third Parties

We rely on third parties to conduct our non-clinical studies and some of our clinical trials. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.

We sometimes rely on third parties, such as CROs, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our non-clinical studies and clinical trials. For example, the NCI is conducting clinical trials for GI-6207 and GI-6301 and we are supporting the investigator-initiated GI-4000-03 clinical trial in NSCLC at MSKCC, and the investigator-initiated GI-4000-05 clinical trial for Stage IV colorectal cancer with Ras mutations at the Lombardi Cancer Center at Georgetown University. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA requires us to comply with Good Laboratory Practice for conducting and recording the results of our preclinical studies and Good Clinical Practices, or GCP, for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third

 

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parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with GCP, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be more costly than expected or budgeted, extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

Further, if our contract manufacturers are not in compliance with regulatory requirements at any stage, including post-marketing approval, we may be fined, forced to remove a product from the market and/or experience other adverse consequences, including delays, which could materially harm our business.

We may explore strategic collaborations that may never materialize or may fail.

We may, in the future, periodically explore a variety of possible strategic collaborations in an effort to gain access to additional product candidates or resources. At the current time, we cannot predict what form such a strategic collaboration might take. We are likely to face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be complicated and time-consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with establishing strategic collaborations.

Risks Relating to Protecting Our Intellectual Property

If we are unable to protect our proprietary rights or to defend against infringement claims, we may not be able to compete effectively or operate profitably.

Our success will depend, in part, on our ability to obtain patents, operate without infringing the proprietary rights of others and maintain trade secrets, both in the United States and other countries. Patent matters in the biotechnology and pharmaceutical industries can be highly uncertain and involve complex legal and factual questions. Accordingly, the validity, breadth and enforceability of our patents and the existence of potentially blocking patent rights of others cannot be predicted, either in the United States or in other countries.

There can be no assurance that we will discover or develop patentable products or processes or that patents will issue from any of the currently pending patent applications or that claims granted on issued patents will be sufficient to protect our technology or adequately cover the actual products we may actually sell. Potential competitors or other researchers in the field may have filed patent applications, been issued patents, published articles or otherwise created prior art that could restrict or block our efforts to obtain additional patents. There also can be no assurance that our issued patents or pending patent applications, if issued, will not be challenged, invalidated, rendered unenforceable or circumvented or that the rights granted hereunder will provide us with proprietary protection or competitive advantages. Our patent rights also depend on our compliance with technology and patent licenses upon which our patent rights are based and upon the validity of assignments of patent rights from consultants and other inventors that were, or are, not employed by us.

In addition, competitors may manufacture and sell our potential products in those foreign countries where we have not filed for patent protection or where patent protection may be unavailable, not obtainable or ultimately not enforceable. In addition, even where patent protection is obtained, third-party competitors may challenge our patent claims in the various patent offices, for example via opposition in the European Patent Office or reexamination or interference proceedings in the United States Patent and Trademark Office, or USPTO. The ability of such competitors to sell such products in the United States or in foreign countries where we have obtained patents is usually governed by the patent laws of the countries in which the product is sold.

We will incur significant ongoing expenses in maintaining our patent portfolio. Should we lack the funds to maintain our patent portfolio or to enforce our rights against infringers, we could be adversely impacted. Even if claims of infringement are without merit, any such action could divert the time and attention of management and impair our ability to access additional capital and/or cost us significant funds to defend.

 

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

   

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

 

   

We may not develop additional proprietary technologies that are patentable.

 

   

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

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

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until one year or 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business, our current and pending patent portfolio and future intellectual property strategy. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

We may be subject to litigation with respect to the ownership and use of intellectual property that will be costly to defend or pursue and uncertain in its outcome.

Our success also will depend, in part, on our refraining from infringing patents or otherwise violating intellectual property owned or controlled by others. Pharmaceutical companies, biotechnology companies, universities, research institutions and others may have filed patent applications or have received, or may obtain, issued patents in the United States or elsewhere relating to aspects of our technology. It is uncertain whether the issuance of any third-party patents will require us to alter our products or processes, obtain licenses, or cease certain activities. Some third-party applications or patents may conflict with our issued patents or pending applications. Any such conflict could result in a significant reduction of the scope or value of our issued or licensed patents.

 

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In addition, if patents issued to other companies contain blocking, dominating or conflicting claims and such claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or to develop or obtain alternative non-infringing technology and cease practicing those activities, including potentially manufacturing or selling any products deemed to infringe those patents. If any licenses are required, there can be no assurance that we will be able to obtain any such licenses on commercially favorable terms, if at all, and if these licenses are not obtained, we might be prevented from pursuing the development and commercialization of certain of our potential products. Our failure to obtain a license to any technology that we may require to commercialize our products on favorable terms may have a material adverse impact on our business, financial condition and results of operations.

Litigation, which could result in substantial costs to us (even if determined in our favor), may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of the proprietary rights of others. The FDA has only recently published draft guidance documents for implementation of the Biologics Price Competition and Innovation Act (BPCIA) under the PPACA, related to the development of follow-on biologics (biosimilars), and detailed guidance for patent litigation procedures under this act has not yet been provided. If another company files for approval to market a competing follow-on biologic, and/or if such approval is given to such a company, we may be required to promptly initiate patent litigation to prevent the marketing of such biosimilar version of our product prior to the normal expiration of the patent. There can be no assurance that our issued or licensed patents would be held valid by a court of competent jurisdiction or that any follow-on biologic would be found to infringe our patents.

In addition, if our competitors file or have filed patent applications in the United States that claim technology also claimed by us, we may have to participate in interference proceedings to determine priority of invention. These proceedings, if initiated by the USPTO, could result in substantial costs to us, even if the eventual outcome is favorable to us. Such proceedings can be lengthy, are costly to defend and involve complex questions of law and fact the outcomes of which are difficult to predict. Moreover, we may have to participate in post-grant proceedings or third-party ex parte or inter partes reexamination proceedings under the USPTO. An adverse outcome with respect to a third-party claim or in an interference proceeding could subject us to significant liabilities, require us to license disputed rights from third parties, or require us to cease using such technology, any of which could have a material adverse effect on our business, financial condition and results of operations.

We also rely on trade secrets to protect technology, especially where patent protection is not believed to be appropriate or obtainable or where patents have not issued. We attempt to protect our proprietary technology and processes, in part, with confidentiality agreements and assignment of invention agreements with our employees and confidentiality agreements with our consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. We may fail in certain circumstances to obtain the necessary confidentiality agreements, or their scope or term may not be sufficiently broad to protect our interests.

If our trade secrets or other intellectual property become known to our competitors, it could result in a material adverse effect on our business, financial condition and results of operations. To the extent that we or our consultants or research collaborators use intellectual property owned by others in work for us, disputes may also arise as to the rights to related or resulting know-how and inventions.

The patent protection and patent prosecution for some of our product candidates is dependent or may be dependent in the future on third parties.

While we normally seek and gain the right to fully prosecute the patents relating to our product candidates, there may be times when platform technology patents or product-specific patents that relate to our product candidates are controlled by our licensors. This is the case with our license of patents related to CEA from the National Institutes of Health. In addition, our licensors and/or licensees may have back-up rights to prosecute patent applications in the event that we do not do so or choose not to do so, and our licensees may have the right to assume patent prosecution rights after certain milestones are reached. If any of our licensing partners fails to

 

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appropriately prosecute and maintain patent protection for patents covering any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.

Risks Relating to Our Exposure to Litigation

We are exposed to potential product liability or similar claims, and insurance against these claims may not be available to us at a reasonable rate in the future.

Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products. Clinical trials involve the testing of product candidates on human subjects or volunteers under a research plan, and carry a risk of liability for personal injury or death to patients due to unforeseen adverse side effects, improper administration of the product candidate, or other factors. Many of these patients are already seriously ill and are therefore particularly vulnerable to further illness or death.

We currently carry clinical trial liability insurance in the amount of $5 million in the aggregate, but there can be no assurance that we will be able to maintain such insurance or that the amount of such insurance will be adequate to cover claims. We could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim outside the scope of indemnity or insurance coverage, if the indemnity is not performed or enforced in accordance with its terms, or if our liability exceeds the amount of applicable insurance. In addition, there can be no assurance that insurance will continue to be available on terms acceptable to us, if at all, or that if obtained, the insurance coverage will be sufficient to cover any potential claims or liabilities. Similar risks would exist upon the commercialization or marketing of any products by us or our collaborators.

Regardless of their merit or eventual outcome, product liability claims may result in:

 

   

decreased demand for our product;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial volunteers;

 

   

costs of litigation;

 

   

distraction of management; and

 

   

substantial monetary awards to plaintiffs.

Should any of these events occur, it could have a material adverse effect on our business and financial condition.

We may become involved in securities class action litigation that could divert management’s attention and adversely affect our business and could subject us to significant liabilities.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of biopharmaceutical companies. These broad market fluctuations as well a broad range of other factors, including the realization of any of the risks described in this “Risk Factors” section of this prospectus, may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies generally experience significant stock price volatility. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business. Any adverse determination in any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.

 

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Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to the Company.

Our amended and restated certificate of incorporation to be effective upon completion of this offering provides that we will indemnify our directors to the fullest extent permitted by Delaware law.

In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws to be effective upon completion of this offering and our indemnification agreements that we will enter into with our directors and executive officers prior to the completion of this offering will provide that:

 

   

We will indemnify our directors and executive officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.

 

   

We may, in our discretion, indemnify other officers, employees and agents in those circumstances where indemnification is permitted by applicable law.

 

   

We are required to advance expenses, as incurred, to our directors and executive officers in connection with defending a proceeding, except that such directors or executive officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.

 

   

We will not be obligated pursuant to our amended and restated bylaws to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by our Board of Directors, (iii) such indemnification is provided by us, in our sole discretion, pursuant to the powers vested in the corporation under applicable law or (iv) such indemnification is required to be made pursuant to our amended and restated bylaws.

 

   

The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.

 

   

We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.

As a result, if we are required to indemnify one or more of our directors or executive officers, it may reduce our available funds to satisfy successful third-party claims against us, may reduce the amount of money available to us and may have a material adverse effect on our business and financial condition.

Offering Risks

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

Before this offering, there was no public trading market for our common stock and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock will not decline, perhaps substantially, below the initial public offering price. The initial public offering price has been determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. Among the factors considered in such negotiations were prevailing market conditions; our results of operations and financial condition; financial and operating information and market valuations with respect to other companies that we and the representatives of the underwriters believe to be comparable or similar to us; the present state of our development; and our future prospects. See the “Underwriting” section of this prospectus for additional information. If you purchase shares of our common stock, you may not be able to resell those shares at or above

 

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the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on The NASDAQ Global Market or otherwise or how liquid that market might become. If a market for our common stock does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic collaborations or acquire companies or products by using our shares of common stock as consideration. We cannot predict the prices at which our common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.

The market price of our common stock may be highly volatile.

The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including those described elsewhere in this “Risk Factors” section in this prospectus and the following:

 

   

new products, product candidates or new uses for existing products introduced or announced by our competitors or our collaborators, and the timing of these introductions or announcements;

 

   

actual or anticipated results from and any delays in our clinical trials as well as results of regulatory reviews relating to the approval of our product candidates;

 

   

variations in the level of expenses related to any of our product candidates or clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites;

 

   

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

 

   

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

 

   

additions or departures of key scientific or management personnel;

 

   

status of our relationships with Celgene, Gilead, NCI and other collaborators;

 

   

conditions or trends in the biotechnology and biopharmaceutical industries;

 

   

actual or anticipated changes in earnings estimates, development timelines or recommendations by securities analysts;

 

   

actual and anticipated fluctuations in our quarterly operating results;

 

   

financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

deviations from securities analysts’ estimates or the impact of other analyst ratings downgrades by any securities analysts who follow our common stock;

 

   

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

 

   

other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events;

 

   

changes in accounting principles or accounting judgments;

 

   

discussion of us or our stock price by the financial and scientific press and in online investor communities;

 

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general economic and market conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies; and

 

   

sales of common stock by us or our stockholders in the future, as well as the overall trading volume of our common stock.

In addition, the stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business and financial condition.

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

As of April 30, 2012, our executive officers, directors and principal stockholders, together with their respective affiliates, owned approximately 76% of our common stock, including shares issuable upon conversion of our preferred stock and shares subject to outstanding options and warrants that are exercisable within 60 days after April 30, 2012, and we expect that upon completion of this offering that same group will continue to hold at least            % of our outstanding common stock. Accordingly, even after this offering, these stockholders will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of our Board of Directors, future issuances of our common stock or other securities, declaration of dividends on our common stock and approval of other significant corporate transactions. This concentration of ownership could have the effect of delaying or preventing a change-of-control of the Company or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the fair market value of our common stock. In addition, sales of shares beneficially owned by executive officers, directors and their affiliates could be viewed negatively by third parties and have a negative impact on our stock price. Moreover, we cannot assure you as to how these shares may be distributed and subsequently voted.

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

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the “Underwriting” section of this prospectus. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Upon completion of this offering, we will have outstanding a total of             shares of common stock, assuming no exercise of the underwriters’ over-allotment option. Of these shares, approximately             shares of common stock, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable, without restriction, in the public market immediately following this offering. In addition, Wells Fargo Securities, LLC and Piper Jaffray & Co., may, in their sole discretion, permit our officers, directors and other stockholders who are subject to lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

As of April 30, 2012, there were 12,168,449 shares subject to outstanding options and an additional 1,584,965 shares reserved for future issuance under our employee benefit plans. All of the foregoing shares will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act. There were also 3,469,512 shares of common stock issuable upon the exercise of outstanding warrants to purchase preferred stock, which will be converted into warrants to purchase common stock upon completion of

 

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this offering, and 59,796 shares of common stock issuable upon exercise of an outstanding warrant to purchase common stock, which will be eligible for sale in the public market to the extent permitted by the same restrictions. Moreover, upon completion of this offering, holders of an aggregate of 86,538,194 shares of our common stock will have rights, subject to some conditions, to require us to file a registration statement covering their shares or to include their shares in a registration statement that we may file for ourselves or other stockholders. If such holders, by exercising their registration rights, cause a large number of securities to be registered and sold into the public market, these sales could have an adverse effect on the market price for our common stock. We also intend to register all shares of common stock that we may issue under our employee benefit plans. Shares so registered may be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144.

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

If you purchase common stock in this offering, you will pay more for your shares than our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $             per share, the midpoint of the range on the cover page of this prospectus, you will incur immediate and substantial dilution of $             per share, representing the difference between our assumed initial public offering price and our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $             per share, the midpoint of the range on the cover page of this prospectus, purchasers of common stock in this offering will have contributed approximately        % of the aggregate purchase price paid by all purchasers of our stock but will own only approximately        % of our common stock outstanding after this offering.

To the extent outstanding stock options or warrants are exercised, there will be further dilution to new investors and our stock price could decline.

We issued options and warrants in the past to acquire common stock at prices significantly below the initial offering price. As of April 30, 2012, there were 12,168,449 shares of common stock subject to outstanding options with a weighted average exercise price of $0.25 per share, 3,469,512 shares of preferred stock subject to outstanding warrants with a weighted average exercise price of $1.42 per share (such warrants will convert into warrants for 3,469,512 shares of common stock with a weighted average exercise price of $1.42 upon completion of this offering) and 59,796 shares of common stock subject to an outstanding warrant with an exercise price of $0.15 per share, which warrant expires upon completion of this offering. To the extent that these outstanding options and warrants are exercised, you will incur further dilution, and our stock price may decline.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act the listing requirements of The NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an emerging growth company. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire additional employees in the future or engage outside consultants to help us comply with these requirements, which will increase our costs and expenses.

 

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In addition, changing laws, regulations and standards relating to corporate governance and public disclosure create uncertainty for public companies, increase legal and financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from our business activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

For as long as we remain an emerging growth company as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our public filings, periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.

We will remain an emerging growth company for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31 or if our annual gross revenues equal or exceed $1 billion, we would cease to be an emerging growth company on the last day of the year in which that occurs. We cannot predict if investors will find our common stock less attractive because we may rely on the exemptions from certain reporting standards as an emerging growth company. If some investors find our common stock less attractive, there may be a less active trading market for our common stock, and our stock price may be more volatile or decline.

We also expect that being a public company and the associated public company rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation. If such claims are successful, our business and operating results would be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. We will also be required to disclose changes made in our internal control and procedures on a quarterly basis. Eventually, after we are no longer an emerging growth company, we may be required to obtain a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

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We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

If we are unable to assert that our internal control over financial reporting is effective, or, if when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the Securities and Exchange Commission, or SEC.

New accounting pronouncements may impact our reported results of operations and financial position.

The JOBS Act provides that an emerging growth company can take advantage of an extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to opt out of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. U.S. generally accepted accounting principles, or GAAP, and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new pronouncements or the application of existing pronouncements to changes in our business could significantly alter our reported financial statements and results of operations.

We do not expect to pay any cash dividends for the foreseeable future. Investors in this offering may never obtain a return on their investment.

You should not rely on an investment in our common stock to provide dividend income. We do not anticipate we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition, any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

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

We expect to use the net proceeds from this offering primarily to advance one or more of our pre-clinical infectious disease product candidates through a Phase 2 clinical trial, prepare our manufacturing facility and process for commercial-scale production of Tarmogens, and support manufacturing for our trials for GI-4000, GI-6207 and GI-6301, as well as to fund general and administrative activities. We also expect to use the balance of any proceeds for working capital and other general corporate purposes, and any of the purposes described in the “Use of Proceeds” section of this prospectus. However, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

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Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws or Delaware law might discourage, delay or prevent a change-of-control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Provisions of our amended and restated certificate of incorporation, our amended and restated bylaws or Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing a change-of-control of our company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. Our amended and restated certificate of incorporation and amended and restated bylaws will be effective upon completion of this offering. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest. These provisions include:

 

   

advance notice requirements for stockholder proposals and nominations of directors;

 

   

the inability of stockholders to act by written consent or to call special meetings;

 

   

limitations on the ability of stockholders to remove directors or amend our bylaws; and

 

   

the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could include the right to approve an acquisition or other change-of-control or could be used to institute a rights plan, also known as a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our Board of Directors.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person that together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of the Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Our stockholders may be diluted by future issuances of securities by us.

We may issue additional common stock, preferred stock, restricted stock units, or securities convertible into or exchangeable for our common stock. The issuance of additional common stock, preferred stock, restricted stock units, or securities convertible into or exchangeable for our common stock would dilute the ownership of us by existing investors and could adversely affect the price of our securities. In addition, such securities could be issued in the future with rights senior to the rights of the securities purchased in this offering.

Our ability to use our net operating loss carryforwards and certain other tax attributes is limited by Sections 382 and 383 of the Internal Revenue Code.

Sections 382 and 383 of the Internal Revenue Code of 1986 limit a corporation’s ability to utilize its net operating loss carryforwards and certain other tax attributes (including research credits) to offset any future taxable income or tax if the corporation experiences a cumulative ownership change of more than 50% over any rolling three year period. State net operating loss carryforwards (and certain other tax attributes) may be similarly limited. An ownership change can therefore result in significantly greater tax liabilities than a corporation would incur in the absence of such a change and any increased liabilities could adversely affect the corporation’s business, results of operations, financial condition and cash flow.

Based on an analysis from our inception through December 31, 2011, we have experienced Section 382 ownership changes in June 2003 and August 2007. These two ownership changes limit our ability to utilize our

 

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federal net operating loss carryforwards (and certain other tax attributes) that accrued prior to the 2003 and 2007 ownership changes.

Additional analysis will be required to determine whether changes in our ownership that will result from this offering have caused or will cause another ownership change to occur, and the conclusions will depend on the terms of this offering and other information that may not be available to us until after this offering has occurred. Any such change could result in significant limitations on all of our net operating loss carryforwards and other tax attributes.

Even if another ownership change has not occurred and does not occur as a result of this offering, additional ownership changes may occur in the future as a result of additional equity offerings or events over which we will have little or no control, including purchases and sales of our equity by our five percent stockholders, the emergence of new five percent stockholders, redemptions of our stock or certain changes in the ownership of any of our five percent stockholders.

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

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

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

The forward-looking statements in this prospectus include, among other things, statements about our intentions, beliefs, projections, outlook, analyses or expectations concerning, among other things, our plans to develop and commercialize our product candidates, our ongoing and planned preclinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, our relationships with our collaborators and the potential for additional future collaborations, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, the applicability of our Tarmogen platform to address new indications, our results of operations, financial condition, liquidity, need for financing, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that 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 prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions we use are appropriate, neither such research nor these definitions have been verified by any independent source.

 

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USE OF PROCEEDS

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

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

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We currently expect to use the net proceeds of this offering as follows:

 

   

approximately $             million to advance one or more of our preclinical infectious disease product candidates through a Phase 2 clinical trial;

 

   

approximately $             million to prepare our manufacturing facility and process for commercial-scale production of Tarmogens;

 

   

approximately $             million to support manufacturing for our trials for GI-4000, GI-6207 and GI-6301; and

 

   

the remainder for working capital and other general corporate purposes, including hiring of additional personnel and expenses associated with being a public company.

Although it is difficult to predict future liquidity requirements, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents and contingent, future milestone payments under our collaboration agreements, will allow us to fund our operations through at least the end of                     . This expected use of net proceeds from this offering represents our intention based upon our current plans and business conditions. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of, and results from, clinical trials and other studies, achievement of milestones under our existing collaborations, any additional collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, interest-bearing investment grade securities, certificates of deposit or government securities.

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying cash dividends in the foreseeable future.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2012 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to the conversion of all of our outstanding preferred stock into 86,538,194 shares of common stock, which will take place automatically upon completion of this offering in accordance with the terms of our preferred stock and the reclassification of our preferred stock warrant liability of $5,922,163 to additional paid-in capital upon the completion of the offering; and

 

   

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

You should read this information together with our financial statements and the related notes appearing elsewhere in this prospectus, and the information set forth under the headings “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information contained in this prospectus.

 

     As of March 31, 2012 (unaudited)
     Actual     Pro Forma(1)     Pro Forma
As Adjusted(2)
     (in thousands, except share data)

Cash and cash equivalents

   $ 10,703        10,703     
  

 

 

   

 

 

   

 

Convertible preferred stock, $0.001 par value: authorized 93,980,000 shares, issued and outstanding 86,538,194 shares, actual; authorized, issued and outstanding no shares, pro forma and pro forma as adjusted

     165,663            

Stockholders’ equity (deficit)

      

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

                

Common stock, $0.001 par value: authorized 112,500,000 shares, issued and outstanding 2,758,685 shares, actual; 89,296,879 shares issued and outstanding pro forma and          shares issued and outstanding pro forma as adjusted

     3        90     

Additional paid-in capital

            171,499     

Accumulated deficit

     (187,612     (187,612  
  

 

 

   

 

 

   

Total stockholders’ equity (deficit)

     (187,609     (16,023  
  

 

 

   

 

 

   

Total capitalization

   $ (21,946     (16,023  
  

 

 

   

 

 

   

 

 

(1) The unaudited pro forma balance sheet as of March 31, 2012 reflects the automatic conversion of all outstanding shares of redeemable, convertible preferred stock as of that date into 86,538,194 shares of common stock and the reclassification of the preferred stock warrant liability of $5,922,163 to additional paid-in capital, each of which will occur upon completion of this offering. The preferred stock converts to common stock on an assumed one-for-one basis for all series of preferred stock.
(2) The pro forma as adjusted balance sheet data as of March 31, 2012 gives further effect to our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The number of shares of our common stock that will be outstanding upon completion of this offering is based on 89,296,879 shares of common stock outstanding as of March 31, 2012 after giving effect to the conversion of our outstanding preferred stock into common stock upon completion of this offering, and excludes:

 

   

12,168,449 shares of common stock issuable upon the exercise of outstanding options under our 2002 stock incentive plan, at a weighted average exercise price of $0.25 per share;

 

   

3,469,512 shares of common stock issuable upon the exercise of outstanding warrants to purchase preferred stock, which will convert into warrants to purchase common stock upon completion of this offering, at a weighted average exercise price of $1.42 per share;

 

   

59,796 shares of common stock issuable upon the exercise of an outstanding warrant to purchase common stock at an exercise price of $0.15 per share, which warrant expires upon completion of this offering;

 

   

            shares of common stock reserved for future issuance under our 2012 equity incentive plan, plus annual increases in the number of shares of common stock reserved for future issuance pursuant to the “evergreen provision” of such plan, as more fully described in “Executive and Director Compensation—Employee Benefit Plans—2012 Equity Incentive Plan”; and

 

   

            shares of common stock reserved for future issuance under our 2012 employee stock purchase plan, plus annual increases in the number of shares of common stock reserved for future issuance pursuant to the “evergreen provision” of such plan, as more fully described in “Executive and Director Compensation—Employee Benefit Plans—2012 Employee Stock Purchase Plan”.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value (deficit) per share of our common stock is determined at any date by subtracting our total liabilities and preferred stock from the amount of our total tangible assets (total assets less intangible assets) and dividing the difference by the number of shares of our common stock deemed to be outstanding at that date.

Our historical net tangible book value (deficit) as of March 31, 2012 was $(187.6) million or $(68.01) per share of our common stock. On a pro forma basis, after giving effect to the conversion of all of our outstanding preferred stock into an aggregate of 86,538,194 shares of common stock as well as the reclassification of our preferred stock warrant liability to additional paid-in capital upon completion of this offering, our pro forma net tangible book value (deficit) as of March 31, 2012 would have been $(16.0) million or $(0.18) per share of our pro forma outstanding common stock.

Investors participating in this offering will incur substantial dilution. After giving effect to the issuance and sale by us of                 shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range listed on the cover page of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2012 would have been $             million, or $             per share. This represents an immediate increase in pro forma net tangible book value per share of $             to existing stockholders and immediate dilution of $             in pro forma net tangible book value per share to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors.

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

 

Assumed initial public offering price per share

     $                

Historical net tangible book value per share as of March 31, 2012 (unaudited)

   $ (68.01  
  

 

 

   

Pro forma increase in net tangible book value per share attributable to pro forma transactions described in preceding paragraphs

     67.83     
  

 

 

   

Pro forma net tangible book value per share as of March 31, 2012 (unaudited)

     (0.18  
  

 

 

   

Pro forma increase in net tangible book value per share attributable to investors participating in this offering

    
  

 

 

   

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

    
    

 

 

 

Dilution of pro forma as adjusted net tangible book value per share to new investors

     $     
    

 

 

 

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

If the underwriters’ over-allotment option is exercised in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $             per share, which amount represents an immediate increase in net tangible book value of $             per share of our common stock to existing stockholders and an immediate dilution in net tangible book value of $             per share of our common stock to new investors purchasing shares of common stock in this offering.

 

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The following table summarizes, on the pro forma as adjusted basis described above as of March 31, 2012, the difference between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by our existing stockholders and by investors purchasing shares in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us. Investors purchasing shares of our common stock in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

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

Existing Stockholders before this offering

     89,296,879         $ 119,076,728         $ 1.33   

New Investors participating in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0        100.0  

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

The foregoing calculations exclude the following shares as of March 31, 2012:

 

   

12,168,449 shares of common stock issuable upon the exercise of outstanding options under our 2002 stock incentive plan, at a weighted average exercise price of $0.25 per share;

 

   

3,469,512 shares of common stock issuable upon the exercise of warrants to purchase preferred stock, which will convert into warrants to purchase common stock upon completion of this offering, at a weighted average exercise price of $1.42 per share;

 

   

59,796 shares of common stock issuable upon the exercise of an outstanding warrant to purchase common stock at an exercise price of $0.15 per share, which warrant expires upon completion of this offering;

 

   

            shares of common stock reserved for future issuance under our 2012 equity incentive plan, plus annual increases in the number of shares of common stock reserved for future issuance pursuant to the “evergreen provision” of such plan, as more fully described in “Executive and Director Compensation—Employee Benefit Plans—2012 Equity Incentive Plan”; and

 

   

            shares of common stock reserved for future issuance under our 2012 employee stock purchase plan, plus annual increases in the number of shares of common stock reserved for future issuance pursuant to the “evergreen provision” of such plan, as more fully described in “Executive and Director Compensation—Employee Benefit Plans—2012 Employee Stock Purchase Plan”.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be further diluted.

 

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SELECTED FINANCIAL DATA

The following selected financial data should be read together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

We derived the statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 from our audited financial statements included elsewhere in this prospectus. We derived the summary statement of operations data for the years ended December 31, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008 and 2009 from our audited financial statements not included in this prospectus. The selected statement of operations data for the three months ended March 31, 2011 and 2012 and the selected balance sheet data as of March 31, 2012 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited interim financial information has been prepared on a basis consistent with our audited financial statements included in this prospectus and includes all adjustments, consisting only of normal recurring adjustments, that, in the opinion of management, are necessary for a fair presentation of such financial information. Our historical results are not necessarily indicative of our future results and our interim results are not necessarily indicative of results to be expected for the full year.

 

                                   Three Months Ended
March 31,
 
     Year Ended December 31,    
     2007     2008     2009     2010     2011     2011     2012  
                                  (unaudited)  
    (in thousands, except share and per share amounts)  

Statement of Operations Data:

             

Revenue

  $               2,542       4,068       5,108       1,017       2,647  

Operating expenses:

             

Research and development

    14,219       23,313       16,016       14,130       12,063       3,277       3,131  

General and administrative

    3,656       3,851       5,048       4,362       4,686       992       919  

Depreciation and amortization

    1,925       1,948       1,853       1,331       952       253       230  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,800       29,112       22,917       19,823       17,701       4,522       4,280  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (19,800     (29,112     (20,375     (15,755     (12,593     (3,505     (1,633

Other income (expense)

             (1,453     959       (1,132     321       (618

Interest expense

    (734     (426     (312                            

Interest income

    1,002       403       3       4                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (19,532     (29,135     (22,137     (14,792     (13,725     (3,184     (2,251

Preferred stock dividends and accretion of offering costs to redemption value

    (5,128     (7,187     (8,405     (10,564     (11,316     (2,829     (3,026
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

  $ (24,660     (36,322     (30,542     (25,356     (25,041     (6,013     (5,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share(1)

  $ (9.75     (14.24     (11.60     (9.43     (9.08     (2.22     (1.91
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common shares used in the computation of basic and diluted net loss per common share(1)

    2,528,549       2,551,076       2,632,265       2,690,025       2,758,332       2,713,669       2,758,685  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net loss per common share (unaudited)(2)

          $ (0.14       (0.02
         

 

 

     

 

 

 

Pro forma basic and diluted weighted average common shares outstanding (unaudited)(2)

            89,296,526         89,296,879  
         

 

 

     

 

 

 

 

(1) See Note 3 to our financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the historical net loss attributable to common stockholders per share and the number of common shares used in the computation of historical per share amounts.

 

(2) See Note 3 to our financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the pro forma net loss per common share and pro forma weighted average common shares outstanding. The pro forma net loss per common share and pro forma weighted average common shares outstanding assume the conversion of our outstanding preferred stock into an aggregate of 86,538,194 shares of common stock as of December 31, 2011 and March 31, 2012.

 

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     As of December 31,     As of
March 31,
2012
 
                                  
     2007     2008     2009     2010     2011    
                                   (Unaudited)  
     (in thousands)  

Balance Sheet Data:

            

Cash and cash equivalents

   $ 31,507        3,789        22,524        20,291        15,155       10,703   

Working capital

     27,800        (1,481     16,020        14,281        2,134       (839

Total assets

     37,912        8,037        24,911        23,672        17,745       13,140   

Total liabilities

     7,951        6,964        34,784        30,067        37,504       35,086   

Redeemable convertible preferred stock

     96,436        103,623        122,886        151,321        162,638       165,663   

Accumulated deficit

     (66,477     (102,552     (132,761     (157,719     (182,399     (187,612

Total stockholders’ deficit

     (66,475     (102,550     (132,759     (157,716     (182,397     (187,609

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors”.

Overview

We are a biopharmaceutical company focused on developing therapeutic products for cancer and infectious diseases based on our proprietary Tarmogen platform. We have four Tarmogen product candidates in five ongoing clinical trials. Our lead cancer product candidate, GI-4000, is being evaluated in combination with gemcitabine in a fully enrolled, placebo-controlled Phase 2b trial in resected pancreas cancer. Our lead infectious disease product candidate, GI-5005, has completed a Phase 2b trial in chronic HCV infection. Collaborations with biopharmaceutical companies and research institutions have allowed us to advance the development of our Tarmogen product candidates while managing our own investment in these product candidates. We have two strategic collaborations, one with Celgene for all oncology product candidates and one with Gilead for chronic HBV infection product candidates.

We are not profitable and have incurred significant net losses in each year since our inception, including net losses of $2.3 million, $13.7 million, $14.8 million and $22.1 million for the three months ended March 31, 2012, and the years ended December 31, 2011, 2010 and 2009, respectively. As of March 31, 2012, we had an accumulated deficit of $187.6 million. Our losses have resulted principally from costs incurred in our discovery and development activities. We anticipate that our operating losses will substantially increase over the next several years as we expand our discovery, research and development activities, including the clinical development of our Tarmogen product candidates.

Because of the numerous risks and uncertainties associated with biopharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of future expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity securities, upfront payments pursuant to our collaboration agreements, government grants and capital lease and equipment financing. The size of our future net losses will depend, in part, on the magnitude and timing of changes in our expenses, as well as the level and rate of growth, if any, of our revenues. Our ability to achieve profitability is dependent on our ability, alone or with others, to complete the development of our product candidates successfully, obtain required regulatory approvals, manufacture and market our potential products successfully or have such products manufactured and marketed by others, and gain market acceptance for such products. There can be no assurance as to whether or when we will achieve profitability.

We were incorporated as Ceres Pharmaceuticals, Ltd. in Colorado on February 10, 1995. We changed our name to GlobeImmune, Inc. on May 26, 2001, and reincorporated in Delaware on June 5, 2002.

Financial Operations Overview

Revenue

We currently derive our revenue from the amortization of the upfront payments received in 2009 and 2011 for research funding via our collaboration agreements with Celgene and Gilead, respectively. Our collaboration agreements also provide opportunities to derive revenue from milestone payments, license fees, reimbursement of costs, and fees paid for the manufacturing of drug candidates.

In May 2009, in connection with our collaboration with Celgene, we received a non-refundable, upfront payment of $30.0 million. We were initially recognizing the upfront payment over 7.3 years, the estimated term

 

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of performance under the collaboration, commencing at the time of execution of the agreement in May 2009. We subsequently adjusted the estimated term to 8.1 years in June 2011 due to our revised estimate of the time of completion of performance. In October 2011, we signed an amendment to our collaboration with Celgene pursuant to which we received an additional non-refundable payment of $1.0 million at the time of execution of the amendment and an additional $0.3 million in April 2012. The additional payments are being recognized over the same estimated remaining term as the upfront payment.

In November 2011, we received a non-refundable, upfront payment of $10.0 million in connection with our collaboration with Gilead, $8.1 million of which we are recognizing over 1.2 years, the estimated term of performance for the preclinical and IND filing obligations, commencing at the time of execution of the collaboration agreement in October 2011, and the remainder of which we intend to recognize over 0.8 years commencing in January 2013 over the estimated term of a Phase 1a clinical trial.

In the future, additional contract revenues under our collaboration agreements may include payments for achieving research milestones, license payments for product candidates, as well as payments for such licensed product candidates achieving development, regulatory and commercial milestones, and royalties on net product sales.

Revenue recognition related to upfront payments and milestone payments could be accelerated in the event of early termination of drug programs or, alternatively, decelerated if programs are extended. As such, while changes to such estimates have no impact on our reported cash flows, our reported revenue is significantly influenced by our estimates of the period over which our obligations are expected to be performed.

We have no products approved for sale, have not generated any revenues from product sales and do not expect to generate any revenue from the sale of products in the near future. If our discovery or development efforts result in clinical success and regulatory approval or additional collaboration agreements with third parties for any of our product candidates, we may generate revenues.

Research and Development Expense

Research and development expense consists of:

 

   

personnel related expenses, including salaries, benefits, stock-based compensation, travel, and related costs for the personnel involved in drug discovery and development;

 

   

payments we make to third-party contract research organizations, contract manufacturers, investigative sites, consultants and other clinical trial costs;

 

   

technology and intellectual property license costs;

 

   

manufacturing costs;

 

   

activities relating to regulatory filings and the advancement of our product candidates through preclinical studies and clinical trials; and

 

   

facilities and other allocated expenses, which include direct and allocated expenses for rent and facility maintenance, as well as laboratory and other supplies.

We have multiple research and development projects ongoing at any one time. We utilize our internal resources, employees and infrastructure across multiple projects. We do not believe that allocating internal costs on the basis of estimates of time spent by our employees would accurately reflect the actual costs of a project. We do, however, record and maintain information regarding external, out-of-pocket research and development expenses on a project-specific basis.

We expense research and development costs as incurred, including payments made to date under our in-licensing agreements. We believe that significant investment in product development is a competitive necessity and plan to continue these investments in order to realize the potential of our product candidates; therefore, we expect our research and development expense to increase as we continue to develop our product candidates.

 

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The following table summarizes our principal product development programs and the expenses incurred with respect to each product candidate.

 

Research and Development Expense   
     Year Ended December 31,      Three Months Ended March 31,  
         2009              2010              2011              2011              2012      
                          (unaudited)  
     (in thousands)  

GI-4000

   $ 5,419         5,093         3,614         1,029         1,305   

GI-5005

     4,033         3,404         1,846         970         188   

GI-6207

     504         477         482         75         115   

GI-6301

             29         701         36         147   

GI-13000

             29         682         25         230   

Other research and development

     110         32         565         122         122   

Compensation and benefits

     5,950         5,066         4,173         1,020         1,024   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,016         14,130         12,063         3,277         3,131   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The successful development of our product candidates is uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from any of our clinical or preclinical product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

 

   

the number of clinical sites included in the trials;

 

   

the length of time required to enroll suitable patients;

 

   

the number of patients that ultimately participate in the trials; and

 

   

the results of our clinical trials.

Our expenditures are subject to additional uncertainties, including the terms and timing of collaboration agreements, clinical trial expenses, regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those which we anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expense

General and administrative expense primarily consists of salaries and other related costs, including stock-based compensation expense, for employees and consultants in our executive, finance, accounting, legal, information technology and human resource departments. Other general and administrative expenses include facility-related costs not otherwise included in research and development expense, promotional expenses, costs associated with industry and trade shows, and professional fees for legal services, including patent-related expense, insurance and accounting services.

 

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We anticipate that our general and administrative expense will continue to increase over the next several years for the following reasons, among others:

 

   

increased payroll, expanded infrastructure and higher consulting, legal, auditing and tax services and investor relations costs, and director and officer insurance premiums associated with being a public company;

 

   

increased expenses to support our research and development activities, which we expect to expand as we continue to advance the clinical development of our product candidates; and

 

   

we may also begin to incur expenses related to the planned sales and marketing of our product candidates in anticipation of commercial launch before we receive regulatory approval, if any, of a product candidate.

Depreciation and Amortization Expense

Depreciation and amortization primarily consists of the depreciation of property and equipment using the straight-line method over the respective estimated useful lives of such property and equipment, or in the case of leasehold improvements, the shorter of the related lease term or the estimated useful life.

Other Income (Expense)

Other income (expense) primarily consists of the gain or loss due to the change in the fair value of preferred stock warrants and also includes one-time federal government funds received in 2010. The future gains or losses, prior to the completion of this offering, on the change in the fair value of preferred stock warrants will fluctuate based on the future fair market value of our preferred stock, the prevailing interest rates at the date of valuation, the remaining term of the warrants and the volatility of the future fair market value of our preferred stock. Subsequent to the completion of this offering, the change in fair value of the preferred stock warrants will no longer be applicable, and as such the requirements for liability classification and mark-to-market adjustments will cease.

Preferred Stock Accretion

Preferred stock accretion consists of the accretion of the preferred stock issuance price to its redemption price and accretion of issuance costs on preferred stock. The issuance costs on the shares of our preferred stock were recorded as a reduction to the carrying amount of the stock when issued, and are accreted to preferred stock ratably through January 8, 2015, the date the preferred stock may first be redeemed in part, by a charge to additional paid-in capital and loss attributable to common stockholders. All of our preferred stock will convert into common stock upon completion of this offering and, as a result, we will no longer record accretion on the preferred stock.

Tax Loss Carryforwards

As of December 31, 2011, we had net operating loss carryforwards of $105.0 million and federal research credit carryforwards of $5.8 million that expire at various dates from 2018 through 2031. Sections 382 and 383 of the Internal Revenue Code of 1986 limit a corporation’s ability to utilize its net operating loss carryforwards and certain other tax attributes (including research credits) to offset any future taxable income or tax if the corporation experiences a cumulative ownership change of more than 50% over any rolling three year period. An ownership change can therefore result in significantly greater tax liabilities than a corporation would incur in the absence of such a change and any increased liabilities could adversely affect the corporation’s business, results of operations, financial condition and cash flow.

Based on an analysis, as defined by Section 382, from our inception in February 1995 through December 31, 2011, we have experienced Section 382 ownership changes in June 2003 and August 2007. These two ownership changes limit our ability to utilize our federal net operating loss carryforwards (and certain other tax attributes) that accrued prior to the 2003 and 2007 ownership changes.

 

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Additional analysis will be required to determine whether changes in our ownership that will result from this offering have caused or will cause another ownership change to occur, and the conclusions will depend on the terms of this offering and other information that may not be available to us until after this offering has occurred. Any such change could result in significant limitations on all of our net operating loss carryforwards and other tax attributes.

Even if another ownership change has not occurred and does not occur as a result of this offering, additional ownership changes may occur in the future as a result of additional equity offerings or events over which we will have little or no control, including purchases and sales of our equity by our five percent stockholders, the emergence of new five percent stockholders, redemptions of our stock or certain changes in the ownership of any of our five percent stockholders.

Results of Operations

Comparison of the Three Months Ended March 31, 2011 and 2012

The following table sets forth our results for the periods shown.

 

     Three Months Ended March 31,      Increase
(Decrease)
     %
Increase
(Decrease)
 
         2011              2012            
     (in thousands, except percentages)  
     (unaudited)  

Revenue

   $ 1,017         2,647         1,630         160%    

Operating expenses:

           

Research and development

     3,277         3,131         (146)         (4)     

General and administrative

     992         919         (73)         (7)     

Depreciation and amortization

     253         230         (23)         (9)     
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     4,522         4,280         (242)         (5)     
  

 

 

    

 

 

    

 

 

    

Loss from operations

     (3,505)         (1,633)         1,872         (53)     

Other income (expense)

     321         (618)         (939)         (293)     
  

 

 

    

 

 

    

 

 

    

Net loss

   $ (3,184)         (2,251)         933         (29%)   
  

 

 

    

 

 

    

 

 

    

Revenues.    Revenues for the three months ended March 31, 2012 were $2.6 million compared to $1.0 million for the three months ended March 31, 2011, an increase of $1.6 million. The increase was due to revenues recognized under the October 2011 collaboration agreement with Gilead.

Research and Development Expense.    Research and development expense for the three months ended March 31, 2012 was $3.1 million compared to $3.3 million for the three months ended March 31, 2011, a decrease of $0.2 million. The decrease was due to a $0.8 million decrease in expenses attributable to the GI-5005 program due to the completion of the GI-5005 Phase 2b clinical trial, a $0.3 million increase in the GI-4000 program costs related to the Phase 2b clinical trial, a $0.2 million increase in the GI-13000 program and an increase of $0.1 million in other preclinical programs.

General and Administrative Expense.    General and administrative expense for the three months ended March 31, 2012 was $0.9 million compared to $1.0 million for the three months ended March 31, 2011, a decrease of $0.1 million. The decrease was due to a reduction in legal costs from those incurred for the Gilead collaboration agreement in 2011.

Depreciation and Amortization Expense.    Depreciation and amortization expense for the three months ended March 31, 2012 was $0.2 million compared to $0.3 million for the three months ended March 31, 2011, a decrease of $0.1 million. The decrease in depreciation expense was due to assets reaching the end of their estimated useful life for depreciation purposes.

 

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Other Income (Expense).    Other expense for the three months ended March 31, 2012 was $0.6 million compared to other income of $0.3 million for the three months ended March 31, 2011, a decrease of $0.9 million. The increase in other expense was due to a $0.6 million increase in the preferred stock warrant values during the three months ended March 31, 2012 compared to a $0.3 million decrease in the preferred stock warrant values during the three months ended March 31, 2011.

Comparison of the Years Ended December 31, 2010 and 2011

The following table sets forth our results for the periods shown.

 

     Year Ended December 31,     Increase
(Decrease)
    %
Increase
(Decrease)
 
         2010             2011          
     (in thousands, except percentages)  

Revenue

   $ 4,068       5,108       1,040       26%    

Operating expenses:

        

Research and development

     14,130       12,063       (2,067     (15)     

General and administrative

     4,362       4,686       324       7      

Depreciation and amortization

     1,331       952       (379     (28)     
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     19,823       17,701       (2,122     (11)     
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (15,755     (12,593     3,162       (20)     

Other income (expense)

     959       (1,132     (2,091     (218)     

Interest income

     4              (4     (100)     
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (14,792     (13,725     1,067       (7%)   
  

 

 

   

 

 

   

 

 

   

Revenues.    Revenues for the year ended December 31, 2011 were $5.1 million compared to $4.1 million for the year ended December 31, 2010, an increase of $1.0 million. The increase was due to revenues recognized under the October 2011 collaboration agreement with Gilead.

Research and Development Expense.    Research and development expense for the year ended December 31, 2011 was $12.1 million compared to $14.1 million for the year ended December 31, 2010, a decrease of $2.0 million. The decrease was primarily due to the following:

 

   

a $1.6 million decrease in expenses related to the completion of the GI-5005 Phase 2b clinical trial in 2010;

 

   

a $1.5 million decrease in the GI-4000 program Phase 2b clinical trial as the number of patients being followed in the trial decreased; and

 

   

a $0.9 million decrease in compensation and benefits due to a layoff of 14 employees in July 2010 that was intended to conserve cash resources.

These decreases were offset during the year ended December 31, 2011 by a $2.0 million increase in expenses related to GI-13000, GI-6301 and other preclinical programs.

General and Administrative Expense.    General and administrative expense for the year ended December 31, 2011 was $4.7 million compared to $4.4 million for the year ended December 31, 2010, an increase of $0.3 million. The increase was due a $0.3 million increase in personnel costs for severance costs and a $0.4 million net increase in legal costs incurred for our collaboration agreement with Gilead and patent prosecution costs related to our intellectual property. These increases were offset by lower business development and investor relation costs of $0.2 million and a $0.2 million decrease in travel and other costs.

Depreciation and Amortization Expense.    Depreciation and amortization expense for the year ended December 31, 2011 was $1.0 million compared to $1.3 million for the year ended December 31, 2010, a decrease of $0.3 million. In June 2010, the initial term of our lease for our principal executive offices was extended an additional three years from five years to eight years and the remaining life of the leasehold improvements were extended accordingly over the new lease term, lowering our monthly depreciation expense.

 

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Other Income (Expense).    Other expense for the year ended December 31, 2011 was $1.1 million compared to other income of $1.0 million for the year ended December 31, 2010, a decrease in other income of $2.1 million. In the year ended December 31, 2011, we recorded $1.1 million of expense due to the increase in the estimated fair value of the outstanding preferred stock warrants. In the year ended December 31, 2010, we received $0.7 million of one-time federal government funds and recorded $0.2 million of income from the decrease in the fair value of our outstanding preferred stock warrants and $0.1 million of other income.

Comparison of the Years Ended December 31, 2009 and 2010

The following table sets forth our results for the periods shown.

 

     Year Ended December 31,     Increase
(Decrease)
    %
Increase
(Decrease)
 
         2009             2010          
     (in thousands, except percentages)  

Revenue

   $ 2,542       4,068       1,526       60

Operating expenses:

        

Research and development

     16,016       14,130       (1,886     (12

General and administrative

     5,048       4,362       (686     (14

Depreciation and amortization

     1,853       1,331       (522     (28
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     22,917       19,823       (3,094     (14
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (20,375     (15,755     4,620       (23

Other income (expense)

     (1,453     959       2,412       (166

Interest expense

     (312            312       100   

Interest income

     3       4       1               33   
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (22,137     (14,792     7,345       (33%
  

 

 

   

 

 

   

 

 

   

Revenues.    Revenues for the year ended December 31, 2010 were $4.1 million compared to $2.5 million for the year ended December 31, 2009, an increase of $1.6 million. The increase was due to recognizing a full year of revenue in 2010 under our May 2009 collaboration agreement with Celgene.

Research and Development Expense.    Research and development expense for the year ended December 31, 2010 was $14.1 million compared to $16.0 million for the year ended December 31, 2009, a decrease of $1.9 million. The decrease was primarily due to a $0.6 million decrease in expenses related to the GI-5005 program, a decrease in personnel costs of $0.9 million due to a layoff of 14 employees in July 2010 that was intended to conserve cash resources, and other decreases of $0.4 million.

General and Administrative Expense.    General and administrative expense for the year ended December 31, 2010 was $4.4 million compared to $5.0 million for the year ended December 31, 2009, a decrease of $0.6 million. The decrease was due to a $0.3 million decrease in personnel costs due to lower bonus costs and a $0.3 million net decrease in legal fees incurred due to legal fees incurred in 2009 related to the Celgene collaboration with no corresponding legal fees in 2010.

Depreciation and Amortization Expense.    Depreciation and amortization expense for the year ended December 31, 2010 was $1.3 million compared to $1.9 million for the year ended December 31, 2009, a decrease of $0.6 million. In June 2010, the term of our lease for our principal executive offices was extended an additional three years from five years to eight years and the remaining life of the leasehold improvements were extended accordingly over the new lease term, lowering our monthly depreciation expense.

Other Income (Expense).    Other income for the year ended December 31, 2010 was $1.0 million compared to other expense of $1.5 million for the year ended December 31, 2009, an increase in other income of $2.5 million. In the year ended December 31, 2010, we received $0.7 million of one-time federal government funds, recorded $0.2 million of income from the decrease in the fair value of our outstanding preferred stock

 

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warrants and other income of $0.1 million. In the year ended December 31, 2009, we recorded $0.9 million of expense due to the increase in the estimated fair value of the outstanding preferred stock warrants, as well as a loss upon the extinguishment of convertible notes of $0.6 million.

Interest Expense.    Interest expense for the year ended December 31, 2010 was $0 compared to $0.3 million for the year ended December 31, 2009, a decrease of $0.3 million. In the year ended December 31, 2009, we recorded $0.1 million of interest expense from equipment loans and $0.2 million of interest expense on $3.0 million of notes that were converted into shares of preferred stock.

Liquidity and Capital Resources

Since our inception through March 31, 2012, we have funded our operations principally through the receipt of $161.1 million, consisting of: $108.2 million of net proceeds from the private placement of preferred equity securities; $0.5 million from the sale of common stock; $5.9 million of net proceeds from the private placement of notes; $31.0 million received under the Celgene collaboration; $10.0 million received under the Gilead collaboration; and receipt of $5.5 million from research grants. We had cash and cash equivalents of $10.7 million as of March 31, 2012. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our funds are currently held in cash and money market funds that are invested in securities issued by the U.S. Treasury.

Based on our current level of operations, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months. Successful completion of our research and development programs, and ultimately, the attainment of profitable operations are dependent upon future events, including completion of our development activities resulting in commercial products and/or technology, obtaining adequate financing to complete our development activities, progress of collaboration arrangements, market acceptance and demand for our products, and attracting and retaining qualified personnel.

The following table sets forth the primary sources and uses of cash for each of the periods set forth below.

 

Sources and Uses of Cash  
     Year Ended December 31,     Three Months Ended March 31,  
         2009             2010             2011             2011             2012      
           (unaudited)  
     (in thousands)  

Net cash provided by (used in) operating activities

   $ 8,037        (17,792     (5,005     (4,209     (4,444

Net cash used in investing activities

     (136     (2,325     (133     (18     (8

Net cash provided by financing activities

     10,834        17,885        1        1          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 18,735        (2,232     (5,137     (4,226     (4,452
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

For the years ended December 31, 2009, 2010 and 2011 and the three months ended March 31, 2011 and 2012, our operating activities provided (used) cash of $8.0 million, $(17.8) million, $(5.0) million, $(4.2) million and $(4.4) million, respectively. The use of cash in all periods primarily resulted from our net losses adjusted for non-cash items and changes in operating assets and liabilities. The cash provided by operating activities of $8.0 million for the year ended December 31, 2009 was primarily due to a net loss of $22.1 million primarily attributed to research and development activities offset by an increase in deferred revenue of $27.5 million due to the $30.0 million upfront Celgene payment. The cash used in operating activities of $(17.8) million for the year ended December 31, 2010 was primarily due to a net loss of $14.8 million primarily attributed to research and development activities and a decrease in deferred revenue of $4.1 million. The cash used in operating activities of $(5.0) million for the year ended December 31, 2011 was primarily due to a net loss of $13.7 million primarily

 

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attributed to research and development activities offset by an increase in deferred revenue of $5.8 million primarily due to the proceeds from the Gilead collaboration agreement. The cash used in operating activities of $(4.2) million for the three months ended March 31, 2011 was primarily due to a net loss of $3.2 million primarily attributed to research and development activities and a decrease in deferred revenue of $1.0 million. The cash used in operating activities of $(4.4) million for the three months ended March 31, 2012 was primarily due to a net loss of $2.3 million primarily attributed to research and development activities and a decrease in deferred revenue of $2.6 million.

Investing Activities

For the years ended December 31, 2009, 2010 and 2011 and the three months ended March 31, 2011 and 2012, our investing activities used cash of $(0.1) million, $(2.3) million, $(0.1) million, $0 and $0, respectively, and was primarily attributable to the purchase of fixed assets. The cash used of $2.3 million for the year ended December 31, 2010 was primarily due to the purchase of manufacturing equipment and leasehold improvements.

Financing Activities

For the years ended December 31, 2009, 2010, 2011 and the three months ended March 31, 2011 and 2012, our financing activities provided cash of $10.8 million, $17.9 million, $0, $0 and $0, respectively. The $10.8 million of cash provided for the year ended December 31, 2009 is the result of the sale of preferred stock for net proceeds of $9.9 million and the issuance of notes for net proceeds of $3.0 million, offset by the repayment of equipment loans of $1.9 million. The cash provided of $17.9 million for the year ended December 31, 2010 is the result of the sale of preferred stock for net proceeds of $17.9 million.

Operating Capital Requirements

We anticipate that we will continue to generate significant operating losses for the next several years as we incur expenses related to the research and development of our product candidates, expand our corporate infrastructure and potentially build out our commercial manufacturing capabilities. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and contingent, future milestone payments under our collaboration agreements will allow us to fund our operations through at least the next 12 months. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of, and results from, clinical trials and other studies, achievement of milestones under our existing collaborations, any additional collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs.

We may seek to sell additional equity or debt securities or obtain a credit facility if our available cash and cash equivalents are insufficient to satisfy our liquidity requirements or if we develop additional opportunities to do so. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

Because of the numerous risks and uncertainties associated with research, development and commercialization of biopharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

 

   

the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

 

   

the scope, rate of progress and costs of our manufacturing development and commercial manufacturing activities;

 

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the cost, timing and outcomes of regulatory proceedings (including FDA review of any BLA or NDA that we file);

 

   

payments required with respect to development milestones we achieve under our in-licensing agreements, including any such payments to University of Colorado, or CU, pursuant to our license agreement with them;

 

   

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

 

   

the costs associated with commercializing our product candidates, if they receive regulatory approval;

 

   

the cost and timing of developing our ability to establish sales and marketing capabilities;

 

   

competing technological efforts and market developments;

 

   

changes in our existing research relationships;

 

   

our ability to establish collaborative arrangements to the extent necessary;

 

   

revenues received from any existing or future products; and

 

   

payments received under any future strategic collaborations.

Critical Accounting Policies and Significant Judgments and Estimates

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

While our significant accounting policies are more fully described in Note 3 to our financial statements included elsewhere in this prospectus, we believe the following items to be the most important accounting policies, including those that affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We currently derive our revenue from the amortization of the upfront payments received in 2009 and 2011 for research funding through our collaboration agreements with Celgene and Gilead, respectively. Our collaboration agreements also provide opportunities to derive revenue from milestone payments, license fees, reimbursement of costs, and fees paid for the manufacturing of drug candidates. Our agreements with Celgene and Gilead include fees based on a nonrefundable upfront fee, nonrefundable milestone payments that are triggered upon achievement of specific development or regulatory goals, and future royalties on sales of products that result from the collaboration.

We recognize revenue in accordance with ASC Topic 605 Revenue Recognition (ASC 605). ASC 605 establishes four criteria, each of which must be met, in order to recognize revenue related to the performance of services or the shipment of products. Revenue is recognized when (a) persuasive evidence of an arrangement exists, (b) products are delivered or services are rendered, (c) the sales price is fixed or determinable, and (d) collectability is reasonably assured.

Our collaboration agreements provide for a combination of nonrefundable upfront fees, nonrefundable potential milestone payments based on achievement of specific goals, reimbursement of costs incurred for

 

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clinical trials, payment received for manufacturing of drug candidates, and future license and royalty fees and are evaluated to determine whether each deliverable under the agreement has value to the customer on a stand-alone basis and whether reliable evidence of fair value for the deliverable exists. Deliverables in an arrangement that do not meet the separation criteria are treated as a single unit of accounting, generally applying applicable revenue recognition guidance for the final deliverable to the combined unit of accounting in accordance with ASC 605.

We recognize revenue from nonrefundable upfront payments on a straight-line basis over the estimated term of performance under the agreement. Since the term is not specifically identifiable in the agreements, we have estimated the performance term based on the likelihood and forecasted achievement of development commitments, and other significant commitments we must achieve. These advance payments are deferred and recorded as deferred revenue upon receipt, pending recognition, and are classified as a short-term or long-term liability in the accompanying balance sheets. We evaluate the likely performance period under our collaboration agreements on a periodic basis. If there are changes to the estimated performance period as a result of the outcome of certain events, the period over which the nonrefundable upfront payments are recognized will be adjusted prospectively. The events that will impact the estimation of the performance period include the progress of the product candidate programs, changes in the terms of our collaboration agreements and, in the case of our collaboration with Celgene, the likelihood of Celgene exercising its options to advance the clinical development of certain product candidates.

Each milestone payment is recognized as revenue when the specific milestone is achieved. To date, we have not recognized any revenue in connection with milestone payments.

Under our agreement with Celgene entered into in May 2009, we recorded the initial $30.0 million upfront payment received in May 2009 as deferred revenue and began recognizing this amount into revenue ratably over a 7.3 year period, which represented the initial expected performance period. We review the expected performance period quarterly and adjust the revenue recognition term if the period changes. In June 2011, we reassessed our performance period under the agreement and revised the expected performance period to 8.1 years due to a longer research and development forecast for GI-6207.

Under our agreement with Gilead entered into in October 2011, we recorded the initial $10.0 million upfront payment received in November 2011 as deferred revenue and we are recognizing approximately $8.1 million of the upfront payment over 1.2 years, which is the estimated term of performance for the preclinical and IND filing obligations, commencing at the time of execution of the collaboration agreement in October 2011, and the remaining portion, approximately $1.9 million, over 0.8 years, commencing in January 2013, which is the estimated term of a Phase 1a clinical trial. We review the expected performance period quarterly and adjust the revenue recognition term if the period changes.

In addition, we may continue to receive nonrefundable milestone payments based on achievement of specific goals, reimbursement of costs incurred for clinical trials, payments received for manufacturing of drug candidates, and future license and royalty fees. In assessing the milestone payments contemplated in our agreements, we have reviewed the criteria for achievement of future milestones. Based on this review, we believe that achievement is uncertain and dependent upon a number of factors which will involve substantial effort. A separate earnings process has been identified for each of the remaining development and commercial milestones, the amounts received will be fixed and determinable and, therefore, we intend to recognize revenue related to these milestones upon achievement. To date, we have not recognized any revenue in connection with milestone payments, reimbursement of costs, payments for manufacture, license fee or royalties.

Revenue recognition related to upfront payments and to milestone payments could be accelerated in the event of early termination of drug programs or alternatively, decelerated, if programs are extended. As such, while changes to such estimates have no impact on our reported cash flows, our reported revenue is significantly influenced by our estimates of the period over which our obligations are expected to be performed.

Accrued Liabilities

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of

 

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service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. Examples of estimated accrued expenses include:

 

   

fees owed to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

 

   

fees owed to investigative sites in connection with clinical trials;

 

   

fees owed to contract manufacturers in connection with the production of clinical trial materials;

 

   

fees owed for professional services;

 

   

property taxes; and

 

   

unpaid salaries, wages, and benefits.

Impairment of Long-Lived Assets

The long-lived assets held and used by us are reviewed for impairment no less frequently than annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, we perform an evaluation of recoverability. No asset impairments were recorded during 2009, 2010, 2011 or the three months ended March 31, 2012.

Fair Value of Preferred Stock Warrants

We have issued warrants for the purchase of preferred stock in connection with equipment financings, convertible promissory notes and preferred stock financings. Since the warrants can be exercised for redeemable preferred stock, they have been deemed to be derivative instruments that require liability classification and mark-to-market accounting at each balance sheet date. Subsequent to the completion of this offering, the provisions described above will no longer be applicable and the requirements for liability classification and mark-to-market adjustments will cease.

Upon issuance, we estimated the fair values of these warrants using the Black-Scholes option pricing model with the following assumptions: the estimated fair value of the underlying stock at the valuation measurement date; the risk-free interest rates; the expected dividend rates; the remaining contractual terms of the warrants; and the expected volatility of the underlying preferred stock. Our estimates are based, in part, on subjective assumptions and could differ materially in the future.

At the end of each reporting period, we determine the fair values of the warrants using the Black-Scholes option-pricing model using the following assumptions: the estimated fair value of the underlying preferred stock at the valuation measurement date; the risk-free interest rates; the expected dividend rates; the remaining contractual terms of the warrants; and the expected volatility of the price of the underlying preferred stock with any changes in value during the period recorded as a component of other income (expense). The valuations for the underlying preferred stock are based on valuations performed by an independent third-party valuation specialist that allocate the total equity value of the Company to all classes of stock. We will continue to adjust the fair values of the warrants at each period end for changes in fair value until the earlier of the exercise or expiration of the applicable warrants or the completion of this offering.

There is inherent uncertainty in these estimates and if we had made different assumptions than those described above, the amount of our (gain) loss on change in fair value of preferred stock warrants, net loss and net loss per share amounts could have been significantly different.

 

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Stock-Based Compensation

To date, stock-based compensation expense has not been material to our financial results. Nevertheless, we expect to make additional equity incentive grants, which will result in additional stock-based compensation expense. Accordingly, described below is the methodology we have employed to date in measuring such expenses.

Stock Option Valuation.    We are required to estimate the grant-date fair value of stock options issued to employees and recognize this cost over the period these awards vest. We estimate the fair value of each option granted using the Black-Scholes option-pricing model. Generally, we have issued employee awards that vest over time. For these awards, we record compensation cost on a straight-line basis over the vesting period. We issue awards that typically vest 25% on the first anniversary of the date of issuance with the remaining options vesting ratably over the next 36 months.

We have issued awards to nonemployee consultants and advisers. All grants to nonemployees are valued using the same fair value method that we use for grants to employees. The compensation cost on these awards is on a straight-line basis over the vesting period. We issue awards which typically vest ratably over 24 to 36 months following the date of grant.

The following table summarizes our assumptions used in the Black-Scholes model for option grants during the last three years and the three months ended March 31, 2012.

Black-Scholes Model Assumptions

 

     Year Ended December 31,    Three Months
Ended
March 31, 2012
     2009    2010    2011   
                    (unaudited)

Exercise price

   $0.22 - $0.27    $0.40    $0.32 - $0.40    $0.58

Risk-free interest rate

   2.0% - 3.6%    1.8% - 3.6%    1.6% - 3.5%    1.3% - 2.2%

Expected life, in years

   5.7 - 10.0    6.0 - 10.0    5.9 - 10.0    5.8 - 10.0

Expected volatility

   83.5% - 95.0%    82.5% - 86.7%    82.9% - 87.1%    83.3% - 91.2%

Expected dividend yield

   0.0%    0.0%    0.0%    0.0%

Exercise Price.     Our stock options are granted with an exercise price at or above the then current fair value of our common stock as determined by the Board of Directors. As an input to making these determinations, the Board of Directors obtained multiple third-party valuations. See “—Common Stock Fair Value” below.

Risk-Free Interest Rate.     We use the average yield on current U.S. Treasury instruments with terms that approximate the expected term of the stock options being valued.

Expected Term (in Years).     The expected term of a stock option is the period of time for which the option is expected to be outstanding. We have a large number of options outstanding. There is no secondary market for our options and they contain only basic terms. Therefore, we used a simplified method of determining expected term by selecting the midpoint between the date upon which they would be fully vested in accordance with their terms and the anticipated forfeiture date as the expected term for grants. For certain non-employee grants, the contractual life of the option was used.

Expected Volatility.     Since prior to this offering we were a privately-held company, the estimated future expected volatility for each stock option valuation utilizes volatility rates of similar publicly-traded companies considered to be in the same peer group. The volatility is calculated over a period of time commensurate with the expected term for the options granted.

Expected Dividend Yield.     The expected dividend yield for all of our stock option grants is 0%, as we have not declared a cash dividend since inception, and do not expect to do so in the foreseeable future.

 

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Forfeitures.     The stock-based compensation expense recognized has been reduced for estimated forfeitures. The estimated forfeiture rate is based on historical experience of our option plan, which we expect to continue at the current level, and any adjustments in the forfeiture rate in the future will result in a cumulative adjustment in the period that this estimate is changed. Ultimately, the total compensation expense recognized for any given stock-based award over its vesting period will only be for those shares that actually vest.

Common Stock Fair Value.    Due to the absence of an active market for our common stock, the fair value of our common stock for purposes of determining the exercise price for stock option grants was determined by our Board of Directors, with the assistance of an independent third-party valuation specialist, in good faith based on a number of objective and subjective factors including:

 

   

the prices of our preferred stock sold to outside investors in arms-length transactions, and the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preference of our preferred stock;

 

   

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

 

   

our stage of development and business strategy;

 

   

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

 

   

valuations performed by an independent third-party valuation specialist prepared in accordance with methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”, or the AICPA Practice Aid;

 

   

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

 

   

the material risks related to our business; and

 

   

the composition of and changes to our management team.

Common Stock Valuations

After taking into account management’s recommendations based on the valuation reports prepared by an independent third-party valuation specialist, our Board of Directors adopted valuations of our common stock as of September 18, 2008, May 15, 2009, January 21, 2010, November 30, 2010, October 31, 2011 and January 19, 2012.

Valuation of Our Common Stock

The valuations of our common stock were determined in accordance with the guidelines outlined in the AICPA Practice Aid. There are several approaches for allocating enterprise value of a privately-held company among the securities held in a complex capital structure. The possible methodologies include the probability-weighted expected return method, the option-pricing method and the current value method.

Valuation as of September 18, 2008

The valuation analysis that was conducted on this date determined the total value available to equity holders by applying a probability-weighted expected return model. Under this approach, share value is based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available, as well as the rights of each share class. We estimated the fair value of our common stock using this probability-weighted analysis of the present value of the returns afforded to our stockholders under each of three possible scenarios. The three scenarios were: an initial public offering, a sale and a dissolution.

Liquidity Scenarios. For the valuation performed as of September 18, 2008, probabilities were assigned to the successful IPO scenario and our sale scenario that would result in a return to the holders of our common stock. We considered that our success in completing either an initial public offering or sale that resulted in a

 

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return to the holders of our common stock would be dependent upon our realization of clinical milestones, together with our execution of our business plan and a receptive marketplace. Under our sale scenario, we took into account the liquidation preferences that would be payable to the shares of our preferred stock before any distribution of proceeds to holders of our common stock. We also considered that the holders of the preferred stock would have the right to participate, after payment of the preferred stock liquidation preference, in receiving their pro rata share of remaining proceeds payable to the common stock, up to a maximum amount per share of preferred stock set forth in our certificate of incorporation. As a result, the value per share of our common stock in the acquisition scenario was less than the corresponding value per share of common stock in the IPO scenario.

Guideline Public Company Analysis. Within the probability-weighted expected return analysis, we used market multiples to estimate liquidation values. Specifically, we identified publicly-traded companies using specific criteria as it pertained to our business model. Companies operating within the biotechnology or biopharmaceutical industry that were actively traded on a national stock exchange in the United States were identified. We identified guideline companies with similar business descriptions and business models. From our analysis of these companies, we calculated the enterprise value for each company as of a particular valuation date as well as when the company became a publicly-traded company. In selecting multiples to apply to us, we compared our business to the guideline companies based on business description, size and financial performance.

Discount Rate. Once we had allocated the per share values to our common stock and to each series of our preferred stock at each of the future dates in our various scenarios, we calculated the present values of each per share amount to the valuation date, using a discount rate of 50.0%. Having assessed the risk associated with an investment in us, the analysis was considered along with market evidence and venture capital research to determine the appropriate discount rate for us. The discount rates applied to closely-held firms by several venture capital research studies were considered. Consistent with the Criteria described in the AICPA Practice Aid, it was determined that we were in the first stage of business development. Stage one characteristics include companies with no current revenue, negative earnings, material development expenses, and multiple rounds of venture financing. The cost of capital of a company in this stage of development falls between 38.0% and 58.0%. Considering these factors and our specific risk profile, a cost of equity of 50.0% was selected.

Valuations as of May 15, 2009, January 21, 2010, November 30, 2010, October 31, 2011, and January 19, 2012

Due to our early stage with limited visibility of the long-term operating outlook, the probability-weighted expected return model was considered to be the most appropriate method to be utilized in valuations prior to 2009. In 2009 and thereafter, we achieved several operating milestones, including the commencement of two Phase 2 clinical trials and entering into collaboration agreements in 2009 and 2011. The option-pricing model was determined to be the most appropriate method to be utilized in the valuations beginning in 2009. The option-pricing method treats common stock and preferred stock as call options on a subject company’s equity value, with exercise prices based on the liquidation preference of the preferred stock. The model estimates the fair value of each class of securities as a function of the current estimated fair value of the company.

To implement this method, we examined the characteristics of each class of stock, including: (1) the conversion ratio of preferred stock; (2) the liquidation preferences assigned to the preferred stock; and (3) the exercise price for all outstanding options and warrants. Under this method we allocated value to common shares only in circumstances where the total equity value exceeded the liquidation rights associated with the preferred shares. The option-pricing method provides the stockholder the right, but not the obligation, to buy the underlying net assets at a predetermined price or “strike” price. The strike price is determined by analyzing the break points at which value would be allocated to each class of stock, based on the distribution characteristics associated with the equity. There are five key inputs integral to the implementation of the option pricing method. These include: (1) the market value of equity; (2) the time to expiration; (3) the risk free rate; (4) the volatility of the underlying equity; and (5) the break points for each class of stock.

 

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The Market Value of Equity. We used the market approach, which considers transactions in a subject company’s stock or transactions in similar companies. Our market value of equity input to the option-pricing method relied on indications resulting from this market approach.

Time to Expiration. In assessing the appropriate time to expiration, we relied on our estimation of the timing for a liquidity event at the time of each valuation. The expected exit timings were four years as of May 15, 2009, 3.5 years as of January 21, 2010, 1.5 years as of October 31, 2011, and 1.3 years as of January 19, 2012.

Risk Free Rate. A risk free rate over the interval corresponding to the time to expiration was considered. We used the average yield on current U.S. Treasury instruments with terms that were commensurate with our outlook for a liquidity event.

Volatility. Since prior to this offering we were a privately-held company, the volatility of the underlying equity for each valuation utilizes volatility rates of similar publicly-traded companies considered to be in the same peer group. The selected volatility is commensurate with our estimation of timing for a liquidity event.

Breakpoints for Each Class of Stock. As different stockholders in the company have differing rights and preferences, per share values must take into account those rights and preferences. The capitalization table is combined with the liquidation priority, liquidation preference, dividend policy, participation rights, and conversion ratio to determine payout breakpoint and each class of stockholder’s claim on the assets of the company upon liquidation. Accounting for the breakpoints and characteristics of each class of shares allows for the determination of per share value, which takes into account all rights and preferences of our outstanding capital stock.

Fair Value Estimates

After taking into account all of the assumptions and estimates described in our application of the option-pricing method, we determined the fair value of our common stock to be as follows:

 

   

approximately $0.22 per share as of September 18, 2008;

 

   

approximately $0.27 per share as of May 15, 2009;

 

   

approximately $0.40 per share as of January 21, 2010;

 

   

approximately $0.32 per share as of November 30, 2010;

 

   

approximately $0.46 per share as of October 31, 2011; and

 

   

approximately $0.58 per share as of January 19, 2012.

The following table lists grants of options to purchase shares of common stock with grant dates in 2009, 2010, 2011 and 2012.

 

Grant Date

   Number of Shares
Underlying Options

Granted
     Exercise Price  per
Share
     Common Stock
Fair Value  per Share on
Grant Date
 

April 22, 2009

     1,191,212       $ 0.22       $ 0.22   

September 24, 2009

     472,834         0.27         0.27   

December 17, 2009

     25,667         0.27         0.27   

February 2, 2010

     1,516,814         0.40         0.40   

March 17, 2010

     13,000         0.40         0.40   

June 10, 2010

     15,000         0.40         0.40   

September 2, 2010

     44,001         0.40         0.40   

November 30, 2010(1)

     607,500         0.40         0.32   

January 26, 2011(1)

     529,746         0.40         0.32   

March 17, 2011

     122,927         0.32         0.32   

March 28, 2012

     851,647         0.58         0.58   

 

(1) The November 30, 2010 and January 26, 2011 grants were made prior to the completion and approval of the third-party valuation report of our common stock as of November 30, 2011, and therefore we used the prior common stock fair value as the exercise price.

 

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From September 18, 2008 to May 15, 2009, the estimated per share fair value of our common stock increased from $0.22 to $0.27. This increase in estimated fair value was due primarily to the valuation associated with the $10 million May 2009 preferred stock financing, and the $3 million in convertible promissory notes issued in March 2009. In May 2009, we signed the collaboration agreement with Celgene and received a $30 million upfront payment.

From May 15, 2009 to January 21, 2010, the estimated per share fair value of our common stock increased from $0.27 to $0.40. This increase in estimated fair value was due primarily to the valuation associated with the approximately $18 million January 2010 preferred stock financing. The increase also reflected continued progress of the GI-5005-02 and GI-4000-02 clinical trials.

From January 21, 2010 to November 30, 2010, the estimated per share fair value of our common stock decreased from $0.40 to $0.32. This decrease in estimated fair value was due primarily to estimates of increased competition in the HCV market.

From November 30, 2010 to October 31, 2011, the estimated per share fair value of our common stock increased from $0.32 to $0.46. This increase in estimated fair value was due primarily to entering into the collaboration agreement with Gilead and an amendment to our collaboration agreement with Celgene.

From October 31, 2011 to January 19, 2012, the estimated per share fair value of our common stock increased from $0.46 to $0.58. This increase in estimated fair value was due primarily to data from the R1 patients in the GI-4000-02 trial as well as our Board of Directors’ decision to explore this offering in January 2012.

Financial Obligations Related to Licensing and Development

In-Licensing Agreements

We are party to a number of licensing agreements with respect to certain of the technologies that underlie our intellectual property. Unless otherwise noted, these agreements typically provide that we have exclusive rights to the use and sublicensing of the technologies in question for the duration of the intellectual property patent protection in question, subject to us meeting our financial and other contractual obligations under the agreements. Certain of the key licensing agreements with significant financial obligations include the following:

University of Colorado.    We are a party to a license agreement, or the CU Agreement, dated September 18, 1997, with CU, which was amended March 18, 1998, June 1, 2001 and October 16, 2003. The CU Agreement grants to us an exclusive, worldwide license to make, have made, use and sell licensed products that are covered by CU patent rights, proprietary information and know-how relating to Tarmogens. In partial consideration of the license under the CU Agreement, we entered into a stock purchase agreement with CU, under which we issued to CU shares of our common stock and granted CU certain rights related to ownership of such shares. The agreement requires us to make certain advance royalty payments, which are offset against future royalties, make development milestone payments, make royalty payments based on sales of approved products, if any, and pay a portion of any consideration received by us in exchange for granting a sublicense. Development milestone payments payable to CU may total up to $150,000 per product candidate beginning upon filing of an IND and continuing through approval from the FDA and after the first commercial sale of the licensed products. Each milestone payment shall be credited against future royalties, until the full amount of such milestone payment has been credited in full.

Washington Research Foundation.    We are a party to a license agreement, dated November 24, 2003, with Washington Research Foundation, or WRF, which was amended May 5, 2009, or the WRF Agreement. The WRF Agreement grants to us a non-exclusive license in the United States and certain other countries in the field of use to develop, use, make, have made, market, offer for sale, sell, have sold or import licensed products that are covered by certain WRF patent rights relating to the engineering of yeast to produce protein antigens derived from disease-causing agents or cancer cells. This license agreement requires us to make annual license and sublicense fee payments and certain development and commercial milestone payments, and to pay royalties on sales of any products we may receive approval to market. Development milestone payments payable to WRF may total up to $50,000 per product candidate, if we initiate a Phase 2 trial. We are required to make nonrefundable royalty advances totaling $50,000 if we apply for, and receive, approval to market products developed under the agreement

 

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and royalty payments once we begin selling products developed under the agreement. The nonrefundable royalty advances are to be credited against future royalties.

National Institutes of Health.    We are a party to a series of license agreements with the NIH, consisting of the NIH MUC1 license agreement dated March 12, 2012, the NIH Brachyury Agreement, dated January 3, 2012, NIH VirusPlus Agreement, dated August 23, 2011 and the NIH CEA Agreement, dated June 12, 2007. Collectively we refer to these agreements as the NIH license agreements. The NIH license agreements grant us worldwide, exclusive licenses to make and have made, to use and have used, to sell and have sold, to offer to sell and have offered for sale, and to import and have imported products relating to the use of the Tarmogen immunotherapy platform with certain antigens, other immunotherapy platforms and other intellectual property to treat cancer that are covered by licensed patent rights and to practice and have practiced any licensed processes in the licensed fields of use. These license agreements required us to make certain noncreditable and nonrefundable initial royalty payments upon signing of each license agreement, make certain milestone payments upon achievement of specified development and commercial milestones, make royalty payments based on sales of approved products, if any, and pay a portion of any consideration we receive in exchange for granting a sublicense.

 

   

Under the NIH MUC1 Agreement, we are required to make royalty advances totaling $500,000 beginning upon the acceptance of the first filing of an application for marketing approval with the FDA through the first commercial sale, and royalty payments once we begin selling products developed under the agreement.

 

   

Under the NIH Brachyury Agreement, we are required to make royalty advances totaling $650,000 beginning upon the successful completion of the first Phase 3 clinical study through the first commercial sale, and royalty payments once we begin selling products developed under the agreement.

 

   

Under the NIH VirusPlus Agreement, we are required to make royalty advances totaling $500,000 beginning upon the first filing of an application for marketing approval through the first commercial sale, and royalty payments once we begin selling products developed under the agreement.

 

   

Under the NIH CEA Agreement, we are required to make royalty advances totaling $745,000 beginning upon the filing of an IND through FDA approval, and royalty payments once we begin selling products developed under the agreement.

Collaboration Agreements

NIH — Cooperative Research and Development Agreement. We are a party to a collaboration agreement, or the CRADA, dated May 8, 2008, with the NIH. The CRADA is for the preclinical and clinical development of our proprietary yeast-based Tarmogens expressing tumor-associated antigens as potential vaccines for the prevention and/or therapy of a range of human cancers. The CRADA provides that the producing party will own all inventions invented solely by its employees. For any invention made by the NIH under the CRADA, we have an exclusive option to negotiate for commercialization rights. We must pay an annual fee to the NIH based on the clinical trial phase of Tarmogens and supply product for any clinical trials the NIH conducts. The CRADA requires us to make annual payments of up to $0.3 million, depending on the stage of development of a covered product candidate.

Celgene Collaboration and Option Agreement.    In May 2009, we entered into a collaboration agreement with Celgene. Under the terms of the agreement, in May 2009 Celgene made a $30 million initial payment to us. We granted Celgene an exclusive option to all of our oncology programs, on a program-by-program basis. We will conduct the early development of the product candidates through certain predefined endpoints. Celgene will have the option to obtain an exclusive worldwide license to develop and commercialize each of these immunotherapy product candidates. If certain development and regulatory milestones are achieved, we would be eligible to receive up to $441 million in milestone payments, and, if products are commercialized, up to an additional $60 million of milestone payments plus tiered royalties based on net sales of each licensed product candidate. This agreement was amended in June 2011 to replace one of the product candidates with another

 

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oncology Tarmogen product. The terms of the amendment did not materially modify the agreement as the financial terms and the length of the agreement remained substantially the same. In October 2011, we signed an amendment with Celgene for additional immunology work for the GI-4000 products. Under this amendment, we received an additional $1 million in October 2011 and $0.3 million in April 2012 from Celgene.

Gilead License and Collaboration Agreement.    In October 2011, we entered into a collaboration agreement with Gilead, granting Gilead an exclusive license to all of our hepatitis B Tarmogen products for the development and commercialization of therapeutic vaccine products for use in conjunction with Viread (tenofovir disoproxil fumarate) for the treatment of chronic HBV infection. Under the terms of the agreement, in November 2011, Gilead made a $10 million initial payment to us. We will conduct the preclinical development, file the IND and perform the initial Phase 1a clinical trial in healthy volunteers for the selected HBV Tarmogen. Gilead will perform all future clinical development, regulatory and commercialization activities. Gilead activities are subject to commercially reasonable diligence, milestone payments and royalties. We are eligible to receive additional proceeds of up to $135 million in development and regulatory milestones, and if products are commercialized, tiered royalties and up to $40 million of sales milestone payments based on net sales of the licensed product candidates.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at March 31, 2012.

 

     Payments Due by Period  
     Total      Less than
1 year
     1-3 years      3-5 years      Over
5 years
 
     (in thousands)  

Operating lease obligations

   $ 903         559         341         3           

In June 2010, we extended the term of our lease for our office space into 2013. Under the terms of the lease, we have the option to extend the lease for an additional five-year period upon the fair market rental value at the time of renewal.

Under the license agreements described above in “—Financial Obligations Related to Licensing and Development”, we are obligated to make potential milestone payments. These obligations are contingent upon achieving applicable milestone events, the timing of which cannot presently be determined.

Patents and Trademarks

We presently have a portfolio of patents and patent applications (and certain trademark registrations) with the United States Patent and Trademark Office. During the three months ended March 31, 2012 and March 31, 2011, we incurred expenses related to the filing, maintenance, and initiation of our patent portfolio of $0.1 million and $0.1 million, respectively. During the years ending December 31, 2011, 2010 and 2009, these expenses totaled $0.6 million, $0.4 million and $0.5 million. These expenses increased by $0.2 million or 50 % for 2011 compared to 2010. We anticipate these expenses will continue to increase into 2012.

Related Party Transactions

In September 2007, Celgene purchased $3.0 million of our Series C preferred stock. In March 2009, we issued Celgene (i) a convertible promissory note for approximately $0.1 million and (ii) the right to receive a warrant to purchase shares of our Series C preferred stock upon certain pre-specified conditions. In May 2009, we issued 8,650,519 shares of our Series D preferred stock at a purchase price of $1.156 per share, and a warrant to purchase 2,076,125 shares of our Series C preferred stock with an exercise price of $1.445 per share, to Celgene for an aggregate purchase price of approximately $10 million. In addition, in May 2009, in connection with our Series D preferred stock financing, (i) all principal and unpaid interest accrued under the convertible promissory note converted into 84,557 shares of our Series C preferred stock at a price per share of $1.156 and (ii) we issued a warrant to purchase 20,203 shares of our Series C preferred stock at an exercise price of $1.445

 

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per share. In connection with our collaboration agreement with Celgene, we received an upfront payment of $30.0 million. In January 2010, Celgene purchased approximately $2.7 million of our Series E preferred stock. In October 2011, we signed an amendment to the collaboration agreement with Celgene to perform additional immunology work for $1.3 million, of which we received $1.0 million in October 2011 and the remaining $0.3 million in April 2012.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”, or ASU 2011-11. Under ASU 2011-11, an entity is required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions executed under a master netting or similar arrangement and was issued to enable users of financial statements to understand the effects or potential effects of those arrangements on its financial position. ASU 2011-11 is required to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of ASU 2011-12 did not have a material impact on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220)”, or ASU 2011-05. ASU 2011-05 was issued to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance in ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to present the components of net income and other comprehensive income in a single continuous statement. ASU 2011-05 was effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2011. We adopted ASU No. 2011-05 on January 1, 2012 and the adoption did not have a material impact on our financial statements.

In December 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, or ASU 2011-12. Under ASU 2011-12, the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of Update 2011-05 are reinstated, effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2011. The adoption of ASU 2011-12 did not have a material impact on our financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820)”, or ASU 2011-04. ASU 2011-04 was issued to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and International Financial Reporting Standards, or IFRS. The guidance in ASU 2011-04 explains how to measure fair value, but does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. ASU 2011-04 will be effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on our financial statements.

As an emerging growth company under the JOBS Act, we have elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Act. This election is irrevocable.

 

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Internal Control Over Financial Reporting

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting. As a result, our management did not perform an evaluation of our internal control over financial reporting as of December 31, 2011. Further, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting.

For the year ending December 31, 2013, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Under current SEC rules, our independent registered public accounting firm may also eventually be required to deliver an attestation report on the effectiveness of our internal control over financial reporting when we no longer qualify as an emerging growth company. We may qualify as an emerging growth company for as long as five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if our annual gross revenues equal or exceed $1 billion, we would cease to be an emerging growth company as of the following December 31.

Quantitative and Qualitative Disclosures about Market Risks

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. As of December 31, 2010 and 2011 and the three months ended March 31, 2012, we had cash and cash equivalents of $20.3 million, $15.2 million and $10.7 million, respectively, consisting of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates, particularly because our investments are in short-term marketable securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio.

Foreign Currency Risk

All of our employees are located, and all of our major operations are currently performed, in the United States. Accordingly, we believe we do not have a material exposure to foreign currency risk. We occasionally pay for contractor or research services in a currency other than the U.S. dollar. Today, we have minimal exposure to fluctuations in foreign currency exchange rates as the difference from the time period for any services performed which require payment in a foreign currency and the date of payment is short.

 

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BUSINESS

Overview

We are a biopharmaceutical company focused on developing therapeutic products for cancer and infectious diseases based on our proprietary Tarmogen platform. Tarmogens activate the immune system by stimulating cellular immunity, known as T cell immunity, in contrast to traditional vaccines, which predominately stimulate antibody production. This difference allows Tarmogens to generate immune responses that target specific intracellular or extracellular proteins, or antigens, that frequently distinguish malignant and chronically infected cells from normal cells.

We have four product candidates in five ongoing clinical trials. We have treated more than 300 patients, including some who have received monthly dosing for over four years, with a tolerability profile that we believe will allow our product candidates to be added to other therapeutic regimens without leading to additional toxicity. Collaborations with biopharmaceutical companies and research institutions have allowed us to advance the development of our Tarmogen product candidates while managing our own investment in these product candidates. We have two strategic collaborations, one with Celgene Corporation, or Celgene, for oncology product candidates and one with Gilead Sciences, Inc., or Gilead, for chronic hepatitis B virus, or HBV, infection.

Our lead cancer program, GI-4000, in collaboration with Celgene, is in Phase 2b testing for resected pancreas cancer and in Phase 2a testing for non-small cell lung cancer, or NSCLC, and colon cancer. Our wholly-owned lead infectious disease program, GI-5005, is in Phase 2b testing for chronic hepatitis C virus, or HCV, infection. As part of our alliance with Gilead, we are advancing our second infectious disease program, GI-13000, through preclinical development for HBV infection.

A Tarmogen consists of intact, heat-inactivated yeast containing a target protein. Immunization with a Tarmogen results in antigen-specific cellular immune responses against the target protein and reduction in the number of abnormal cells containing the same target antigen. Tarmogens target the molecular profile that distinguishes a diseased cell from a normal cell but are not required to be custom manufactured for each individual patient. Tarmogens are manufactured by a process that yields a stable, off-the-shelf product candidate that is disease- or antigen-specific. We believe that the Tarmogen platform has applicability to a number of diseases and may enable us to develop a broad portfolio of products.

GI-4000 is a series of four Tarmogens targeting cancers expressing mutations in the Ras protein. The mutated Ras protein causes a normal cell to become malignant by altering cell division pathways, resulting in uncontrolled proliferation of malignant cells. Studies have shown that tumors with Ras mutations are generally less responsive than tumors with normal Ras to conventional chemotherapy as well as approved targeted agents. We estimate that Ras mutations are found in approximately 180,000 new cancer cases each year in the United States. Ras mutations occur in approximately 90% of pancreas cancers, 40% of colorectal cancers and 20% to 25% of NSCLCs. Our treatment approach is unique because we identify the specific Ras mutation in a patient’s tumor and immunize with a GI-4000 product candidate matched to the mutation in the patient’s tumor, resulting in mutation-specific immune targeting of tumor cells.

The GI-4000-02 Phase 2b clinical trial is a fully-enrolled, randomized double-blind, active-control study of 176 subjects with resected pancreas cancer. Thirty-nine of these subjects had microscopic residual disease after surgery, or R1 subjects, and were randomized separately from the subjects with no microscopic residual disease after surgery, or R0 subjects. Of these 39 subjects, the 19 subjects randomized to the GI-4000 plus gemcitabine group had a 2.7 month advantage in median overall survival compared to the 20 R1 subjects randomized to the placebo and gemcitabine group (17.7 months compared to 15.0 months). Further, in 15 R1 subjects for whom we had sufficient blood samples to test for immune response using an assay that measures the frequency of antigen-specific T cells after treatment, seven were identified as immune responders to mutated Ras and had a 5.1 month advantage in median survival compared to the 20 R1 subjects who received placebo and gemcitabine (20.1 months compared to 15.0 months). We consider a subject to be an immune responder when the frequency of antigen-specific T cells is measured at pre-specified levels. Of the 12 placebo-treated subjects for whom we had

 

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sufficient blood sample for immune testing, only 1 of 12 was identified as having an immune response to mutated Ras. We continue to monitor the recurrence and mortality events in the 137 R0 subjects and plan to conduct a complete unblinded analysis in the R0 subgroup when sufficient deaths have occurred to allow us to reach meaningful conclusions.

We also have two ongoing Phase 2a clinical trials studying GI-4000 in NSCLC and colon cancer. The Phase 2a NSCLC study, GI-4000-03, is being conducted at Memorial Sloan Kettering Cancer Center, or MSKCC, and is designed to evaluate safety, immune response and efficacy in 24 subjects with non-metastatic, or Stage I to III, NSCLC with mutated Ras who had successfully completed initial, or first-line, therapy with no evidence of residual disease. In this single-arm trial, subjects are being treated for up to three years with the version of GI-4000 containing the same mutation as their tumor. GI-4000 has been generally well tolerated. The study met the primary endpoint of at least 25% of the subjects showing a Ras mutation-specific cellular immune response with 10 of 20 evaluable subjects showing an immune response.

Enrollment is also underway in a Phase 2a colon cancer clinical trial, GI-4000-05, which is being conducted at the Lombardi Cancer Center at Georgetown University. This study is designed to evaluate the safety, immune response and efficacy of GI-4000 plus first-line chemotherapy plus bevacizumab in patients with metastatic, or Stage IV, colorectal cancer with mutated Ras. GI-4000 has been generally well tolerated in the five patients enrolled, and no immune response or efficacy analyses have yet been conducted.

We are evaluating two other oncology product candidates in clinical trials at the National Cancer Institute, or NCI:

 

   

GI-6207 targets carcinoembryonic antigen, or CEA, a protein that is over-expressed in a large number of epithelial cancers, which we estimate represent approximately 500,000 new cancer cases in the United States each year. The NCI has completed a dose escalation Phase 1 clinical trial of GI-6207 and we expect them to begin a Phase 2 trial for medullary thyroid cancer, or MTC, in 2012.

 

   

GI-6301 targets cancers expressing the brachyury protein, which plays a role in metastatic progression of certain cancers. The NCI is currently conducting a dose escalation Phase 1 trial of GI-6301 in patients with advanced cancer.

In May 2009, we entered into a worldwide strategic collaboration with Celgene focused on the discovery, development and commercialization of product candidates for the treatment of cancer and we received an initial $30 million fee. Celgene also made a $10 million equity investment. We are responsible for initial development of product candidates under the agreement. Celgene has the option to license each product candidate at specific development milestones and continue to either fund our development or assume development responsibility for each product candidate. If certain development and regulatory milestones are achieved, we would be eligible to receive up to $441 million in milestone payments, and, if products are commercialized, up to an additional $60 million of milestone payments plus tiered royalties based on net sales of each licensed product candidate.

Our most advanced infectious disease product candidate is GI-5005 for HCV infection. GI-5005 contains a fusion of two hepatitis C proteins, NS3 and Core. We believe that GI-5005 is the first therapeutic vaccine to demonstrate a clinically meaningful outcome in patients with a chronic infectious disease. The World Health Organization estimates that up to 170 million people globally are infected with HCV, with three to four million new infections each year. We conducted a randomized, active-control 140-patient Phase 2b clinical trial with GI-5005 plus pegylated interferon and ribavirin, or pegIFN/ribavirin, in patients with genotype 1 HCV, the most common type of HCV in the United States. In 96 subjects who had not previously been treated, GI-5005 demonstrated a 21% relative advantage in sustained virologic response at 24 weeks after the completion of therapy, or SVR24, which is generally considered a cure; 58% of subjects who received GI-5005 plus pegIFN/ribavirin therapy compared to 48% of subjects who received pegIFN/ribavirin alone. The study also demonstrated a three-fold advantage in SVR24 in 37 subjects who previously had received, but not responded to, interferon plus ribavirin therapy; 17% for subjects who received GI-5005 plus pegIFN/ribavirin compared to 5% for subjects who only received pegIFN/ribavirin. GI-5005 was generally well tolerated and could potentially be a valuable addition to future HCV combination treatment regimens in difficult-to-treat patient subgroups. We also believe that the GI-5005 HCV data demonstrate the potential value of the Tarmogen platform to develop therapies for other chronic infectious diseases.

 

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Our second infectious disease program is GI-13000 for HBV infection. HBV is the most common liver infection and the major cause of liver cancer worldwide. Globally, 350 million people are chronically infected with HBV. While approved anti-viral drugs can suppress the virus, they rarely result in cures and must be taken indefinitely. Similar to the Phase 2b trial we conducted with GI-5005, our development strategy will be to combine GI-13000 with Gilead’s Viread, an approved antiviral drug, to determine if the combination can reduce or eliminate HBV infection.

In October 2011, we entered into a worldwide strategic collaboration with Gilead to develop GI-13000 under which we received a $10 million upfront payment and Gilead also agreed to fund a Phase 1a clinical trial of GI-13000. Gilead is responsible for all clinical development beyond the Phase 1a clinical trial. We are eligible to receive additional proceeds of up to $135 million in development and regulatory milestones, and if products are commercialized, tiered royalties and up to $40 million of sales milestone payments based on net sales of the licensed product candidates.

Investment Highlights

Our Tarmogen technology is a differentiated product development platform with applicability to a range of diseases.    Cellular immunity evolved to protect from, among other things, yeast and fungal infections as evidenced by the high frequency of these types of infections in patients with impaired cellular immunity such as AIDS patients. Being yeast-based, immunization with Tarmogens primarily results in cellular immune responses, rather than antibody production. Since antibodies cannot enter cells, cellular immunity is critical to protection from malignant and chronically infected cells because the antigen targets in these cells are predominately intracellular. We have been successful in engineering Tarmogens to express over 100 different proteins and we have advanced seven Tarmogens from concept into human clinical trials in approximately 6 to 18 months, potentially allowing us to develop a broad pipeline targeting a range of diseases.

We have achieved clinical proof-of-concept for our lead oncology and infectious disease product candidates.    Our product candidates have exhibited evidence of efficacy and safety in randomized, controlled clinical trials in pancreas cancer and HCV. Clinical data available from our ongoing Phase 2b clinical trial indicated a survival advantage in R1 pancreas cancer subjects who received GI-4000 plus gemcitabine compared to R1 pancreas cancer subjects who received gemcitabine alone. Genotype 1 HCV subjects who received GI-5005 plus peg IFN/ribavirin generated an advantage in SVR24 compared to genotype 1 HCV patients who received peg IFN/ribavirin alone. Our Tarmogen product candidates have been generally well tolerated in more than 300 patients, including some who have received monthly dosing for over four years. We believe the efficacy data from these clinical trials provide evidence of the potential value of our Tarmogen platform across various cancers and infectious diseases.

Tarmogens enable personalized molecular targeting of large patient populations in cancer and infectious diseases.    Tarmogens target antigens that play a role in a variety of cancers and infectious diseases. For example, the GI-4000 series of Tarmogens targets Ras mutations. We estimate that Ras mutations are found in approximately 180,000 new cancer cases each year in the United States, including large proportions of patients with pancreas, NSCLC and colon cancers. We identify the specific mutation in each patient’s tumor and administer the corresponding Tarmogen. We have also targeted our platform to CEA and brachyury, two other cancer antigens found in a variety of oncology indications. In infectious diseases, Tarmogens target proteins expressed in chronically infected cells. Our lead infectious disease candidates target chronic HCV and HBV, both of which are global health epidemics affecting up to 170 million and 350 million patients worldwide, respectively.

We have entered into strategic collaborations with Celgene and Gilead.    We established a worldwide collaboration with Celgene in May 2009 to develop oncology Tarmogens. In October 2011, we licensed worldwide rights to our HBV program to Gilead. We expect these collaborations to provide expertise and resources for ongoing development and potential commercialization of these product candidates.

We have established low-cost manufacturing capabilities for our Tarmogen product candidates.    At our approximately 22,000 square foot facility, we have the capacity and equipment for commercial-scale production of Tarmogens. We have manufactured all clinical supplies for the seven Tarmogen product candidates that have been tested in clinical trials and we believe that the productivity of our manufacturing process compares favorably to the

 

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productivity reported by other biotechnology companies for their manufacturing processes. In contrast to some other immune therapies, our product candidates are made in large batches and not required to be custom manufactured for each patient.

Our Strategy

Our strategy is to develop and commercialize Tarmogen products targeting diseases representing significant unmet medical needs while leveraging our collaborations to manage our expenses. The key components of our strategy include advancing the clinical development of GI-4000 and our other oncology Tarmogens in collaboration with Celgene and the NCI, progressing our Tarmogens targeting infectious diseases, including our HBV collaboration with Gilead, while retaining certain development and commercialization rights to proprietary product candidates.

Our executive management team has more than 60 years of combined drug development and regulatory experience. We seek to manage our expenses by limiting corporate overhead spending and outsourcing appropriate functions. We intend to continue to use corporate and research collaborations to advance the development of many of our product candidates. In addition, we plan to advance at least one of our preclinical infectious disease product candidates through a Phase 2 clinical trial with a portion of the proceeds from this offering while maintaining cash resources sufficient to allow us to fund our operations through                         .

Tarmogen Product Candidates

The following tables summarize the status of our pipeline:

 

ONCOLOGY PRODUCT CANDIDATES

Product

Candidate

  Indication   Target   Stage of
Development
  Worldwide Commercial
Rights
       

GI-4000

 

Resected pancreas

cancer

  Mutated Ras   Phase 2b   Celgene Option
       

GI-4000

 

Non-small cell lung

cancer

  Mutated Ras   Phase 2a   Celgene Option
       

GI-4000

 

Colorectal

cancer

  Mutated Ras   Phase 2a   Celgene Option
       

GI-6207

 

Medullary thyroid

cancer

 

Carcinoembryonic

Antigen

  Phase 1 complete   Celgene Option
       

GI-6301

 

Multiple solid

tumors

  Brachyury   Phase 1   Celgene Option

 

INFECTIOUS DISEASE PRODUCT CANDIDATES

Product

Candidate

  Indication   Target   Stage of
Development
  Worldwide Commercial
Rights
       

GI-5005

  Chronic hepatitis C infection   NS3 / Core   Phase 2b   GlobeImmune
       

GI-13000

  Chronic hepatitis B infection   HBV antigens   Preclinical   Gilead

Oncology Programs

In oncology, our strategy is to identify molecular targets that distinguish diseased cells from normal cells and activate the immune system to selectively target and eliminate only the diseased cells. We are developing all of our oncology product candidates in collaboration with Celgene.

 

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GI-4000 Overview

Our GI-4000 product candidates are designed to stimulate immune responses against the mutated Ras protein. We estimate that Ras mutations are found in approximately 180,000 new cancer cases each year in the United States across a spectrum of tumor types, including pancreas, NSCLC, colorectal, endometrial and ovarian cancers, as well as melanoma and multiple myeloma. Studies have shown that tumors with Ras mutations are generally less responsive than tumors with normal Ras to conventional chemotherapy as well as targeted agents. For some cancers, such as NSCLC or colorectal cancer, therapies that target epidermal growth factor receptor, or EGFR, have improved clinical outcomes. However, the presence of a Ras mutation in the tumor has been associated with poor prognosis despite use of EGFR targeted therapies. For example, studies have shown that NSCLC with a Ras mutation is associated with a lack of response to tyrosine kinase inhibitors, such as erlotinib and gefitinib, while these therapies result in better survival rates for patients without a Ras mutation. Similarly, other studies have shown that patients with Ras mutated colorectal tumors do not benefit from cetuximab therapy, another EGFR targeted agent, compared to patients with normal Ras, who have improved survival rates when treated with the same therapy. As a result, patients with Ras mutations have fewer available effective treatment options. We believe these patients could benefit from treatment with GI-4000.

We believe that targeted reduction of cells containing Ras mutations could result in improved clinical outcomes for patients with a number of human cancers due to the role mutated Ras plays in tumor growth. We believe there are no available therapies targeting mutated Ras in late-stage clinical trials and that GI-4000’s unique mechanism of action may allow targeting of these tumors.

GI-4000 is a series of four product versions; each version is a heat-inactivated S. cerevisiae yeast expressing a unique combination of three Ras mutations, collectively targeting seven of the most common Ras mutations observed in human cancers. In the GI-4000 clinical trials, each patient’s tumor is sequenced to identify the specific Ras mutation contained in the patient’s tumor and the corresponding, off-the-shelf Tarmogen containing the identified mutated protein is then administered. Each Tarmogen in the GI-4000 series is manufactured and vialed separately.

GI-4000-01, our first human clinical trial of Tarmogens, was a Phase 1 open-label, multi-center, dose-escalation, therapeutic trial in patients with advanced colorectal or pancreas cancer with mutated Ras. In this study, the six doses tested ranged from 0.1YU to 40YU. One YU, or yeast unit, equals 10 million yeast cells. At the 40 YU dose, each subject received four 10 YU subcutaneous doses, one in each arm and leg. Thirty-three subjects were enrolled between August 2004 and March 2006. Each subject was to receive five weekly doses with a 48-week follow-up period. In this advanced disease population, subjects had an average of three prior treatment failures, and 32 of 33 subjects had metastatic disease at study entry.

T cell immune responses were measured by two different assays. Twenty-three of 31 subjects for whom we had sufficient blood samples to test for immune response, or 74%, showed Ras-specific T cell immune responses by one or both of these assays. Five subjects survived longer than the 48-week follow-up period and each of those subjects exhibited Ras-specific T cell responses either at baseline or after treatment with GI-4000. GI-4000 was generally well tolerated and no dose limiting toxicity was observed in the study.

GI-4000 for Pancreas Cancer

We are developing GI-4000 in patients with resected pancreas cancer in combination with gemcitabine. Our strategy is to begin treating the patient when the overall tumor burden in the body is relatively low after resection, allowing enough time before disease progression for GI-4000 to induce an immune response against residual tumor.

Market Opportunity

The American Cancer Society predicts that in the United States in 2012 there will be 43,920 new cases of pancreas cancer diagnosed and 37,390 deaths from pancreas cancer. Pancreas cancer is rarely curable, with a median survival of 9 to 12 months and an overall five-year survival rate of three percent. Pancreas cancer is particularly

 

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aggressive with non-specific initial symptoms, which frequently results in a delayed diagnosis. Therefore, the majority of patients are not aware they have the disease until the cancer has metastasized.

A patient’s eligibility to undergo resection is an important factor in the patient’s prognosis. Only 15% to 20% of patients with pancreas cancer are candidates for resection. Of resected patients, approximately 80% will receive chemotherapy or radiation therapy after surgery, known as adjuvant therapy, while 20% will not for a variety of reasons. Despite offering the only chance of a cure, long-term survival following resection of pancreas cancer remains poor. There are no approved adjuvant drugs for resected pancreas cancer. Although not approved for this indication, gemcitabine is the most often used adjuvant chemotherapy in the United States.

We believe that a therapy that promotes cellular immune responses to mutated Ras, such as GI-4000, may improve outcomes in those resected patients who receive adjuvant chemotherapy by addressing low levels of residual disease.

Development Status

GI-4000-02 is a fully-enrolled Phase 2b randomized, double-blind, placebo-controlled, multi-center, adjuvant clinical trial of GI-4000 plus gemcitabine or placebo plus gemcitabine in patients with R0 or R1 resected pancreas cancer. An R0 resection is defined by the absence of microscopic residual disease at the surgical margin. An R1 resection is defined by the presence of microscopic residual disease at the surgical margin. R0 and R1 patients have different expected survival rates, with R0 patients living longer on average.

In this clinical trial, we obtained a sample of tumor tissue from each subject during the screening period and evaluated the tumor for the presence of a Ras mutation. If a subject has a product-related mutation, then we then administer the GI-4000 Tarmogen version that matches the specific Ras mutation in the subject’s tumor.

The study population consists of 176 subjects with Ras mutated resected pancreas cancer enrolled at 39 centers in the United States and five international centers between June 2006 and May 2010. Following resection, subjects were prospectively stratified into two groups by resection status and both the R1 and R0 groups were randomly assigned into two treatment groups at a one-to-one ratio to receive either 40YU of GI-4000 plus gemcitabine or placebo plus gemcitabine. Thirty-nine R1 subjects were enrolled, of whom 19 were assigned to the GI-4000 plus gemcitabine group and 20 were assigned to the placebo plus gemcitabine group. One hundred thirty-seven R0 subjects were enrolled, of whom 69 were assigned to the GI-4000 plus gemcitabine group and 68 were assigned to the placebo plus gemcitabine group. The 40YU dose of GI-4000 is administered as four separate 10YU subcutaneous injections, one in each arm and leg. Subjects were given three weekly doses of either GI-4000 or placebo between resection and the initiation of gemcitabine therapy. All subjects were administered up to six monthly cycles of gemcitabine beginning between six and eight weeks after resection. Monthly doses of GI-4000 or placebo were given after each cycle of gemcitabine to coincide with the scheduled breaks in monthly gemcitabine treatment. Monthly administration of GI-4000 or placebo continues until subjects withdraw from the study, experience disease recurrence or die. This study has been monitored on at least a biannual basis from the time of enrollment through the date of this prospectus by a Data Safety Monitoring Board, or DSMB, consisting of a panel of three pancreas cancer experts and a biostatistician.

We evaluated a number of disease-specific baseline characteristics, including the following prognostic factors, which have been shown to have an impact on outcome:

 

   

Lymph node status is defined by the presence or absence of microscopic evidence of pancreas cancer cells. Positive nodes are considered a poor prognostic indicator;

 

   

Performance status, which consists of a five point scale (0, 1, 2, 3, 4) that reflects the general health of the patients, with 0 being the most favorable status and 4 being the least favorable;

 

   

CA19-9, which is a blood biomarker of pancreas cancer cells that serves as a measure of tumor burden. Higher CA19-9 levels are associated with poorer clinical outcomes;

 

   

Tumor size in centimeters, with larger size generally associated with poorer outcomes; and

 

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Tumor stage, which ranges from Stage I through IV and is defined based on a standardized scoring system that consists of primary tumor size, extent of local invasion, extent of involvement of regional lymph nodes and systemic spread of the cancer away from the primary tumor. Increasing tumor stage is associated with poorer prognosis: the earliest stage, or Stage I, tumors generally consist of a small localized primary tumor without evidence of systemic spread and the most advanced stage, or Stage IV, tumors show evidence of systemic spread away from the primary tumor.

The primary endpoint for this clinical trial is recurrence-free survival. Secondary endpoints include overall survival, immune responses and biomarkers of disease burden, such as CA19-9. As of May 11, 2012, 33 of the 39 R1 subjects had died and 85 of the 137 R0 subjects had died. Since the R1 subjects have greater than 75% mortality, we have performed an analysis of the results for this group. The R0 group has not had enough deaths yet to conduct a meaningful analysis of the results.

The R1 subjects in the GI-4000 and placebo groups were comparable for general baseline features such as gender, age and race. The majority of subjects in each group had regional lymph nodes that were positive for microscopic evidence of disease (79% for subjects in the GI-4000 group and 85% for subjects in the placebo group) and performance score of 1 or 2 (79% for subjects in the GI-4000 group and 75% for subjects in the placebo group). There was a 3.5 cm median tumor size in each group. There were two disease related imbalances between the groups that favored the subjects in the placebo arm. The GI-4000 group had a greater number of Stage III (T4 based on the TNM tumor classification system) subjects (16% compared to 0% in the placebo group) and higher median post-operative CA19-9 levels (31U/mL compared to 11U/mL in the placebo group).

In the R1 group, we observed the following:

 

   

A 2.7 month advantage in median overall survival for the 19 subjects in the GI-4000 group compared to the 20 subjects in the placebo group (17.7 months compared to 15.0 months, respectively), representing an 18% relative advantage;

 

   

Of subjects tested for immune response, 7 of 15 subjects in the GI-4000 group showed Ras mutation specific T cell response compared to 1 of 12 subjects in the placebo group;

 

   

A 5.1 month survival advantage in the seven subjects with immune response in the GI-4000 group compared to the 20 subjects in the placebo group (20.1 months compared to 15.0 months, respectively, representing a 34% relative improvement);

 

   

A 16% advantage in one-year survival for subjects in the GI-4000 group (72% compared to 56% in the placebo group, representing a 29% relative improvement based on the Kaplan Meier analysis);

 

   

A one month advantage in median recurrence free survival for the 19 subjects in the GI-4000 group compared to the 20 subjects in the placebo group (9.6 months compared to 8.5 months, respectively, representing a 13% relative advantage);

 

   

A safety profile for GI-4000 treated subjects consistent with what is generally observed in patients with early stage resected pancreas cancer treated with gemcitabine alone, as determined by the DSMB; and

 

   

This study was not powered to achieve statistical significance and the differences observed in survival and occurrence were not statistically significant.

GI-4000 for NSCLC

Market Opportunity

There are over 420,000 new cases of NSCLC annually in the United States, Western Europe and Japan. Studies suggest 20% to 25% of NSCLCs have Ras mutations. There are numerous treatments for NSCLC, including multiple chemotherapies, EGFR targeted molecular therapies and biologic therapies. A significant unmet medical need continues to exist for patients with NSCLCs containing a Ras mutation. Studies have shown that NSCLCs with Ras mutations are associated with poorer recurrence free survival and overall survival with adjuvant chemotherapy, as well as a lack of recurrence and survival benefit with EGFR targeted tyrosine kinase inhibitors, such as erlotinib and gefitinib. The five-year survival rate for patients with NSCLC is approximately 15%.

 

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Other than GI-4000, we are not aware of any products in the market or in late-stage development that directly target mutated Ras. Furthermore, for patients that do not appear to have remaining disease after receiving initial treatment, monitoring for recurrence with observation alone is the standard practice. The majority of these patients will ultimately have a recurrence of disease. Adding GI-4000 therapy to patients with Ras mutations after completion of first line therapy has the potential to improve survival, without additional toxicity allowing GI-4000 to be incorporated into an extension of first-line treatment for patients.

Development Status

GI-4000-03 is a single arm, open label, Phase 2a clinical trial in 24 subjects at MSKCC designed to evaluate GI-4000 following successful first-line treatment for non-metastatic, or Stage I to III, Ras-mutated NSCLC. Subjects were enrolled between February 2008 and July 2010. Patients having no evidence of active cancer one to four months following completion of first-line therapy consisting of resection and/or radiation therapy and/or chemotherapy were eligible for this study. This study is being funded by MSKCC, and we supply study drug.

Subjects received 40 YU of GI-4000 given in three weekly doses, followed by six monthly doses, followed by supplemental doses every three months for up to three years. The 40YU dose is administered as four separate 10YU subcutaneous injections, one in each arm and leg, at each dosing visit. Administration of study drug continues according to this schedule until subjects withdraw from the study, experience disease recurrence or die.

The objectives for the study are to evaluate immune response and safety. The study is also evaluating recurrence-free survival and overall survival. Twenty-four subjects were enrolled; 17 were female and seven were male. Twelve subjects had Stage I disease, five subjects had Stage II disease and seven subjects had Stage III disease. We have compared survival results from the Stage II and III GI-4000 treated subjects to 95 Stage II and III Ras mutation-positive NSCLC patients not enrolled in the trial but treated and followed at MSKCC over the same period of time as the GI-4000-03 study. We believe these 95 patients are useful as a comparison group because they were treated at the same institution over the same time period. We refer to these 95 patients as case-matched controls. We used a statistical adjustment to account for differences in disease stage, gender, age, smoking history and type of first-line treatment when comparing the results of the GI-4000 treated subjects to the case-matched control group using Kaplan Meier estimates of survival.

The study met its primary efficacy endpoint with 50% of the GI-4000 treated subjects showing Ras-specific T cell responses. Of the 20 subjects with immune samples sufficient for analysis, ten subjects developed a Ras-specific T cell response. GI-4000 treated subjects with Stage II-III NSCLC had a median observation time of 2.7 years and received a median of 11 doses. We have evaluated overall survival rates for subjects treated with GI-4000 relative to the case-matched control group at prescribed time points. At one and two years, all 12 subjects in the GI-4000 group were alive, compared to 93% still alive at one year and 85% still alive at two years in the case-matched control group. As of February 2012, all nine subjects in the GI-4000 treated group who had completed two and a half years of follow up were still alive, compared to 79% of the case-matched control group. Of the nine subjects in the GI-4000 treated group who were alive at two and a half years, two Stage III patients subsequently died, one at 2.6 years and one at 3.7 years after study initiation. The three subjects in the GI-4000 treated group who had not yet reached two and a half years of follow up as of February 2012 were still alive. There have been no serious adverse events related to GI-4000 in the study. Further development of GI-4000 in NSCLC would require randomized, controlled trials that demonstrate statistically significant efficacy before the product candidate could be approved for commercialization.

GI-4000 for Colorectal Cancer

GI-4000-05 is a single center, open label, pilot Phase 2a clinical trial at the Lombardi Cancer Center at Georgetown University designed to evaluate GI-4000 in combination with first-line treatment in subjects with metastatic, or Stage IV, colorectal cancer with Ras mutations. Subjects receive GI-4000 in combination with chemotherapy plus bevacizumab. Since commencement of the trial in October 2010, we have enrolled five subjects and enrollment will continue until up to 52 subjects have been enrolled. The objectives of this study are to evaluate safety, immune response, progression-free survival and overall survival. The study is being funded by Georgetown University, and we are supplying study drug.

 

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GI-6207

GI-6207 is a Tarmogen that expresses a modified version of the human carcinoembryonic antigen, or CEA, protein as the target cancer antigen. The NCI has conducted and funded preclinical efficacy and safety studies, as well as the early clinical development of the product candidate, and we are supplying study drug.

We believe that CEA represents an attractive target antigen for immunotherapy since it is over-expressed in many cancers. Because CEA is minimally or not expressed in normal cells, we believe GI-6207 can be used for targeted reduction of cancer cells with little or no effect on normal tissues.

Market Opportunity

CEA is over-expressed in a number of human epithelial cancers, including NSCLC, colorectal, pancreas, breast, gastric and MTC. We estimate CEA is over-expressed in approximately 500,000 new cancer cases in the United States each year.

The American Cancer Society estimates that there are over 56,000 new thyroid cancer cases annually in the United States. According to a study conducted by Bodéré et al. published in Cancer in 2010, our lead indication for GI-6207, MTC, accounts for 8% of thyroid cancer cases annually in the United States. In a study conducted by Wells et al. published in Cancer in 1978, 23 of the 37 patients, or 62%, with MTC expressed CEA. Surgery is currently the only curative treatment for MTC. Patients who develop metastatic MTC have a poor prognosis, with approximately 25% and 10% alive at five and ten years, respectively. Furthermore, metastatic MTC is largely unresponsive to conventional chemotherapy and radiotherapy. The only approved drug for metastatic disease has demonstrated some clinical benefit and substantial toxicity.

Development Status

A Phase 1 dose escalation clinical trial of GI-6207 has been completed at the NCI. Twenty-five patients with Stage IV cancers expressing CEA were enrolled into three dose groups. GI-6207 doses were evenly divided and administered subcutaneously at four injection sites, in the right and left axillary chest wall, or under-arm area, and in the right and left inguinal area, or groin. Five subjects have had stable or decreased CEA levels and stable disease on treatment. Only one subject experienced a grade 3 toxicity, defined as an event severe enough to interfere with daily living activities. This subject had pleural and pericardial metastases, or cancer in the spaces surrounding the heart and lungs, at the beginning of the study. The trial investigator and sponsor believed the event was likely caused by a therapeutic immune response directed at the metastatic lesions. The grade 3 toxicity resolved with cessation of GI-6207 therapy and treatment with corticosteroids. The patient resumed treatment with chemotherapy.

A Phase 2 clinical trial is being designed in collaboration with the NCI to treat patients with MTC tumors expressing CEA. The study is targeted for initiation at the NCI in 2012.

GI-6301

The GI-6301 Tarmogen is designed to target cancers expressing the brachyury protein, which plays a role in metastatic progression of certain cancers. The frequency of brachyury expression increases with stage of disease. In lung cancer, approximately 60% of later stage lung cancer biopsies showed expression of brachyury, compared to approximately 40% of earlier stage lung cancers. We plan to study GI-6301 in tumors known to have high incidence of brachyury expression.

Market Opportunity

A variety of cancers express brachyury, including lung, breast, colon, bladder, kidney, ovary, uterus and prostate cancers. Brachyury is also expressed in virtually all chordomas, a rare and difficult-to-treat central nervous system tumor.

 

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Development Status

In February 2012, in collaboration with the NCI, we initiated the GI-6301 Phase 1 clinical trial in subjects with metastatic cancers who have failed previous therapy or have no further therapeutic options. The trial is an open label, single agent, sequential dose escalation trial, with three to six subjects per dose group. Three dose levels will be tested, 4YU, 16YU and 40YU. In addition, up to ten subjects may be enrolled in an expansion group after three to six subjects have been treated at the maximum tolerated dose for at least four weeks. GI-6301 doses will be evenly divided and administered subcutaneously at four injection sites, in each under-arm area and in the right and left groin, every other week for seven visits, then monthly. The endpoints of this study are safety, tolerability, brachyury specific immune responses and clinical benefit.

Infectious Disease Programs

GI-5005

The GI-5005 Tarmogen contains a fusion protein encompassing sequences from two HCV proteins expressed in infected cells, NS3 and Core, which are highly conserved across HCV genotypes and are recognized by T cells. GI-5005 is engineered to activate an HCV-specific T cell immune response, resulting in the reduction of cells containing viral antigens.

GI-5005 is designed to complement therapeutic approaches that suppress replication of HCV, including interferon- and small molecule-based regimens, without adding meaningful toxicities to the regimen. We believe GI-5005 is the first therapeutic vaccine to demonstrate a clinically meaningful outcome in patients with a chronic infectious disease.

Market Opportunity

HCV infection is a major health epidemic with up to 170 million people infected worldwide. Approximately 20% to 30% of all HCV patients will face life-threatening complications as a result of their disease. In industrialized countries, HCV accounts for 40% of cases of end-stage cirrhosis, 60% of cases of hepatocellular carcinoma and 30% of liver transplants.

Historically, standard-of-care treatment of genotype 1 HCV has been weekly injections of pegylated-interferon with twice-daily oral ribavirin, or pegIFN/ribavirin, for 48 weeks of therapy. A patient genetic marker near the IL28B gene has recently been shown to be an important predictor of which patients in the acute setting will clear HCV without treatment and which patients with chronic infection will achieve SVR24 after receiving pegIFN/ribavirin. Unfavorable IL28B genotypes occur at a higher frequency in African Americans and correlate significantly to the poor SVR24 rates observed in this group. The consistency of the IL28B effect on viral clearance without treatment in the acute setting as well as SVR24 rates in the chronic setting suggests that the different genotypes mark a difference in the underlying immune response characteristics of the patients. The most difficult-to-treat IL28B genotype is referred to as the T/T genotype.

Recently, the addition of telaprevir or boceprevir to pegIFN/ribavirin has improved SVR24 to 65% to 75% using a shortened overall regimen. Despite these improvements, the addition of these agents adds toxicity to pegIFN/ribavirin therapy, which is associated with flu-like symptoms, depression, and decreased white and red blood cells. Future improvements to treatment will likely be aimed at eliminating interferon entirely from the regimen.

Data presented at a recent scientific conference indicated that an interferon-free treatment regimen may be effective in achieving higher SVR24 rates in certain treatment groups. Historically, genotype 2/3 HCV infected populations treated with interferon-based therapy have achieved higher SVR24 rates compared to genotype 1 HCV infected populations treated with interferon-based therapy. Recent studies have shown promising SVR24 rates in genotype 2/3 HCV infected patients using interferon-free treatment regimens. However, these studies have also shown that in genotype 1 HCV infected patients an interferon-free treatment regimen may be less effective than it is in patients with genotype 2/3 HCV. We believe additional data from external ongoing clinical trials using interferon-free treatment regimens may help to identify difficult-to-treat subgroups within the

 

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genotype 1 HCV population. As these data become available, we will evaluate the potential role of GI-5005 in the emerging landscape of interferon-free HCV treatment regimens.

Development Status

GI-5005-01 was a Phase 1, randomized, double-blind, placebo-controlled, dose escalation clinical trial of GI-5005 monotherapy in patients with chronic HCV. Over 85% of the subjects in the trial had HCV genotype 1 infections and approximately 80% of the subjects had previously not responded to interferon-based regimens. These patients represent the most difficult-to-treat HCV population. Subjects were given five weekly doses followed by two monthly doses, and were followed for a total of 12 months. GI-5005 was generally well tolerated, with no dose limiting toxicities, and demonstrated HCV-specific T cell immune responses, and showed treatment-associated HCV viral load reductions and normalization of liver enzyme, or ALT, levels compared to the placebo group.

GI-5005-02 was a randomized Phase 2b clinical trial evaluating 40YU GI-5005 plus pegIFN/ribavirin compared to pegIFN/ribavirin alone in subjects with chronic genotype 1 HCV infection. The study was initiated in December 2007 and completed enrollment with 140 subjects. The study was stratified by prior response to interferon plus ribavirin therapy. Seventy-three percent of subjects randomized had not previously been treated with interferon-based therapy and 27% of subjects had not previously responded to interferon-based regimens.

Study results included:

 

   

Overall, GI-5005 when used in combination with pegIFN/ribavirin demonstrated an improvement in each of the following:

 

   

43 of 68 subjects, or 63%, receiving GI-5005 plus pegIFN/ribavirin compared to 29 of 65 subjects, or 45%, receiving pegIFN/ribavirin alone had clearance of virus at the end of treatment;

 

   

29 of 50 subjects not previously treated with interferon-based therapy, or 58%, receiving GI-5005 plus pegIFN/ribavirin compared to 22 of 46 such subjects, or 48%, receiving pegIFN/ribavirin alone achieved SVR24; and

 

   

3 of 18 subjects who had previously not responded to interferon-based regimens, or 17%, receiving GI-5005 plus pegIFN/ribavirin compared to 1 of 19 such subjects, or 5%, receiving pegIFN/ribavirin alone achieved SVR24;

 

   

Responses differed by IL28B genotype in subjects who had not received prior treatment. For example, the largest improvement in SVR24 was observed in subjects with the most difficult-to-treat IL28B genotype, T/T, with three of five subjects, or 60%, receiving GI-5005 plus pegIFN/ribavirin achieving SVR24 compared to none of the five subjects receiving pegIFN/ribavirin alone. Additionally, the largest immune effect in subjects receiving GI-5005 plus pegIFN/ribavirin, measured by the number of HCV-specific T cells, was seen in subjects with the T/T genotype;

 

   

37 of 61 subjects, or 61%, receiving GI-5005 plus pegIFN/ribavirin compared to 16 of 44 subjects, or 36%, receiving pegIFN/ribavirin alone showed normalized ALT levels at the completion of therapy;

 

   

GI-5005 was generally well tolerated; and

 

   

While the trial was not powered to achieve statistical significance, the difference observed in SVR24 did not achieve statistical significance.

We have expanded the GI-5005-02 clinical trial to enroll 19 additional difficult-to-treat IL28B T/T subjects. These subjects have been randomized to either GI-5005 plus pegIFN/ribavirin or pegIFN/ribavirin alone to further evaluate the magnitude of the potential treatment effect of GI-5005.

GI-13000

GI-13000 is our series of Tarmogens expressing HBV antigens for the treatment of chronic HBV infection. We are developing GI-13000 in collaboration with Gilead. Our development strategy will be to combine GI-13000 with Gilead’s Viread, an approved antiviral drug, to determine if the combination can reduce or eliminate HBV infection.

 

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Market Opportunity

HBV infection is the most common serious liver infection in the world. National and regional prevalence ranges from over 10% in Asia to under 1% in the North America and Western Europe. Worldwide, approximately 350 million people are chronic carriers of HBV, of whom more than 620,000 die from liver-related disease annually. In the United States, chronic HBV infection affects up to 1.4 million people.

Vaccination has dramatically reduced the prevalence rates among children. However, mother-to-newborn transmission, especially in Asia, remains a common source of new infection. There is currently no cure for the vast majority of chronically-infected patients.

Current treatment for HBV includes oral antiviral therapy to suppress virus replication. These antiviral products have been highly effective in controlling the disease but generally do not result in a long-term cure, thus requiring chronic suppressive therapy to control the disease. An important unmet need in HBV is a treatment that can effectively improve seroconversion rates or “cures” in chronically infected patients, allowing cessation of long-term antiviral therapy without relapse.

Other Infectious Disease Product Candidates

Several other product candidates targeting a variety of infectious diseases are being explored in preclinical programs, including hepatitis delta virus, HIV/AIDS and certain pathogenic fungi. We currently expect to use a portion of the net proceeds of this offering to advance one or more of our unpartnered infectious disease programs through a Phase 2 clinical trial.

The Tarmogen Platform

The Tarmogen platform is based on research conducted by our scientific founders, Drs. Donald Bellgrau, Richard Duke and Alex Franzusoff, in the late 1990s and early 2000s. The discovery upon which the platform is based is that when animals are immunized with yeast expressing a recombinant protein, a cellular immune response is generated against the target recombinant protein and this immune response is capable of protecting the animal against diseased cells that express the same protein. While some antibody may be generated against the yeast, the antibody does not block the activity of the yeast, allowing for repeated administration and boosting of the immune response with additional administrations. The following graphics and corresponding captions describe the mechanism by which we believe Tarmogens work.

 

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LOGO

Administration of Tarmogens initially results in binding of the yeast to white blood cells called antigen-presenting cells, the most important of which are known as dendritic cells, near the injection site. The dendritic cells are activated as a result of the Tarmogens binding to molecules called Toll-like receptors and other receptor molecules on the surface of the dendritic cell, resulting in the activation of immune signaling molecules called cytokines. The dendritic cell then engulfs the Tarmogen. Multiple Tarmogens may be taken up by the same dendritic cell.

 

LOGO

The Tarmogen is processed by the dendritic cell in two ways. First, the Tarmogen is engulfed by subcellular bodies known as endosomes and the protein inside the endosome is cut into shorter fragments called peptides. These peptides are presented by Class II MHC molecules on the surface of the dendritic cell. In combination with IL-12, a cytokine that is produced by the dendritic cell, these MHC-peptide complexes on the surface of the dendritic cell are recognized by and activate cells involved in viral immunity called CD4+ helper T cells.

 

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LOGO

Dendritic cells also process Tarmogens by engulfing them with different subcellular bodies called phagosomes. This results in presentation of peptides, including the antigen from inside the Tarmogen, to cells, known as CD8+ killer T cells, via Class I MHC molecules on the surface of the dendritic cell, resulting in proliferation of identical antigen specific CD8+ T cells. CD4+ helper T cells are so named because one of their roles is to “help” activate killer T cells by expressing a cytokine called interferon gamma, IFNg.

 

LOGO

The newly activated CD8+ killer T cells move throughout the body and identify any other cell that expresses the same disease protein as the one recognized by the CD8+ killer T cells. Once the CD8+ killer T cell finds another cell in the body containing the target protein, it can kill the cell using multiple mechanisms.

 

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Manufacturing

We commissioned an approximately 22,000 square foot facility in 2006 in Louisville, Colorado that incorporates current Good Manufacturing Practices, or cGMP, for the manufacture of clinical supplies of our product candidates. The manufacturing facility includes clean room space, laboratories, support areas, a warehouse and a loading dock, and has enabled us to meet clinical demand in a cost-effective and timely manner. Controlling our own manufacturing facility has allowed us to produce Tarmogens at relatively small scale to meet Phase 1 and 2 clinical trial demands while avoiding the need to transfer technology and schedule production at contractors. We have invested $10.9 million since late 2005 in our facility to support both small-scale early clinical production and commercial-scale production for a pivotal trial and inventory build for potential product launch. Our small-scale production process is in routine operation. In addition, we have installed and partially validated our commercial-scale process equipment and demonstrated the growth of cells at commercial scale. We use this facility to produce bulk product candidate that is then shipped to contract manufacturing organizations for filling and finishing. Currently, we are working with two qualified filling contractors.

The Tarmogen manufacturing process yields an off-the-shelf vialed product candidate with multi-year stability that can be distributed through conventional pharmaceutical channels. We believe the projected yields using a 250 liter fermentor that will allow Phase 3 clinical trial and commercial manufacturing will result in productivity estimates that compare favorably to those reported by biotechnology companies for their products. We have designed the process using scalable unit operations implemented on portable, disposable equipment, which gives us the flexibility to scale up when needed and facilitates technology transfer to a contract manufacturer or a partner, should this be desirable.

Vials of live yeast cells for each of our product candidates are stored frozen at two different locations. We believe the storage conditions and available number of vials ensure adequate availability of cells through the life-cycle of each of our product candidates. To make a batch of a product candidate, a vial containing live cells is thawed and used to inoculate a series of fermentors of increasing size until a sufficient mass of cells is produced for further processing. The cells are then collected, heat treated so that no live cells remain, washed to remove impurities and vialed at the appropriate volume and concentration for dosing patients.

All production activities are conducted under cGMP, the global standards established by the U.S. Food and Drug Administration, or FDA, and other regulatory agencies for pharmaceutical production. The equipment used in the manufacturing process is based on designs typically encountered in the production of other biotechnology products, and has been customized to tailor their use to Tarmogen production. Tarmogens are tested according to standards reviewed by the FDA and other applicable regulatory bodies before the Tarmogens can be released for use in humans.

We currently supply clinical trial materials under our collaboration agreements with Celgene and Gilead. Our collaborators have the option to take over manufacturing under specified circumstances. If our collaborators assume manufacturing responsibility, we will transfer the manufacturing process to them. We may also serve as a primary or secondary source of manufacturing.

Sales and Marketing

Oncology Products

All of our oncology product candidates, including GI-4000, GI-6207 and GI-6301, are subject to our collaboration and option agreement signed in May 2009 with Celgene. If Celgene exercises its option to a specific oncology product candidate, then Celgene will have an exclusive license to develop, market and sell that product in all markets worldwide. If Celgene does not exercise its option to a particular oncology product candidate, we would evaluate the opportunity and may elect to further pursue development and commercialization independently or find a new corporate partner to support that product candidate.

 

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Infectious Disease Products

GI-5005. We retain all worldwide rights to GI-5005. As additional data from external ongoing clinical trials become available, we will evaluate the potential role of GI-5005 in future HCV combination treatment regimens in difficult-to-treat patient subgroups.

GI-13000. Our Tarmogen product candidates targeting HBV are subject to our license and collaboration agreement with Gilead. As a result, Gilead has an exclusive license to develop, market and sell any approved HBV products worldwide.

Other infectious disease product candidates. Other than our GI-13000 program, we retain worldwide rights to all infectious disease Tarmogen product candidates. In addition to our evaluation of GI-5005, we intend to develop and commercialize these product candidates through a combination of collaborations and internal sales and marketing teams, appropriate to each situation.

Competition

The biopharmaceutical industry is highly competitive. We face competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Given the significant unmet medical need for novel therapies to treat cancer and chronic infection, these are areas of specialty for many companies, public and private universities and research organizations that are actively engaged in the discovery and research and development of products. As a result, there are and will likely continue to be extensive research and substantial financial resources invested in the discovery and development of new products to treat cancer and chronic infection. We anticipate facing intense and increasing competition as new products enter the market and advanced technologies become available. We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, reimbursement coverage, price and patent position.

In addition, there are numerous multinational pharmaceutical companies and large biotechnology companies currently marketing or pursuing the development of products or product candidates targeting the same indications as our product candidates. Many of our competitors will have substantially greater financial, technical and human resources. Accordingly, our competitors may be more successful in developing or marketing products and technologies that are more effective, safer or less costly. Additionally, our competitors may obtain regulatory approval for their products more rapidly and may achieve more widespread market acceptance.

Competing Immunotherapy Technologies

There are numerous immunotherapy products in clinical development, with over 215 targeting cancer, over 90 targeting infectious diseases and over 90 targeting chronic and other conditions. These products are generally based on one of several different competing platform technologies. These include peptide-based vaccines, whole autologous-cell based vaccines, whole allogeneic-cell based vaccines, DNA vaccines, viral-vector based vaccines, tumor lysate vaccines and dendritic cell vaccines. We are not aware of any other companies specifically utilizing yeast vectors. However, as research progresses, it is possible that competing approaches may prove superior to our Tarmogen technology, as each approach has the potential to confer different advantages and disadvantages based on its immunostimulatory mechanisms, formulation characteristics, manufacturing requirements, and logistical demands.

There is only one FDA-approved therapeutic vaccine, Dendreon Corporation’s sipuleucel-T, active cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic metastatic castrate resistant hormone refractory prostate cancer. In addition, ipilimumab is an immunomodulatory product marketed by Bristol-Myers Squibb Company for the treatment of patients with late-stage melanoma. The cancer immunotherapy landscape is broad but still in the earlier stages of development with several public biopharmaceutical companies having clinical stage cancer immunotherapy products, including Dendreon Corporation, Bristol-Myers Squibb Company, GlaxoSmithKline plc, Merck & Co., Inc., NewLink Genetics Corporation, Merck KGaA and Sanofi. The immunotherapy landscape for the treatment of chronic infection is

 

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equally broad, with competing programs from large public biopharmaceutical companies such as Intercell AG, Novartis International AG, Dynavax Technologies Corporation, Transgene S.A., and Emergent BioSolutions Inc.

GI-4000

GI-4000 is the only late-stage product candidate targeting Ras mutated cancer. There are several marketed products indicated for pancreas cancer, including Astellas Pharma Inc.’s erlotinib, Teva Pharmaceutical Industries Limited’s streptozocin, and gemcitabine, fluorouracil, or 5-FU, and mitomycin, which are marketed by several generic pharmaceutical firms. In addition, there are multiple companies or institutions conducting clinical trials of immunotherapy products in pancreas cancer, including NCI, Bavarian Nordic, NewLink Genetics Corporation, Aduro BioTech Inc., Sidney Kimmel Comprehensive Cancer Center, Providence Health & Services, Duke University, Advantagene, Inc. and AlphaVax, Inc.

There are numerous marketed therapeutics indicated for NSCLC, including Roche Holding AG’s bevacizumab, Eli Lilly’s pemetrexed, Astellas Pharma’s erlotinib and AstraZeneca PLC’s gefitinib, as well as generically available gemcitabine, platinum-based chemotherapeutics (cisplatin, oxaliplatin and carboplatin) and mitotic inhibitors (paclitaxel and vinorelbine), which are marketed by several generic pharmaceutical firms. In addition, there are multiple companies or institutions with clinical trials of immunotherapy products in lung cancer, including Merck KGaA, NCI, Duke University, Innogene Kalbiotech Pte. Ltd., H. Lee Moffitt Cancer Center, University of Miami Sylvester Comprehensive Cancer Center, Transgene S.A., Heat Biologics, AVAX Technologies, Inc., Antigenics, Laboratory Elea S.A.C.I.F., Roswell Park Cancer Institute, Baylor College of Medicine, Institut Gustave Roussy, Celldex Therapeutics and Immunovative Therapies, Ltd.

There are numerous marketed therapeutics indicated for colorectal cancer, including Roche Holding AG’s bevacizumab, Bristol Myers-Squibb’s cetuximab, and Amgen’s panitumumab, as well as irinotecan, oxaliplatin, leucovorin and 5-FU, which are marketed by several generic pharmaceutical firms. In addition, there are multiple companies or institutions with clinical trials of immunotherapy products in colorectal cancer, including NCI, Instituto Cientifico y Tecnological de Navara, Stanford University, Radboud University, University of Michigan Cancer Center, AlphaVax Inc., Duke University, Immunovative Therapies Ltd. and Ohio State University Comprehensive Cancer Center.

GI-6207

In April 2011, AstraZeneca’s vandetanib was the first FDA-approved treatment for late-stage, or metastatic, MTC in adult patients who are ineligible for resection. We believe there are no immunotherapy products in late stage clinical development other than GI-6207 for MTC. There are companies or institutions with clinical trials of immunotherapy products generally targeting CEA, including Bavarian Nordic, NCI and Radboud University.

GI-6301

We believe there are no approved products targeting brachyury, and no immunotherapy products in clinical development targeting brachyury other than GI-6301.

GI-5005

There are several marketed therapeutics indicated for the treatment of chronic HCV infection, including Roche Holding AG’s pegylated interferon 2a, Merck’s pegylated interferon 2b and boceprevir, Vertex’s telaprevir, and ribavirin, which is marketed by several generic pharmaceutical firms. In addition, there are several companies or institutions with clinical trials of immunotherapy products for the treatment of chronic HCV infection, including Intercell, Novartis, Tripep, Inovio, Dynavax Technologies Corporation, Okairos, Transgene, Gilead, Abbott, Bristol Myers-Squibb, Biolex and Achillion. The availability of newly-approved and other investigational drugs for HCV may make it particularly difficult to enroll clinical trials for our GI-5005 product candidate.

 

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GI-13000

There are several marketed therapeutics indicated for the treatment of chronic HBV infection, including Roche Holding AG’s pegylated interferon 2a, Gilead’s tenofovir and adefovir, Bristol Myers-Squibb’s entecavir, Novartis’ telbivudine, and lamivudine, which is marketed by several generic pharmaceutical firms. In addition, there are several companies or institutions with clinical trials of immunotherapy products for the treatment of chronic HBV infection, including Chongqing Jiachen Biotechnology, Emergent Biosolutions, Shanghai Medical University, Dynavax Technologies Corporation, Institut Pasteur, Pohang University of Science and Technology and Vaxine Pty. Ltd.

Intellectual Property

It is important to our business to maintain the proprietary nature of and to protect our technology and know-how, including our proprietary Tarmogen product candidates, methods of making and using Tarmogen products, manufacturing processes, trade secrets, and know-how related to our Tarmogen products, processes and technology. Our success depends in part on our ability to protect our proprietary Tarmogen 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 seek patent protection in the United States and internationally for our Tarmogen technology, Tarmogen product candidates, and other technology we develop. Our policy is to patent or in-license the technology, inventions and improvements that we consider important to the development of our business. We also rely on trade secrets, know-how and continuing innovation to develop and maintain our competitive position. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will be commercially useful in protecting our technology.

The Tarmogen technology platform is covered by eight families of patents and patent applications of which 30 are issued patents and 57 are patent applications, providing protection in the United States and foreign jurisdictions for the basic Tarmogen platform, as well as various improvements and modifications to the Tarmogen platform, technology and manufacturing processes. These eight patent families are owned and/or co-owned by us and/or exclusively licensed from The Regents of the University of Colorado or The United States of America as represented by the Department of Health and Human Services, or HHS. One of the patent families that cover the basic Tarmogen compositions of matter and method of use extends until November 2015. The other seven patent families provide coverage through November 2021, December 2023, February 2027, February 2028, April 2030, September 2030, and August 2031, respectively.

In addition to the protection provided by the existing patent families that we currently own, co-own and/or license, our exclusive, worldwide license from The Regents of the University of Colorado provides intellectual property rights related to the Tarmogen platform including various improvements and specific technologies related to the Tarmogen platform that have been or may be discovered in the future by University of Colorado researchers during the term of the license. We also have a non-exclusive license from Washington Research Foundation to intellectual property rights in the United States and certain other countries covering the production of recombinant yeast; the last of the issued patents under this license expires in April 2014.

Our lead oncology product candidate, GI-4000, targeting cancers expressing mutated Ras, is specifically covered under two patent families that we currently own and/or co-own and/or license under our exclusive, worldwide license from The Regents of the University of Colorado, of which 9 are issued patents and 26 are patent applications. These issued patents and any patent applications that issue as patents in the United States and/or abroad will expire in December 2023 or March 2027, unless the patent term is extended by patent term adjustment or patent term extension.

GI-6207, our oncology product candidate targeting cancers expressing CEA, is specifically covered by a patent family that we currently own and/or co-own and/or license under our exclusive, worldwide license from The Regents of the University of Colorado, of which eight are issued patents and 12 are patent applications. These issued patents and any patent applications that issue as patents in the United States and/or abroad will expire in

 

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December 2023, unless the patent term is extended by patent term adjustment or patent term extension. The antigen expressed by GI-6207 is also covered under a patent family that we have in-licensed from the Public Health and Human Services of The United States Government. The last of the 29 issued patents covered by the license from the Public Health and Human Services of The United States Government expires in September 2018.

GI-6301, our oncology product candidate targeting cancers expressing brachyury, is covered by two patent families. One patent family, of which eight are issued patents and 12 are patent applications, is owned and/or co-owned by us and/or licensed under our exclusive, worldwide license from The Regents of the University of Colorado. These issued patents and any patent applications that issue as patents in the United States and/or abroad will expire December 2023, unless the patent term is extended by patent term adjustment or patent term extension. A second patent family covering GI-6301, currently including one pending Patent Cooperation Treaty patent application, is co-owned by us and the United States of America as represented by HHS, and if patent applications claiming priority to this patent application issue in the United States and/or abroad, such issued patents will expire in March 2032, unless the patent term is extended by patent term adjustment or patent term extension. We also have an exclusive, worldwide license from the Public Health Service to the U.S. Government’s rights in this patent family.

Our lead product candidate in HCV infection, GI-5005, is specifically covered by three patent families, all owned by us, of which seven are issued patents and 22 are patent applications. These issued patents and any patent applications that issue as patents in the United States and/or abroad will expire on December 2023, October 2025, September 2029, or March 2031, unless the patent term is extended by patent term adjustment or patent term extension.

Our lead product candidates in HBV infection, known collectively as GI-13000, are primarily covered by one patent family that is owned by us and exclusively licensed to Gilead. The family currently contains five pending patent applications and is expected to provide exclusivity through February 2032, if these patent applications, or patent applications claiming priority to these patent applications, issue as patents in the United States and/or abroad, and unless the patent term is extended by patent term adjustment or patent term extension.

We are also actively pursuing additional patent applications in the United States and foreign patent jurisdictions for other preclinical Tarmogen product candidates and methods of use, including additional Tarmogen product candidates targeting oncology antigens, and additional Tarmogen product candidates for infectious disease. In addition, we intend to seek patent protection whenever available for any products or product candidates and related technology we develop and/or acquire in the future.

The patent positions of biotechnology companies like ours are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether the Tarmogen product candidates we are developing will gain patent protection or, if patents are issued, whether they will provide significant proprietary protection or will be challenged, circumvented or invalidated. Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in post-grant proceedings, interference proceedings, or third-party ex parte or inter partes reexamination proceedings under the U.S. Patent and Trademark Office, or in opposition proceedings in a foreign patent office, any of which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that the patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using specific compounds or technology. To the extent prudent, we intend to bring litigation against third parties that we believe are infringing one or more of our patents.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in

 

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granting a patent, or may be shortened if a patent is terminally disclaimed over another patent. Certain of our patents currently benefit from patent term adjustment and some of our patents issuing in the future may benefit from patent term adjustment.

The patent term of a patent that covers an FDA-approved product may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. 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 of the patent. The length of the patent term extension is related to the length of time the product is under regulatory review. Patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved product may be extended. Similar provisions are available in Europe and other non-U.S. jurisdictions to extend the term of a patent that covers an approved product. In the future, if and when our Tarmogen product candidates receive FDA approval, we expect to apply for patent-term extensions on patents covering those products.

To protect our rights to any of our issued patents and proprietary information, we may need to litigate against infringing third parties, or avail ourselves of the courts or participate in hearings to determine the scope and validity of those patents or other proprietary rights. These types of proceedings are often costly and could be very time-consuming to us, and there can be no assurance that the deciding authorities will rule in our favor. An unfavorable decision could allow third parties to use our technology without being required to pay us licensing fees or may compel us to license needed technologies to avoid infringing third-party patent and proprietary rights. Such a decision could even result in the invalidation or a limitation in the scope of our patents or forfeiture of the rights associated with our patents or pending patent applications.

We intend to seek orphan drug status whenever it is available. If a product which has an orphan drug designation subsequently receives the first regulatory approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, meaning that the applicable regulatory authority may not approve any other applications to market the same drug for the same indication, except in certain very limited circumstances, for a period of seven years in the United States and 10 years in the European Union. Orphan drug designation does not prevent competitors from developing or marketing different drugs for an indication. We have applied for orphan drug status for GI-4000 for use in pancreas cancer.

We also rely on trademark registration to protect our intellectual property. We currently have trademarks registered on the Principal Register in the United States for “GLOBEIMMUNE”, “TARMOGEN”, and for our company logo, and on the Supplemental Register for “TARGETED MOLECULAR IMMUNOTHERAPY”, with an application pending for “TARGETED MOLECULAR IMMUNOTHERAPY” on the Principal Register. We also have a trademark application pending for “TAME” and a trademark application pending for “GBIM”.

We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets. However, we believe that the substantial costs and resources required to develop technological innovations will help us to protect the competitive advantage of our products.

It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting or collaborative relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be and are our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

 

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Licensing Agreements

Celgene Corporation – Collaboration and Option Agreement

We are party to a Collaboration and Option Agreement, or the Celgene Agreement, with Celgene, dated May 14, 2009, as amended November 6, 2009, February 9, 2010, June 16, 2011 and October 24, 2011. Under the Celgene Agreement, we granted Celgene the exclusive option, on a program-by-program basis, to all of our oncology programs. For each such program, we have agreed to conduct early development of the product candidates in such oncology program through certain predefined endpoints, at which time Celgene will have the right to exercise its option and obtain the exclusive license to develop and commercialize the product candidates in such program. After the exercise of the option, Celgene will be solely responsible for the development and commercialization of the applicable products. We are responsible for the manufacture and supply of the products for both development and commercial use, for which we will be paid a fee, unless Celgene exercises its option to manufacture the products.

Under the Celgene Agreement, Celgene paid us an initial $30 million fee. If certain development and regulatory milestones are achieved, we would be eligible to receive up to $441 million in milestone payments, and, if products are commercialized, up to an additional $60 million of milestone payments plus tiered royalties based on net sales of each licensed product candidate.

Each party has the right to terminate the Celgene Agreement for the other party’s uncured material breach or insolvency, and Celgene has the right to terminate the Celgene Agreement for convenience at any time upon prior notice. Following termination of the Celgene Agreement by Celgene for our uncured material breach or insolvency, all licenses granted to Celgene will continue with respect to the programs for which Celgene has exercised the option, subject to certain continuing obligations. If not terminated earlier, the Celgene Agreement will remain in effect, for a particular product in a particular country, until the expiration of all payment obligations for such product in such country.

Gilead Sciences, Inc. – License and Collaboration Agreement

We are party to a License and Collaboration Agreement, or the Gilead Agreement, dated October 24, 2011 with Gilead Sciences. Under the agreement, we granted Gilead exclusive worldwide rights to use our platform technology on Tarmogens to research, develop, and commercialize vaccine products directed at HBV. Under the agreement, we also granted Gilead licenses under certain trademarks owned or controlled by us, solely for use with respect to such HBV vaccine product.

Under the Gilead Agreement, we will collaborate with Gilead on the development and commercialization of therapeutic vaccine products for use in conjunction with Gilead’s drug, Viread (tenofovir disoproxil fumarate), for the treatment of HBV infection. We are responsible for the manufacture and supply to Gilead of the vaccine products during the collaboration development period. Gilead granted to us a non-exclusive, worldwide license under any Gilead improvements to our Tarmogen technology, to develop and commercialize Tarmogens in all fields other than HBV. Such license will bear royalties payable to Gilead as negotiated by the parties in good faith.

Under the Gilead Agreement, Gilead paid us an upfront payment of $10 million and agreed to fund a Phase 1a clinical trial of GI-13000. Gilead is responsible for clinical development beyond the Phase 1a clinical trial. We are eligible to receive additional proceeds of up to $135 million in development and regulatory milestones, and if products are commercialized, tiered royalties and up to $40 million of sales milestone payments based on net sales of the licensed product candidates.

The term of the Gilead Agreement continues on a product-by-product and country-by-country basis until the expiration of Gilead’s obligation to pay royalties for such product in such country, or until the agreement is earlier terminated. Gilead can terminate the agreement at will on prior written notice to us. Each party has the right to terminate the agreement for the other party’s uncured material breach of the agreement, or if such other party becomes insolvent or bankrupt. Under certain circumstances of termination of the agreement, Gilead will negotiate in good faith with us the terms under which Gilead will grant to us an exclusive, royalty-bearing license to a terminated product in the terminated country.

 

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The Regents of the University of Colorado – Restated Intellectual Property License Agreement

We are party to a Restated Intellectual Property License Agreement, or the CU Agreement, with The Regents of the University of Colorado, or CU, dated March 30, 2006 and originally effective as of September 18, 1997, as amended May 5, 2009 and March 12, 2010. The CU Agreement granted to us an exclusive, worldwide, sublicenseable license under specified CU patent rights relating to yeast-based immunotherapy, to make, use and sell products and processes that are covered by such patent rights. CU retains a non-exclusive, non-transferrable right to use such patent rights for academic and research purposes, and also to certain pre-existing rights of the U.S. government. The CU Agreement also granted to us an option to obtain rights to any future inventions or discoveries created or developed at CU by one or more of the original inventors of the licensed CU patents.

In consideration of our license under the CU Agreement, we issued to CU shares of our common stock. We also are obligated to pay CU royalties on net revenues from our and our sublicensee’s sale of any commercialized licensed product or process, and certain other payments. We are responsible for diligently prosecuting and maintaining the licensed CU patent rights, at our sole cost and expense.

Under the CU Agreement, we have certain obligations to obtain funding or financing to conduct further research and development, and are obligated to commercialize, either directly or through a sublicensee, the licensed CU patent rights as licensed products or processes.

The term of the CU Agreement continues until the expiration of the last patent included within the licensed CU patents, or until the agreement is earlier terminated. We may terminate the agreement on prior written notice to CU. Each party has the right to terminate the agreement for the other party’s uncured material breach of obligations under the agreement.

Washington Research Foundation – Field-of-Use Non-Exclusive License Agreement

We are party to a Field-of-Use Non-Exclusive License Agreement, or the WRF Agreement, with Washington Research Foundation, or WRF, dated November 24, 2003, as amended on May 5, 2009. The WRF Agreement granted to us a non-exclusive license in the United States and certain other countries, under specified WRF patent rights relating to WRF’s recombinant yeast expression technology, to develop and commercialize products in a certain field of use. We may grant sublicenses, through multiple tiers, under such license from WRF, subject to certain additional conditions.

In consideration of such license grant, we are obligated to pay to WRF specified license fees, annual license maintenance fees, annual sublicense fees, a milestone payment if a certain development milestone is met, and royalties as a percentage of net sales of a licensed product by us, an affiliate or a sublicensee.

Under the agreement, we are obligated to demonstrate our, or an affiliate’s or a sublicensee’s, progress in developing, marketing and selling licensed products, including providing annual reports to WRF on such progress.

Unless terminated earlier, the WRF Agreement will remain in effect until the expiration of the last valid claim in the licensed WRF patents. We may terminate the agreement with written notice to WRF. Each party has the right to terminate the agreement for the other party’s uncured material breach of obligations under the agreement. WRF may terminate the agreement in the event of our bankruptcy or insolvency. If the agreement terminates, any sublicense we granted under the WRF patent rights will automatically become a direct license of WRF, subject to that sublicensee meeting certain additional conditions and obligations.

National Cancer Institute – Cooperative Research and Development Agreement

We are party to a Cooperative Research and Development Agreement, or CRADA, with NCI, entered into in 2008, as amended on August 8, 2011. We previously carried out a series of collaborative research studies with NCI on the generation and analysis of yeast-based vaccines in preclinical models. Under the CRADA, the parties will jointly develop products intended to treat a variety of cancers, through collaborative research and development activities set forth in a research plan. We will utilize our proprietary Tarmogen technology to

 

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develop multiple immunotherapy products expressing various cancer antigens provided by the NCI, and the NCI will conduct and fund preclinical and early clinical development of the product candidates.

Under the CRADA, NCI will be the sponsor of, and will prepare and submit an Investigational New Drug Application, or IND covering the applicable product candidate or candidates. We may sponsor our own clinical trials for Tarmogens developed within or outside the scope of the CRADA and hold our own IND for studies performed outside the scope of the CRADA, or for studies within the scope of the CRADA if mutually agreed by the parties.

The party that produces an invention or develops materials under the CRADA retains sole ownership of such invention and materials. The parties will jointly own all data created under the CRADA. Subject to certain rights retained by the U.S. government, NCI has granted us certain license and option rights, with respect to any inventions made solely by NCI or jointly between the parties under the CRADA. Further, we have granted to the U.S. government, for research or other U.S. government purposes, a non-exclusive, worldwide, nontransferable, irrevocable, paid-up license to practice any inventions made solely by us under the CRADA.

The term of the CRADA is for five years. A party may unilaterally terminate the CRADA by providing prior written notice. In the event we terminate the CRADA, or otherwise suspend development of the product candidates during the term of the CRADA without transferring our development efforts, assets and obligations to a third party within ninety days of such discontinuation, we have agreed to continue supplying the product candidates with respect to all patients enrolled under any active or approved protocols, subject to certain restrictions.

Public Health Service – Patent License Agreements

We are party to a Patent License Agreement, or the PHS Agreement, with the U.S. Public Health Service, or PHS, dated June 12, 2007, as amended April 5, 2010 and October 31, 2011. Under the PHS Agreement, we are granted a worldwide exclusive license under certain PHS patent rights to develop and commercialize licensed products and licensed processes for oncology indications related to over-expressed CEA. The Company has the right to grant sublicenses, through multiple tiers, upon written approval of PHS, such approval not to be unreasonably delayed or withheld, and subject to certain additional conditions and obligations.

Our license under the PHS Agreement is subject to the U.S. government’s retained rights under a non-exclusive, worldwide, royalty-free license for the practice of all inventions licensed under the PHS patent rights, by or on behalf of the U.S. government and on behalf of any foreign government or international organization pursuant to any existing or future treaty or agreement to which the U.S. government is a signatory. For purposes of encouraging basic research, the U.S. government also reserves the right to grant or require us to grant to a third party on reasonable terms a non-exclusive, non-transferable license to make and use the licensed products or licensed processes for research purpose only, but subject to PHS consulting with us in the event such third party is a commercial entity. Under certain exceptional and enumerated circumstances, the U.S. government may require us to grant a sublicense to a responsible third party applicant, on terms that are reasonable under the circumstances. The PHS takes responsibility for all aspects of the preparation, filing, prosecution and maintenance of any and all patent applications or patents included in the licensed PHS patent rights, subject to our payment of certain patent-related expenses.

In consideration of our license under the PHS Agreement, we have agreed to pay to PHS certain royalties, including as a percentage of net sales of any licensed products or licensed processes. Under the agreement, we agreed to use reasonable commercial efforts to bring the licensed products and licensed processes to practical application, including meeting certain development benchmarks as agreed to by the parties, and making such licensed products and licensed processes commercially available to the public in accordance with an agreed-to commercial development plan. Upon the first commercial sale of any licensed product or licensed process, we have agreed to use reasonable commercial efforts to make reasonable quantities of such licensed product available on a compassionate use basis to patients, and to develop educational materials directed to patients and physicians.

The term of the PHS Agreement continues until the expiration or termination of the last to expire of the patents under the PHS patent rights, or until the agreement is earlier terminated. We have the unilateral right to terminate

 

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the agreement, or our license in any country, on written notice to PHS. PHS has the right to terminate for our uncured material breach of our obligations under the agreement, or if we become insolvent or bankrupt. PHS also has the right to terminate or modify the PHS Agreement if it determines that certain specific events have occurred, such as our failure to achieve any development benchmarks or failure to satisfy unmet health and safety needs, provided such right is subject to appeal by us. Upon termination of the PHS Agreement, a sublicensee of ours under the PHS patent rights may elect for termination of its sublicense, or the conversion to a license directly between it and PHS. Such conversion is subject to PHS approval and contingent upon the sublicensee’s acceptance of the remaining provisions of the PHS Agreement.

We are also party to three other Patent License Agreements, or the Additional PHS Agreements, with PHS dated August 23, 2011, March 12, 2012, and January 3, 2012. Under the Additional PHS Agreements, we are granted worldwide exclusive licenses under certain PHS patent rights covering “subject inventions” that arose under the CRADA between us and NCI, to make, have made, use, have use, sell, have sold, offer to sell, and import licensed products and licensed processes. We have the right to grant sublicenses, through multiple tiers, upon written approval of PHS, such approval not to be unreasonably delayed or withheld, and subject to certain additional conditions and obligations.

Our licenses under the Additional PHS Agreements are subject to the U.S. government’s retained rights under a non-exclusive, worldwide, royalty-free license for the practice of all inventions licensed under the PHS patent rights, by or on behalf of the U.S. government and on behalf of any foreign government or international organization pursuant to any existing or future treaty or agreement to which the U.S. government is a signatory. For purposes of encouraging basic research, the U.S. government also reserves the right to grant or require us to grant to a third party on reasonable terms a non-exclusive license to make and use the licensed products or licensed processes for research purpose only, but subject to PHS consulting with us in the event such third party is a commercial entity. Under certain exceptional and enumerated circumstances, the U.S. government may require us to grant a sublicense to a responsible third party applicant, on terms that are reasonable under the circumstances.

In consideration of our licenses under the Additional PHS Agreements, we have agreed to pay to PHS certain royalties, including as a percentage of net sales of any licensed products or licensed processes. We are also responsible for the preparation, filing, prosecution and maintenance of any and all patent applications or patents included in the licensed PHS patent rights, subject to consultation with PHS. In addition, under the agreement, we agreed to use reasonable commercial efforts to bring the licensed products and licensed processes to practical application, including meeting certain development benchmarks as agreed to by the parties, and making such licensed products and licensed processes commercially available to the public in accordance with an agreed-to commercial development plan. Upon the first commercial sale of any licensed product or licensed process, we have agreed to use reasonable commercial efforts to make reasonable quantities of such licensed product available on a compassionate use basis to patients, and to develop educational materials directed to patients and physicians.

The terms of the Additional PHS Agreements continue until the expiration or termination of the last to expire of the patents under the applicable PHS patent rights, or until the agreements are earlier terminated. For each agreement within the Additional PHS Agreements, we have the unilateral right to terminate the agreement, or our license in any country, on written notice to PHS. PHS has the right to terminate for our uncured material breach of our obligations under the agreement, or if we become insolvent or bankrupt. PHS also has the right to terminate or modify the Additional PHS Agreements if it determines that certain specific events have occurred, such as our failure to achieve any development benchmarks or failure to satisfy unmet health and safety needs, provided that such right is subject to appeal by us. Upon termination of any of the agreements within the Additional PHS Agreements, a sublicensee of ours under the applicable PHS patent rights may elect for termination of its sublicense, or the conversion to a license directly between it and PHS. Such conversion is subject to PHS approval and contingent upon the sublicensee’s acceptance of the remaining provisions of the applicable Additional PHS Agreement.

 

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Government Regulation

We operate in a highly regulated industry that is subject to significant federal, state, local and foreign regulation. Our present and future business has been, and will continue to be, subject to a variety of laws including, the Federal Food, Drug, and Cosmetic Act, or FDC Act, and the Public Health Service Act, among others.

The FDC Act and other federal and state statutes and regulations govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. As a result of these laws and regulations, product development and product approval processes are very expensive and time-consuming.

FDA Approval Process

In the United States, pharmaceutical products, including biologics, are subject to extensive regulation by the FDA. The FDC Act and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, or biologic license applications, or BLAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.

Pharmaceutical product development in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug or biologic for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.

Preclinical tests include laboratory evaluation as well as animal trials to assess the characteristics and potential pharmacology and toxicity of the product. The conduct of the preclinical tests must comply with federal regulations and requirements including good laboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not objected to the IND within this 30-day period, the clinical trial proposed in the IND may begin.

Clinical trials involve the administration of the investigational drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with federal regulations and good clinical practices, or GCP, as well as under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The clinical trial protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

Clinical trials to support NDAs or BLAs, which are applications for marketing approval, are typically conducted in three sequential Phases, but the Phases may overlap. In Phase 1, the initial introduction of the

 

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investigational drug candidate into healthy human subjects or patients, the investigational drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population, to determine the effectiveness of the investigational drug for a particular indication or indications, dosage tolerance and optimum dosage, and identify common adv