S-4 1 d696376ds4.htm S-4 S-4
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As filed with the Securities and Exchange Commission on February 4, 2019

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

VITAL THERAPIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   56-2358443

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

15222-B Avenue of Science

San Diego, California 92128

(858) 673-6840

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

Dr. Duane D. Nash

Chief Executive Officer and President

Vital Therapies, Inc.

15222-B Avenue of Science

San Diego, California 92128

(858) 673-6840

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

 

 

Copies to:

 

Mike Hird

Pillsbury Winthrop Shaw Pittman LLP

12255 El Camino Real, Suite 300

San Diego, California 92130

(619) 234-5000

 

John M. Dunn

General Counsel

Vital Therapies, Inc.

15222-B Avenue of Science

San Diego, California 92128

(858) 673-6840

 

Thomas Strassner

Dentons Europe LLP

Jungfernturmstr. 2

80333 Munich

Germany

+49 89 244408 442

Gabriella Lombardi

Pillsbury Winthrop Shaw Pittman LLP

2550 Hanover Street

Palo Alto, California 94304

(650) 233-4500

 

Dr. Daniel Vitt

Immunic AG

Am Klopferspitz 19

82152 Planegg-Martinsried

Germany

 

Ilan Katz

Dentons U.S. LLP

1221 Avenue of the Americas

New York, New York 10020

(212) 768-6700

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and the satisfaction or waiver of all other conditions under the Exchange Agreement described herein.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  ☐

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered (1)

 

Proposed

maximum

offering price

per share

 

Proposed

maximum

aggregate

offering price (2)

 

Amount of

registration fee (3)

Common stock, $0.0001 par value per share

  600,000,000   N/A   $43,635,391.33   $5,288.61

 

 

(1)

Represents the maximum number of shares of common stock, $0.0001 par value per share, of Vital Therapies, Inc. issuable to holders of common shares of Immunic AG, or Immunic, in the proposed Transaction. The amount of Vital Therapies’ common stock to be registered is based on the estimated number of shares of common stock that are expected to be issued to the shareholders of Immunic pursuant to the Transaction, before taking into account the effect of the proposed reverse stock split of the Registrant’s common stock.

(2)

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f) of the Securities Act of 1933, as amended, based upon the estimated book value of the Immunic securities to be exchanged in the proposed transaction, as of immediately prior to the proposed transaction (which calculation takes into effect a new investment of $30.0 million in Immunic which is expected to occur following the date hereof and prior to the consummation of the proposed transaction). Immunic is a private company and no market exists for its securities.

(3)

Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $121.20 per $1,000,000 of the proposed maximum aggregate offering price.

 

 

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

 

 

 


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The information in this proxy statement/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 proxy statement/prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2019

PROPOSED TRANSACTION

YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Vital Therapies, Inc.:

Vital Therapies, Inc., or Vital Therapies, Immunic AG, or Immunic, and all of the current shareholders of Immunic entered into an Exchange Agreement dated as of January 6, 2019, or the Exchange Agreement, pursuant to which the Immunic shareholders will contribute, transfer, assign and deliver all of the Immunic shares owned by them, and all of their rights with respect to such Immunic shares, to Vital Therapies in exchange for shares of Vital Therapies common stock, with the result of Immunic becoming a wholly-owned subsidiary of Vital Therapies, which is referred to as the Transaction. Immunic and Vital Therapies believes that following the closing of the Transaction, the company, which will be renamed “Immunic, Inc.” immediately after the Transaction, will focus on advancing Immunic’s pipeline of treatments for chronic inflammatory and autoimmune diseases.

Prior to entry into the Exchange Agreement, all current Immunic shareholders as well as certain of Immunic’s executive officers and directors entered into an Investment and Subscription Agreement, or the Subscription Agreement, with Immunic dated as of January 6, 2019, pursuant to which certain Immunic shareholders have agreed, subject to the terms and conditions of such agreement, to invest, prior to the consummation of the Transaction, an aggregate amount of approximately €26.7 million, or net proceeds of approximately $30.3 million based on the current exchange rate, in Immunic by means of an increase of its registered share capital and payments into its capital reserves.

At the closing of the Transaction, each Immunic common share will be exchanged for the right to receive a number of shares of Vital Therapies common stock referred to in this proxy statement/prospectus as the Exchange Ratio. It is currently anticipated that, at the closing of the Transaction, the Exchange Ratio will be approximately 735 shares of Vital Therapies’ common stock, or Vital Therapies common stock, for each Immunic share. Vital Therapies stockholders will continue to own and hold their existing shares of Vital Therapies common stock. The Exchange Ratio is determined pursuant to a formula in the Exchange Agreement and described in the attached proxy statement/prospectus, and this estimate is subject to adjustment. The Exchange Ratio will be adjusted to account for the reverse stock split described in this proxy statement/prospectus.

Immediately after the Transaction, (a) current Vital Therapies stockholders are expected to own approximately 11% of the company and (b) current Immunic shareholders are expected to own approximately 89% of the company, on a fully-diluted basis, in each case calculated on a pro forma basis after giving effect to (i) the issuance of shares by Immunic immediately prior to the closing of the Transaction pursuant to the terms of the Subscription Agreement, and (ii) the Transaction. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment.

Shares of Vital Therapies common stock are currently listed on The Nasdaq Global Market under the symbol “VTL.” Immunic intends to file an initial listing application for the company following the closing of the Transaction with The Nasdaq Stock Market. After consummation of the Transaction, Vital Therapies will be renamed “Immunic, Inc.” and expects to trade on The Nasdaq Stock Market under the symbol “IMUX.” On [●], 2019, the last trading day before the date of this proxy statement/prospectus, the closing sale price of Vital Therapies common stock was $[●] per share.

Vital Therapies is holding a special meeting of stockholders, or the special meeting, in order to obtain the stockholder approvals necessary to complete the Transaction and related matters. At the special meeting, which will be held at 12255 El Camino Real, Suite 300, San Diego, California 92130, at [●] [a.m./p.m.], local time, on [●], [●], 2019, unless postponed or adjourned to a later date, Vital Therapies will ask its stockholders to, among other things:

 

   

approve the issuance of shares of Vital Therapies common stock to Immunic shareholders pursuant to the terms of the Exchange Agreement;

 

   

approve the change in control of Vital Therapies resulting from the Transaction;

 

   

approve an amendment to the amended and restated certificate of incorporation of Vital Therapies changing the Vital Therapies corporate name to “Immunic, Inc.”;

 

   

approve an amendment to the amended and restated certificate of incorporation of Vital Therapies effecting a reverse stock split of Vital Therapies’ issued and outstanding common stock in accordance with a ratio to be determined by the board of directors within a range of 30 to 60 shares (or any number in between) of outstanding Vital Therapies common stock being combined and reclassified into one share of Vital Therapies common stock;

 

   

consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposals set forth above; and

 

   

transact such other business as may properly come before the stockholders at the special meeting or any adjournment or postponement thereof.

After careful consideration, the board of directors of Vital Therapies has approved the Exchange Agreement and the proposals described in this proxy statement/prospectus, and the board of directors has determined that it is advisable to consummate the Transaction. Our board of directors recommends that stockholders vote “FOR” the proposals described in the accompanying proxy statement/prospectus.

More information about Vital Therapies, Immunic and the Transaction is contained in this proxy statement/prospectus. You are urged to read the accompanying proxy statement/prospectus carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 33.

We are excited about the opportunities the proposed Transaction brings to Vital Therapies’ stockholders, and thank you for your consideration and continued support.

Dr. Duane D. Nash

Chief Executive Officer and President

Vital Therapies, Inc.

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 proxy statement/prospectus. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus is dated [●] [●], 2019, and is first being mailed to stockholders on or about [●] [●], 2019.


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VITAL THERAPIES, INC.

15222-B AVENUE OF SCIENCE

SAN DIEGO, CALIFORNIA 92128

(858) 673-6840

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [] [], 2019

 

Time:

  

[●] [a.m./p.m.], local time

Date:

  

[●] [●], 2019

Place:

  

12255 El Camino Real, Suite 300, San Diego, California 92130

Purposes:

1. To approve the issuance of shares of common stock of Vital Therapies, Inc., or Vital Therapies, to shareholders of Immunic AG, or Immunic, pursuant to the terms of the Exchange Agreement between Vital Therapies, Immunic and the Shareholders of Immunic, dated as of January 6, 2019, a copy of which is attached as Annex A and incorporated by reference herein, and is referred to as the Exchange Agreement;

2. To approve the change in control of Vital Therapies resulting from the Transaction contemplated by the Exchange Agreement;

3. To approve an amendment to the amended and restated certificate of incorporation of Vital Therapies changing the Vital Therapies corporate name to “Immunic, Inc.” in the form attached as Annex B;

4. To approve an amendment to the amended and restated certificate of incorporation of Vital Therapies effecting a reverse stock split of Vital Therapies’ issued and outstanding common stock within a range of 30 to 60 shares (or any number in between) of outstanding Vital Therapies common stock being combined and reclassified into one share of Vital Therapies common stock in the form attached as Annex C;

5. To consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposals set forth above; and

6. To transact such other business as may properly come before the stockholders at the special meeting or any adjournment or postponement thereof.

Record Date: The board of directors of Vital Therapies has fixed [●] [●], 2019 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only stockholders of record of shares of Vital Therapies common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, [●] shares of common stock of Vital Therapies were outstanding and entitled to vote at the special meeting.

Your vote is important. The affirmative vote of the holders of a majority of the shares of Vital Therapies’ common stock having voting power present in person or represented by proxy at the special meeting, assuming a quorum is present, is required for approval of Proposals 1, 2 and 5. The affirmative vote of the holders of a majority of the outstanding shares of common stock entitled to vote on the record date for the special meeting is required for approval of Proposals 3 and 4. Each of Proposals 1, 2, 3, and 4 are conditioned upon each other and the approval of each such proposal is a condition to the completion of the Transaction. Therefore, the Transaction cannot be consummated without the approval of Proposals 1, 2, 3 and 4.

Even if you plan to attend the special meeting in person, we request that you sign and return the enclosed proxy to ensure that your shares will be represented at the special meeting if you are unable to attend. You may change or revoke your proxy at any time before it is voted at the special meeting.


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THE BOARD OF DIRECTORS HAS DETERMINED THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS FAIR TO, AND IN THE BEST INTERESTS OF, VITAL THERAPIES AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS OF VITAL THERAPIES VOTE “FOR” EACH OF THE PROPOSALS.

By Order of the Board of Directors,

Dr. Duane D. Nash

Chief Executive Officer and President

San Diego, California

[●] [●], 2019


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates important business and financial information about Vital Therapies that has been filed with the Securities and Exchange Commission, or SEC, and that is not included in or delivered with this document. You may obtain this information without charge through the SEC’s website (http://www.sec.gov) or upon your written or oral request by contacting the secretary of Vital Therapies, Inc., 15222-B Avenue of Science, San Diego, California 92128 or by calling (858) 673-6840.

To ensure timely delivery of these documents, any request should be made no later than [], 2019 to receive them before the special meeting.

For additional details about where you can find information about Vital Therapies, please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus.


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE TRANSACTION

     1  

PROSPECTUS SUMMARY

     8  

The Companies

     8  

The Transaction

     8  

Reasons for the Transaction

     9  

Interests of the Directors and Executive Officers of Vital Therapies in the Transaction

     10  

Interests of the Directors and Executive Officers of Immunic in the Transaction

     11  

Opinion of Financial Advisor to Vital Therapies

     12  

Management Following the Closing of the Transaction

     12  

Overview of the Exchange Agreement and Agreements Related to the Exchange Agreement

     13  

Regulatory Approvals

     17  

Material U.S. Federal Income Tax Consequences of the Transaction

     17  

Nasdaq Stock Market Listing

     18  

Anticipated Accounting Treatment

     18  

Appraisal Rights

     18  

Risk Factors

     18  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     20  

Selected Historical Consolidated Financial Data of Vital Therapies

     20  

Comparative Historical and Unaudited Pro Forma Per Share Data

     22  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     23  

MARKET PRICE AND DIVIDEND INFORMATION

     32  

RISK FACTORS

     33  

Risks Related to the Transaction

     33  

Risks Related to Vital Therapies

     37  

Risks Related to Immunic

     70  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     111  

THE SPECIAL MEETING OF STOCKHOLDERS OF VITAL THERAPIES

     113  

Date, Time and Place

     113  

Purposes of the Special Meeting

     113  

Recommendation of the Board of Directors of Vital Therapies

     113  

Record Date and Voting Power

     114  

Voting and Revocation of Proxies

     114  

Required Vote

     115  

Solicitation of Proxies

     116  

Other Matters

     116  

THE TRANSACTION

     117  

Background of the Transaction

     117  

Vital Therapies Reasons for the Transaction

     125  

Opinion of Financial Advisor to Vital Therapies

     127  

Information Regarding Financial Projections Used for Fairness Opinion Analysis

     135  

Immunic Reasons for the Transaction

     136  

Interests of the Directors and Executive Officers of Vital Therapies in the Transaction

     137  

Interests of the Directors and Executive Officers of Immunic in the Transaction

     143  

Form of the Transaction

     146  

Transaction Consideration and Exchange Ratio

     146  

Stock Options and Warrants

     147  

Closing Time of the Transaction

     148  

Regulatory Approvals

     148  

 

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     Page  

Material German Tax Considerations to Immunic Shareholders Related to the Transaction

     148  

Material U.S. Federal Income Tax Consequences of the Transaction

     149  

Material Consequences of Ownership and Disposition of Vital Therapies Common Stock

     153  

Anticipated Accounting Treatment

     156  

Nasdaq Stock Market Listing

     157  

Appraisal Rights

     157  

THE EXCHANGE AGREEMENT

     158  

Structure

     158  

Completion and Effectiveness of the Transaction

     158  

Transaction Consideration and Exchange Ratio

     158  

Determination of Vital Therapies’ Net Cash

     160  

Vital Therapies Common Stock

     161  

Fractional Shares

     162  

Representations and Warranties

     162  

Covenants; Conduct of Business Pending the Transaction

     165  

Non-Solicitation

     167  

Disclosure Documents

     169  

Meeting of Vital Therapies Stockholders

     169  

Regulatory Approvals

     169  

Indemnification and Insurance for Officers and Directors

     170  

Additional Agreements

     170  

Nasdaq Stock Market Listing

     171  

Conditions to the Completion of the Transaction

     171  

Termination of the Exchange Agreement and Termination Fee

     173  

Amendment

     174  

Expenses

     174  

Directors and Officers of Vital Therapies Following the Transaction

     174  

Amendments to the Amended and Restated Certificate of Incorporation of Vital Therapies

     175  

Special Meeting of Vital Therapies Stockholders

     175  

AGREEMENTS RELATED TO THE TRANSACTION

     176  

Subscription Agreement

     176  

Lock-up Agreements

     176  

MATTERS BEING SUBMITTED TO A VOTE OF THE STOCKHOLDERS OF VITAL THERAPIES

     178  

Proposal 1: Approval of the Issuance of Common Stock in the Transaction

     178  

Proposal 2: Approval of the Change of Control Resulting from the Transaction

     178  

Proposal 3: Approval of Name Change

     179  

Proposal 4: Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Vital Therapies Effecting the Reverse Stock Split.

     179  

Proposal 5: Approval of Possible Adjournment of the Special Meeting

     186  

VITAL THERAPIES BUSINESS

     187  

IMMUNIC BUSINESS

     199  

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

     217  

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

     232  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF VITAL THERAPIES

     241  

MANAGEMENT FOLLOWING THE CLOSING OF THE TRANSACTION

     242  

Executive Officers and Directors

     242  

Board of Directors of the Company Following the Transaction

     245  

 

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     Page  

Director Compensation

     247  

Immunic Executive Compensation

     248  

Compensation Risk Management

     250  

Employment Benefits Plans

     250  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     252  

DESCRIPTION OF CAPITAL STOCK

     257  

PRINCIPAL STOCKHOLDERS OF VITAL THERAPIES

     261  

PRINCIPAL SHAREHOLDERS OF IMMUNIC

     263  

LEGAL MATTERS

     265  

EXPERTS

     265  

WHERE YOU CAN FIND MORE INFORMATION

     265  

TRADEMARK NOTICE

     266  

OTHER MATTERS

     266  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF VITAL THERAPIES, INC.

     F-1  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF IMMUNIC AG

     F-42  

ANNEX A—EXCHANGE AGREEMENT

 

ANNEX B—AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION—NAME CHANGE

 

ANNEX C—AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION—REVERSE STOCK SPLIT

 

ANNEX D—SUBSCRIPTION AGREEMENT

 

ANNEX E—OPINION OF FINANCIAL ADVISOR TO VITAL THERAPIES, INC.

 

 

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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus does not give effect to the proposed reverse stock split described in Proposal 4 in this proxy statement/prospectus.

The following section provides answers to frequently asked questions about the Transaction. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

Q: What is the Transaction?

A: Vital Therapies, Inc., or Vital Therapies, and Immunic AG, or Immunic, and all of the current shareholders of Immunic have entered into an Exchange Agreement dated as of January 6, 2019, or the Exchange Agreement. The Exchange Agreement contains the terms and conditions of the proposed business combination of Vital Therapies and Immunic. Under the Exchange Agreement, shareholders of Immunic will exchange all of their outstanding shares of Immunic for shares of Vital Therapies common stock, resulting in Immunic becoming a wholly-owned subsidiary of Vital Therapies. After the completion of the Transaction, Vital Therapies will change its corporate name to “Immunic, Inc.” as required by the Exchange Agreement. This transaction is referred to as the Transaction.

Immediately prior to the closing of the Transaction, each Immunic preferred share will be converted into one Immunic common share, or an Immunic common share. At the closing of the Transaction, each Immunic common share will be converted into the right to receive a certain number of shares of Vital Therapies common stock, or the Exchange Ratio. It is currently anticipated that, at the closing of the Transaction, the Exchange Ratio will be approximately 735 shares of Vital Therapies’ common stock, or Vital Therapies common stock, per Immunic common share. The Exchange Ratio will be adjusted to account for the reverse stock split described in this proxy statement/prospectus. Stockholders of Vital Therapies will continue to own and hold their existing shares of Vital Therapies common stock. The Exchange Ratio is determined pursuant to a formula in the Exchange Agreement and described in this proxy statement/prospectus, and this estimate is subject to adjustment.

Immediately after the Transaction, (a) current Vital Therapies stockholders are expected to own approximately 11% of the company and (b) current Immunic shareholders are expected to own approximately 89% of the company, on a fully-diluted basis, in each case calculated on a pro forma basis after giving effect to (i) the issuance of common shares by Immunic immediately prior to the closing of the Transaction pursuant to the terms of the Subscription Agreement, and (ii) the Transaction. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment.

The calculation of the Exchange Ratio, which is described in the sections entitled “The Transaction—Transaction Consideration and Exchange Ratio” and “The Exchange Agreement—Transaction Consideration and Exchange Ratio”, is complex and circumstances as of the closing of the Transaction may result in an Exchange Ratio that differs from estimates in this proxy statement/prospectus.

Q: What will happen to Vital Therapies if, for any reason, the Transaction does not close?

A: If, for any reason, the Transaction does not close, our board of directors may elect to, among other things, attempt to complete another strategic transaction like the Transaction, attempt to sell or otherwise dispose of the various assets of the company, dissolve and liquidate its assets, or continue to operate the business of Vital Therapies. If Vital Therapies decides to dissolve and liquidate its assets, Vital Therapies would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left, if any, to distribute to stockholders after paying the debts and other obligations of Vital Therapies and setting aside funds for reserves.

 

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If Vital Therapies were to continue its business, in addition to raising additional capital to do so, it would likely need to identify, acquire and develop other products or product candidates, as it has no current plans to pursue further development of its ELAD system. If Vital Therapies decided to reestablish its business, it would also need to rebuild its workforce.

Q: Why are the two companies proposing to enter into the Transaction?

A: Following the closing of the Transaction, Vital Therapies and Immunic believe that the company will focus on advancing Immunic’s pipeline of treatments for chronic inflammatory and autoimmune diseases. Vital Therapies and Immunic believe that the company will have the following potential advantages:

 

   

the company after the Transaction will be a publicly traded, clinical-stage biotechnology company focused on developing best-in-class therapies for the treatment of chronic inflammatory and autoimmune diseases;

 

   

the company after the Transaction will be led by an experienced senior management team from Immunic and a board of directors of five members, with four members designated by Immunic and one member designated by Vital Therapies; and

 

   

proceeds from the concurrent financing would provide funds for the company’s research and development and operating activities after the closing of the Transaction.

Q: Why am I receiving this proxy statement/prospectus?

A: You are receiving this proxy statement/prospectus because you have been identified as a stockholder of Vital Therapies as of the record date, and you are entitled to vote at the special meeting of stockholders to approve the matters set forth above. This document serves as:

 

   

a proxy statement of Vital Therapies used to solicit proxies for its special meeting of stockholders to vote on the matters set forth above; and

 

   

a prospectus of Vital Therapies used to offer shares of Vital Therapies common stock in exchange for Immunic common shares in the Transaction.

Q: What approvals by the stockholders of Vital Therapies are required to consummate the Transaction?

A: To consummate the Transaction, stockholders of Vital Therapies must approve the proposal numbers 1 through 4. Pursuant to the terms of the Exchange Agreement, Vital Therapies is also requesting that stockholders approve proposal number 5 below, which is, collectively with proposal numbers 1 through 5, referred to as the Proposals. The Proposals include the following matters:

 

  1.

the issuance of shares of common stock of Vital Therapies to shareholders of Immunic pursuant to the terms of the Exchange Agreement between Vital Therapies, Immunic and the Shareholders of Immunic, dated as of January 6, 2019, a copy of which is attached as Annex A, which is referred to as the Exchange Agreement;

 

  2.

the change in control of Vital Therapies resulting from the Transaction contemplated by the Exchange Agreement;

 

  3.

an amendment to the amended and restated certificate of incorporation of Vital Therapies changing the Vital Therapies corporate name to “Immunic, Inc.” in the form attached as Annex B;

 

  4.

an amendment to the amended and restated certificate of incorporation of Vital Therapies effecting a reverse stock split of Vital Therapies’ issued and outstanding common stock in accordance with a ratio to be determined by the board of directors within a range of 30 to 60 shares (or any number in between) of outstanding Vital Therapies common stock being combined and reclassified into one share of Vital Therapies common stock; and

 

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  5.

to consider and vote on an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposals set forth above.

The presence, in person or represented by proxy, at the special meeting of the holders of a majority of the shares of Vital Therapies common stock outstanding and entitled to vote at the special meeting is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes will be counted towards a quorum. The affirmative vote of the holders of a majority of the shares of Vital Therapies common stock having voting power present in person or represented by proxy at the special meeting, assuming a quorum is present, is required for approval of Proposals 1, 2 and 5. The affirmative vote of the holders of a majority of the outstanding shares of common stock entitled to vote on the record date for the special meeting is required for approval of Proposals 3 and 4. Each of Proposals 1, 2, 3, and 4 are conditioned upon each other and the approval of each such proposal is a condition to the completion of the Transaction. Therefore, the Transaction cannot be consummated without the approval of Proposals 1, 2, 3 and 4.

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes. Abstentions will be counted towards the vote total for each proposal and will have the same effect as “AGAINST” votes for Proposals 3 and 4, but will have no effect on Proposals 1, 2 and 5. Similarly, broker non-votes will have the same effect as “AGAINST” votes for Proposals 3 and 4, but will have no effect on Proposals 1, 2 and 5.

As of January 15, 2019, the directors and executive officers of Vital Therapies owned or controlled less than 1% of the outstanding shares of Vital Therapies common stock entitled to vote at the special meeting.

The adoption of the Exchange Agreement and the approval of the Transaction and related transactions has been approved by the shareholders of Immunic.

For a more complete description of the closing conditions under the Exchange Agreement, you are urged to read the section entitled “The Exchange Agreement—Conditions to the Completion of the Transaction” in this proxy statement/prospectus.

Q: What will Immunic shareholders receive in the Transaction?

A: As a result of the Transaction, Immunic shareholders will become entitled to receive shares of Vital Therapies common stock equal to approximately 89% of the outstanding common stock of the company on a pro forma basis, assuming that Immunic closes its concurrent financing immediately prior to the closing of the Transaction. This is subject to adjustment based on the Exchange Agreement.

For a more complete description of what Immunic shareholders will receive in the Transaction, please see the sections entitled “Market Price and Dividend Information,” “The Transaction—Transaction Consideration and Exchange Ratio” and “The Exchange Agreement—Transaction Consideration and Exchange Ratio” in this proxy statement/prospectus.

Q: Who will be the directors of Vital Therapies following the Transaction?

A: Immediately following the Transaction, the board of directors of Vital Therapies (which will be renamed Immunic, Inc.) is expected to consist of five members, including four members of the current Immunic board, Dr. Daniel Vitt, Chief Executive Officer of Immunic, Dr. Jörg Neermann, Life Science Partners, Dr. Vincent Ossipow, Omega Funds and Jan van den Bossche, Fund+, and Dr. Duane Nash, Chief Executive Officer, President and a director of Vital Therapies.

 

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Q: Who will be the executive officers of Vital Therapies immediately following the Transaction?

A: Immediately following the Transaction, the executive management of Vital Therapies (which will be renamed Immunic, Inc.) is expected to be composed of the members of the Immunic executive management team prior to the Transaction, as set forth below:

 

Name

  

Title

Dr. Daniel Vitt    President and Chief Executive Officer
Dr. Manfred Gröppel    Chief Operating Officer
Dr. Andreas Muehler    Chief Medical Officer
Dr. Hella Kohlhof    Chief Science Officer

Q: As a stockholder of Vital Therapies, how does the board of directors recommend that I vote?

A: After careful consideration, the board of directors of Vital Therapies recommends that stockholders vote “FOR” all of the Proposals.

Q: What risks should I consider in deciding whether to vote in favor of the Transaction?

A: You should carefully review the section of this proxy statement/prospectus entitled “Risk Factors” which sets forth certain risks and uncertainties related to the Transaction, risks and uncertainties to which the company’s business following the closing of the Transaction will be subject, and risks and uncertainties to which each of Vital Therapies and Immunic, as an independent company, is subject.

Q: When do you expect the Transaction to be consummated?

A: The Transaction is anticipated to occur as early as the second quarter of 2019 after the special meeting of stockholders of Vital Therapies to be held on [●], 2019, but the exact timing cannot be predicted. For more information, please see the section entitled “The Exchange Agreement—Conditions to the Completion of the Transaction” in this proxy statement/prospectus.

Q: What do I need to do now?

A: Vital Therapies urges you to read this proxy statement/prospectus carefully, including its annexes, and to consider how the Transaction affects you.

If you are a stockholder of record, you may vote in one of the following ways:

 

   

You may vote in person. If you plan to attend the special meeting, you may vote by delivering your completed proxy card in person or by completing and submitting a ballot, which will be provided at the special meeting.

 

   

You may vote by mail. Complete, sign and date the proxy card that accompanies this proxy statement and return it promptly in the postage-prepaid envelope provided (if you received printed proxy materials). Your completed, signed and dated proxy card must be received prior to the special meeting.

 

   

You may vote by telephone. To vote over the telephone, dial toll-free 1-800-579-1639 using a touch-tone telephone and follow the recorded instructions (have your Notice of Internet Availability or proxy card in hand when you call). You will be asked to provide the company number and control number from your Notice of Internet Availability or proxy card. Telephone voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on [●], 2019.

 

   

You may vote via the Internet. To vote via the Internet, go to www.proxyvote.com to complete an electronic proxy card (have your Notice of Internet Availability or proxy card in hand when you visit

 

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the website). You will be asked to provide the control number from your Notice of Internet Availability or proxy card. Internet voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on [●], 2019.

If you are a beneficial owner of shares held of record by a broker, bank or other nominee, you will receive voting instructions from your broker, bank or other nominee. You must follow the voting instructions provided by your broker, bank or other nominee in order to instruct your broker, bank or other nominee on how to vote your shares. Beneficial owners of shares should generally be able to vote by returning the voting instruction card, or by telephone or via the Internet. However, the availability of telephone or Internet voting will depend on the voting process of your broker, bank, or other nominee. If you are a beneficial owner, you may not vote your shares in person at the special meeting unless you obtain a legal proxy from your broker, bank or other nominee.

Q: What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

A: The failure to return your proxy card or otherwise provide proxy instructions will reduce the aggregate number of votes required to approve Proposals 1, 2 and 5 and will have the same effect as voting against Proposals 3 and 4. Further, your shares will not be counted for purposes of determining whether a quorum is present at the special meeting.

Q: May I vote in person at the special meeting of stockholders?

A: If your shares of common stock are registered directly in your name with our transfer agent, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Vital Therapies. If you are a stockholder of record, you may attend the special meeting of stockholders and vote your shares in person. Even if you plan to attend the special meeting in person, Vital Therapies requests that you sign and return the enclosed proxy card to ensure that your shares will be represented at the special meeting if you are unable to attend.

If your shares of common stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction form. As the beneficial owner, you are also invited to attend the special meeting of stockholders. Because a beneficial owner is not the stockholder of record, you may not vote these shares in person at the special meeting unless you obtain a legal proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the special meeting.

Q: When and where is the special meeting of stockholders being held?

A: The special meeting of stockholders will be held at 12255 El Camino Real, Suite 300, San Diego, California 92130, at [●] [a.m./p.m.], local time, on [●] [●], 2019. Subject to space availability, all stockholders as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis.

Q: If my shares are held in “street name” by my broker, will my broker vote my shares for me?

A: Unless your broker has discretionary authority to vote on certain matters, your broker will not be able to vote your shares of common stock on matters requiring discretionary authority without instructions from you.

If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules applicable to brokers on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the

 

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shares will be treated as broker non-votes. It is anticipated that Proposals 1 and 2 will be non-discretionary items. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.

Q: Can I change my vote or revoke my proxy?

A: If you are a stockholder of record, you can change your vote or revoke your proxy at any time before the special meeting by:

 

   

entering a new vote by Internet or telephone (until the applicable deadline for each method as set forth above);

 

   

returning a later-dated proxy card (which automatically revokes the earlier proxy);

 

   

providing a written notice of revocation to our corporate secretary at Vital Therapies, Inc., 15222-B Avenue of Science, San Diego, California 92128, Attn: Corporate Secretary; or

 

   

attending the special meeting and voting in person (attendance at the special meeting will not cause your previously granted proxy to be revoked unless you specifically so request).

Q: Who is paying for this proxy solicitation?

A: Vital Therapies and Immunic will share equally the cost of printing and filing of this proxy statement/prospectus and the proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Vital Therapies common stock for the forwarding of solicitation materials to the beneficial owners of Vital Therapies common stock. Vital Therapies will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. Vital Therapies has retained Advantage Proxy, Inc. to assist it in soliciting proxies using the means referred to above. Vital Therapies will pay the fees of Advantage Proxy, Inc., which Vital Therapies expects to be approximately $10,000, plus reimbursement of out-of-pocket expenses.

Q: What are the material U.S. federal income tax consequences of the reverse stock split to stockholders?

A: The reverse stock split described in Proposal 4 should constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a Vital Therapies U.S. Holder (as described in more detail in the section entitled “Matters Being Submitted to a Vote of the Stockholders of Vital Therapies—Proposal 4: Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Vital Therapies Effecting the Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split) of Vital Therapies common stock generally should not recognize gain or loss upon such reverse stock split, except with respect to cash received in lieu of a fractional share of Vital Therapies common stock, as discussed below in the section entitled “Matters Being Submitted to a Vote of the Stockholders of Vital Therapies—Proposal 4: Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Vital Therapies Effecting the Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split—Cash in Lieu of Fractional Shares.” A Vital Therapies U.S. Holder’s aggregate tax basis in the shares of Vital Therapies common stock received pursuant to such reverse stock split should equal the aggregate tax basis of the shares of the Vital Therapies common stock surrendered (excluding any portion of such basis that is allocated to any fractional share of Vital Therapies common stock), and such Vital Therapies U.S. Holder’s holding period in the shares of Vital Therapies common stock received should include the holding period in the shares of Vital Therapies common stock surrendered. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Vital Therapies common stock surrendered to the shares of Vital Therapies common stock received in a recapitalization pursuant to such reverse stock split. Vital Therapies U.S. Holders of shares of Vital Therapies common stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares. For more information, please see the section entitled “Matters Being Submitted to a Vote of the Stockholders of Vital Therapies—Proposal 4:

 

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Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Vital Therapies Effecting the Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split.”

Q: Who can help answer my questions?

A: If you are a stockholder of Vital Therapies and would like additional copies of this proxy statement/prospectus without charge or if you have questions about the Transaction, including the procedures for voting your shares, you should contact:

Advantage Proxy, Inc.

Telephone: 1-877-870-8565 (toll free); 1-206-870-8565 (collect)

Email: ksmith@advantageproxy.com

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus and may not contain all the information that is important to you. To better understand the Transaction, the proposals being considered at the special meeting, you should read this entire proxy statement/prospectus carefully, including the Exchange Agreement and the other annexes to which you are referred herein. For more information, please see the section entitled Where You Can Find More Information in this proxy statement/prospectus. Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus does not give effect to the proposed reverse stock split described in Proposal 4, beginning on page 179 of this proxy statement/prospectus.

The Companies

Vital Therapies, Inc.

15222-B Avenue of Science

San Diego, California 92128

(858) 673-6840

Vital Therapies, Inc. is a biotherapeutic company that has been developing a cell-based therapy targeting the treatment of acute forms of liver failure. The company’s ELAD System is an extracorporeal human allogeneic cellular liver therapy that was in phase 3 clinical trials through late 2018. In September 2018, Vital Therapies announced that its phase 3 clinical trial did not achieve its primary or secondary endpoints and that further development of ELAD had been halted. In October 2018, the company announced that it had retained Ladenburg Thalmann & Co. Inc. as its strategic financial advisor to assist in an exploration of strategic opportunities for enhancing stockholder value. In addition to the Transaction, Vital Therapies is exploring selling assets, including those relating to ELAD, and options to reduce the amount of space it leases in order to increase its cash balance and reduce expenses.

Immunic AG

Am Klopferspitz 19

82152 Planegg-Martinsried

Germany

Immunic is a specialist in selective oral drugs in immunology and is focused on developing novel oral therapies with best-in-class potential for chronic inflammatory and autoimmune diseases. Immunic’s three development programs target inflammatory bowel diseases, multiple sclerosis, and psoriasis and include orally available, small molecule inhibitors of DHODH (IMU-838 program), an inverse agonist of RORgt (IMU-935 program), and IMU-856 (targeting improvement in intestinal barrier function). Immunic’s lead development program, IMU-838 is currently in phase 2 clinical development for ulcerative colitis, with additional phase 2 trials in Crohn’s disease, and multiple sclerosis, and an investigator- initiated proof of concept study in primary sclerosing cholangitis planned for 2019.

The Transaction (see page 117)

If the Transaction is completed, each common share of Immunic will be exchanged for a number of shares of Vital Therapies common stock, or the Exchange Ratio. Based on the valuations specified in the Exchange Agreement, which are subject to adjustment, and the estimated number of common shares of Immunic expected to be outstanding at the closing of the Transaction, it is currently anticipated that, at the closing of the Transaction, the Exchange Ratio will be approximately 735 shares of Vital Therapies’ common stock per



 

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Immunic common share. The Exchange Ratio will be adjusted to account for the reverse stock split described in this proxy statement/prospectus. Based on the estimates set forth above, following the completion of the Transaction, (a) current Vital Therapies stockholders are expected to own approximately 11% of the common stock of the company and (b) Immunic shareholders are expected to own approximately 89% of the common stock of the company, on a fully-diluted basis (including shares issued in Immunic’s concurrent financing), assuming that Immunic closes its concurrent financing immediately prior to the effective time of the Transaction.

The Exchange Ratio is determined pursuant to a formula in the Exchange Agreement and described in this proxy statement/prospectus and these estimates are subject to adjustment.

Each share of Vital Therapies common stock issued and outstanding at the time of the Transaction will remain issued and outstanding and those shares will be unaffected by the Transaction. Vital Therapies warrants that are unexercised immediately prior to the effective time of the Transaction will remain outstanding. Vital Therapies stock options that are not exercised prior to the effective time of the Transaction will be cancelled and terminated upon the effectiveness of the Transaction to the extent permitted pursuant to the applicable option plan, without any right to receive any consideration. Please see “The Transaction—Stock Options and Warrants” beginning on page 147.

For a more complete description of the Exchange Ratio, please see the sections entitled “The TransactionTransaction Consideration and Exchange Ratio” beginning on page 146 and “The Exchange Agreement—Transaction Consideration and Exchange Ratio” beginning on page 158.

The Transaction will be completed as promptly as practicable after all of the conditions to completion of the Transaction are satisfied or waived, including the approval of the stockholders of Vital Therapies. Vital Therapies and Immunic are working to complete the Transaction as quickly as practicable. However, Vital Therapies and Immunic cannot predict the exact timing of the completion of the Transaction because it is subject to various conditions. After completion of the Transaction, assuming Vital Therapies receives the required stockholder approval of Proposal 2, the company will be renamed “Immunic, Inc.”

Reasons for the Transaction (see pages 125 and 136)

Following the Transaction, the company will focus on Immunic’s three development programs which target inflammatory bowel diseases, multiple sclerosis, and psoriasis and include orally available, small molecule inhibitors of DHODH (IMU-838 program), an inverse agonist of RORgt (IMU-935 program), and IMU-856 (targeting improvement in intestinal barrier function). Vital Therapies and Immunic believe that the company will have the following potential advantages:

 

   

the company, after the Transaction, will be a publicly traded, clinical-stage biotechnology company focused on developing what it believes can be best-in-class therapies for the treatment of chronic inflammatory and autoimmune diseases;

 

   

the company, after the Transaction, will be led by an experienced senior management team from Immunic and a board of directors of five members, with four members designated by Immunic and one member from Vital Therapies; and

 

   

proceeds from the concurrent financing would provide funds for the company’s research and development and operating activities after the closing of the Transaction.

Each of the board of directors of Vital Therapies and Immunic also considered other reasons for the Transaction, as described herein in this proxy statement/prospectus.



 

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For example, Vital Therapies’ board of directors considered, among other things:

 

   

the consequences of the disappointing results from the Phase III clinical trial of Vital Therapies’ ELAD System, and the likelihood that the resulting circumstances for Vital Therapies would not change for the benefit of the stockholders of Vital Therapies in the foreseeable future on a stand-alone basis;

 

   

the strategic alternatives of Vital Therapies to the Transaction, including potential transactions that could have resulted from discussions that management and representatives of Ladenburg Thalmann conducted with other potential strategic partners;

 

   

the current market conditions, and Vital Therapies’ current liquidity position, its depressed stock price and continuing net operating losses;

 

   

the risks associated with, and the uncertain value, timing and costs to stockholders of, liquidating Vital Therapies or effecting a sale of all or some of its assets and thereafter distributing the proceeds to its stockholders;

 

   

the risks of continuing to operate Vital Therapies on a stand-alone basis, including the need to rebuild the company’s product candidate development programs, infrastructure and management to continue its operations;

 

   

Vital Therapies management’s belief that it would be difficult to obtain additional equity or debt financing on acceptable terms, if at all;

 

   

the opportunity as a result of the Transaction for Vital Therapies stockholders to participate in the potential value that may result from advancing the Immunic’ pipeline of treatments for chronic inflammatory and autoimmune diseases and the potential increase in value of the company following the closing of the Transaction;

 

   

the terms and conditions of the draft Exchange Agreement and associated transactions, as well as the safeguards and protective provisions included therein intended to mitigate risks; and

 

   

the risk that Immunic is not able to successfully execute its business plan and commercialize its product candidates on the planned timeline or at all.

In addition, Immunic’s board of directors approved the Transaction based on a number of factors, including the following:

 

   

Immunic’s need for capital to support the development, regulatory and commercialization activities for its current product candidates and product candidates that may be acquired in the future and the potential to access public market capital, including sources of capital from a broader range of investors than it could otherwise obtain if it continued to operate as a privately-held company;

 

   

the expectation that the Transaction would be a more time-and cost-effective means to access capital than other options considered;

 

   

the potential to provide its current shareholders with greater liquidity by owning stock in a public Nasdaq-listed company; and

 

   

the fact that shares of Vital Therapies common stock issued to Immunic shareholders will be registered pursuant to a registration statement on Form S-4 by Vital Therapies and will become freely tradable for Immunic’s shareholders who are not affiliates of Immunic upon the expiration of the lock-up agreements described herein.

Interests of the Directors and Executive Officers of Vital Therapies in the Transaction (see page 137)

As of January 15, 2019, the directors and executive officers of Vital Therapies owned or controlled less than 1% of the outstanding shares of Vital Therapies common stock.



 

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In considering the recommendation of the board of directors that the stockholders vote to approve Proposal 2, stockholders should be aware that our current and former directors and executive officers have interests in the Transaction that are different from, or in addition to, the interests of stockholders generally. Interests of these persons may be different from or in addition to the interests of stockholders for the following reasons, among others:

 

   

accelerated vesting of stock options held by our current non-employee directors simultaneously with the closing of the Transaction;

 

   

cancellation of stock options held by our current and former executive officers and grant of restricted stock units, or RSUs, in exchange therefor;

 

   

the entitlement of our executive officers to receive payments and benefits (including accelerated vesting of the RSUs) under their respective Change of Control and Severance Agreements in connection with an involuntary termination of employment by Vital Therapies other than for “cause” or a resignation from employment by the executive without “good reason” (as such terms are defined in the applicable agreements) during the period beginning six months prior to, and ending on the date that is 12 months following, the closing of the Transaction, or the Change of Control Period; and

 

   

continued indemnification and directors’ and officers’ liability insurance to be provided by Vital Therapies.

These interests are discussed in more detail in the section entitled “The Transaction—Interests of the Directors and Executive Officers of Vital Therapies in the Transaction” beginning on page 137 of this proxy statement/prospectus. The members of the board of directors were aware of the different or additional interests described in such section and considered these interests, among other matters, in evaluating and negotiating the Exchange Agreement and the Transaction, and in recommending to our stockholders that the Transaction be approved.

Interests of the Directors and Executive Officers of Immunic in the Transaction (see page 143)

Vital Therapies’ stockholders should be aware that certain executive officers and directors of Immunic have interests in the Transaction that may be different from the interests of stockholders of Vital Therapies.

Continued Service with Company

The executive officers and certain directors of Immunic are expected to become executive officers and directors of Vital Therapies (to be renamed Immunic, Inc.) after the closing of the Transaction.

Equity Ownership

Certain of Immunic’s executive officers and directors have entered into exit bonus agreements that provide such executive officers and directors with the right to receive Immunic common shares immediately prior to the closing of the Transaction, which common shares will be exchanged for a number of shares of Vital Therapies common stock as determined pursuant to the Exchange Ratio described in more detail below.

Immunic Virtual Stock Option Plan

Immunic has a Virtual Stock Option Program for Members of the Supervisory Board dated August 26, 2017, or the Supervisory Board VSOP, which provides for the grant of up to 1,840 virtual options to certain members of Immunic’s supervisory board as beneficiaries. The virtual options under the Supervisory Board VSOP are modeled as phantom stock options: the beneficiaries do not acquire the right to acquire shares in Immunic at a predetermined price in the event that the option is exercised; instead, the beneficiary receives a direct cash payment (after deduction of taxes and charges) in an amount equal to the return the beneficiary would have



 

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received had the beneficiary sold shares in Immunic. Virtual stock options under the Supervisory Board VSOP are granted and allocated at the Immunic general shareholders meeting. The terms of the virtual options are set forth in separate grant letters with each beneficiary.

The virtual options are exercised automatically in case of an Immunic exit event. An exit event comprises, among other things, a direct or indirect initial public offering of Immunic’s shares and the sale and transfer of at least 50% of Immunic’s shares; the Transaction, upon its closing, constitutes such an exit event. The payment upon an exit event is calculated by multiplying the number of virtual options with the value of an Immunic common share at the time of the exit event.

Immunic has granted a total of 460 virtual options to Immunic’s supervisory board member Dr. Thomas Taapken. Immunic has also granted a total of 655 virtual options to Dr. Jörg Neermann; however, Dr. Neermann is in the process of confirming whether he is permitted to accept these virtual options.

As of January 15, 2019, directors and the executive officers of Immunic owned or controlled 12.9% of the outstanding common and preferred shares of Immunic.

Opinion of Financial Advisor to Vital Therapies (see page 127)

On January 4, 2019, Ladenburg Thalmann & Co. Inc., or Ladenburg Thalmann, financial advisor to Vital Therapies, rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated January 4, 2019, to the Vital Therapies board of directors, that, as of the date of such opinion, and based upon the various assumptions, qualifications and limitations set forth therein, that the Exchange Ratio was fair, from a financial point of view, to the stockholders of Vital Therapies.

The full text of the written opinion of Ladenburg Thalmann, dated January 4, 2019, or the Opinion, is attached as Annex E to this proxy statement/prospectus and is incorporated by reference. Vital Therapies encourages its stockholders to read the Opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by Ladenburg Thalmann. The summary of the written opinion of Ladenburg Thalmann set forth elsewhere in the proxy statement/prospectus is qualified by reference to the full text of the Opinion. Ladenburg Thalmann provided its Opinion for the sole benefit and use of the board of directors of Vital Therapies in its consideration of the Transaction. Ladenburg Thalmann’s Opinion is not a recommendation to any stockholder as to how to vote with respect to the proposed Transaction or to take any other action in connection with the Transaction or otherwise.

Management Following the Closing of the Transaction (see page 242)

Immediately following the Transaction, the executive management team of Vital Therapies is expected to be composed of the members of the Immunic executive management team prior to the Transaction, as set forth below:

 

Name

  

Title

Dr. Daniel Vitt

  

Chief Executive Officer and President and Director

Dr. Andreas Muehler

  

Chief Medical Officer

Dr. Hella Kohlhof

  

Chief Science Officer

Dr. Manfred Gröppel

  

Chief Operating Officer and Principal Financial Officer



 

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Overview of the Exchange Agreement and Agreements Related to the Exchange Agreement

Transaction Consideration and Exchange Ratio (see page 158)

Prior to the effective time of the Transaction, all of the Immunic preferred shares will be converted into Immunic common shares. At the effective time of the Transaction, each outstanding common share of Immunic will be exchanged for that number of shares of Vital Therapies common stock as determined pursuant to the Exchange Ratio described in more detail below.

No fractional shares of Vital Therapies common stock will be issued in connection with the Transaction. Instead, all fractional shares of Vital Therapies common stock issuable to each Immunic shareholder will be aggregated and will be rounded up into one full share of Vital Therapies common stock.

The Exchange Ratio is calculated using a formula intended to allocate existing Immunic shareholders (on a fully-diluted basis), a percentage of the company. It is currently anticipated that at the closing of the Transaction, the Exchange Ratio will be approximately 735 shares of Vital Therapies’ common stock per Immunic common share. The Exchange Ratio will be adjusted to account for the reverse stock split described in this proxy statement/prospectus.

Under the terms of the Exchange Agreement, in addition to certain adjustments to account for the issuance of any additional common shares of Immunic or any shares of common stock of Vital Therapies, as applicable, prior to the consummation of the Transaction, the Exchange Ratio at the closing of the Transaction may be subject to either (i) an upward adjustment to the extent that Vital Therapies’ net cash at the effective time of the Transaction is less than $4,200,000 (and as a result, Vital Therapies securityholders could own less, and Immunic securityholders could own more, of the company) or (ii) a downward adjustment to the extent that Vital Therapies’ net cash at the effective time of the Transaction is greater than $5,200,000 (and as a result, Vital Therapies securityholders could own more, and Immunic securityholders could own less, of the company). In addition, if Vital Therapies’ net cash at the effective time of the Transaction is less than a specified minimum amount of approximately $1,500,000, the Exchange Ratio at the closing of the Transaction may be subject to an additional upward adjustment (and as a result, Vital Therapies securityholders could own less, and Immunic securityholders could own more, of the company). The minimum specified amount will be $1,500,000 if the Transaction closes on or before March 31, 2019, and the minimum cash will be reduced by $5,000 for each day (including any partial day) after March 31, 2019 until the Transaction closes.

Based on the estimates set forth above, following the completion of the Transaction, (a) current Vital Therapies stockholders are expected to own approximately 11% of the common stock of the company and (b) Immunic shareholders are expected to own approximately 89% of the common stock of the company, on a fully-diluted basis (including shares issued in Immunic’s concurrent financing), assuming that Immunic closes its concurrent financing immediately prior to the effective time of the Transaction.

The Exchange Ratio formula is the quotient obtained by dividing the number of Immunic transaction shares (defined below) by the Immunic outstanding shares (defined below), where:

 

   

Immunic transaction shares is the product determined by multiplying (i) the post-closing Vital Therapies shares by (ii) the Immunic allocation percentage.

 

   

Immunic outstanding shares is the total number of common shares and preferred shares of Immunic outstanding immediately prior to the effective time of the Transaction on a fully-diluted and an as-converted to common stock basis, assuming (i) the consummation of the concurrent financing and (ii) the issuance of Immunic common shares in respect of all bonus arrangements or other rights to receive Immunic common shares that will be outstanding immediately prior to the effective time of the Transaction.



 

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Post-closing Vital Therapies shares is the quotient determined by dividing (i) the Vital Therapies outstanding shares by (ii) the Vital Therapies allocation percentage.

 

   

Vital Therapies outstanding shares is the total number of shares of Vital Therapies common stock outstanding immediately prior to the effective time of the Transaction on a fully-diluted and an as-converted to common stock basis, assuming (i) the exercise of each Vital Therapies option outstanding and unexercised immediately prior to the effective time that has an exercise price less than or equal to the then current trading price for shares of Vital Therapies common stock (i.e., “in-the-money” options), excluding any portion thereof which cannot become vested or exercisable (due, for example, to a termination of service) or will otherwise not be outstanding immediately after the effective time, (ii) the settlement in shares of Vital Therapies common stock of each Vital Therapies RSU outstanding as of the effective time (including Vital Therapies RSUs which were granted to certain of Vital Therapies executive officers, or the Vital Severance RSUs), excluding any portion thereof which cannot become vested or exercisable (due, for example, to a termination of service) or will otherwise not be outstanding immediately after the effective time, and (iii) the exercise of each Vital Therapies warrant outstanding and unexercised immediately prior to the effective time that has an exercise price less than or equal to the then current trading price for shares of Vital Therapies common stock (i.e., “in-the-money” warrants) and will be outstanding immediately after the effective time. For the avoidance of doubt, shares of Vital Therapies common stock issuable upon the exercise of Vital Therapies options or Vital Therapies warrants that are not in-the-money immediately prior to the effective time will be excluded from the calculation of Vital Therapies outstanding shares.

 

   

Immunic allocation percentage is 1.00 minus the Vital Therapies allocation percentage.

 

   

Vital Therapies allocation percentage means the quotient determined by dividing (i) the sum of (a) $9,600,000 (or $7,000,000 if Vital Therapies does not have minimum net cash of approximately $1,500,000 at the anticipated closing date), plus (b) $4,700,000, or should the net cash for Vital Therapies be determined pursuant to the Exchange Agreement to be greater than $5,200,000 or less than $4,200,000, then such net cash amount, by (ii) the sum of (y) the product of (A) the Immunic outstanding shares multiplied by the price per Immunic common share for cash investors in the concurrent financing based upon the pre-money valuation of Immunic that shall not exceed $85,000,000, minus (B) the aggregate amount (if any) of all payments to be made to any current or former employee, consultant, independent contractor or director of Immunic in connection with the Transaction or the other contemplated transactions the extent in excess of $300,000, plus (z) the amount determined pursuant to clause (i).

For example, the Vital Therapies allocation percentage would be approximately 11% if Vital Therapies’ net cash is $4,700,000, the product of the Immunic outstanding shares multiplied by the price per Immunic common share for cash investors in the concurrent financing is $115,000,000, and Immunic has no obligation to make payments to any current or former employee, consultant, independent contractor or director of Immunic in connection with the Transaction or the other contemplated transactions in excess of $300,000.

Treatment of Vital Therapies Stock Options (see page 147)

Vital Therapies stock options that remain unexercised as of the effective time will be cancelled and terminated to the extent permitted pursuant to the applicable plan, without any right to receive any consideration. Warrants to purchase shares of Vital Therapies common stock that are outstanding immediately prior to the effective time of the Transaction will remain outstanding following the effective time of the Transaction.



 

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Immunic Exit Bonus Agreements (see page 254)

Certain of Immunic’s executive officers and directors have entered into exit bonus agreements that provide such executive officers and directors with the right to receive Immunic common shares immediately prior to the closing of the Transaction, which common shares will be exchanged for a number of shares of Vital Therapies common stock as determined pursuant to the Exchange Ratio.

Immunic Virtual Stock Option Plan (see page 144)

Immunic has a Virtual Stock Option Program for Members of the Supervisory Board and a Virtual Stock Option Program for employees, each of which provides for the grant of up to 1,840 virtual options. The virtual options are modeled as phantom stock options: the beneficiaries do not acquire the right to acquire shares in Immunic at a predetermined price in the event that the option is exercised; instead, the beneficiary receives a direct cash payment (after deduction of taxes and charges) in an amount equal to the return the beneficiary would have received had the beneficiary sold shares in Immunic. Virtual stock options under the Supervisory Board VSOP are granted and allocated at the Immunic general shareholders meeting. The terms of the virtual options are set forth in separate grant letters with each beneficiary.

The virtual options are exercised automatically in case of an Immunic exit event. An exit event comprises, among other things, a direct or indirect initial public offering of Immunic’s shares and the sale and transfer of at least 50% of Immunic’s shares; the Transaction, upon its closing, constitutes such an exit event. The payment upon an exit event is calculated by multiplying the number of virtual options by the value of an Immunic common share at the time of the exit event.

Conditions to the Completion of the Transaction (see page 171)

To complete the Transaction, Vital Therapies stockholders must approve the Vital Therapies proposals set forth herein. In addition to obtaining such stockholder approval, each of the other closing conditions set forth in the Exchange Agreement must be satisfied or waived.

Non-Solicitation (see page 167)

The Exchange Agreement contains provisions prohibiting Immunic, the securityholders of Immunic and Vital Therapies from seeking a competing transaction, subject to specified exceptions described in the Exchange Agreement. Under these “non-solicitation” provisions, each of Immunic, the securityholders of Immunic and Vital Therapies has agreed that neither it nor its subsidiaries, nor any of its officers, directors, employees, representatives, affiliates, advisors or agents will directly or indirectly:

 

   

solicit, initiate, respond to or take any action to facilitate or encourage any inquiries or the communication, making, submission or announcement of any competing proposal or take any action that could reasonably be expected to lead to a competing proposal;

 

   

enter into or participate in any discussions or negotiations with any person with respect to any competing proposal;

 

   

furnish any information regarding Immunic or Vital Therapies to any person in connection with, in response to, relating to or for the purpose of assisting with or facilitating a competing proposal;

 

   

approve, endorse or recommend any competing proposal, subject to the terms and conditions in the Exchange Agreement;

 

   

execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to any competing proposal; or



 

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grant any waiver or release under any confidentiality, standstill or similar agreement (other than to the other party).

Termination of the Exchange Agreement (see page 173)

Either of Immunic or Vital Therapies can terminate the Exchange Agreement under certain specified circumstances, which would prevent the Transaction from being consummated.

Termination Fees (see page 173)

The Exchange Agreement provides that, upon termination of the Exchange Agreement under specified circumstances, Immunic may be required to pay Vital Therapies a termination fee of $2,000,000 and/or up to $275,000 in expense reimbursements, or Vital Therapies may be required to pay Immunic a termination fee of $500,000 and/or up to $275,000 in expense reimbursements.

Subscription Agreement (see page 176)

On January 6, 2019, immediately prior to the execution of the Exchange Agreement, Immunic entered into an investment and subscription agreement, or the Subscription Agreement, with all current shareholders of Immunic, as well as certain of Immunic’s executive officers and directors, pursuant to which certain Immunic shareholders made commitments, subject to the closing of the Transaction, to invest an aggregate amount of €26,677,176 (approximately $30 million) in Immunic by means of an increase of its registered share capital and payments into its capital reserves.

Upon the consummation of the Transaction, the Immunic common shares issued pursuant to the Subscription Agreement will automatically be exchanged for a number of shares of Vital Therapies common stock based on the Exchange Ratio.

The commitment of one of the Immunic shareholders for €1,500,000, which was made by a state-backed fund, is subject to the condition precedent that its investment committee approve its commitment prior to February 14, 2018.

The use of the proceeds raised pursuant to the Subscription Agreement will be subject to certain limitations set forth in the Subscription Agreement and its exhibits. Other than this, management will have broad discretion as to the use of the proceeds.

Lock-up Agreements (see page 176)

The shareholders of Immunic have agreed to lock-up covenants (and the executive officers and directors of Immunic are required to join in these covenants as a condition to closing), pursuant to which such persons have agreed not to, except in certain circumstances, offer, pledge, sell, contract to sell, sell any option to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, any Vital Therapies securities or shares of Vital Therapies common stock, including, as applicable, shares received in the Transaction, until 180 days after the closing date of the Transaction. The Immunic securityholders who have agreed to lock-up agreements owned, as of January 15, 2019, in the aggregate, 100% of the outstanding Immunic common and preferred shares.

Vital Therapies officers and directors are required to execute lock-up agreements prior to the closing of the Transaction, pursuant to which such Vital Therapies officers and directors will agree not to, except in certain circumstances, offer, pledge, sell, contract to sell, sell any option to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, any Vital Therapies securities or shares of Vital Therapies common stock, including, as applicable, shares issuable upon exercise of certain warrants and options, until 180 days after the closing date of the Transaction.



 

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Current directors and officers of Vital Therapies are expected to execute lock-up agreements, and as of January 15, 2019, owned, in the aggregate, less than 1% of the outstanding common stock of Vital Therapies entitled to vote at the special meeting.

Regulatory Approvals (see page 148)

In the United States, Vital Therapies must comply with applicable federal and state securities laws and the rules and regulations of The Nasdaq Stock Market in connection with the issuance of shares of Vital Therapies common stock and the filing of this proxy statement/prospectus with the Securities and Exchange Commission. As of the date hereof, the registration statement on Form S-4 of which this proxy statement/prospectus is a part has not become effective.

Material U.S. Federal Income Tax Consequences of the Transaction (see page 149)

Each of Immunic and Vital Therapies intends for, and has agreed to use its commercially reasonable efforts to cause, the Transaction to qualify as an exchange described in Section 351(a) of the Code. Each of Immunic and Vital Therapies has further agreed not to permit or cause any of their respective affiliates or any subsidiaries to take any action, or cause any action to be taken, which would cause the Transaction to fail to qualify as an exchange described in Section 351(a) of the Code. Assuming the Transaction qualifies as an exchange described in Section 351(a) of the Code, in general, and subject to the qualifications and limitations set forth in the section entitled “The Transaction—Material U.S. Federal Income Tax Consequences of the Transaction,” the material U.S. federal income tax consequences to Immunic U.S. Holders (as defined herein) should be as follows:

As an exchange described in Section 351(a) of the Code, and subject to the qualifications and assumptions described in this registration statement, the material U.S. federal income tax consequences of the Transaction should be as follows:

 

   

an Immunic U.S. Holder will not recognize gain or loss upon the exchange of Immunic common shares for Vital Therapies common stock pursuant to the Transaction;

 

   

an Immunic U.S. Holder’s aggregate tax basis in the shares of Vital Therapies common stock received in the Transaction will equal the shareholder’s aggregate tax basis in the shares of Immunic common shares surrendered upon completion of the Transaction; and

 

   

the holding period of the shares of Vital Therapies common stock received by an Immunic U.S. Holder in the Transaction will include the holding period of the shares of Immunic common shares surrendered in exchange therefor.

For purposes of the above discussion of the bases and holding periods for shares of Immunic common shares and Vital Therapies common stock, shareholders who acquired different blocks of Immunic common shares at different times or for different prices must calculate their gains and losses and holding periods separately for each identifiable block of such stock exchanged in the Transaction.

Tax matters are very complicated, and the tax consequences of the Transaction to a particular Immunic shareholder will depend on such shareholder’s circumstances. Accordingly, you should consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws. For more information, please see the section entitled “The Transaction—Material U.S. Federal Income Tax Consequences of the Transaction” beginning on page 149 of this proxy statement/prospectus.

The Transaction will not result in any material tax consequences to holders of Vital Therapies common stock.



 

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Nasdaq Stock Market Listing (see page 157)

Immunic intends to file an initial listing application for the company with The Nasdaq Stock Market. If such application is accepted, Immunic anticipates that the company’s common stock will be listed on The Nasdaq Stock Market following the closing of the Transaction under the trading symbol “IMUX.”

Anticipated Accounting Treatment (see page 156)

The Transaction will be treated by Vital Therapies as a “reverse merger” under the acquisition method of accounting for business combinations in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. For accounting purposes, Immunic is considered to be acquiring Vital Therapies in the Transaction.

Appraisal Rights (see page 157)

Holders of Vital Therapies common stock are not entitled to appraisal rights in connection with the Transaction.

Risk Factors (see page 33)

Both Vital Therapies and Immunic are subject to various risks associated with their businesses and their industries. In addition, the Transaction, including the possibility that the Transaction may not be completed, poses a number of risks to each company and its respective securityholders, including the following risks:

 

   

the Exchange Ratio is not adjustable based on the market price of Vital Therapies common stock so the Transaction consideration at the closing may have a greater or lesser value than at the time the Exchange Agreement was signed;

 

   

failure to complete the Transaction may result in Vital Therapies or Immunic paying a termination fee to the other party and could harm the common stock price of Vital Therapies and future business and operations of each company;

 

   

if the conditions to the Transaction are not met, the Transaction may not occur;

 

   

the Transaction may be completed even though material adverse changes may result from the announcement of the Transaction, industry-wide changes and other causes;

 

   

some Vital Therapies and Immunic executive officers and directors have interests in the Transaction that are different from yours and that may influence them to support or approve the Transaction without regard to your interests;

 

   

the market price of Vital Therapies common stock following the Transaction may decline as a result of the Transaction;

 

   

Vital Therapies and Immunic securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the company as compared to their current ownership and voting interest in the respective companies following the completion of the Transaction;

 

   

during the pendency of the Transaction, Vital Therapies and Immunic may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Exchange Agreement, which could adversely affect their respective businesses;

 

   

certain provisions of the Exchange Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Exchange Agreement; and



 

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because the lack of a public market for Immunic’s capital stock makes it difficult to evaluate the fairness of the Transaction, the shareholders of Immunic may receive consideration in the Transaction that is less than the fair market value of Immunic’s capital stock and/or Vital Therapies may pay more than the fair market value of Immunic’s capital stock.

These risks and other risks are discussed in greater detail under the section entitled “Risk Factors” in this proxy statement/prospectus. Vital Therapies and Immunic both encourage you to read and consider all of these risks carefully.



 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

Selected Historical Consolidated Financial Data of Vital Therapies

The following summarizes our selected consolidated financial data for the periods and as of the dates indicated. We have derived the consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 from our audited consolidated financial statements included elsewhere in this proxy statement/prospectus. We have derived the consolidated statement of operations data for the nine months ended September 30, 2018 and 2017 and the consolidated balance sheet data as of September 30, 2018 from our unaudited condensed consolidated financial statements included elsewhere in this proxy statement/prospectus. The selected statement of operations data for the years ended December 31, 2014 and 2013 and the balance sheet data as of September 30, 2017, and December 31, 2015, 2014 and 2013 are derived from our consolidated financial statements or unaudited interim condensed consolidated financial statements not included in this proxy statement/prospectus. Our unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our financial position as of September 30, 2018 and 2017 and our results of our operations for the nine months ended September 30, 2018 and 2017. The results for the nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ended December 31, 2018, any other interim periods or any future period or year. This historical financial data should be read in conjunction with the section entitled “Managements Discussion and Analysis of Financial Condition and Results of Operations of Vital Therapies” and with our audited and unaudited consolidated financial statements and their related notes, which are included elsewhere in this proxy statement/prospectus.

 

    Nine Months
Ended September 30,
    For the Year
Ended December 31,
 
    2018     2017     2017     2016     2015     2014     2013  
    (in thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

             

Operating expenses:

             

Research and development

  $ 24,805     $ 29,151     $ 39,341     $ 30,046     $ 39,118     $ 39,479     $ 21,787  

General and administrative

    11,054       8,724       13,314       11,220       12,138       10,863       9,615  

Severance costs

    2,395       —         —         —         863       —         —    

Impairment loss

    1,219       —         —         —         —         —         —    

Total operating expenses

    39,473       37,875       52,655       41,266       52,120       50,342       31,402  

Loss from operations

    (39,473     (37,875     (52,655     (41,266     (52,120     (50,342     (31,402

Net loss

    (39,011     (37,490     (52,078     (40,969     (52,023     (47,667     (32,718

Net loss attributable to common stockholders

  $ (39,011   $ (37,490   $ (52,078   $ (40,969   $ (52,023   $ (56,821   $ (39,085

Net loss per share attributable to common stockholders, basic and diluted

  $ (0.92   $ (0.96   $ (1.31   $ (1.31   $ (2.07   $ (3.54   $ (74.86

Weighted-average common shares outstanding, basic and diluted

    42,369,093       39,054,978       39,859,009       31,387,579       25,152,948       16,054,452       522,102  


 

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    As of September 30,     As of December 31,  
    2018     2017     2017     2016     2015     2014     2013  
    (in thousands)  

Consolidated Balance Sheet Data:

 

Cash and cash equivalents

  $ 17,798     $ 66,391     $ 56,901     $ 59,991     $ 83,416     $ 102,238     $ 38,186  

Working capital

    13,370       59,726       47,840       55,983       78,433       94,538       36,409  

Total assets

    19,988       70,358       60,384       64,026       89,081       108,082       46,585  

Additional paid-in-capital

    349,132       343,351       345,915       302,185       285,098       248,305       58,413  

Accumulated deficit

    (334,964     (281,365     (295,953     (243,825     (202,856     (150,833     (103,166

Total stockholders’ equity (deficit)

    14,252       62,078       50,044       58,446       82,325       97,563       (44,657


 

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Comparative Historical and Unaudited Pro Forma Per Share Data

The following information does not give effect to the proposed reverse stock split described in Proposal 4, beginning on page 179 in this proxy statement/prospectus.

The information below reflects the historical net loss and book value per share of Vital Therapies common stock and the historical net loss and book value per share of Immunic common and preferred shares in comparison with the unaudited pro forma net loss and book value per share after giving effect to the Transaction on a pro forma basis. The pro forma amounts are presented for illustrative purposes only and are not necessarily indicative of what the financial position, results of operations or per share information of the company would have been if Vital Therapies and Immunic had effected the Transaction as of or for the periods presented.

You should read the information below in conjunction with the audited and unaudited consolidated financial statements of each of Vital Therapies and Immunic included in this proxy statement/prospectus and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus.

 

     Nine Months
Ended
September 30,
2018
     Year
Ended
December 31,
2017
 

Vital Therapies Historical Per Common Share Data:

     

Basic and diluted net loss per share

   $ (0.92    $ (1.31

Book value per share

   $ 0.34      $ 1.18  

Immunic Historical Per Common Share Data:

     

Basic and diluted net loss per share

   (16.02    (26.81

Book value per share

   29.92      18.02  

Vital Therapies and Immunic Combined Unaudited Pro Forma Data:

     

Basic and diluted net loss per share

   $ (0.11    $ (0.14

Book value per share

   $ 0.11     


 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following information does not give effect to the proposed reverse stock split of Vital Therapies, Inc., common stock described in Proposal 4 in this proxy statement/prospectus.

On January 6, 2019, Vital Therapies, Inc., a Delaware corporation, and Immunic AG, a stock corporation formed under the laws of Germany focused on developing novel oral therapies for chronic inflammatory and autoimmune diseases, entered into a definitive agreement, or the Exchange Agreement, pursuant to which and subject to, among other things, the satisfaction or waiver of the conditions set forth in the Exchange Agreement, Vital Therapies is expected to acquire all of the outstanding shares of Immunic in exchange for newly-issued shares of Vital Therapies in an all-stock transaction, or the Transaction. The exchange is intended to constitute a transaction qualifying for federal income tax purposes as a tax-free exchange under the provisions of Section 351(a) of the Internal Revenue Code of 1986, as amended.

Subject to the terms and conditions of the Exchange Agreement, at the effective time of the exchange, or the Effective Time, (a) each holder of Immunic’s outstanding shares shall contribute and transfer by assignment all of the Immunic shares held by such holder in exchange for Vital Therapies’ common stock based on the exchange ratio described below. Immediately following the exchange, Immunic AG will be a wholly-owned subsidiary of Vital Therapies and the name of Vital Therapies will be changed from “Vital Therapies, Inc.” to “Immunic, Inc.”

Under the exchange ratio provided in the Exchange Agreement, as of and immediately after the merger and assuming no adjustments for Vital Therapies net cash balance or for the purchase price in Immunic’s pre-closing equity financing, all as provided for in the Exchange Agreement, the Immunic security holders are expected to own approximately 89% of the aggregate number of shares of the company’s common stock issued and outstanding plus any common stock equivalent outstanding on the Effective Date, or the Post-Closing Shares, and the stockholders of Vital Therapies are expected to own approximately 11% of the aggregate number of Post-Closing Shares, as of the Effective Date.

Concurrent with Immunic’s entry into the Exchange Agreement, certain of Immunic’s existing security holders entered into an Investment and Subscription Agreement to purchase shares of Immunic’s common stock in a private financing prior to consummation of the Transaction for an aggregate purchase price of approximately $30.3 million, referred to as the Pre-Closing Financing.

The following unaudited pro forma condensed combined financial statements give effect to the exchange of all of the outstanding shares of Immunic AG for newly-issued shares of Vital Therapies in the Transaction, pursuant to the Exchange Agreement between the companies, and were prepared in accordance with the regulations of the Securities and Exchange Commission, or the SEC. Immunic was determined to be the accounting acquirer based upon the terms of the Transaction and other factors including: (i) Immunic’s security holders will own over 80% of the company, (ii) Immunic directors will hold a majority of the board seats in the company, and (iii) Immunic management will hold all key positions in the management of the combined company, immediately following the closing of the Transaction.

In the unaudited pro forma condensed combined financial statements, the Transaction will be recorded as a business combination using the acquisition method of accounting under accounting principles generally accepted in the United States, or “U.S. GAAP”. The Transaction will be accounted for as a reverse acquisition under the accounting guidance and Immunic, as the accounting acquirer, will record the assets acquired and liabilities assumed of Vital Therapies in the Transaction at their fair values as of the acquisition date. Vital Therapies and Immunic have determined a preliminary estimated purchase price calculated as described in Note 2 to the unaudited pro forma condensed combined financial statements. The net tangible and intangible assets acquired and liabilities assumed in connection with the Transaction are recorded at their estimated acquisition date fair values. A final determination of these estimated fair values will be based on the estimated net tangible and intangible assets and liabilities of Vital Therapies that exist as of the date of completion of the Transaction.



 

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The unaudited pro forma condensed combined balance sheet as of September 30, 2018 gives effect to the Transaction as if it took place on September 30, 2018 and combines the historical balance sheets of Vital Therapies and Immunic as of such date. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2018 and for the year ended December 31, 2017 gives effect to the Transaction as if it took place as of January 1, 2017, and combines the historical results of Vital Therapies and Immunic for each period. The historical financial statements of Vital Therapies and Immunic have been adjusted to give pro forma effect to events that are (i) directly attributable to the Transaction, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of operations, at the date hereof are expected to have a continuing impact on the combined companies’ results.

The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. The unaudited pro forma condensed combined financial statements and pro forma adjustments have been prepared based on preliminary estimates of fair value of assets acquired and liabilities assumed. Differences between these preliminary estimates and the final acquisition accounting are likely to occur and these differences could be material as compared to the accompanying unaudited pro forma condensed combined financial statements and the combined companies’ future results of operations and financial position. The actual amounts recorded as of the completion of the Transaction may also differ materially from the information presented in these unaudited condensed combined pro forma financial statements as a result of, among other factors, the amount of capital raised by Immunic between entering the Exchange Agreement and closing of the Transaction; the amount of cash used in Vital Therapies’ operations between the signing of the Exchange Agreement and the closing of the Transaction; the timing of closing of the Transaction; changes in the fair value of Vital Therapies common stock; and other changes in the Vital Therapies assets and liabilities that occur prior to the completion of the Transaction.

The unaudited pro forma condensed combined financial information does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the two companies, if any. The unaudited pro forma condensed combined financial information is preliminary and has been prepared for informational purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Vital Therapies and Immunic been a combined company during the specified periods. The actual results reported in periods following the transaction are expected to differ significantly from those reflected in the unaudited pro forma condensed combined financial information presented herein for a number of reasons, including, but not limited to, the termination of Vital Therapies clinical trials and the related reduction in work force in September 2018, sales of assets and actual differences from the assumptions used to prepare the pro forma financial information.

The unaudited pro forma condensed combined financial information, including the notes thereto, should be read in conjunction with the separate Vital Therapies and Immunic historical financial statements, and their respective management’s discussion and analysis of financial condition and results of operations included elsewhere in this proxy statement/prospectus.



 

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Unaudited Pro Forma Condensed Combined Balance Sheet

September 30, 2018

(in millions)

 

     Vital
Therapies
    Immunic
U.S. GAAP
Adjusted (1)
    Pro Forma
Adjustments
    Note      Pro Forma
Combined
 

Assets

           

Current assets

           

Cash and cash equivalents

   $ 17.8     $ 10.0     $ 30.3       A      $ 58.1  

Prepaid expenses and other current assets

     1.3       0.2       1.3       B        2.8  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total current assets

     19.1       10.2       31.6          60.9  

Property and equipment, net

     0.9       —         —            0.9  

Intangible assets, net

     —         —         —            —    

In process research and development

     —         —         0.6       C        0.6  

Goodwill

     —         —         0.1       D        0.1  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total assets

   $ 20.0     $ 10.2     $ 32.3        $ 62.5  
  

 

 

   

 

 

   

 

 

      

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Accounts payable

   $ 1.1     $ 0.4     $ —          $ 1.5  

Accrued expenses and other current liabilities

     4.6       0.2       7.8       E        12.6  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total current liabilities

     5.7       0.6       7.8          14.1  

Stockholders’ equity:

           

Preferred Stock

     —         0.4       (0.4     G        —    

Common Stock

     —         —         —         G        —    

Additional paid-in capital

     349.1       30.2       30.3       A        78.6  
         7.3       F     
         (338.3     G     

Accumulated other comprehensive income

     0.1       (0.7     (0.1     G        (0.7

Accumulated deficit

     (334.9     (20.3     (1.9     E        (29.5
         (7.3     F     
         334.9       G     
  

 

 

   

 

 

   

 

 

      

 

 

 

Total stockholders’ equity

     14.3       9.6       24.5          48.4  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total liabilities and stockholders’ equity

   $ 20.0     $ 10.2     $ 32.3        $ 62.5  
  

 

 

   

 

 

   

 

 

      

 

 

 

 

(1)

Intangible assets for Immunic excludes $2.9 million of costs related to acquired intangibles that Immunic capitalizes and amortizes under international financial reporting standards as issued by the International Accounting Standards Board that are expensed in the period acquired under U.S.generally accepted accounting principles. Accordingly, the accumulated deficit is also $2.9 million higher in the pro forma condensed combined balance sheet.

See accompanying notes to the unaudited pro forma condensed combined financial statements.



 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Nine Months Ended September 30, 2018

(in millions, except share and per share amounts)

 

     Vital
Therapies
    Immunic
U.S. GAAP
Adjusted (1)
    Pro Forma
Adjustments
     Pro Forma
Combined
    Note  

Operating Expenses:

                              

Research and development

   $ 24.8     $ 5.3     $ —        $ 30.1    

General and administrative

     11.1       1.5       —          12.6    

Severance costs

     2.4       —         —          2.4    

Impairment loss

     1.2       —         —          1.2    
  

 

 

   

 

 

   

 

 

    

 

 

   

Total operating expenses

     39.5       6.8       —          46.3    
  

 

 

   

 

 

   

 

 

    

 

 

   

Loss from operations

     (39.5     (6.8     —          (46.3  

Other income (expense):

           

Interest income (expense), net

     0.5       —         —          0.5    

Other income (expense), net

     —         —         —          —      
  

 

 

   

 

 

   

 

 

    

 

 

   

Total other income (expense)

     0.5       —         —          0.5    
  

 

 

   

 

 

   

 

 

    

 

 

   

Net loss

   $ (39.0   $ (6.8   $ —        $ (45.8  
  

 

 

   

 

 

   

 

 

    

 

 

   

Net loss per share, basic and diluted

   $ (0.92   $ (18.69      $ (0.11  
  

 

 

   

 

 

      

 

 

   

Weighted-average common shares outstanding, basic and diluted

     42,369,093       362,997          424,118,380       H  
  

 

 

   

 

 

      

 

 

   

 

(1)

Research and development costs for Immunic exclude $0.2 million of costs related to the amortization of acquired intangibles that Immunic capitalizes and amortizes under international financial reporting standards as issued by the International Accounting Standards Board that is expensed in the period acquired under U.S.generally accepted accounting principles.

See accompanying notes to the unaudited pro forma condensed combined financial statements.



 

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Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2017

(in millions, except share and per share amounts)

 

     Vital
Therapies
    Immunic
U.S. GAAP
Adjusted (1)
    Pro Forma
Adjustments
    Note      Pro Forma
Combined
    Note  

Operating Expenses:

                                

Research and development

   $ 39.4     $ 8.7     $ (1.3     B      $ 46.8    

General and administrative

     13.3       1.3       —            14.6    

Severance costs

     —         —         —            —      
  

 

 

   

 

 

   

 

 

      

 

 

   

Total operating expenses

     52.7       10.0       (1.3        61.4    
  

 

 

   

 

 

   

 

 

      

 

 

   

Loss from operations

     (52.7     (10.0     1.3          (61.4  

Other income (expense):

             

Interest income (expense), net

     0.7       —         —            0.7    

Other income (expense), net

     (0.1     —         —            (0.1  
  

 

 

   

 

 

   

 

 

      

 

 

   

Total other income (expense)

     0.6       —         —            0.6    
  

 

 

   

 

 

   

 

 

      

 

 

   

Net loss

   $ (52.1   $ (10.0   $ 1.3        $ (60.8  
  

 

 

   

 

 

   

 

 

      

 

 

   

Net loss per share, basic and diluted

   $ (1.31   $ (33.14        $ (0.14  
  

 

 

   

 

 

        

 

 

   

Weighted-average common shares outstanding, basic and diluted

     39,859,009       301,554            421,608,296       H  
  

 

 

   

 

 

        

 

 

   

 

(1)

Research and development costs for Immunic include $0.9 million of costs for acquired intangibles expensed under U.S.generally accepted accounting principles that Immunic capitalizes and amortizes under international financial reporting standards as issued by the International Accounting Standards Board.

See accompanying notes to the unaudited pro forma condensed combined financial statements.



 

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Notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

1.

Description of the Transaction, Basis of Presentation

Description of the Transaction

On January 6, 2019, Vital Therapies, Inc., a Delaware corporation, and Immunic AG, a stock corporation formed under the laws of Germany focused on developing novel oral therapies for chronic inflammatory and autoimmune diseases, entered into a definitive agreement, or the Exchange Agreement, pursuant to which and subject to, among other things, the satisfaction or waiver of the conditions set forth in the Exchange Agreement, Vital Therapies is expected to acquire all of the outstanding shares of Immunic in exchange for newly-issued shares of Vital Therapies in an all-stock transaction, or the Transaction. The exchange is intended to constitute a transaction qualifying for federal income tax purposes as a tax-free exchange under the provisions of Section 351(a) of the Internal Revenue Code of 1986, as amended.

Subject to the terms and conditions of the Exchange Agreement, at the effective time of the exchange, or the Effective Time, (a) each holder of Immunic’s outstanding shares shall contribute and transfer by assignment all of the Immunic shares held by such holder in exchange for Vital Therapies’ common stock based on the exchange ratio described below. Immediately following the exchange, Immunic AG will be a wholly-owned subsidiary of Vital Therapies and the name of Vital Therapies will be changed from “Vital Therapies, Inc.” to “Immunic, Inc.”

Under the exchange ratio provided in the Exchange Agreement, as of and immediately after the merger and assuming no adjustments for Vital Therapies net cash balance or for the purchase price in Immunic’s pre-closing equity financing, all as provided for in the Exchange Agreement, the Immunic security holders are expected to own approximately 89% of the aggregate number of shares of the company’s common stock issued and outstanding plus any common stock equivalent outstanding on the Effective Date, or the Post-Closing Shares, and the stockholders of Vital Therapies are expected to own approximately 11% of the aggregate number of Post-Closing Shares, as of the Effective Date.

Concurrent with Immunic’s entry into the Exchange Agreement, certain of Immunic’s existing security holders entered into an Investment and Subscription Agreement to purchase shares of Immunic’s common stock in a private financing prior to consummation of the Transaction for an aggregate purchase price of approximately $30.3 million, referred to as the Pre-Closing Financing.

In addition to other customary conditions, the Transaction requires Vital Therapies’ stockholders to approve the issuance of shares to the Immunic security holders, and the amendment of Vital Therapies’ certificate of incorporation to effect a reverse split of its shares and to change its name to Immunic, Inc. The Exchange Agreement also contains certain termination rights for both Vital Therapies and Immunic, and further provides that, upon termination under specified circumstances, either party may be required to pay the other party a termination fee and, in some circumstances, reimburse the other party’s expenses up to an agreed maximum.

Basis of Presentation

The accompanying unaudited pro forma condensed combined financial information was prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and pursuant to Article 11 of SEC Regulation S-X. The condensed combined pro forma financial position and results of operations of the combined companies is based upon the separate historical data of Vital Therapies and Immunic. Immunic’s historical financial statements were prepared under International Financial Reporting Standards as issued by the International Accounting Standards Board and converted to U.S. GAAP.

The accompanying unaudited pro forma condensed combined balance sheet as of September 30, 2018 is presented as if the Transaction had been completed on September 30, 2018. The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2018 and for the year ended



 

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December 31, 2017 gives effect to the Transaction as if it took place as of January 1, 2017, and were prepared using the historical results of Vital Therapies and Immunic for the nine months ended September 30, 2018, and for the year ended December 31, 2017, respectively.

Accounting Policies

During the preparation of the accompanying unaudited pro forma condensed combined financial information, management did not identify any material differences between Vital Therapies’ accounting policies and the accounting policies of Immunic.

 

2.

Accounting for the Transaction

The management of Vital Therapies and Immunic has preliminarily concluded that the Transaction represents a business combination pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations, or ASC 805. For accounting purposes, Immunic has been determined (i) to be the accounting acquirer based upon the terms of the Transaction and other factors including: (x) Immunic’s security holders are expected to own over 80% of the company immediately following the closing of the Transaction, (y) Immunic directors will hold a majority board seats in the company, and (z) Immunic management will hold all key positions in the management of the combined company, and (ii) that the Transaction will be accounted for as a reverse acquisition using the acquisition method of accounting for business combinations under the guidance of ASC 805. Accordingly, Immunic will record the acquired assets and liabilities at their fair value as of the Transaction closing date.

Management has estimated the preliminary purchase price and not yet completed an external valuation analysis of the fair market value of Vital Therapies’ assets to be acquired and liabilities to be assumed. As a result, management has the estimated the allocation of the preliminary purchase price to Vital Therapies’ assets and liabilities. This preliminary purchase price allocation has been used to prepare the pro forma adjustments in the unaudited pro forma condensed combined balance sheet. The final purchase price allocation will be determined when the final purchase price has been determined, the final assets and liabilities and any asset sales are known, and detailed valuations and any other studies and calculations deemed necessary have been completed. The final purchase price and purchase price allocation could differ materially from the preliminary purchase price and purchase price allocation used to prepare the pro forma adjustments resulting from changes to assets and liabilities and to the ultimate purchase consideration, and operations during the intervening period to the closing of the Transaction, among other factors.

The preliminary purchase price, or the proportional value to be retained by the Vital Therapies stockholders and the holders of its common stock equivalents, has been based on the last reported sale price of Vital Therapies common stock on The Nasdaq Global Market on January 31, 2019. This preliminary purchase price is based on the aggregate number of shares of Vital Therapies’ common stock and common stock equivalents expected to be outstanding at the closing of the Transaction as summarized below (amounts in millions, except share and per share amounts):

 

Estimated number of shares to be owned by Vital Therapies stockholders

     47,469,694  

Multiplied by the fair value per share of Vital Therapies commons stock

   $ 0.22  
  

 

 

 

Estimated purchase price

   $ 10.4  
  

 

 

 


 

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The actual purchase price will fluctuate until the Effective Date of the Transaction and the final valuation could differ significantly from the preliminary estimate. The following table illustrates the effect of changes in the price of Vital Therapies common stock on the estimated purchase price and on goodwill or the estimated bargain purchase gain than may result at certain purchase price levels in the Transaction (in millions, except per share amounts):

 

     Vital Stock
Price
     Purchase
Price
     Goodwill/
(Bargain
Purchase Gain)
 

Increase of 10%

   $ 0.24      $ 11.5      $ 1.2  

Increase of 20%

   $ 0.26      $ 12.5      $ 2.2  

Increase of 30%

   $ 0.29      $ 13.6      $ 3.3  

Decrease of 10%

   $ 0.20      $ 9.4      $ (0.9

Decrease of 20%

   $ 0.18      $ 8.4      $ (1.9

Decrease of 30%

   $ 0.15      $ 7.3      $ (3.0

Any excess of the purchase price over the estimated fair value of the net assets acquired will be recorded as goodwill on the balance sheet. Any excess of the estimated fair value of the net assets acquired over the purchase price paid will be recorded as a bargain purchase gain in the statement of operations.

The net tangible and intangible assets acquired and liabilities assumed in connection with the Transaction are recorded at their estimated acquisition date fair values with the excess going to goodwill. A final determination of these estimated fair values will be based on the estimated net tangible and intangible assets and liabilities of Vital Therapies that exist as of the date of completion of the Transaction. The following summarizes a preliminary allocation of the estimated purchase price as if the Transaction had been completed on September 30, 2018 (in millions):

 

Cash and cash equivalents

   $ 17.8  

Prepaid expenses and other assets

     2.6  

Property and equipment

     0.9  

In-process research and development

     0.6  

Accounts payable, accrued expenses and other liabilities

     (11.6
  

 

 

 

Net assets acquired

     10.3  

Less: preliminary purchase price

     10.4  
  

 

 

 

Goodwill

   $ 0.1  
  

 

 

 

The allocation of the estimated purchase price is preliminary because the proposed Transaction has not yet been completed. The purchase price will remain preliminary until the close of the Transaction. The purchase price allocation will also remain preliminary until the final assets and liabilities existing at closing are determined and detailed valuations and any other studies and calculations deemed necessary have been completed. The final determination of the purchase price allocation is anticipated to be completed as soon as practicable after completion of the Transaction and will be based on the fair values of the assets acquired and liabilities assumed as of the closing date of the Transaction. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements.

Note 4—Pro forma adjustments

The unaudited pro forma condensed combined financial statements include pro forma adjustments (i) for the Pre-Closing Financing by Immunic and (ii) that are (x) directly attributable to the Transaction, (y) factually



 

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supportable, and (z) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the results of operations of the company. The unaudited pro forma condensed combined financial information does not give effect to the proposed reverse stock split of Vital Therapies common stock described in the reverse stock split proposal.

The pro forma adjustments, based on preliminary estimates that may change significantly as additional information is obtained, are as follows:

 

  A.

Adjustments to reflect an estimated $30.3 million in net proceeds from the sale of equity capital to be raised by Immunic as part of the Pre-Closing Financing prior to consummation of the Transaction and the issuance of Immunic shares in conjunction with such financing.

 

  B.

Reflects the estimated fair value of inventory and supplies on hand at September 30, 2018 that had been expensed by Vital Therapies in accordance with U.S. GAAP.

 

  C.

To reflect the estimated fair value of indefinite-lived intangible assets associated Vital Therapies’ ELAD System. These intangible assets would only be amortized over their respective estimated useful lives after approval, if any, by the FDA or other regulatory agencies.

 

  D.

Represents an adjustment to record goodwill resulting from the Transaction. Goodwill represents the excess of the preliminary estimated purchase price over the estimated fair value of Vital Therapies identified net assets.

 

  E.

To reflect the accrued liabilities that are assumed by Immunic of approximately $2.2 million in severance and change in control obligations payable to Vital Therapies officers and $5.6 million for estimated transaction costs directly attributable to the closing of the Transaction. The $5.6 million in transaction costs includes the following costs to be incurred by Vital Therapies: $1.3 million for investment banking services, $1.3 million in insurance costs, and $1.1 million in legal, accounting and other expenses; and the following are transaction costs to be incurred by Immunic: $1.0 million for investment banking services and $0.9 million in legal, accounting and other expenses. These pro forma transaction costs are not reflected in the unaudited pro forma condensed combined statements of operations as these amounts are not expected to have a continuing effect on the operating results of the combined company.

 

  F.

Adjustment to reflect the acceleration of restricted stock units held by Vital Therapies officers on termination and the issuance of shares to Immunic officers as a transaction bonus.

 

  G.

To reflect (1) the elimination of Vital Therapies’ historical stockholders’ equity and (2) the issuance of Vital Therapies common shares in exchange for Immunic’s common and preferred shares to finance the acquisition.

 

  H.

Reflects the pro forma weighted average shares outstanding including the issuance of common shares to finance the Transaction, without giving effect to the proposed reverse stock split.



 

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MARKET PRICE AND DIVIDEND INFORMATION

Vital Therapies common stock is listed on The Nasdaq Global Market under the symbol “VTL.” The following table presents, for the periods indicated, the range of high and low per share sales prices for our common stock as reported on The Nasdaq Global Market for each of the periods set forth below. Immunic is a private company and its common stock and preferred stock are not publicly traded.

The closing price of our common stock on January 4, 2019, the last trading day prior to the public announcement of the Transaction, was $0.24 per share, and the closing price of our common stock on [●], 2019 was $[●] per share, in each case as reported on The Nasdaq Stock Market.

Because the market price of our common stock is subject to fluctuation, the market value of the shares of Vital Therapies common stock that Immunic shareholders will be entitled to receive in the Transaction may increase or decrease.

Assuming approval of Proposal 4 and successful application for initial listing with The Nasdaq Stock Market, following the completion of the Transaction, our common stock will be listed on The Nasdaq Stock Market and will trade under the company’s new name, “Immunic, Inc.” and new trading symbol, “IMUX.”

As of January 15, 2019, there were 52 registered holders of our common stock. This number does not include stockholders for whom shares were held in “nominee” or “street name.” For information regarding the beneficial ownership of some stockholders of Vital Therapies and Immunic, see the section entitled “Principal Stockholders of Vital Therapies” beginning on page 261 and the section entitled “Principal Shareholders of Immunic” beginning on page 263 of this proxy statement/prospectus.



 

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RISK FACTORS

The company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus, you should carefully consider the material risks described below before deciding how to vote your shares of Vital Therapies common stock. In addition, you should read and consider the risks associated with the business of Vital Therapies because these risks may also affect the company following the Transaction—these risks can be found in Vital Therapies’ Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC. You should also read and consider the other information in this proxy statement/prospectus. Please see the section entitled Where You Can Find More Information in this proxy statement/prospectus.

Risks Related to the Transaction

The Exchange Ratio is not adjustable based on the market price of Vital Therapies common stock so the Transaction consideration at the closing may have a greater or lesser value than at the time the Exchange Agreement was signed.

The relative proportion of the company that the Vital Therapies stockholders will own when the Transaction closes will be based on the relative valuations of Vital Therapies and Immunic as negotiated by the parties and as specified in the Exchange Agreement. Following the completion of the Transaction, (a) current Vital Therapies stockholders are expected to own approximately 11% of the common stock of the company and (b) Immunic shareholders are expected to own approximately 89% of the common stock of the company, on a fully-diluted basis (including shares issued in Immunic’s concurrent financing), assuming that Immunic closes its concurrent financing immediately prior to the effective time of the Transaction. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment as provided in the Exchange Agreement. Fluctuations in Vital Therapies stock price will not affect Vital Therapies’ valuation under the Exchange Agreement or the portion of the company to be retained by our existing stockholders. The terms of the Exchange Agreement provide for adjustments to the relative valuations of both Vital Therapies and Immunic in certain events. For example, prior to the consummation of the Transaction, the Exchange Ratio at the closing of the Transaction may be subject to either (i) an upward adjustment to the extent that Vital Therapies’ net cash at the effective time of the Transaction is less than $4,200,000 (and as a result, Vital Therapies securityholders could own less, and Immunic securityholders could own more, of the company) or (ii) a downward adjustment to the extent that Vital Therapies’ net cash at the effective time of the Transaction is greater than $5,200,000 (and as a result, Vital Therapies securityholders could own more, and Immunic securityholders could own less, of the company). In addition, if Vital Therapies’ net cash at the effective time of the Transaction is less than a specified minimum amount of approximately $1,500,000, the Exchange Ratio at the closing of the Transaction may be subject to an additional upward adjustment (and as a result, Vital Therapies securityholders could own less, and Immunic securityholders could own more, of the company). The minimum specified amount will be $1,500,000 if the Transaction closes on or before March 31, 2019, and the minimum cash will be reduced by $5,000 for each day (including any partial day) after March 31, 2019 until the Transaction closes.

Failure to complete the Transaction may result in Vital Therapies or Immunic paying a termination fee to the other party and could harm the common stock price of Vital Therapies and future business and operations of each company.

If the Transaction is not completed, Vital Therapies and Immunic are subject to the following risks:

 

   

upon termination of the Exchange Agreement under specified circumstances, Immunic may be required to pay Vital Therapies a termination fee of $2,000,000 and/or up to $275,000 in expense reimbursements, or Vital Therapies may be required to pay Immunic a termination fee of $500,000 and/or up to $275,000 in expense reimbursements;

 

   

the price of Vital Therapies common stock may decline and remain volatile;

 

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the parties will have incurred significant expenses related to the Transaction, such as legal and accounting fees, which Vital Therapies and Immunic estimate will total approximately $1.4 million and $0.5 million, respectively, many of which must be paid even if the Transaction is not completed; and

 

   

Vital Therapies may be forced to cease its operations, dissolve and liquidate its assets.

In addition, if the Exchange Agreement is terminated and the board of directors of Vital Therapies or Immunic determines to seek another business combination, there can be no assurance that either Vital Therapies or Immunic will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Transaction or any partner at all.

If the conditions to the closing of the Transaction are not met, the Transaction may not occur.

Even if the change of control and related share issuance are approved by the stockholders of Vital Therapies, specified conditions must be satisfied or waived to complete the Transaction. These conditions are set forth in the Exchange Agreement and described in the section entitled “The Exchange Agreement—Conditions to the Completion of the Transaction” in this proxy statement/prospectus, such as Immunic’s concurrent financing. Vital Therapies and Immunic cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Transaction may not occur or will be delayed, and Vital Therapies and Immunic each may lose some or all the intended benefits of the Transaction.

The Transaction may be completed even though material adverse changes may result from the announcement of the Transaction, industry-wide changes and other causes.

In general, either Vital Therapies or Immunic can refuse to complete the Transaction if there is a material adverse change affecting the other party between January 6, 2019, the date of the Exchange Agreement, and the closing of the Transaction. However, certain types of changes do not permit either party to refuse to complete the Transaction, even if such change could be said to have a material adverse effect on Vital Therapies or Immunic, including:

 

   

any rejection by a governmental body of a registration or filing by Vital Therapies or Immunic relating to their respective intellectual property rights;

 

   

any change in the cash position of Vital Therapies or Immunic that results from operations in the ordinary course of business;

 

   

conditions generally affecting the industries in which Vital Therapies or Immunic participates or the U.S. or global economy or capital markets as a whole, to the extent that such conditions do not have a disproportionate impact on Vital Therapies or Immunic and their respective subsidiaries, taken as a whole;

 

   

any failure by Immunic to meet internal projections or forecasts on or after the date of the Exchange Agreement, provided that any such effect, change, event, circumstance or development causing or contributing to any such failure to meet projections or forecasts may constitute a material adverse effect of Vital Therapies or Immunic and may be taken into account in determining whether a material adverse effect has occurred;

 

   

any failure by Vital Therapies to meet internal projections or forecasts or third-party predictions for any period ending (or for which results are released) on or after the date of the Exchange Agreement or any change in the price or trading volume of Vital Therapies’ common stock, provided that any such effect, change, event, circumstance or development causing or contributing to any such failure to meet projections or forecasts may constitute a material adverse effect of Vital Therapies and may be taken into account in determining whether a material adverse effect has occurred;

 

   

the execution, delivery, announcement or performance of obligations under the Exchange Agreement or the announcement, pendency or anticipated consummation of the Transaction or Immunic’s concurrent financing;

 

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a transfer, sale, lease, disposition or license of assets by Vital Therapies that is permitted under the Exchange Agreement;

 

   

any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof; or

 

   

any changes after the date of the Exchange Agreement in U.S. GAAP or applicable laws.

If adverse changes occur and Vital Therapies and Immunic still complete the Transaction, the stock price of the company following the closing of the Transaction may suffer. This in turn may reduce the value of the Transaction to the stockholders of Vital Therapies, Immunic or both.

Some executive officers and directors of Vital Therapies and Immunic have interests in the Transaction that are different from yours and that may influence them to support or approve the Transaction without regard to your interests.

Some officers and directors of Vital Therapies and Immunic are parties to arrangements that provide them with interests in the Transaction that are different from yours, including, among others, service as an officer or director of the company following the closing of the Transaction, severance and retention benefits, the acceleration of equity award vesting, and continued indemnification. For more information regarding the interests of the Vital Therapies and Immunic executive officers and directors in the Transaction, see the sections entitled “The Transaction—Interests of the Directors and Executive Officers of Vital Therapies in the Transaction” and “The Transaction—Interests of the Directors and Executive Officers of Immunic in the Transaction” of this proxy statement/prospectus.

The market price of Vital Therapies common stock following the Transaction may decline as a result of the Transaction.

The market price of Vital Therapies common stock may decline as a result of the Transaction for a number of reasons, including if:

 

   

investors react negatively to the prospects of the company’s business and prospects following the closing of the Transaction;

 

   

the effect of the Transaction on the company’s business and prospects following the closing of the Transaction is not consistent with the expectations of financial or industry analysts; or

 

   

the company does not achieve the perceived benefits of the Transaction as rapidly or to the extent anticipated by stockholders or financial or industry analysts.

Immunic and Vital Therapies securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the company following the closing of the Transaction as compared to their current ownership and voting interest in the respective companies.

After the completion of the Transaction, the current securityholders of Immunic and Vital Therapies will own a smaller percentage of the company than their ownership in their respective companies prior to the Transaction. Immediately after the Transaction, it is currently estimated that Immunic securityholders will own approximately 89% of the common stock of Vital Therapies, with Vital Therapies securityholders, whose shares of Vital Therapies common stock will remain outstanding after the Transaction, will own approximately 11% of the common stock of the company on a fully-diluted basis, calculated on a pro forma basis including after giving effect to (i) the issuance of common shares by Immunic immediately prior to the effective time of the Transaction pursuant to the terms of the Subscription Agreement, and (ii) the Transaction. These estimates are based on the anticipated Exchange Ratio and are subject to adjustment as provided in the Exchange Agreement.

 

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In addition, the five member board of directors of the company will initially consist of four individuals with prior affiliations with Immunic and Dr. Duane Nash, Chief Executive Officer, President and a director of Vital Therapies. Consequently, securityholders of Immunic and Vital Therapies will be able to exercise less influence over the management and policies of the company following the closing of the Transaction than they currently exercise over the management and policies of their respective companies.

During the pendency of the Transaction, Vital Therapies and Immunic may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Exchange Agreement, which could adversely affect their respective businesses.

Covenants in the Exchange Agreement impede the ability of Vital Therapies and Immunic to make acquisitions, subject to specified exceptions relating to fiduciary duties or complete other transactions that are not in the ordinary course of business pending completion of the Transaction. As a result, if the Transaction is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Exchange Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into specified extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party, subject to specified exceptions, even if any such transactions could be favorable to such party’s stockholders.

Certain provisions of the Exchange Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Exchange Agreement.

The terms of the Exchange Agreement prohibit each of Vital Therapies and Immunic from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith, after consultation with its independent financial advisor, if any, and outside counsel, that an unsolicited competing proposal constitutes, or would reasonably be expected to result in, a superior competing proposal and that failure to take such action would be reasonably likely to result in a breach of the fiduciary duties of the board of directors. In addition, if Vital Therapies or Immunic terminate the Exchange Agreement under specified circumstances, including terminating because of a decision of a board of directors to recommend a superior competing proposal, Immunic may be required to pay Vital Therapies a termination fee of $2,000,000 and/or up to $275,000 in expense reimbursements, or Vital Therapies may be required to pay Immunic a termination fee of $500,000 and/or up to $275,000 in expense reimbursements, as defined and described under “The Exchange Agreement—Termination of the Exchange Agreement and Termination Fee.” This termination fee may discourage third parties from submitting competing proposals to Vital Therapies or Immunic or their stockholders, and may cause the respective boards of directors to be less inclined to recommend a competing proposal.

Because the lack of a public market for Immunic’s capital stock makes it difficult to evaluate the fairness of the Transaction, the shareholders of Immunic may receive consideration in the Transaction that is less than the fair market value of Immunic’s capital stock and/or Vital Therapies may pay more than the fair market value of Immunic’s capital stock.

The outstanding capital stock of Immunic is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Immunic’s capital stock. Because the percentage of Vital Therapies equity to be issued to Immunic shareholders was determined based on negotiations between the parties, it is possible that the value of the Vital Therapies common stock to be received by Immunic shareholders will be less than the fair market value of Immunic’s capital stock, or Vital Therapies may pay more than the aggregate fair market value for Immunic’s capital stock.

 

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Risks Related to Vital Therapies

Risks Related to Our Evaluation of Strategic Alternatives

Our activities to evaluate and pursue strategic alternatives may not be successful.

In September 2018, we voluntarily discontinued our development of our product candidate, the ELAD System, or ELAD, in view of the results of our VTL-308 phase 3 clinical trial in the U.S. and Europe. We have engaged Ladenburg Thalmann & Co. Inc., as a financial advisor to assist us in pursuing strategic alternatives, and on January 7, 2019, we announced that we had entered into the Exchange Agreement. We continue to evaluate additional strategic alternatives in order to enhance stockholder value, including the possibility of a sale of our assets related to the ELAD System, and we have suspended many of our research and development activities to reduce operating expenses while we evaluate and pursue these opportunities. We have and expect to continue to devote significant time and resources to identifying and evaluating strategic alternatives, including the Transaction; however, there can be no assurance that the Transaction or other such activities will enhance stockholder value. In addition, potential strategic transactions that require stockholder approval, such as the Transaction and the related matters stockholders are being asked to approve in this proxy statement/prospectus, may not be approved by our stockholders. Further, any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.

Any strategic transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:

 

   

exposure to unknown liabilities;

 

   

incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

 

   

higher than expected acquisition and integration costs;

 

   

write downs of assets or goodwill or impairment charges;

 

   

increased amortization expenses;

 

   

difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

   

impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership;

 

   

the inability to sell assets or to reduce its leased space; and

 

   

the inability to retain key employees of our company or any acquired businesses.

Accordingly, although there can be no assurance that we will undertake or successfully complete any strategic transactions of the nature described above. Any transactions that we do complete may be subject to the foregoing or other risks and could have a material adverse effect on our business, financial condition and prospects.

If we do not successfully consummate a strategic transaction, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend significantly on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the Transaction or any other strategic transactions we may identify or undertake, including the possible sale of our assets, will result in one or more successfully consummated transactions. If the Transaction is not completed, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily

 

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on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as we fund our operations while we continue to pursue strategic alternatives. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations; (ii) obligations under our employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of our company; (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business; and (iv) non-cancelable facility lease obligations. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company.

Our business to date has been almost entirely dependent on the success of ELAD and we have recently decided to discontinue further development of ELAD in the U.S. and Europe, and devote significant time and resources to identifying and evaluating strategic alternatives, which may not be successful.

To date, we have invested substantially all of our efforts and financial resources into the research and development of the ELAD System, which was our only product candidate to enter clinical trials. In September 2018, we voluntarily discontinued our development of ELAD in the U.S. and Europe in view of the results of our VTL-308 phase 3 clinical trial.

We are evaluating and pursuing strategic alternatives with a goal to enhance stockholder value, including the Transaction and the potential sale of assets, and have suspended most of our research and development activities, other than our early stage normothermic liver perfusion program, to reduce operating expenses while we focus on closing the Transaction and pursuing other strategic alternatives with respect to the sale of assets.

There can be no assurance that our efforts to sell certain of our assets will result in any definitive offer to buy such assets or if made, what the terms thereof will be or that the Transaction or any asset sale will be approved or consummated. In addition, there can be no assurance that any transactions, involving our company and/or assets, that is consummated would enhance stockholder value. There also can be no assurance that we will conduct additional research or development activities in the future.

We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction. We could lose such key employees, in particular, as a result of the VTL-308 data and the reduction in our workforce that we announced in September 2018.

In September 2018, we instituted across the board expense reductions to conserve capital, including a workforce reduction of approximately 85%. Our cash conservation activities may yield unintended consequences, such as attrition beyond our planned reduction in workforce and reduced employee morale, which may cause remaining employees to seek alternative employment. Our ability to successfully complete a strategic transaction, including the Transaction, depends in large part on our ability to retain certain of our remaining personnel, particularly Duane D. Nash M.D., our Chief Executive Officer and President, Robert A. Ashley, our Executive Vice President and Chief Scientific Officer, Michael V. Swanson, our Executive Vice President and Chief Financial Officer, and John M. Dunn, our General Counsel and Secretary. Despite our efforts to retain these employees, one or more may terminate their employment with us on short notice. The loss of the services of any of these employees could potentially harm our ability to evaluate and pursue strategic alternatives, as well as fulfill our reporting obligations as a public company.

 

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Competition among biotechnology companies for qualified employees is intense, and the ability to retain our key employees is critical to our ability to effectively manage our resources and to consummate a strategic transaction. Although we have suspended most of our research and development activities, if we resume the development of ELAD outside the U.S. or of new therapeutic products, such development requires expertise from a number of different disciplines, some of which are not widely available. The failure of the VTL-308 clinical trial will likely make it more challenging to retain qualified personnel and difficult to recruit personnel in the future, if necessary. The inability to recruit or loss of the services of any executive, key employee, consultant or advisor may impede our ability to identify and execute on a strategic path forward.

Our key employees have a significant amount of know-how and experience in our company, and the loss of one or more of them could have a material and adverse effect on our operations or ability to consummate a strategic transaction. While we have taken steps to retain our employees, including the granting of equity awards, paying competitive salaries and implementing appropriate bonus programs, these factors may not be enough to retain the employees that we need, particularly in light of the recent failure of our VTL-308 clinical trial and scaling back operations.

The loss of the services of existing personnel or the failure to recruit additional, suitable key scientific, managerial, clinical, regulatory, operational and other personnel in a timely manner, if required, could harm our business. We may experience difficulty in hiring and retaining highly-skilled employees with appropriate qualifications as needed, particularly in light of the recent failure of our VTL-308 clinical trial. If we fail to retain and motivate our current personnel or fail to attract new personnel, our business and future growth prospects and our ability to consummate a strategic transaction would be harmed.

Furthermore, while we have entered into employment letters with each of our executive officers, any of them could leave our employment at any time, as all of our employees are “at will” employees. It can be challenging to retain qualified personnel. The inability to recruit or loss of the services of any executive, key employee, consultant or advisor may impede our ability to identify and execute on our strategy.

Risks Related to Our Business

We were dependent on the success of the ELAD System, and we do not expect be able to complete the development of, successfully obtain regulatory or marketing approval for, or successfully commercialize, the ELAD System in the United States, or U.S., or Europe.

We are subject to all of the uncertainties and complexities affecting a clinical-stage, combination product, biologic and medical device company. We have not successfully completed clinical development for any of the ELAD System’s potential indications in the U.S. or Europe where the ELAD System is regulated as a combination biologic and medical device, and as a combined somatic cell Advanced Therapy Medicinal Product, respectively. In September 2018, we announced that our VTL-308 clinical trial failed to meet both its primary and secondary endpoints. In light of these results, we do not believe that the ELAD System can be approved in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete. Consequently, we have ceased any further development of the ELAD System and are exploring strategic options including the potential sale of these assets. We do not have any other product candidates in our near-term product pipeline, other than our normothermic liver perfusion program which is early in development.

Our VTL-308 clinical trial was performed in certain subjects with severe alcoholic hepatitis, or sAH. Any additional indications we elect to pursue in future trials will require the initiation and completion of additional phase 3 clinical trials demonstrating safety and efficacy for each such indication. For example, even prior to our VTI-208 clinical trial, the Food and Drug Administration, or FDA, had noted its view that preliminary clinical evidence did not indicate that the ELAD System may demonstrate a substantial improvement over standard of care. Since then, our VTI-208 and VTL-308 clinical trials failed to meet both their primary and secondary endpoints. There is no guarantee that any potential future clinical trials would be completed in a timely fashion or

 

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would succeed. Further, there can be no assurance that any potential future clinical trials will be timely, successful, or that regulators will approve the ELAD System in a timely manner, or at all. Finally, even if clinical testing of the ELAD System is resumed in the future and the ELAD System is subsequently proven to be safe and effective and ultimately receives regulatory approval, there is no guarantee that its commercialization would be successful.

We are a clinical-stage company with no approved products, which makes assessment of our future viability and performance difficult.

We are a clinical-stage company, and we have no approved products or revenues from the sale of products. Our operations to date have been limited to organizing, staffing and financing our company, applying for patent rights, manufacturing on a clinical scale, undertaking clinical trials, and engaging in research and development. Our VTL-308, VTI-208, VTI-210 and VTI-212 trials failed to reach both their primary and secondary endpoints or were terminated. We have not yet demonstrated an ability to obtain regulatory approval, manufacture products on a commercial scale, or conduct the sales and marketing activities necessary for successful product commercialization. As a result, there is limited information about us for investors to use when assessing our future viability and our potential to successfully develop product candidates, conduct clinical trials, manufacture our products on a commercial scale, obtain regulatory approval or profitably commercialize any approved products.

We have not obtained regulatory approval for any of our product candidates in the U.S. or any other country, and we do not believe that the ELAD System can obtain regulatory approval in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete.

We must obtain regulatory approval for each indication we seek before we can market and sell the ELAD System in a particular jurisdiction for such indication. To date, we have not applied for or received the regulatory approvals required for the commercial sale of the ELAD System for any indication in the United States or Europe. In light of the clinical results from our VTL-308 clinical trial, we do not believe that the ELAD System can be approved in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete.

Although we have suspended our research and development activities related to the ELAD System, if we resume development, and if we were able to secure marketing approval, our commercial success would be determined by our ability to obtain acceptable pricing and reimbursement for the ELAD System.

Although we have suspended our research and development activities related to the ELAD System, if we resume the development of the ELAD System, therapies such as the ELAD System are paid for primarily by private and government insurance, although in some markets payment may be made by private individuals and their families. Reimbursement policies and decisions for medical products is a highly bureaucratic, politicized and regulated process that includes consideration of factors such as cost effectiveness and meaningful patient benefit. Government and third-party payors are under great pressure to reduce costs. Furthermore, there are no therapies approved to restore liver function and the lack of an established reimbursement structure introduces additional uncertainty with regard to reimbursement for the ELAD System. Although we do not expect to pursue regulatory approval of the ELAD System at this time, we believe it may be difficult to sustain a commercial price outside of the U.S. at or above the commercial price within the U.S. In addition, we will have no control over the reimbursement or conditions that may be set by the government or private insurers, if any, assuming we were able to secure marketing approval for the ELAD System. In markets where payment would be made by private individuals and their families, such private payors may not be prepared to pay an acceptable price.

 

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Although we have suspended our research and development activities related to the ELAD System, if we resume development, and if we are unable to implement our sales, marketing, distribution, training and support strategies in the U.S. and Europe or enter into agreements with third parties to perform these functions in markets outside of the U.S. and Europe, we will not be able to effectively commercialize the ELAD System or any other product candidates and may not reach profitability.

Although we have suspended our research and development activities, if we resume the development of the ELAD System or of any other product candidates, we may not be able to effectively commercialize any potential product candidates. Our technology is new and complex, and potential customers will have limited knowledge of, or experience with, such a product. In addition, we have no related sales and marketing experience either domestically or abroad. We have not commercialized any products anywhere. Our commercial success would depend on our ability to market and receive adequate reimbursement. This success would also depend on our ability to obtain and maintain adequate pricing.

Further, we do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of biologic products and medical devices. To achieve commercial success of any product candidates, assuming we were to obtain marketing approval, we would need to establish a sales and marketing organization, and we are unable to currently predict how we would market any such product candidates.

We have incurred losses since our inception and expect to incur significant losses in the foreseeable future and may never become profitable. Even if we ultimately achieve profitability, it may not be sustained, and we may require additional capital.

We are a clinical-stage company, and clinical development of a novel therapy is a highly speculative undertaking. We have incurred significant losses in each fiscal year since our inception, including net losses of $39.0 million for the nine months ended September 30, 2018 and $52.1 million, $41.0 million and $52.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of September 30, 2018, we had an accumulated deficit of $335.0 million. Even though we discontinued most of our research efforts in September 2018, we expect to continue to spend a considerable amount of our resources on strategic opportunities. We continue to incur expenses related to the pursuit of strategic alternatives, including the Transaction, and we expect these expenses will increase as we work toward obtaining stockholder approval and closing of the Transaction, and as we continue to evaluate opportunities to sell assets. We also may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on our decisions on strategic alternatives. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We anticipate incurring additional losses and negative cash flow from operations for the foreseeable future. We are not currently generating revenues, and we cannot estimate with precision the extent of our future losses. We do not currently have any products that are available for commercial sale, we may never generate significant revenue from selling products or achieve profitability and we may never resume the development of the ELAD System or complete the development of any other product candidates. We do not have a product candidate that has been approved for marketing in the United States or elsewhere, and we may never receive any such approval. Our two most recent clinical trials, VTI-208 and VTL-308, failed to reach both their primary and secondary endpoints. Our only product in development is our normothermic liver perfusion program, which is too early in development to assess its product value or potential product sales. If we do develop or acquire other product candidates, we would expect our research and development expenses to increase significantly. If we do acquire a new product candidate and successfully develop and obtain regulatory approval for it, we also expect to incur significant sales and marketing expenses.

We have suspended most of our research and development activities to reduce operating expenses while we continue to pursue closing of the Transaction and efforts to sell assets. We expect to continue to incur significant

 

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expenses and operating losses for the foreseeable future as we evaluate these strategic alternatives and continue our efforts to close the Transaction.

As a result of these factors, we expect to continue to incur significant operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have a material adverse effect on our stockholders’ equity, financial position, cash flows and working capital. We are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. Our ability to produce revenue and achieve profitability is dependent on our ability to complete the development of product candidates, obtain necessary regulatory approvals, and to successfully manufacture and market products. We cannot assure you that we will ever be profitable even if we successfully enter into strategic transactions or commercialize products. Failure to become and remain profitable or the perception that we may never become profitable would adversely affect the market price of our common stock and our ability to raise capital and continue operations.

Although we have suspended most of our research and development activities, if we resume the clinical development of any product candidates, we would need to obtain additional financing to fund our operations and, if we were then unable to obtain such financing, we may be unable to complete the development and commercialization of any potential product candidates.

We have a history of incurring losses and negative cash flows from operations and have an accumulated deficit of $335.0 million through September 30, 2018. Based on our current employees, our known commitments, and our ongoing administrative costs to explore and pursue strategic options, we believe that our existing cash and cash equivalents of $17.8 million as of September 30, 2018 should be sufficient to meet our known liabilities and commitments as of September 30, 2018; however, we expect our resource requirements to change materially to the extent we identify and enter into any other strategic transactions. To advance the development of product candidates, we would need to obtain additional financing and increase our expenditures.

Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate any potential future research and development programs or potential future commercialization efforts. Our forecast of the period of time through which our financial resources will be adequate to support our operating requirements is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this forecast on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate.

Our future funding requirements will depend on many factors, including, but not limited to:

 

   

the timing and structure of any strategic options that are being considered by us, including the Transaction and any potential asset sales;

 

   

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

 

   

the number and characteristics of any future product candidates we pursue (if any);

 

   

the timing and progress in the development of our normothermic liver perfusion program;

 

   

the scope, progress, results and costs of research and development and future clinical trials, if any, related to the ELAD System or other product candidates;

 

   

the cost and timing of any regulatory submissions;

 

   

the cost and timing of scaling up and validating the manufacturing process for the ELAD System or any other potential product candidates for commercialization;

 

   

the cost and timing of commercialization activities, including reimbursement, marketing, sales and distribution costs, both before and after product approval (if any);

 

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the costs involved with being a public company;

 

   

the cost timing and outcome of any future litigation;

 

   

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and

 

   

the timing, receipt and amount of sales of, or royalties, if any, on the ELAD System and any future product candidates.

We may finance future cash needs through public or private equity offerings, license agreements, debt financings, collaborations, strategic alliances, marketing or distribution arrangements or a combination thereof. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. General market conditions or the market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The Nasdaq Stock Market, or Nasdaq, or upon obtaining stockholder approval. On October 25, 2018, we received a letter from the staff of Nasdaq providing notification that, for the previous 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share requirement, or the Bid Price Requirement, for continued listing on Nasdaq. The notification had no immediate effect on the listing of our common stock. In accordance with Nasdaq listing rules, we were afforded 180 calendar days, or until April 23, 2019, to regain compliance with the Bid Price Requirement. There can be no assurance that we will be able to satisfy the criteria for continued listing on Nasdaq or that we will be able to obtain stockholder approval, if it is necessary, to take the steps needed to remedy the Bid Price Requirement. If our common stock is delisted, this would, among other things, substantially impair our ability to close the Transaction and limit our strategic alternatives, and result in fewer development opportunities. If adequate funds are not available, we may be required to close our operations.

We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. In addition, if we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. Our inability to obtain additional funding when we need it could seriously harm our business.

If we resume the clinical development of any product candidates, additional capital that we may need to operate or expand our business may not be available.

We may require additional capital to operate or expand our business. The failure of the VTL-308 clinical trial to meet its primary or secondary endpoints may make it very difficult for us to seek and obtain financing from the capital markets on favorable terms, or at all. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be substantially diluted and these newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. Furthermore, volatility in the credit or equity markets may have an adverse effect on our ability to obtain debt or equity financing or the cost of such financing. If we do not have funds available to enhance any potential product candidates, maintain the competitiveness of our technology and pursue business opportunities, this could have an adverse effect on our business, operating results and financial condition.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2017, we had net operating loss, or NOL, carryforwards of approximately $167.7 million and $200.8 million (prior to our adjustments for uncertain tax positions), net of estimated limitations caused by certain ownership changes under Section 382 of the Internal Revenue Code, for federal and state income tax purposes, respectively. In general, under Section 382, a corporation that undergoes an “ownership change” is

 

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subject to limitations on its ability to utilize its pre-change NOLs and its tax credit carryforwards. We believe our existing NOLs and tax credit carryforwards are subject to limitations arising from previous ownership changes, and if we undergo any further ownership changes, such as in connection with the Transaction, our ability to utilize NOLs and tax credit carryforwards could be further limited. Future changes in our stock ownership, some of which are outside of our control, could also result in additional ownership changes under Section 382. The strategic options that we are pursuing, including the Transaction, will create an ownership change under Section 382 of the Internal Revenue Code, which would limit all or substantially all of our NOLs and tax credit carryforwards. Furthermore, our ability to utilize NOLs and tax credit carryforwards of companies that we may acquire in the future, if any, may be subject to limitations.

Furthermore, in 2013, California adopted a single factor, sales, for apportioning income and losses to the state. Although completely offset by our valuation allowance, we had recognized NOL and tax credit carryforwards from 2013 through 2017 based on a multiple factor apportionment based on salaries, property and sales in the state. This position was based on prior court rulings supporting the use of the multiple factor apportionment. This ruling was overturned by the California Supreme Court in December 2015, and, in October 2016, the U.S. Supreme Court declined to hear the case. California has no regulations or guidance nor have there been any rulings addressing how a company with no sales should apportion losses to California. As most of our operations are in California, we have filed our tax returns using a multiple factor apportionment until such time as California provides a ruling or guidance on such an apportionment. For these reasons and due to the limitations discussed above, we likely will not be able to utilize all or substantially all of such NOLs and tax credit carryforwards, even if we attain profitability.

We conduct business and file income tax returns in various tax jurisdictions. Our tax position could be adversely affected by several factors, many of which are outside of our control. For example, in the U.S., recently enacted U.S. tax reform in December 2017 commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act, may have a negative impact on our business. In addition, it is possible that further changes to the U.S. tax code and the tax rules in the other jurisdictions could occur in the near future. Although we monitor these developments, it is not possible to assess to what extent changes may be implemented in the U.S. and other jurisdictions in which we conduct our business, what impact they may have on the way in which we conduct our business, or how they may impact our effective tax rate due to the unpredictability and interdependency of these potential changes. Even though we maintain a full valuation allowance to offset our NOLs and tax credit carryforwards, changes in tax laws and related regulations and practices could have a material adverse effect on our business operations, cash flows, effective tax rate, financial position and results of operations and likelihood of consummating a strategic transaction.

Our internal computer systems, cloud-based systems and those systems previously used, or that may in the future be used, by our clinical investigators, contract research organizations or other contractors or consultants may fail or suffer security breaches, which could result in a material disruption of any of our development programs.

We rely on information technology systems to keep financial records, maintain laboratory information, clinical data and corporate records, communicate with staff and external parties and operate other critical functions. Despite the implementation of security measures, our internal computer systems, cloud-based systems and those systems previously used, or that may in the future be used, by us, our clinical investigators, clinical research organizations, or CROs, and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, cyber-attacks, terrorism, war, and telecommunication and electrical failures. The techniques that could be used to attack these computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these risks proactively or implement adequate preventative measures. While, to our knowledge, we have not experienced any significant system failure, theft of information, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of any clinical development or manufacturing activities. For example, the loss of clinical trial data could result in delays

 

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in future regulatory approval efforts and significantly increase costs to recover or reproduce the data. To the extent that any disruption, theft of information, or security breach were to result in a loss of or damage to data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and any future clinical development or other development of product candidates could be delayed.

In the recent past, we have been involved in securities litigation, and defending against such litigation or an adverse resolution of such litigation may adversely affect our business, financial condition, results of operations and cash flows and ability to consummate strategic transactions.

Our industry is characterized by frequent claims and litigation, including claims regarding patent or other intellectual property rights, as well as product liability. Additionally, in the past, companies that experience volatility in the market price of their stock have been subject to securities class action litigation. For example, following our announcement that the ELAD System, our sole product candidate, failed to meet its primary and secondary endpoints in our VTI-208 phase 3 clinical trial, we became the subject of a lawsuit alleging securities law violations. Although this litigation was dismissed, this type of litigation can be expensive and disruptive to normal business operations and divert management’s attention, and the outcome can be difficult to predict regardless of the facts involved. We are at a heightened risk of, and could be subject to, additional litigation following our announcement in September 2018 that the ELAD System failed to meet its primary and secondary endpoints in our VTL-308 phase 3 clinical trial. An unfavorable outcome with respect to a lawsuit could have a material adverse effect on our business, financial condition, results of operations or cash flows and ability to consummate strategic transactions.

Risks Related to the ELAD System’s or other Product Candidates’ Potential Future Clinical Development

If we resume the clinical development of any product candidates, we have limited experience in conducting pivotal clinical trials used to support regulatory approval, and our prior clinical trials of the ELAD System did not demonstrate a statistically significant improvement in survival, the primary endpoint that was needed to support regulatory approval.

Our VTI-208 phase 3 randomized, controlled, open-label trial evaluating the ELAD System in subjects primarily with severe alcoholic hepatitis, or sAH, failed to meet the primary endpoint of overall survival through at least 91 days assessed using the Kaplan Meier statistical method. Our protocol for our subsequent clinical trial of the ELAD system in sAH, VTL-308, incorporated limits on subjects’ age, model for end-stage liver disease score, or MELD score, and its three components. While the endpoints and populations for VTL-308 were derived from results of our prior studies, including the results of VTI-208, and based on medical literature, in none of those prior studies had we demonstrated a statistically significant effect on the population based on the endpoints prospectively described in the study plan. Our prior clinical trials of the ELAD System in sAH did not demonstrate statistically significant improvement over standard of care in the primary endpoint of survival through at least study day ninety-one. Similarly, our prior clinical trials of the ELAD System in fulminant hepatic failure, or FHF, did not demonstrate statistically significant improvement in the primary endpoint of 28-day survival. In September 2018, we announced that the VTL-308 clinical trial failed to meet both its primary and secondary endpoints. The lack of statistical significance from these previous trials could be attributed to various factors, including the lack of power to demonstrate significance, the design of the studies and the lack of an ELAD System treatment benefit.

If we resume the clinical development of the ELAD System or any of our product candidates, any positive results from previous clinical trials may not be predictive of future results.

Any positive results from our prior clinical trials, including either statistical significance in some endpoints or trends towards statistical significance in other endpoints, should not be relied upon as evidence that our potential future clinical trials will necessarily succeed. For example, our primary endpoint in VTL-308 was based on the results of a subset of subjects in our VTI-208 clinical trial. Additionally, our primary endpoint in VTI-208 was

 

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based on the results of a subset of subjects in our VTI-206 clinical trial. Although these subsets showed a trend toward increased survival up to at least study day ninety-one, the subsequent trials still failed to meet their primary and secondary endpoints. The FDA has noted its belief that this preliminary clinical evidence did not indicate that our product may demonstrate a substantial improvement over standard of care. We cannot provide any guarantee that any potential future clinical trials of any product candidates will provide statistically significant data sufficient to support regulatory approval.

Random variation or changes in standard of care could cause any potential future clinical trials to be delayed and/or fail.

Regulatory authorities worldwide have adopted the standard that, to gain marketing approval, clinical trials should produce a result that has less than a 5% probability of being due to random variation. There is no assurance that any of our potential future clinical trials will meet that standard. In addition, we have designed all of our past clinical trials to be judged by a survival primary endpoint, which may have been difficult to achieve for many reasons, including unanticipated survival rates of control subjects due to random variations, deficiencies in our exclusion and inclusion criteria, and the standard of care of the subjects, which may vary from site to site and country to country and is continuously evolving. Such difficulties may continue in any potential future clinical trials.

Any of these factors, which are beyond our control, could materially and adversely affect the results of any potential future trials and prevent us from gaining regulatory approval of any product candidates. In addition, even if the results of any potential future clinical programs are positive, our inability to control or adequately account for these factors between treatment arms could cause the FDA or other regulatory authorities to determine that the results are not adequate, or must be reproduced in a confirmatory study, to support marketing approval.

If we resume clinical development, the ELAD System treatment could result in significant clinical risks to the patient, including death.

The ELAD System therapy was targeted toward very sick patients who were likely to die if left untreated. Patients with liver failure resulting from acute hepatocellular insult quickly develop failure of other organs including lungs, kidney, brain, and blood coagulation systems. Patients who received the ELAD System therapy were at risk of dying due to other serious health problems even if the ELAD System was demonstrated to be effective.

All extracorporeal therapy systems, including the ELAD System, cause a decline in blood platelets, which can lead to coagulation problems and uncontrolled bleeding because platelets are critical to clot formation. Patients with liver failure generally have serious blood clotting problems since the liver produces almost all of the body’s blood clotting proteins. These patients therefore have wide variations in their ability to coagulate their blood. To minimize blood clotting issues during ELAD treatment, some subjects require an infusion of anti-coagulants, which can aggravate bleeding. Because every subject is different, the need for anti-coagulant therapy is variable and must be closely monitored during ELAD System therapy. The risk of uncontrolled bleeding may be treated during the ELAD System therapy by administering platelet transfusions or by administering blood coagulation factors. However, there have been cases of uncontrolled bleeding during and after the ELAD System therapy. Additionally, some patients have abnormal red blood cells, which have weakened cell walls subject to rupture by physical force, a process known as hemolysis. The physical force exerted on the red blood cells by the ultrafiltrate generator in the ELAD System line can, in some cases, be enough to cause overt mechanical hemolysis that resolves after ELAD treatment is stopped, but can result in death if it continues too long. The incidence of hemolysis was less than 0.5% in subjects enrolled in our prior clinical trials, and one patient died in our China trial as a result of hemolysis.

Data from our prior clinical trials suggest that ELAD treatment should not be used in subjects with acute kidney injury (defined as a serum creatinine level of greater than or equal to 1.5 mg/dL). The use of extracorporeal

 

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systems such as ELAD may cause harm in patients with pre-existing kidney injury because these subjects are at an increased risk to develop fluid overload due to the renal impairment. Furthermore, ELAD treatment should be stopped if a patient develops any indication for renal replacement therapy, because patients with renal impairment are less likely to be able to tolerate the increased stresses associated with two extracorporeal devices requiring high venous flow rates.

Similarly, data from our prior clinical trials suggest that ELAD treatment should not be used in subjects with severe coagulopathy (problems with blood clotting, defined as an International Normalized Ratio, or INR, of greater than 2.5). The use of extracorporeal systems such as ELAD may cause harm in patients with pre-existing severe coagulopathy because the circulation of blood outside the body can cause a depletion in circulating factors associated with the blood clotting cascade, and reductions in the number of circulating platelets in the blood which are required for the blood to clot properly. As a result, subjects on extracorporeal systems such as ELAD are at an increased risk to develop bleeding issues.

Human liver-derived C3A cells have been shown in animal studies to have the capacity to grow into a tumor mass under certain conditions. While it is possible that some VTL C3A cells could escape from the ELAD cartridges and cause tumors in patients or produce substances that could lead to the development of malignant tumors, it is expected within the natural medical history of this population of patients with chronic liver disease (whether caused by hepatitis B or alcohol) that a certain incidence of cancer will be reported. There was no evidence that the incidence or type of cancer was different between the ELAD and the control group in our study in China. There have been two reported cancers (rectal cancer and squamous cell carcinoma) in our extended follow-up of ELAD-treated subjects from the VTI-208 study and there have been no such reported cases of cancer in VTL-308. These or other adverse events, even those that are currently unforeseen, could significantly affect any potential future development and commercialization efforts, cause the regulatory authorities to place any potential future clinical trials on hold or to refuse to grant or maintain any potential future marketing approval or result in withdrawal of the ELAD System from the market in the event that development of the ELAD System is resumed and ultimately receives marketing approval.

Due to ethical considerations, we have conducted open-label clinical trials of the ELAD System, where control subjects do not receive a sham treatment, and this could introduce unacceptable bias into any future trial results.

We did not conduct our VTI-208, VTI-210, VTI-212 or VTL-308 clinical trials with a sham control extracorporeal circuit that includes empty cartridges. This is due to the potential harm that the extracorporeal circuit can cause to control subjects without the potential for any benefit, which makes it unethical to subject the controls to a sham. Although regulatory agencies agree that, due to the nature of the ELAD System therapy, it is not possible to conduct a blinded study, they have expressed concern that the open-label nature of the study design may introduce significant bias in the treatment of the ELAD System or control subjects, since the study subject, physicians and caregivers know who has and has not received the ELAD System therapy. We had developed a protocol that attempted to minimize this bias to the extent possible, including defining a protocol-specific standard of care, specifying steroid treatment, standardizing the discharge criteria for both the ELAD-treated and control subjects, requiring that follow-up visits are conducted by a blinded reviewer, ensuring home healthcare nurses and other clinical personnel are unaware of treatment assignment, educating subjects not to reveal treatment assignment to their caregivers and monitoring concomitant medications, alcohol recidivism and interaction with the healthcare system to provide evidence that there is no meaningful difference between the groups that might have significantly confounded the trial data. However, there is no guarantee that bias will not enter into any potential future clinical trial, affect the results of such trials or cause regulatory agencies to refuse marketing approval of the ELAD System or any other product candidates.

 

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If we resume the clinical development of any product candidates, and if we encounter difficulties enrolling subjects, any potential future clinical trials could be delayed or otherwise adversely affected.

Clinical trials for the ELAD System required us to identify and enroll a large number of subjects that met all of the entry criteria set forth in our protocols, including having the disease under investigation. If we resume the development of any product candidates and conduct any future clinical trials, we may not be able to enroll a sufficient number of subjects who meet our protocol requirements in a timely manner. Subject enrollment is affected by numerous factors, many of which fall outside of our control, including:

 

   

the size and nature of the subject population;

 

   

timeliness of contracting with clinical trial sites, and obtaining approval of the trial by the applicable institutional review boards, or IRBs, or ethics committees;

 

   

lack of a sufficient number of subjects who meet the enrollment criteria for potential future clinical trials;

 

   

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; and

 

   

proximity and availability of clinical trial sites and resources for prospective subjects.

In light of results and disclosures of our prior clinical trials by us or others, it is possible that subjects will be less willing to participate in any potential future trials. Even if we were to identify an appropriate subject population for a clinical trial, there can be no assurance that the subjects will elect to enroll in the study or complete the study. These difficulties could negatively impact any potential future clinical trials.

If we have difficulty enrolling a sufficient number of subjects to conduct any potential future clinical trials or if enrolled subjects fail to complete the study or comply with our protocols, particularly with regard to follow-up appointments, the completion of any potential future clinical trials would be delayed, and our business would be harmed.

If we resume the clinical development of any product candidates, we may face delays in completing any potential future clinical trials, and we may be required to suspend, repeat or terminate any potential future clinical trials if they are not conducted in accordance with applicable regulatory requirements, the results are negative or inconclusive, or the clinical trials are not well-designed or executed as expected.

Any potential future clinical trials must be conducted in accordance with regulations governing clinical studies, and are subject to oversight by the FDA, foreign governmental agencies, ethics committees and IRBs at the medical institutions where the clinical trials are conducted. In addition, clinical trials may require large numbers of test subjects. Changes in regulatory requirements may occur at any time, and we may need to amend clinical trial protocols to reflect such changes. In addition, we may voluntarily amend our protocols, as we did for our VTI-210 clinical trial. Amendments may require us to resubmit any potential future clinical trial protocols to ethics committees or IRBs for reexamination, which may impact the costs, timing or successful completion of the underlying trial.

Any potential future clinical trials may require amendment or be delayed, not approved, unsuccessful or terminated as a result of many factors, including:

 

   

delays or failures in designing an appropriate clinical trial protocol with sufficient statistical power and in reaching agreement on trial design with investigators and regulatory authorities;

 

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delays or failure in reaching agreement on acceptable terms with prospective 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;

 

   

delays or failure by CROs, investigators and clinical trial sites in ensuring the proper and timely conduct of any potential future clinical trials;

 

   

delays or failure by us in manufacturing sufficient quantities of product pursuant to required quality standards and by third-party manufacturers in supplying the product or necessary and suitable components;

 

   

delays or failure in transporting products to clinical trial sites with sufficient rapidity to enable treatment to begin early enough to have an opportunity for clinical benefit;

 

   

delays or failure in completing data analysis and achieving primary and secondary endpoints;

 

   

delays in subject enrollment or site initiation, including in light of, among other things, our prior clinical results;

 

   

regulators or clinical site ethics committees or IRBs may not approve or may delay, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about subject safety;

 

   

we may suspend or terminate any potential future clinical trials if we believe our product is exposing the participating subjects to unacceptable health risks or for other reasons;

 

   

subjects may not complete any potential future clinical trials due to safety issues, adverse events, inconvenience or other reasons;

 

   

subjects in any potential future clinical trials may die or suffer other adverse events for reasons that may be either related or unrelated to our product;

 

   

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

 

   

final analysis of the data from any potential future clinical trials may conclude that such product candidate lacks sufficient clinical efficacy or presents unacceptable safety risks, such as occurred with the VTL-308 clinical trial.

Due to the failure of VTI-208 and VTL-308 to provide evidence of safety and efficacy sufficient to satisfy the requirements of the regulatory authorities, we do not expect the ELAD System to be approved unless we are able to perform additional clinical trials showing such safety and efficacy.

Risks Related to Regulatory Matters

If we resume the clinical development of any product candidates, the FDA regulatory approval process is complex, time-consuming and inherently unpredictable. In addition, the failure of our VTL-308 and VTI-208 clinical trials may adversely affect the attitude of regulatory authorities toward any potential future development of the ELAD System.

Potential future clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution is subject to extensive regulation by the FDA. In the U.S., the ELAD System has been regulated by the FDA as a combination biologic and medical device. Before a biologic product can be marketed in the U.S., we must submit, and the FDA must approve, a Biologics License Application, or BLA. In addition, for a combination biologic and medical device, the device components must be found acceptable as part of the BLA. The regulatory review process for a novel therapy is complex, time-consuming and unpredictable. As a result, development costs, timelines and approvals are not readily predictable.

The time required to obtain approval by the FDA to market a new therapy is unpredictable but typically takes many years and depends upon many factors, including the substantial discretion of regulatory authorities.

 

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Even if a product shows evidence of safety and efficacy in clinical trials, it could fail to receive regulatory approval for many reasons, including the following:

 

   

the FDA may disagree with the design or implementation of the clinical trials or the study endpoints. For example, in our ELAD clinical trials, the FDA had expressed concern about the open-label design and multiplicity of confounding variables, including the need for delineating the standard of care that both the treated and control groups received during our studies;

 

   

we may be unable to demonstrate to the satisfaction of the FDA that our product is safe and effective for its proposed indications or that the product provides significant clinically relevant benefits or that the benefits outweigh the safety risks;

 

   

the results of a clinical trial may not meet the level of statistical significance required by the FDA for approval or may not support approval of a label that could command a price sufficient for us to be profitable;

 

   

the FDA may disagree with our interpretation of data from any preclinical studies or clinical trials;

 

   

the FDA may not accept clinical data from trials which are conducted outside their jurisdiction;

 

   

the opportunity for bias in any potential future clinical trials as a result of the open-label design may not be adequately handled and may cause any potential future trial to fail;

 

   

the product may be subject to an FDA advisory committee review, which is triggered by an FDA request and is solely within the FDA’s discretion, which may result in unexpected delays or additional hurdles to approval;

 

   

the FDA may determine that the manufacturing processes at our facilities or facilities of third-party manufacturers with which we contract for clinical and commercial supplies are inadequate;

 

   

even if a future clinical trial is successful in demonstrating a statistically significant improvement over standard of care, in light of the fact that certain confounding factors may be viewed by the FDA as limiting the persuasiveness of the study results, a single successful phase 3 clinical trial may not be sufficient to provide the substantial evidence of effectiveness necessary to support regulatory approval, and therefore we may need more than one additional phase 3 clinical trial to secure regulatory approval;

 

   

the approval policies or regulations of the FDA may significantly change in a manner rendering any future clinical data insufficient for approval; and

 

   

the failure of prior clinical trials could result in more stringent requirements being imposed by regulatory bodies and advisory groups.

The FDA expressed concern with our past phase 3 clinical trials that to the extent there are significant differences in how treated and control subjects are treated during the study and after discharge from the hospital, the study may not be able to provide convincing evidence of safety and efficacy. For example, differences in length of hospital stay, rates of hospital re-admission, alcohol recidivism rates, nutritional support, and concomitant medications could significantly confound the reported study results.

In addition, even if we were to obtain approval following any potential future clinical trials, the FDA may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a label that does not include the labeling claims necessary or desirable for successful commercialization. Any of the above could materially harm a product’s commercial prospects.

If we begin or resume the clinical development of any biologic product candidates, we do not have, and may never obtain, the regulatory approvals we need to market our product.

In responding to a BLA, the FDA may require additional testing or information, may require that the product labeling be modified, may impose a post-approval study and other commitments or reporting requirements or

 

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other restrictions on product commercialization, or may deny the application. The FDA has established performance goals for review of BLAs; however, the FDA is not required to complete its review within these time periods. The timing of final FDA review and action varies greatly, but can take years in some cases and may involve the input of an FDA advisory committee of outside experts. Sales of the product in the United States may commence only when the BLA is approved. To date, we have not applied for or received the regulatory approvals required for the commercial sale of any product.

In light of the clinical results from our VTL-308 clinical trial, we do not believe that the ELAD System can be approved for marketing for sAH in the U.S. or Europe, if ever, without additional clinical trials that would require substantial capital and time to complete. Therefore, the ELAD System may never be approved for marketing.

If we resume the development of any product candidates, the FDA may or may not grant an accelerated or Priority Review to any potential future BLA, if requested by us, and even if the FDA designates Priority Review for any product candidate, that designation would not assure FDA approval and may not even lead to a faster regulatory review or approval process.

On the date the FDA receives an original BLA submission, a 60 calendar day filing review period starts. Assuming the FDA accepts the submission for filing, a ten-month standard BLA review clock begins, which means the FDA has an aggregate twelve months from its receipt of the original submission to take regulatory action. We may be eligible for Priority Review for a BLA submission if the FDA determines that the product candidate, if approved, would provide a significant improvement in safety or effectiveness. A six-month Priority Review clock would begin at the conclusion of the 60 calendar day filing review period that starts on the date of FDA receipt of the original BLA submission. Therefore, if Priority Review is granted, the FDA has a total of eight months to take action on an application as opposed to the standard timeline of twelve months. We may request Priority Review if we were to submit a BLA; however, the FDA has broad discretion whether or not to grant Priority Review even if we believe a product is eligible. Moreover, even if a product is designated for Priority Review, such a designation does not assure a faster regulatory review process or confer any advantage with respect to FDA approval. Moreover, a designation of Priority Review or even a standard review from the FDA does not guarantee approval within the eight-month or twelve-month review period, respectively, or at any time thereafter. Accordingly, we cannot assure you that any future BLA will be approved in a timely manner, or at all.

If we resume the development of any product candidates, the regulatory approval processes of foreign regulatory authorities are complex, time-consuming and inherently unpredictable.

Outside the U.S., our ability to market a product is contingent upon receiving marketing authorizations from appropriate regulatory authorities. If any potential future clinical programs were to be successful, we would anticipate submitting applications for marketing authorization in Europe and other foreign countries based on need. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country, and we may be unable to meet such requirements. If the regulatory authority is satisfied that adequate evidence of safety, efficacy, and quality has been presented, a marketing authorization should be granted. The foreign regulatory approval process involves all of the risks associated with FDA approval.

If any product candidate receives regulatory approval, we will be subject to ongoing regulatory requirements and may face regulatory or enforcement action.

If any product receives regulatory approval, we will be subject to significant ongoing regulation by the FDA and other regulatory authorities, including regulation of our manufacturing operations and any third-party manufacturing operations to ensure our compliance with applicable current Good Manufacturing Practices, or cGMP, and/or Quality System Regulation, or QSR, requirements for post-approval clinical data, adverse event

 

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reporting and complaint handling, and advertising and promotional activities. Failure to comply with regulatory requirements may subject us to sanctions. These may include warning letters, adverse publicity, civil and criminal penalties, injunctions, product seizures or detention, and refusal to approve pending product marketing applications.

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

We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in fraud, misconduct or other illegal activity or that they do not comply with regulatory standards and requirements. Misconduct or non-compliance by these parties could include intentional, reckless and/or negligent conduct or unauthorized activities that violate (1) FDA regulations, including those laws that require the reporting of true, complete and accurate information to the FDA, (2) quality standards, including Good Laboratory Practices, or GLP, Good Clinical Practice, or GCP, and cGMP, (3) federal and state healthcare fraud and abuse laws and regulations, (4) laws that require the reporting of true and accurate financial information and data, (5) securities laws and regulations, (6) the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, or (7) General Data Protection Regulation. If we were to obtain FDA approval of any future product candidate and begin commercializing that product in the United States, our potential exposure under such laws would increase significantly, and our costs associated with compliance with such laws would also be likely to increase. In particular, research, sales, marketing, education and business arrangements in the healthcare industry are also 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. Activities subject to these laws also involve the improper use of information obtained in the course of subject recruitment for clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct by employees and third parties. We may fail to identify and deter misconduct or non-compliance by employees and third parties, or the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws 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, including the imposition of changes to or even the halt of any potential future clinical trials or manufacturing or civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Risks Related to the Medical Device Components of the ELAD System or Any of Our Products

If we or our third-party manufacturers fail to comply with QSR in the U.S. or Medical Device Directives and Standards in Europe, our business would suffer.

We are required to demonstrate and maintain compliance with applicable regulations for the manufacturing of combination biologic products, including specified parts of the QSR and European Medical Device Directives, or MDD, with respect to any biological product candidates. Our third-party medical device manufacturers are required to demonstrate and maintain compliance with the QSR and MDD. The QSR and MDD are complex regulatory schemes that cover the methods and documentation of and for the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of the regulated products. Regulatory agencies enforce the QSR and MDD through periodic inspections. Prior to any potential approval of any such product in the U.S. and Europe, our manufacturing facility would be subject to a preapproval inspection to

 

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determine compliance with the applicable regulations, including cGMPs, parts of the QSR, the European drug cGMP regulations, and the MDD. In addition, our third-party medical device component manufacturers would be subject to a preapproval inspection to determine compliance with QSR and MDD requirements. Our failure, or the failure of our third-party manufacturers, to pass a preapproval inspection, or to take satisfactory and prompt corrective action in response to an adverse inspection, could prevent or significantly delay approval of any product.

The ELAD System bedside unit is based on a cardio-pulmonary bypass system that was replaced with an updated system, and regulatory authorities may not view the systems as interchangeable, which could cause regulatory approvals to be significantly delayed should we resume development of ELAD for new indications.

The ELAD System bedside unit was originally based exclusively on the LivaNova (formerly Sorin) Stöckert Perfusion System S3 Double Head Pump Module, a medical device indicated for use during cardio-pulmonary bypass surgery. All or part of our early clinical trials were carried out using an ELAD System bedside unit based on LivaNova’s S3 system. However, LivaNova stopped selling the S3 system and replaced it with an updated S5 system. We carried out testing of an ELAD System bedside unit based on the S5 and we believe that the S3 and S5 systems are equivalent and interchangeable from a clinical and regulatory perspective. We have submitted information to both the U.S. and the European regulatory authorities to support equivalence. Both the S3 and S5 systems were used in our VTI-208, VTI-210 and VTL-308 clinical trials. There can be no assurance that regulatory authorities will continue to view the S3 and S5 systems interchangeably, or that LivaNova would cooperate with us or provide us with the documentation necessary for inclusion in a BLA submission, if any, which would be required to obtain regulatory approval of our ELAD System. If regulatory authorities do not view the S3 and S5 systems as equivalent, or LivaNova fails to provide the information necessary for inclusion in our regulatory filings, future development and approval of the ELAD System, if any, may be significantly delayed or prevented. In addition, effective January 1, 2018, LivaNova no longer supports its S3 systems. Accordingly, if a future trial is undertaken and successful, we would expect to commercialize ELAD with only the LivaNova S5 system.

One of the ELAD System component suppliers was subject to an FDA consent decree, which could have forced us to find another supplier for this component.

One of the components of the ELAD System bedside unit is manufactured by Terumo Cardiovascular Systems, or Terumo. In March 2011, Terumo entered into a consent decree with the FDA which limited its ability to ship products from certain of its manufacturing facilities including the one that manufactures the component we used in our prior clinical trials. We received notice from Terumo in June 2016 that all restrictions listed in the 2011 consent decree were lifted. If we had been unable to source the component we use from Terumo, we would have had to source the component from an alternative supplier. If Terumo or another component supplier has similar issues in the future, there is no guarantee that a qualified alternative supplier can be found that will agree to terms reasonably acceptable to us on a timely basis or at all. This and similar situations with other suppliers could significantly delay the development of future products.

In the development of combination biologic and device products, changes in any of the device components could affect our ability to complete any future clinical trials or to obtain and maintain approval and commercialization efforts.

The device components of the ELAD System must be reviewed as part of any BLA for ELAD. If the manufacturers of those components make modifications, discontinue supplying or are unable to supply sufficient quantities of such components during any potential clinical testing or after any approval, or if we elect to change a component, we would need to perform validation testing and obtain FDA and other regulatory approval prior to using the modified or replacement component. For example, one of our suppliers of a key component in our manufacturing process was having an issue meeting all of their customer orders for the component. If we were unable to obtain sufficient quantities of the component on a timely basis, there could have been a delay in

 

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enrollment in our clinical trial or, following an approval, in the marketing of ELAD until additional supplies became available, or we would be required to validate an alternative component to use, which could delay any clinical trials or the marketing of a product, and increase our costs. If the FDA or any other regulatory body fails to approve use of those modified or replacement devices or if we were unable to validate a replacement component, we would not be able to initiate or complete clinical trials or, in the future, we might not be able to market or could have to suspend marketing in certain jurisdictions.

If we determine to resume the clinical development of ELAD, we may be unable to demonstrate that devices cleared for different uses may be safe and effective for use in the ELAD System.

Most device components of the ELAD System have been previously cleared for use by the FDA or other regulatory authorities. However, in many instances, we would be using the components outside the scope of their cleared indications. Other device components have no regulatory approvals. If we resume development of the ELAD System, we may need to conduct additional testing to bridge the differences between the cleared indications for use and its use in the ELAD System in order to obtain any approval, or we could be required to obtain separate clearance for one or more of the components used in the ELAD System. The failure to provide adequate bridging information or to obtain separate clearance of these device components for use in the ELAD System, if required, could delay or prevent an approval of the ELAD System should further development of the ELAD System be pursued.

Risks Related to the Cellular Products and Related Components

If we fail to comply with cGMPs, our business will suffer.

We are required to demonstrate and maintain compliance with cGMPs. The cGMPs describe the methods to be used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a biologic to assure the biologic meets the requirements for safety, and has the quality, purity, and potency characteristics that it purports or is represented to possess. Regulatory agencies enforce these requirements through periodic inspections. Prior to any potential approval of any such product, our manufacturing facilities would be subject to a preapproval inspection to determine compliance with U.S. and European cGMPs and applicable QSR and MDD requirements or other foreign regulatory agencies. Our failure to pass such an inspection, or take satisfactory and prompt corrective action in response to an adverse inspection, could prevent or significantly delay approval of such a product.

In the manufacture of products, we rely on third party suppliers, and in many instances, a single third party supplier, for critical components, and these suppliers could cease to manufacture the components, go out of business or otherwise not perform as anticipated.

While the growth of VTL C3A cells for ELAD is under our control, the manufacture of all of the other parts and components of the ELAD System have been undertaken by third party suppliers. We have previously relied on a single source of supply for many critical components, including components of the ELAD System bedside unit, the ultrafiltrate generator cartridges, the media we use to grow and ship our VTL C3A cells, the cartridges in which our VTL C3A cells are grown, the final cell filter cartridges and the bioreactors that have been developed to grow and store the ELAD cartridges. We have investigated additional sources of supply for some of these components to support any potential future clinical development and, ultimately, commercialization of the ELAD System. If we fail to develop additional sources of supply, and a single source of supply of a critical component of the ELAD System were to become unavailable, our ability to develop or to initiate commercialization of the ELAD System would be severely compromised should we determine to pursue the further development of ELAD for new indications or geographical regions. In addition, we have relied on third party suppliers for the safety of products of human and animal origin that are incorporated in the ELAD System production process, and these suppliers could cease to manufacture the components, inadequately test these components, go out of business or otherwise not perform as anticipated. We do not have long-term agreements with our suppliers, and we will have

 

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to purchase components on a purchase order basis. For components that are not readily available from other sources, we would be subject to the risks that our suppliers will raise their prices or impose other terms or conditions that are less favorable or unacceptable to us if we resume development of the ELAD System.

For instance, bovine serum, which is a component of the cell growth media, is used in the manufacture of the ELAD System cartridges. It is obtained from an outside supplier. We are wholly reliant on the guarantee of our supplier that the calf serum used in our manufacturing procedures is free of transmitted animal viruses and other pathogens. Should the source of supply become infected, or the supplier become unable to continue to supply calf serum of the quality necessary to support human use, or the regulations change such that the calf serum cannot be used for human use, we would have to find alternative sources of supply and manufacturing methods, for which there is no guarantee of success.

Human albumin and Trypsin-EDTA are also used in the manufacture of ELAD System cartridges and are each provided by a single supplier. In addition, while these products were tested to be free of contamination by the supplier, we cannot guarantee that will always continue to be the case.

If our facility becomes inoperable, we will be unable to continue manufacturing any product candidate and as a result, our business will be harmed until we are able to secure a new facility.

We have manufactured our biologic product and assembled the device component at our facility in San Diego, California. No other manufacturing or assembly facilities are currently available to us, and any additional manufacturing or assembly facilities that we might use would need to be qualified and approved by regulatory authorities prior to our use. Our facility and the equipment would be costly to replace and could require substantial lead time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquakes, flooding and power outages, which may render it difficult or impossible for us to perform our research, development and manufacturing for some period of time. The inability to perform our manufacturing activities, combined with our limited inventory of reserve raw materials and manufactured supplies, could result in the delay of any potential future clinical trials.

We often rely on third parties for certain aspects of the manufacture of our clinical products and supplies. Our business could be harmed if those third parties fail to provide us with sufficient quantities of product or fail to do so at acceptable quality levels or prices or if they encounter other manufacturing issues.

We would expect to use third parties for certain parts of our production process for any products developed. This would expose us to a number of risks, including the following:

 

   

We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any manufacturers. This approval would require new testing and good manufacturing practices compliance inspections by the FDA. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of any potential future products.

 

   

Any third-party manufacturers might be unable to timely manufacture the components and custom materials and supplies we require, or to produce the quantity and quality required to meet our needs.

 

   

Contract manufacturers may not be able to execute or comply with our manufacturing procedures and other logistical support requirements appropriately.

 

   

Any contract manufacturers may not perform as agreed, may not devote sufficient resources to us, or may not remain in the contract manufacturing business and alternative manufacturers that can meet our requirements may be difficult to identify and qualify on a timely basis, if at all.

 

   

Manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state agencies to ensure strict compliance with current good manufacturing practices and other

 

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government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards, and they are also subject to the same ongoing periodic unannounced inspection. Any license to manufacture product candidates will be subject to continued regulatory review. Failure to meet such standards could result in the need to take corrective actions and even withdrawal of product from the market.

 

   

We may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufactures in the manufacturing process, or in the manufacture of the custom materials used in the manufacture thereof.

 

   

Any third-party manufacturers could breach or terminate their agreement with us.

 

   

Any contract manufacturers may have unacceptable or inconsistent product quality, success rates and yields.

 

   

The actual cost to manufacture and process any future product candidates could materially and adversely affect their commercial viability.

 

   

Any manufacturers may experience manufacturing difficulties due to resource constraints and labor disputes, as well as natural or man-made disasters.

Each of these risks could delay or prevent the completion of any potential future clinical trials or the approval of any future product by the FDA, result in higher costs, or adversely impact commercialization. If our contract manufacturers are unable to successfully produce any components or any related supplies for potential future clinical trials or commercialization, potential future clinical trials or potential future commercial efforts would be impaired, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.

We forecast the requirements for components and materials used in our products and, if our forecasts are incorrect, we may experience delays in shipments or increased inventory costs.

In the past, we have kept limited materials, components and, if applicable, finished product on hand. To manage our manufacturing operations with our suppliers, we forecast anticipated product orders and material requirements to predict our future inventory needs and enter into purchase orders on the basis of these requirements. Our limited historical experience may not provide us with enough data to accurately predict our future needs. Many of our components are medical devices, which have fixed future expiration dates. If we overestimate our component and material requirements, we will have excess inventory, which may have to be disposed of if it exceeds approved expiration dates, which would increase our expenses. If we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay or prevent delivery of any products. Any of these occurrences would negatively affect our financial performance and the level of satisfaction any potential customers or partners have with our business.

We may not be able to grow cells used in our products reliably and cost-effectively.

Operations with human cells, even a stable, cell line such as the VTL C3A cells, which are used in the ELAD System, can be subject to conditions and influences that we may not be able to control. Although our VTL C3A cells are stored at three separate locations in the U.S. and the United Kingdom, or UK, it is possible that all three locations could be destroyed and we could lose all or a portion of our cell banks. It is also possible that the cells will simply cease to function. While we take precautions to prevent this from happening, we could encounter unforeseen complications. To date, we have only produced the small number of the ELAD cartridges required to support our prior clinical trials. If we were to resume development of the ELAD System and needed to increase production to support demand, we could experience significant scale-up issues, which may cause quality and cost problems and our business could be materially harmed.

 

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Cellular therapy is complex, and we may not ever have a complete understanding of the mechanism of action of any cellular therapy.

Cellular therapy is a complex treatment with multiple variables that are not fully understood. For example, our VTL C3A cells, which were used in the ELAD cartridges produce hundreds of metabolites. Likewise, the plasma ultrafiltrate formed from blood, which has been treated by our VTL C3A cells in our ELAD cartridges, is a similarly complex material. The composition and stability of the treated blood can also be affected by the conditions of its generation in the ELAD System bedside unit, which could affect treatment outcomes. For instance, while most subjects treated with the ELAD System typically only required a single set of cartridges, some subjects required more than one set during their treatment period, which may have implications for efficacy and costs. While we believed that we had identified the key parameters of the ELAD System VTL C3A cartridges and set them in an appropriate range, it was possible that there were other variables that were important to safety and efficacy that were not anticipated.

Likewise, our past research into the potential mechanism of action for the ELAD System remains unproven and may never be proven. The ELAD System’s mechanism of action appears complex, may involve numerous pathways and we may not succeed in ever elucidating the exact role of any given pathway. Moreover, our research on mechanism of action was primarily based on laboratory studies, and needed correlation with in vivo studies and patient outcomes.

Risks Related to Doing Business Internationally

If we were to do business internationally, it may prove to be difficult and fraught with economic, regulatory and political issues.

If we were to commercialize the ELAD System or any other product in countries where the business, economic and political climates are very different from those of the U.S., we may not be aware of some of these issues, and it may be difficult for a U.S. company to overcome these issues and ultimately become profitable. For instance, we completed our Chinese pivotal clinical trial in 2007 and submitted our data to the China Food and Drug Administration, or CFDA, showing a statistically significant improvement in transplant-free survival among the ELAD System-treated subjects compared with control subjects. However, this application has been neither approved nor rejected and the timing and nature of any potential decision is highly uncertain. Moreover, currency controls are in effect in many foreign countries and could become much tighter in the future, which will hinder our ability to repatriate any profits or capital. These foreign countries may also favor businesses that are owned by nationals of those countries as opposed to foreign-owned businesses operating locally. As a small company, we may not have the resources to engage in the negotiation and time-consuming work needed to overcome some of these potential issues.

In the event that we were to receive any marketing approval in foreign countries outside of the U.S. and Europe, we could create wholly-owned subsidiaries or work with a partner in those countries or in a region. These subsidiaries will need to build an effective sales, marketing, distribution, training and support staff and system, find an effective marketing partner or both. Any internal sales, marketing, training and support capabilities of the subsidiaries will need to be developed by these subsidiaries and will need to be built from scratch. The culture and accepted practices related to selling medical products in many foreign countries are unique, and it is possible that we will not be able to successfully penetrate these markets. A similar consideration applies to selling in the U.S., since each medical system is very different and requires a different strategic approach. We cannot guarantee that our approach to the U.S., European, Chinese or any other international market will be effective.

The medical systems in many foreign countries are very different from that of the U.S. and could cause significant problems for the ELAD System if foreign commercialization is pursued.

If we were to resume development and ultimately pursue foreign commercialization of ELAD, the medical systems in many countries around the world would pose challenges to the commercialization of the ELAD

 

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System. For instance, most medical care in China is delivered on a private pay basis, and it may be difficult to receive payment for the ELAD System therapy delivered or the price of our product, which we expect to be relatively high, may prove to be beyond the capability of the targeted Chinese patient to pay. Further, as we have encountered in our prior clinical trials, the standard and the operation of the delivery of care in China are different, causing problems with the operation of the ELAD System therapy. These issues include the withholding of necessary medicines, the inadequate staffing of Chinese hospitals, the shortage of blood products, the differing practice of delivery of extracorporeal therapies, and the attitude of physicians and nurses. These issues and others are likely to occur in other countries around the world and there is no assurance that we could overcome these challenges or succeed in commercializing the ELAD System or any other product in any foreign country.

If we were to pursue foreign commercialization we would face increased risks of doing business due to the extent of our operations internationally.

If we were to pursue foreign commercialization, these efforts may be through wholly-owned, foreign domiciled subsidiaries. Our efforts to expand internationally pose risks that could adversely affect our business. These risks include, among others, the effects of:

 

   

fluctuations in foreign currency exchange rates and controls;

 

   

economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;

 

   

differing and changing regulatory requirements in non-U.S. countries;

 

   

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

 

   

negative consequences from changes in tax laws;

 

   

difficulties associated with staffing and managing international operations, including differing labor relations;

 

   

potential liability under the Foreign Corrupt Practices Act or comparable foreign laws;

 

   

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

 

   

competitive disadvantages to established foreign businesses with significant current market share and business and customer relationships;

 

   

nationalization;

 

   

tax and regulatory policies of local governments and the possibility of trade embargoes;

 

   

political instability, war, terrorism, or other hostilities; and

 

   

laws and policies of the U.S. and foreign governments affecting foreign trade and investment.

Any of these risks could cause significant interruptions in potential future operations, which would adversely affect our ability to commercialize products internationally and our financial condition, results of operations and business.

Revenues, profits and cash flows derived in foreign countries by foreign subsidiaries may be denominated in foreign currency. The value of this currency may be controlled or adjusted periodically by foreign governments, and may be subject to changes in political and economic conditions.

 

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Foreign economic, political and social conditions and government policies could materially and adversely affect our business.

If we were to pursue foreign commercialization, a significant portion of our potential future operations may be conducted in foreign countries and it is possible that a significant percentage of our revenues may be derived from these countries. Accordingly, our results of operations, financial condition and prospects would be subject, to a significant degree, to economic, political, legal and social developments around the world. The economies of many of these countries differ from the economy of the U.S. in many respects, including:

 

   

level of government involvement;

 

   

economic structure;

 

   

allocation of resources;

 

   

level of development;

 

   

inflation rates;

 

   

growth rate; and

 

   

control of foreign exchange.

The legal systems in many foreign countries have inherent uncertainties that could limit the legal protections available to us.

We are subject to the laws and regulations of foreign governments, including those applicable to foreign investment and, in particular, laws applicable to wholly foreign-owned enterprises. Any litigation in these countries may be protracted and may result in substantial costs and diversion of resources and management attention. For example, in 2007, one of our clinical sites in China was sued in connection with the death of a subject of our clinical trial. An expert panel concluded that neither the ELAD System nor the clinical site was at fault and dismissed the lawsuit. Nevertheless, we were later informed that the subject’s family had been awarded approximately $100,000 in a subsequent civil proceeding brought against the clinical site. We ultimately decided to reimburse the clinical site for $100,000, which was partially insured. In addition, these countries may enact new laws or amend current laws that may be detrimental to us, which may have a material adverse effect on our business operations.

We have limited business insurance coverage internationally.

The insurance industry in many parts of the world is still in an early stage of development. Insurance companies in many countries offer only limited business insurance options. As a result, we may not be able to maintain any liability, hazard or other insurance covering our services, business, operations, errors, acts or omissions, personnel or properties in all of the countries in which we have operations. To the extent that we are unable to recover from others for any uninsured losses, such losses could result in a loss of capital and significant harm to our business. If any action, suit, or proceeding is brought against us and we are unable to pay a judgment rendered against us or defend ourselves against such action, suit, or proceeding, our business, financial condition and operations could be negatively affected.

We must comply with the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.

The U.S. Foreign Corrupt Practices Act, to which we are subject, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Other countries, such as the UK and China, have

 

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similar laws with which we must comply. Although we attempt to rigidly adhere to the requirements of the U.S. Foreign Corrupt Practices Act and all similar laws to which we are subject, there remains the risk that an employee or agent of ours could be accused of violating one or more of these laws, particularly in geographic regions where significant overlap exists between local government and healthcare industries. Such an accusation, even if unwarranted, could prove disruptive to our developmental and commercialization efforts if such efforts are resumed.

We could be subject to additional income and other tax liabilities.

We are subject to income and other taxes in the U.S. and may be subject to income and other taxes in various other foreign jurisdictions. Significant planning is required in evaluating a worldwide provision for income and other taxes. During the ordinary course of business, there may be transactions for which the ultimate tax determination is uncertain. We may be subject to audit in various jurisdictions and such jurisdictions may assess additional income or other tax against us. Although we may believe our tax positions are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material and adverse effect on our operating results or cash flows in the period or periods for which that determination is made.

The United Kingdom’s impending departure from the European Union could adversely affect our business.

The United Kingdom held a referendum in June 2016 in which a majority of voters voted to exit the European Union, or Brexit. Negotiations are underway to determine the future terms of the United Kingdom’s relationship with the European Union, including, among other things, the terms of trade between the United Kingdom and the European Union as well as other world trading partners. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could adversely affect European and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the sterling and euro. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate, including laws that could impact any potential future clinical trials and our ability to obtain approval of our products or sell our products in the United Kingdom. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, results of operations, financial condition and cash flows.

Risks Related to Our Intellectual Property

Our patent rights may prove to be an inadequate barrier to competition.

We hold a patent in the U.S. which claims a method of using C3A cells to treat a patient’s blood, which we believe covers the ELAD System therapy. In addition, we hold another U.S. patent with claims covering an extracorporeal device configuration, which we believe includes our ELAD System, independent of the cell-type used. Foreign counterparts of these patents have been issued or allowed in Australia, Brazil, Canada, Europe, Indonesia, Israel, Japan, Mexico, New Zealand, Singapore, South Africa, South Korea, the Philippines and Taiwan and remain under review in certain jurisdictions, including but not limited to Europe, Hong Kong and India. In addition to these two U.S. patents, we hold one additional patent in the U.S. However, the lifespan of any one patent is limited and each of these patents will ultimately expire, and we cannot be sure that pending applications will be granted, or that we will discover new inventions which we can successfully patent. Moreover, any of our granted patents may be held invalid by a court of competent jurisdiction, and any of these patents may also be construed narrowly by a court of competent jurisdiction in such a way that it is held to not directly cover the entire ELAD System or treatment. Furthermore, even if our patents are held to be valid and of broadly enforceable scope, third parties may find legitimate ways to compete with the ELAD System by inventing around our patents to avoid claims of patent infringement. Finally, the process of obtaining new patents is lengthy and expensive, as is the process for enforcing patent rights against an alleged infringer. Any such

 

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litigation could take years, cost large sums of money and pose a significant distraction to management. Indeed, certain jurisdictions outside of the U.S. and Europe have a history of inconsistent, relatively lax or ineffective enforcement of patent rights. In such jurisdictions, even a valid patent may have limited value. Our failure to effectively enforce our patents would likely have a harmful impact on our ability to potentially commercialize the ELAD System in these jurisdictions.

We do not hold any patents covering our VTL C3A cells or the production processes we used to grow the VTL C3A cells in the ELAD cartridges.

C3A cells are publicly available and the proprietary methods and production process that we use to grow our VTL C3A cells in the ELAD cartridges are our trade secrets, but they are not currently covered by a patent and no patents are pending. Although we have sought patent protection for certain aspects of our technology, such as our method of using human liver-derived C3A cells to treat a patient’s blood, and we have obtained orphan designation in the U.S. and Europe for the use of C3A cells to treat acute liver failure, we have not sought patent protection for the proprietary methods we use to grow VTL C3A cells. Although we believe that some of these methods may be patentable, we prefer to avoid the disclosure requirements inherent in the patenting process, as such disclosure could provide competitors with insights that allow them to invent around any granted patents. We believe that this concern is particularly appropriate since C3A cells are publicly available, and have been available for research purposes for more than twenty years. Despite this availability, we are not aware of any third parties who have either demonstrated an ability to grow C3A cells in the quantities we do, or have succeeded in treating a human subject with such cells. In addition, patent protection expires 20 years after the application’s priority date which does not apply to trade secret protection. In light of the foregoing, we do not currently contemplate seeking patent protection for our production methods and instead intend to keep our production methods protected as trade secrets, which does not require us to publicly disclose these methods and which is not subject to a formal expiration date. However, trade secrets are vulnerable to inadvertent disclosure and misappropriation. In addition, independent discovery and publication of these methods by third parties, which is feasible given the public availability of C3A cells, would also destroy their trade secret protection. If any of these were to occur, our business may be harmed.

We protect much of our intellectual property as trade secrets. Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information.

Trade secrets offer a relatively limited form of protection as they do not create any barrier for third-parties who independently develop this information and who may even patent the information. In the course of our research and development activities and our business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentiality agreements may be used, for example, when we talk to vendors of laboratory or clinical development services or potential strategic partners. In addition, each of our employees is required to sign a confidentiality agreement upon joining us. We take steps to protect our proprietary information, and our confidentiality agreements are carefully drafted to protect our proprietary interests. Nevertheless, there can be no assurance that an employee or an outside party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. sometimes are less willing than U.S. courts to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how, which would harm our business.

If our ELAD cartridges or our VTL C3A cells are stolen, misappropriated or reverse engineered, others could produce competing products.

Third parties, including those previously involved in, or that may in the future be involved in, shipping our ELAD System cartridges or in any manufacturing abroad that we may undertake, often have custody or control

 

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of our ELAD cartridges. If our ELAD cartridges, or VTL C3A cells from our proprietary VTL C3A cell bank that are stored to grow in these cartridges, were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce these cartridges for their own commercial gain. If this were to occur, it would be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection or in countries in which we do not have patents covering the misappropriated ELAD cartridges. In such instance, our business would be harmed.

Ownership of our intellectual property may be claimed by others.

The ELAD System has been under development for over 20 years and certain of our predecessor companies have filed for reorganization and bankruptcy. We were founded in 2003 by acquisition of the assets of a prior company after a bankruptcy. While we believe we have performed extensive diligence on the ownership of the intellectual property rights and have developed our own innovative technology which is independent of prior intellectual property rights, there could be claims by parties associated with the prior entities that could lead to costly and time consuming legal actions. In addition, we have engaged in collaborations with third parties where intellectual property has been developed. In one instance, we were engaged in a dispute over the ownership of intellectual property when a collaborator of ours pursued patent rights over technology which we believe we may have held rights to under the collaboration agreement. Although a patent which claims a different configuration than our ELAD System was ultimately issued in the U.S. to our former collaborator, we do not hold any rights to this patent. We are unaware of any active development with respect to the claimed system. Other such disputes could arise in the future or emerge from past activities which could lead others to claim our intellectual property.

We may be involved in future costly intellectual property litigation, which could impact our future business and financial performance.

Our industry has been characterized by frequent intellectual property litigation. Our competitors or other patent holders may assert that our ELAD System and the methods we employ are covered by their patents. For instance, we are aware of other patents issued in the liver support field which we believe do not cover our ELAD System or its use. If our ELAD System or methods are found to infringe any valid patents, we could be prevented from marketing our ELAD System, if our efforts to develop ELAD are resumed. In addition, we do not know whether our competitors or potential competitors have applied for, or will apply for or obtain, patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our ELAD System.

Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive and time-consuming and could divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using technologies essential to our ELAD System, any of which would have a material adverse effect on our business, results of operations and financial condition. We do not know whether necessary licenses would be available to us on satisfactory terms, or whether we could redesign our ELAD System or processes to avoid infringement.

Competing products may also appear in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, we could be prevented from marketing our ELAD System in one or more countries, if efforts to develop ELAD are resumed.

In addition, we may hereafter become involved in litigation to protect our trademark rights associated with our company name or the names used with our ELAD System. Names used with our ELAD System and procedures may be claimed to infringe names held by others or to be ineligible for proprietary protection. If we have to change the name of our company or our ELAD System, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales, if any.

 

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We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets owned by third parties.

Many of our employees were previously employed at universities or other life science companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other confidential or proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel could hamper our ability to develop and commercialize the ELAD System, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks Related to Our Capital Requirements and Finances

We have limited resources to fund our operations and may need to raise additional capital in conjunction with and as a result of our pursuit of strategic alternatives.

We have a history of incurring losses and negative cash flows from operations and have an accumulated deficit of $335.0 million through September 30, 2018. Based on our current employees, our known commitments, and our ongoing administrative costs to explore and pursue strategic options, we believe that our existing cash and cash equivalents of $17.8 million as of September 30, 2018 should be sufficient to meet our known liabilities and commitments as of September 30, 2018. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The timing and amount of our actual expenditures will be based on many factors, including, but not limited to, whether and when the Transaction closes, future research and development efforts if any, other strategic options that we may pursue, and any unforeseen cash needs which may deplete current cash and cash equivalents sooner than planned.

As a result of our liquidity needs, vendors and other key contract counterparties may be reluctant to enter into contracts with us if they believe we may not be able to satisfy our obligations. In addition, there is no assurance that we will be able to obtain additional funding when and if needed on acceptable terms or at all. If we are not able to secure adequate additional funding, we would be required to make further reductions in certain spending to extend current funds, we may have to liquidate some or all of our assets, delay, reduce the scope of, or eliminate some or all of any development programs or even close our operations.

We may also have to delay development of any potential products or license to third parties the rights to our products or technology that we would otherwise seek to develop. Our inability to enter into such contracts or raise additional funding would adversely affect our business, liquidity, financial condition, results of operations and cash flows.

To conserve capital, we may undertake additional workforce and cost reduction activities in the future. These activities may cause us to be unable to fully support and manage our operations.

In September 2015, and again in September 2018, we instituted across the board expense reductions to conserve capital, and we may, in the future, need to undertake additional workforce reductions or restructuring activities. As a result of the reduction in our workforce, we face an increased risk of employment litigation. We also need to effectively manage our operations and facilities. Following our recent workforce reduction in September 2018, it is possible that our infrastructure may be inadequate to support our future efforts and business strategy or to maintain operational, financial and management controls and reporting systems and procedures. If we cannot successfully manage our operations, we may be unsuccessful in executing our business strategy, including potential strategic options, including the Transaction.

 

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Our future capital needs are uncertain, and we may need to raise additional funds in the future.

We may need to raise substantial additional capital to:

 

   

pursue strategic options for the company;

 

   

complete any potential future clinical trials and related regulatory applications;

 

   

fund our operations;

 

   

commence and expand the commercialization of any products we may acquire; and

 

   

further our research and development.

Our future funding requirements will depend on many factors, including:

 

   

the cost, timing and structure of any potential strategic options that we pursue;

 

   

the cost of any future research and development activities;

 

   

the cost and timing of any future clinical development activities;

 

   

the cost of filing and prosecuting patent applications;

 

   

the cost of defending litigation or any claims that we infringe third-party patents or violate other intellectual property rights;

 

   

the cost and timing of regulatory clearances or approvals, if any;

 

   

the cost and timing of establishing sales, marketing and distribution capabilities;

 

   

the cost and timing of establishing additional technical support capabilities;

 

   

market acceptance of any products;

 

   

the effect of competing technological and market developments; and

 

   

the extent to which we acquire or invest in businesses, products and technologies, although we currently have no significant commitments or agreements relating to any of these types of transactions.

We may not be able to obtain additional funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, which we have no prior experience in, it may be necessary to relinquish rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, delay, reduce the scope of or eliminate some or all of any potential future development programs or close our operations.

If we do not have, or are not able to obtain, sufficient funds, we may have to delay development of any potential products or license to third parties the rights to develop our products or technologies that we would otherwise seek to develop. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.

Raising additional funds through debt or equity financing is likely to be challenging, could be highly dilutive and may cause the market price of our common stock to decline.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of those securities could result in substantial dilution for our current stockholders and the terms may include

 

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liquidation or other preferences that adversely affect the rights of our current stockholders. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline further and existing stockholders may not agree with our financing plans or the terms of such financings. The failure of the VTI-208 and VTL-308 clinical trials to meet their primary or secondary endpoints, in addition to general market conditions, may make it very difficult for us to seek and obtain further financing from the capital markets on favorable terms, or at all. There is no assurance that we will be able to obtain additional funding on acceptable terms or at all.

In order to raise required funds we may choose to enter into one or more collaborations. Such collaborations could require us to give up substantial rights to the ELAD System in the U.S. and/or outside the U.S.

We may choose to enter into one or more collaborations in order to resume the development of the ELAD System. These collaborations could require us to relinquish substantial rights, potentially including the grant of an exclusive license to make, use and sell the ELAD System, to another company.

Risks Related to Being a Public Company

Our common stock may be delisted from The Nasdaq Global Market if we are unable to maintain compliance with Nasdaq’s continued listing standards.

The Nasdaq Global Market imposes certain continued listing standards including minimum bid and public float requirements. On October 25, 2018, we received a letter from Nasdaq providing notification that, for the previous 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share requirement, or the Bid Price Requirement, for continued listing on The Nasdaq Global Market. The notification had no immediate effect on the listing of our common stock. In accordance with Nasdaq listing rules, we were afforded 180 calendar days, or until April 23, 2019, to regain compliance with the Bid Price Requirement. If we are unable to regain compliance, Nasdaq may determine to delist our common stock. If our common stock is delisted, this would, among other things, substantially impair our ability to raise additional funds to sustain our operations and could result in the loss of institutional investor interest, limit our strategic alternatives, and result in fewer development opportunities.

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 are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of The Nasdaq Stock Market LLC and other applicable securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases demand on our systems and resources, and even more so after we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. 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 are required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. To assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in

 

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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 development 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 due to ambiguities related to their application and practice, 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,” we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” 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 and financial statements in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote to approve executive compensation and stockholder approval of any golden parachute payments not previously approved. We will take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

We will remain an “emerging growth company” until as late as December 31, 2019 (the fiscal year-end following the fifth anniversary of the completion of our initial public offering).

As a public company it is more expensive for us to maintain and 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 may 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.

Under Section 107(b) of the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

As a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. If we do not maintain a proper and effective system of internal control over financial reporting, or if these internal controls are determined not to be designed or operating effectively, it may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are 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 2018 fiscal year. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

We have and will continue to evaluate and test our system of internal control over financial reporting. If, during the evaluation and testing process, 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, which could result in a loss of investor confidence in the accuracy and completeness of our financial reports. This could cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth

 

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company” pursuant to the exemptions contained in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied that our internal controls over financial reporting are designed and operating effectively to prevent or detect a material misstatement to the financial statements.

If we do not remediate any material weaknesses in our internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.

In prior years, we had not maintained an effective control environment to ensure that the design and execution of our controls consistently resulted in effective review of our financial statements and supervision by appropriate individuals. As a result of these factors, certain misstatements in our annual financial statements for periods prior to becoming a public company were identified and brought to the attention of management by our independent registered public accounting firm for correction. We and our independent registered public accounting firm concluded that these control deficiencies constituted a material weakness in our internal control over financial reporting. A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, indicates that there is a reasonable possibility that a material misstatement of our annual or interim condensed consolidated financial statements will not be prevented or detected on a timely basis.

Efforts to remediate the control deficiencies that led to the material weakness discussed above were completed. However, the measures we have taken to date, or any measures we may take in the future, may not be sufficient to avoid potential future material weaknesses. In addition, an independent registered public accounting firm has not performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional significant deficiencies or material weaknesses may have been identified. If we are unable to successfully remediate any significant deficiency or material weakness in our internal control over financial reporting, or identify any additional significant deficiencies or material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result.

Risks Related to our Common Stock

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

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We are not currently aware of any securities or research analysts that are covering our business. We do not have any control of the analysts or the content and opinions included in their reports or whether any such analysts will continue to, or whether new analysts will, cover us for any given period of time. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If a research analyst ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

The market price of our common stock has been, and may continue to be volatile and fluctuate significantly, which could result in substantial losses for investors.

The market price of our common stock has been and is likely to continue to be highly volatile. Since our initial public offering in April 2014 at a price of $12.00 per share, the sale price of stock as reported on The Nasdaq

 

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Global Market has ranged from $0.15 to $32.50, through January 30, 2019. Our announcement in 2015 that the VTI-208 clinical trial failed to meet its primary or secondary endpoints resulted in a significant decline in the market price of our common stock. Then again in September 2018, our announcement that the VTL-308 clinical trial failed to meet its primary or secondary endpoints resulted in a significant decline in the market price of our common stock. Following the announcement on the morning of September 12, 2018 that our VTL-308 clinical trial failed to meet its primary or secondary endpoints, the price of our common stock dropped $5.85 per share, or 93%, from $6.30 per share as of the close of business on September 11, 2018 to $0.45 per share as of the close of business on September 12, 2018. The closing price of our common stock was $[●] on [●], 2019. In addition, as with any public company, some investors hold a short position in our common stock. Such investors have published and distributed information about our company including on past and recent clinical trials. Activities by these investors may increase the volatility of the market price of our common stock, and may affect our ability to raise additional funds and to complete any potential future clinical trials or transactions.

Our stock price could be subject to wide fluctuations due to many factors, including:

 

   

any potential strategic options that we pursue, including the Transaction;

 

   

clinical data and government approvals relating to products in development;

 

   

changes in governmental regulations or in the status of regulatory approvals or applications;

 

   

disputes or other developments with respect to our intellectual property rights or the intellectual property rights of others;

 

   

product liability claims or other litigation, including intellectual property or securities litigation;

 

   

sales of large blocks of our common stock, including sales by our executive officers and directors;

 

   

changes in earnings estimates or recommendations by securities analysts;

 

   

our ability to meet investors’ expectations regarding our future operating performance;

 

   

media exposure of our products or products of our competitors;

 

   

volume and timing of sales of products;

 

   

the introduction of new products or product enhancements by us or our competitors;

 

   

our ability to develop, obtain regulatory clearance or approval for and market new and enhanced products, if any, on a timely basis;

 

   

quarterly variations in our or our competitors’ results of operations;

 

   

developments in our industry; and

 

   

general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

In addition, an active and liquid market may not develop or persist, and you may not be able to sell your shares quickly or at a price that is higher than what you paid for them. These and other factors may make the price of our stock volatile and subject to unexpected fluctuations.

Sale of a substantial number of shares of our common stock by existing stockholders or by us may cause the price of our common stock to decline.

Sales of a substantial number of shares of our common stock into the public market or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise adequate capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

 

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In May 2018, we filed a shelf registration statement on Form S-3, or the 2018 Shelf Registration Statement, which became effective in June 2018. The 2018 Shelf Registration Statement permits: (i) the offering, issuance and sale by us of up to a maximum aggregate offering price of $200.0 million of common stock, preferred stock, warrants, debt securities, and/or units in one or more offerings and in any combination; (ii) sales of up to 2.5 million shares of common stock by certain selling stockholders; and (iii) the offering, issuance and sale by us of up to a maximum aggregate offering price of $60.0 million of our common stock that may be issued and sold under an “at-the-market” sales agreement, or ATM, with Cantor Fitzgerald & Co. At September 30, 2018, $200.0 million remains available for issuance and sale under the 2018 Shelf Registration Statement, $60.0 million of which may be offered, issued and sold under the ATM. However, we expect the amounts available under the shelf registration statement to be significantly limited in the future if our public float remains below $75.0 million, as measured on December 31, 2018, and our ability to use the ATM may likewise be limited or completely unavailable based on the requirements of the ATM. Additionally, funding is expected to be more difficult to secure due to our VTL-308 clinical trial not meeting its primary or secondary endpoints.

In addition, we have filed registration statements on Form S-8 registering a total of 9,634,695 shares of common stock subject to options or reserved for future issuance under our 2012 Stock Option Plan, 2014 Equity Incentive Plan and 2017 Inducement Equity Incentive Plan. Shares registered under these registration statements are available for sale in the public market subject to vesting arrangements, the exercise of such options and, in the case of our affiliates, the restrictions of Rule 144. As of September 30, 2018, options to purchase 4,473,207 shares of our common stock were exercisable.

To the extent we raise additional capital by selling and issuing common stock, convertible securities or other equity securities, it may result in material dilution to our existing stockholders and new investors could gain rights superior to our existing stockholders. Sales by us or by our current stockholders also could cause the price of our common stock to fall and make it more difficult for you to sell shares of our common stock.

Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as Delaware law, could discourage a takeover.

Our amended and restated certificate of incorporation, bylaws, and Delaware law, contain provisions that might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions:

 

   

authorize our board of directors to issue, without further action by our stockholders, up to 20,000,000 shares of undesignated preferred stock;

 

   

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by a supermajority (75%) vote of our directors then in office;

 

   

specify that our board of directors may amend or repeal our bylaws only pursuant to a supermajority (75%) vote of our directors then in office;

 

   

specify that our stockholders may amend or repeal our bylaws only pursuant to a supermajority (75% and majority of the minority, if applicable) vote of the outstanding shares of our capital stock;

 

   

require in general the approval of a supermajority (75% and majority of the minority, if applicable) vote of our outstanding shares of capital stock to amend or repeal certain provisions of our amended and restated certificate of incorporation;

 

   

require the approval of a supermajority (75% and majority of the minority, if applicable) vote of our outstanding shares of capital stock to approve the sale or liquidation of the company;

 

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establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

 

   

provide that directors may be removed only for cause by a supermajority (75%) vote of our outstanding shares of capital stock;

 

   

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

provide that in general the number of directors on our board may only be fixed from time to time by a supermajority (75%) vote of our directors then in office; and

 

   

establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms.

These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

Our amended and restated certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock unless board or stockholder approval is obtained prior to the acquisitions. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect or remove directors of your choosing and to cause us to take other corporate actions you desire.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our stock may be less valuable because a positive return on your investment will only occur if our stock price appreciates.

Risks Related to Immunic

Risks Related to Immunic’s Business and Financial Condition

Immunic has a limited operating history and has incurred significant losses since its inception and anticipates that it will continue to incur losses for the foreseeable future and may never achieve or maintain profitability. The absence of any commercial sales and Immunic’s limited operating history make it difficult to assess its future viability.

Immunic is a development-stage pharmaceutical company with a limited operating history. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Immunic is not profitable and has incurred losses in each year since its inception in 2016. Immunic has only a limited operating history upon which you can evaluate its business and prospects. In addition, Immunic has limited experience and has not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the specialty pharmaceutical industry. Immunic has not generated any revenue to date. Immunic continues to incur significant

 

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research and development and other expenses related to its ongoing operations. Immunic’s net loss for the year ended December 31, 2017 was €8.1 million (approximately $[●] million). As of September 30, 2018, Immunic had an accumulated deficit of €15.1 million (approximately $[●] million). Immunic expects to continue to incur losses for the foreseeable future as it continues its development of, and seeks marketing approvals for, its product candidates.

Immunic has devoted substantially all of its financial resources to identify, acquire, and develop its product candidates, including providing general and administrative support for its operations. To date, Immunic has financed its operations primarily through the sale of equity securities. The amount of its future net losses will depend, in part, on the rate of its future expenditures and its ability to obtain funding through equity or debt financings, strategic collaborations, or grants. Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Immunic expects losses to increase as it conducts clinical trials and continues to develop its lead product candidates. Immunic expects to invest significant funds into the research and development of its current product candidates to determine the potential to advance these product candidates to regulatory approval.

If Immunic obtains regulatory approval to market a product candidate, its future revenue will depend upon the size of any markets in which its product candidates may receive approval, and its ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for its product candidates in those markets. Even if Immunic obtains adequate market share for its product candidates, because the potential markets in which its product candidates may ultimately receive regulatory approval could be very small, Immunic may never become profitable despite obtaining such market share and acceptance of its products.

Immunic expects to continue to incur significant expenses and increasing operating losses for the foreseeable future, and its expenses will increase substantially if and as Immunic:

 

   

continues the clinical development of its product candidates;

 

   

continues efforts to discover new product candidates;

 

   

undertakes the manufacturing of its product candidates or increases volumes manufactured by third parties;

 

   

advances its programs into larger, more expensive clinical trials;

 

   

initiates additional pre-clinical, clinical, or other trials or studies for its product candidates;

 

   

seeks regulatory and marketing approvals and reimbursement for its product candidates;

 

   

establishes a sales, marketing and distribution infrastructure to commercialize any products for which Immunic may obtain marketing approval and market for itself;

 

   

seeks to identify, assess, acquire and/or develop other product candidates;

 

   

makes milestone, royalty or other payments under third-party license agreements;

 

   

seeks to maintain, protect and expand its intellectual property portfolio;

 

   

seeks to attract and retain skilled personnel; and

 

   

experiences any delays or encounters issues with the development and potential for regulatory approval of its clinical candidates such as safety issues, clinical trial accrual delays, longer follow-up for planned studies, additional major studies or supportive studies necessary to support marketing approval.

Further, the net losses Immunic incurs may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of its results of operations may not be a good indication of its future performance.

 

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Immunic currently has no source of product sales revenue and may never be profitable.

Immunic has not generated any revenues from commercial sales of any of its current product candidates. Immunic’s ability to generate product revenue depends upon its ability to successfully commercialize these product candidates or other product candidates that it may develop, in-license or acquire in the future. Immunic does not anticipate generating revenue from the sale of products for the foreseeable future. Immunic’s ability to generate future product revenue from its current or future product candidates also depends on a number of additional factors, including its ability to:

 

   

successfully complete research and clinical development of current and future product candidates;

 

   

establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of product candidates;

 

   

obtain regulatory approval from relevant regulatory authorities in jurisdictions where Immunic intends to market its product candidates;

 

   

launch and commercialize future product candidates for which Immunic obtains marketing approval, if any, and if launched independently, successfully establish a sales force and marketing and distribution infrastructure;

 

   

obtain coverage and adequate product reimbursement from third-party payors, including government payors;

 

   

achieve market acceptance for its products, if any;

 

   

establish, maintain and protect its intellectual property rights; and

 

   

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with clinical product development, including that Immunic’s product candidates may not advance through development or achieve regulatory approval, Immunic is unable to predict the timing or amount of any potential future product sales revenues. Immunic’s expenses also could increase beyond expectations if Immunic decides to or is required by the FDA, or comparable foreign regulatory authorities, to perform studies or trials in addition to those that Immunic currently anticipates. Even if Immunic completes the development and regulatory processes described above, Immunic anticipates incurring significant costs associated with launching and commercializing these products.

Immunic will require substantial additional financing to obtain marketing approval of its product candidates and commercialize its product candidates, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force Immunic to delay, limit, reduce or terminate its product development, other operations or commercialization efforts.

Since Immunic’s inception, substantially all its resources have been dedicated to the clinical development of its product candidates. As of September 30, 2018, Immunic had an accumulated deficit of €15.1 million (approximately $17.3 million) and cash and cash equivalents of €8.6 million (approximately $9.8 million). Immunic believes that it will continue to expend substantial resources for the foreseeable future on the completion of clinical development and regulatory preparedness of its product candidates, preparations for a commercial launch of its product candidates, if approved, and development of any other current or future product candidates it may choose to further develop. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, obtaining marketing approvals, and manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any drug development process is highly uncertain, Immunic cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of its current product candidates, if approved, or future product candidates, if any.

Immunic’s operating plan may change as a result of factors currently unknown to Immunic, and it may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources,

 

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such as strategic collaborations. Such financing may result in dilution to Immunic’s shareholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect its business. In addition, Immunic may seek additional capital due to favorable market conditions or strategic considerations even if Immunic believes it has sufficient funds for its current or future operating plans.

Immunic’s future capital requirements depend on many factors, including:

 

   

the scope, progress, results and costs of researching and developing Immunic’s current product candidates, future product candidates and conducting preclinical and clinical trials;

 

   

the cost of commercialization activities if Immunic’s current product candidates and future product candidates are approved for sale, including marketing, sales and distribution costs and preparedness of its corporate infrastructure;

 

   

the cost of manufacturing current product candidates and future product candidates that Immunic obtains approval for and successfully commercializes;

 

   

Immunic’s ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

 

   

the number and characteristics of any additional product candidates Immunic may develop or acquire;

 

   

any product liability or other lawsuits related to Immunic’s products or commenced against Immunic;

 

   

the expenses needed to attract and retain skilled personnel;

 

   

the costs associated with being a public company;

 

   

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing its intellectual property rights, including litigation costs and the outcome of such litigation; and

 

   

the timing, receipt and amount of sales of, or royalties on, any future approved products, if any.

Additional funds may not be available when Immunic needs them, on terms that are acceptable to Immunic, or at all. If adequate funds are not available to Immunic on a timely basis, Immunic may be required to:

 

   

delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for Immunic’s current product candidates or future product candidates, if any;

 

   

delay, limit, reduce or terminate its research and development activities; or

 

   

delay, limit, reduce or terminate its establishment of sales and marketing capabilities or other activities that may be necessary to commercialize its future product candidates.

Raising additional capital may cause dilution to Immunic’s existing shareholders, restrict its operations or require Immunic to relinquish rights to its technologies or product candidates.

Immunic may seek additional capital through a combination of public and private equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. To the extent that Immunic raises additional capital through the sale of equity or convertible debt securities, including the issuance of shares of capital stock in its concurrent financing in connection with the Transaction, the ownership interest of Immunic’s shareholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of Immunic’s shareholders. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on Immunic’s ability to incur additional debt, limitations on its ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact Immunic’s ability to conduct its business. If Immunic raises additional funds through strategic collaborations and alliances and licensing arrangements with third parties, Immunic may have to relinquish valuable rights to its technologies or product candidates, or grant licenses on terms unfavorable to Immunic.

 

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Risks Related to the Clinical Development and Marketing Approval of Immunic’s Product Candidates

The marketing approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if Immunic is ultimately unable to obtain marketing approval for its product candidates, its business will be substantially harmed.

None of Immunic’s current product candidates have gained marketing approval for sale in the United States or any other country, and Immunic cannot guarantee that it will ever have marketable products. Immunic’s business is substantially dependent on its ability to complete the development of, obtain marketing approval for, and successfully commercialize its product candidates in a timely manner. Immunic cannot commercialize its product candidates in the United States without first obtaining approval from the FDA to market each product candidate. Similarly, Immunic cannot commercialize its product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. Immunic’s product candidates could fail to receive marketing approval for many reasons, including the following:

 

   

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

 

   

the FDA or comparable foreign regulatory authorities may find the human subject protections for its clinical trials inadequate and place a clinical hold on an investigational new drug application, or IND, at the time of its submission precluding commencement of any trials or a clinical hold on one or more clinical trials at any time during the conduct of its clinical trials;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the data collected from clinical trials of Immunic’s product candidates may not be sufficient to support the submission of an application to obtain marketing approval in the United States or elsewhere;

 

   

the FDA or comparable foreign regulatory authorities may find inadequate the manufacturing processes or facilities of third-party manufacturers with which Immunic contracts for clinical and commercial supplies; and

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner that would delay marketing approval.

Before obtaining marketing approval for the commercial sale of any drug product for a target indication, Immunic must demonstrate in preclinical studies and well-controlled clinical trials and, with respect to approval in the United States, to the satisfaction of the FDA, that the product is safe and effective for its intended use and that the manufacturing facilities, processes and controls are adequate to preserve the drug’s identity, strength, quality and purity. In the United States, it is necessary to submit and obtain approval of a new drug application, or NDA, from the FDA. A NDA must include extensive preclinical and clinical data and supporting information to establish the product safety and efficacy for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. After the submission of a NDA, but before approval of the NDA, the manufacturing facilities used to manufacture a product candidate must be inspected by the FDA to ensure compliance with the applicable cGMP requirements. The FDA and the Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory authorities, may also inspect Immunic’s clinical trial sites and audit clinical study data to ensure that

 

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its studies are properly conducted in accordance with the IND regulations, human subject protection regulations, and good clinical practice, or cGCP.

Obtaining approval of a NDA is a lengthy, expensive and uncertain process, and approval may not be obtained. Upon submission of a NDA, the FDA must make an initial determination that the application is sufficiently complete to accept the submission for filing. Immunic cannot be certain that any submissions will be accepted for filing and reviewed by the FDA, or ultimately be approved. If the application is not accepted for review, the FDA may require that Immunic conduct additional clinical studies or preclinical testing, or take other actions before it will reconsider Immunic’s application. If the FDA requires additional studies or data, Immunic would incur increased costs and delays in the marketing approval process, which may require Immunic to expend more resources than Immunic has available. In addition, the FDA may not consider any additional information to be complete or sufficient to support the filing or approval of the NDA.

Regulatory authorities outside of the United States, such as in Europe and Japan and in emerging markets, also have requirements for approval of drugs for commercial sale with which Immunic must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of Immunic’s product candidates. Clinical trials conducted in one country may not be accepted or the results may not be found adequate by regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. However, the failure to obtain regulatory approval in one jurisdiction could have a negative impact on Immunic’s ability to obtain approval in a different jurisdiction. Approval processes vary among countries and can involve additional product candidate testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional non-clinical studies or clinical trials, which could be costly and time consuming. Foreign regulatory approval may include all of the risks associated with obtaining FDA approval. For all of these reasons, Immunic may not obtain foreign regulatory approvals on a timely basis, if at all.

The process to develop, obtain marketing approval for, and commercialize product candidates is long, complex and costly both inside and outside of the United States, and approval is never guaranteed. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Even if Immunic’s product candidates were to successfully obtain approval from regulatory authorities, any such approval might significantly limit the approved indications for use, including more limited patient populations, require that precautions, warnings or contraindications be included on the product labeling, including black box warnings, require expensive and time-consuming post-approval clinical studies, risk evaluation and mitigation strategies or surveillance as conditions of approval, or, through the product label, the approval may limit the claims that it may make, which may impede the successful commercialization of its product candidates. Following any approval for commercial sale of Immunic’s product candidates, certain changes to the product, such as changes in manufacturing processes and additional labeling claims, as well as new safety information, may require new studies and will be subject to additional FDA notification, or review and approval. Also, marketing approval for any of Immunic’s product candidates may be withdrawn. If Immunic is unable to obtain marketing approval for its product candidates in one or more jurisdictions, or any approval contains significant limitations, Immunic’s ability to market to its full target market will be reduced and its ability to realize the full market potential of its product candidates will be impaired. Furthermore, Immunic may not be able to obtain sufficient funding or generate sufficient revenue and cash flows to continue or complete the development of any of its current or future product candidates.

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

Clinical testing is expensive, and can take many years to complete, and its outcome is inherently uncertain. The FDA and comparable foreign regulatory authorities have substantial discretion in the approval process, and

 

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determining when or whether marketing approval will be obtained for Immunic’s current product candidates. Even if Immunic believes the data collected from clinical trials of its current product candidates are promising, such data may not be sufficient to support approval by the FDA or comparable foreign authorities. Immunic’s future clinical trial results may not be successful.

It is impossible to predict the extent to which the clinical trial process may be affected by legislative and regulatory developments. Due to these and other factors, Immunic’s current product candidates or future product candidates could take a significantly longer time to gain marketing approval than expected or may never gain marketing approval. This could delay or eliminate any potential product revenue by delaying or terminating the potential commercialization of Immunic’s current product candidates.

Preclinical trials must also be conducted in accordance with FDA and comparable foreign authorities’ legal requirements, regulations or guidelines, including Good Laboratory Practice, or GLP, an international standard meant to harmonize the conduct and quality of nonclinical studies and the archiving and reporting of findings. Preclinical studies including long-term toxicity studies and carcinogenicity studies in experimental animals may result in findings that may require further evaluation, which could affect the risk-benefit evaluation of clinical development, or which may even lead the regulatory agencies to delay, prohibit the initiation of or halt clinical trials or delay or deny marketing authorization applications. Failure to adhere to the applicable GLP standards or misconduct during the course of preclinical trials may invalidate the data and require one or more studies to be repeated or additional testing to be conducted.

Clinical trials must also be conducted in accordance with FDA and comparable foreign authorities’ legal requirements, regulations or guidelines, including human subject protection requirements and GCP. Clinical trials are subject to further oversight by these governmental agencies and institutional review boards, or IRBs, at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of Immunic’s current product candidates produced under cGMP, and other requirements. Immunic’s clinical trials are conducted at multiple sites, including some sites in countries outside the United States and the European Union, which may subject Immunic to further delays and expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of foreign and non-EU clinical research organizations, as well as expose Immunic to risks associated with clinical investigators who are unknown to the FDA or the European regulatory authorities, and with different standards of diagnosis, screening and medical care.

To date, Immunic has not completed all clinical trials required for the approval of its current product candidates. The commencement and completion of clinical trials for Immunic’s current product candidates may be delayed, suspended or terminated as a result of many factors, including but not limited to:

 

   

the delay or refusal of regulators or IRBs to authorize Immunic to commence a clinical trial at a prospective trial site and changes in regulatory requirements, policies and guidelines;

 

   

the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of Immunic’s clinical trials;

 

   

failure to reach 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;

 

   

delays in patient enrollment and variability in the number and types of patients available for clinical trials;

 

   

the inability to enroll a sufficient number of patients in trials to ensure adequate statistical power to detect statistically significant treatment effects;

 

   

lower than anticipated retention rates of patients and volunteers in clinical trials;

 

   

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

 

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adding new clinical trial sites;

 

   

negative or inconclusive results, which may require Immunic to conduct additional preclinical or clinical trials or to abandon projects that Immunic expects to be promising;

 

   

safety or tolerability concerns could cause Immunic to suspend or terminate a trial if it finds that the participants are being exposed to unacceptable health risks;

 

   

regulators or IRBs requiring that Immunic or its investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

   

Immunic’s third-party research and manufacturing contractors failing to comply with regulatory requirements or meet their contractual obligations to Immunic in a timely manner, or at all;

 

   

difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

 

   

delays in establishing the appropriate dosage levels;

 

   

the quality or stability of Immunic’s current product candidates falling below acceptable standards;

 

   

the inability to produce or obtain sufficient quantities of Immunic’s current product candidates to complete clinical trials; and

 

   

exceeding budgeted costs due to difficulty in predicting accurately the costs associated with clinical trials.

Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications Immunic is investigating.

There are significant requirements imposed on Immunic and on clinical investigators who conduct clinical trials that Immunic sponsors. Although Immunic is responsible for selecting qualified clinical investigators, providing them with the information they need to conduct the clinical trial properly, ensuring proper monitoring of the clinical trial, and ensuring that the clinical trial is conducted in accordance with the general investigational plan and protocols contained in the IND, Immunic cannot ensure the clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record data, omit data, or even falsify data. Immunic cannot ensure that the clinical investigators in its trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on Immunic’s ability to obtain marketing approval, Immunic’s business, and Immunic’s financial condition.

Immunic could encounter delays if a clinical trial is suspended or terminated by Immunic, by the IRBs or Ethics Committees of the institutions in which such trial is being conducted, by the independent Steering Committee, by the data safety monitoring board, or DSMB, for such trial, or by the FDA or comparable foreign regulatory authorities. Immunic or such authorities may impose a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or Immunic’s clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, safety issues or adverse side effects, failure to demonstrate a benefit from using the drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If Immunic experiences delays in the completion of, or termination of, any clinical trial of its current product candidates, the commercial prospects of its current product candidates will be harmed, and Immunic’s ability to generate product revenues from its product candidates will be delayed. In addition, any delays in completing Immunic’s clinical trials will increase its costs, slow its development and approval process and jeopardize its ability to commence product sales and generate revenues. 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 marketing approval of Immunic’s product candidates.

 

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Moreover, clinical investigators for Immunic’s clinical trials may serve as scientific advisors or consultants to Immunic from time to time and receive compensation in connection with such services. Immunic is required to report certain financial relationships with clinical investigators to the FDA and, where applicable, take steps to minimize the potential for bias resulting from such financial relationships. The FDA will evaluate the reported information and may conclude that a financial relationship between Immunic and a clinical investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site, and the utility of the clinical trial itself may be jeopardized. This could result in a refusal to accept or a delay in approval of Immunic’s marketing applications by the FDA and may ultimately lead to the denial of marketing approval of one or more of its product candidates.

Any development candidate may also show in preclinical testing or clinical trials new and unexpected findings regarding safety and tolerability. Such findings may harm the ability to conduct further development, may delay development, may require additional expensive tests, will harm the ability of partner these development candidates, or may delay or prevent marketing approval by regulatory agencies. It may also harm the ability to compete in the market with other products or to achieve certain pricing thresholds.

Any of these occurrences could materially adversely affect Immunic’s business, financial condition, results of operations, and prospects. 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 marketing approval of Immunic’s current product candidates. Significant clinical trial delays could also allow Immunic’s competitors to bring products to market before Immunic is able to do so, shorten any periods during which Immunic has the exclusive right to commercialize its current product candidates and impair its ability to commercialize its current product candidates, which may harm Immunic’s business, financial condition, results of operations, and prospects.

Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate Immunic advances through clinical trials may not have favorable results in later clinical trials or receive marketing approval.

Clinical failure can occur at any stage of Immunic’s clinical development. The results of preclinical studies and early clinical trials of Immunic’s product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Clinical trials may produce negative or inconclusive results, and Immunic may decide, or regulators may require Immunic, to conduct additional clinical or preclinical testing. Data obtained from tests are susceptible to varying interpretations, and regulators may not interpret Immunic’s data as favorably as Immunic does, which may delay, limit or prevent marketing approval. In addition, the design of a clinical trial can determine whether its results will support approval of a product, or approval of a product for desired indications, and flaws or shortcomings in the design of a clinical trial may not become apparent until the clinical trial is well advanced. Immunic has limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval for Immunic’s desired indications. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If one of Immunic’s product candidates is found to be unsafe or lack efficacy, Immunic will not be able to obtain marketing approval for it and Immunic’s business would be harmed. For example, if the results of Immunic’s clinical trials of its product candidates do not achieve pre-specified endpoints or Immunic is unable to provide primary or secondary endpoint measurements deemed acceptable by the FDA or comparable foreign regulators or if Immunic is unable to demonstrate an acceptable level of safety relative to the efficacy associated with its proposed indications, the prospects for approval of Immunic’s product candidates would be materially and adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than Immunic, have suffered significant setbacks in phase 2 and phase 3 clinical trials, even after seeing promising results in earlier clinical trials.

 

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In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including differences in trial protocols and design, the size and type of the patient population, adherence to the dosing regimen and the rate of dropout among clinical trial participants. Immunic does not know whether any clinical trials it may conduct will demonstrate consistent and/or adequate efficacy and safety to obtain marketing approval for Immunic’s product candidates.

Marketing approval may be substantially delayed or may not be obtained for one or all of Immunic’s product candidates if regulatory authorities require additional or more time-consuming studies to assess the safety and efficacy of its product candidates.

Immunic may be unable to initiate or complete development of its product candidates on schedule, if at all. The timing for the completion of the studies for Immunic’s product candidates will require funding beyond the proceeds of the concurrent financing. In addition, if regulatory authorities require additional or more time-consuming studies to assess the safety or efficacy of Immunic’s product candidates, Immunic may not have or be able to obtain adequate funding to complete the necessary steps for approval for any or all of its product candidates. Additional delays may result if the FDA, an FDA Advisory Committee (if one is convened to review Immunic’s NDA) or other regulatory authority indicates that the product candidate should not be approved or there should be restrictions on approval, such as the requirement for a Risk Evaluation and Mitigation Strategy, or REMS, to ensure safe use of the drug. Delays in marketing approval or rejections of applications for marketing approval in the United States or other markets may result from many factors, including:

 

   

the FDA’s or comparable foreign regulatory authorities’ disagreement with the design or implementation of Immunic’s clinical trials;

 

   

regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;

 

   

regulatory questions or disagreement by the FDA or comparable regulatory authorities regarding interpretations of data and results and the emergence of new information regarding Immunic’s current or future product candidates or the field of research;

 

   

unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding safety or efficacy of Immunic’s product candidates during clinical trials;

 

   

failure to meet the level of statistical significance required for approval;

 

   

inability to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

   

lack of adequate funding to commence or continue Immunic’s clinical trials due to unforeseen costs or other business decisions;

 

   

regulatory authorities may find inadequate the manufacturing processes or facilities of the third-party manufacturers with which Immunic contracts for clinical and commercial supplies;

 

   

Immunic may have insufficient funds to pay the significant user fees required by the FDA upon the filing of a NDA; and

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner that would delay marketing approval.

The lengthy and unpredictable approval process, as well as the unpredictability of future clinical trial results, may result in Immunic’s failure to obtain marketing approval to market its other product candidates, which would significantly harm Immunic’s business, results of operations and prospects.

 

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Immunic’s product candidates may cause undesirable adverse effects or have other properties that could delay or prevent their marketing approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if obtained.

Undesirable side effects caused by Immunic’s product candidates could cause Immunic or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or other comparable foreign authorities. If any of Immunic’s current product candidates or any other product candidate Immunic develops is associated with serious adverse, undesirable or unacceptable side effects, Immunic may need to abandon such candidate’s development or limit development to certain uses or sub-populations in which such side effects are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in early-stage or clinical testing have later been found to cause side effects that prevented further development of the compound. Results of Immunic’s trials could reveal a high and unacceptable prevalence of these or other side effects. In such an event, Immunic’s trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order Immunic to cease further development of or deny approval of its 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.

If Immunic’s product candidates receive marketing approval, and Immunic 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;

 

   

Immunic may be required to recall a product or change the way such product is administered to patients;

 

   

additional restrictions may be imposed on the marketing of the particular product or the manufacturing process for the product or any component thereof;

 

   

regulatory authorities may require the addition of labeling statements, such as a precaution, “black box” warning or other warnings or a contraindication;

 

   

Immunic or its collaborators may be required to implement a REMS or create a medication guide outlining the risks of such side effect for distribution to patients;

 

   

Immunic or its collaborators could be sued and held liable for harm caused to patients;

 

   

the product may become less competitive; and

 

   

Immunic’s reputation may suffer.

Any of these events could prevent Immunic from achieving or maintaining market acceptance of its product candidates, if approved, and could materially adversely affect Immunic’s business, financial condition, results of operations and prospects.

Immunic is heavily dependent on the success of its product candidates, which are in the early stages of clinical development. Immunic cannot give any assurance that it will generate data for any of its product candidates sufficient to receive regulatory approval in its planned indications, which will be required before they can be commercialized.

Immunic has invested substantially all of its efforts and financial resources to identify, acquire and develop its portfolio of product candidates. Its future success is dependent on its ability to successfully further develop, obtain regulatory approval for, and commercialize one or more product candidates. Immunic currently generates no revenue from sales of any products, and Immunic may never be able to develop or commercialize a product candidate.

 

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None of Immunic’s product candidates have advanced into a pivotal clinical trial for Immunic’s proposed indications. Immunic is not permitted to market or promote any of its product candidates before it receives regulatory approval from the FDA or comparable foreign regulatory authorities, and Immunic may never receive such regulatory approval for any of its product candidates. Immunic cannot be certain that any of its product candidates will be successful in clinical trials or receive regulatory approval. Further, its product candidates may not receive regulatory approval even if they are successful in clinical trials. If Immunic does not receive regulatory approvals for its product candidates, Immunic may not be able to continue its operations.

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

Because Immunic has limited financial and human resources, it may forego or delay pursuit of opportunities with some programs or product candidates or for other indications that later prove to have greater commercial potential. Immunic’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or more profitable market opportunities. Immunic’s spending on current and future research and development programs and future product candidates for specific indications may not yield any commercially viable products. Immunic may also enter into additional strategic collaboration agreements to develop and commercialize some of its programs and potential product candidates in indications with potentially large commercial markets. If Immunic does not accurately evaluate the commercial potential or target market for a particular product candidate, it may relinquish valuable rights to that product candidate through strategic collaborations, licensing or other royalty arrangements in cases in which it would have been more advantageous for Immunic to retain sole development and commercialization rights to such product candidate, or Immunic may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

Immunic may find it difficult to enroll patients in its clinical trials given the limited number of patients who have the diseases for which its product candidates are being studied. Difficulty in enrolling patients could delay or prevent clinical trials of its product candidates.

Identifying and qualifying patients to participate in clinical trials of Immunic’s product candidates is essential to its success. The timing of Immunic’s clinical trials depends in part on the rate at which Immunic can recruit patients to participate in clinical trials of its product candidates, and Immunic may experience delays in its clinical trials if Immunic encounters difficulties in enrollment.

The eligibility criteria of Immunic’s planned clinical trials may further limit the available eligible trial participants as Immunic expects to require that patients have specific characteristics that Immunic can measure or meet the criteria to assure their conditions are appropriate for inclusion in its clinical trials. Immunic may not be able to identify, recruit, and enroll a sufficient number of patients to complete its clinical trials in a timely manner because of the perceived risks and benefits of the product candidate under study, the availability and efficacy of competing therapies and clinical trials, and the willingness of physicians to participate in its planned clinical trials. If patients are unwilling to participate in Immunic’s clinical trials for any reason, the timeline for conducting trials and obtaining regulatory approval of its product candidates may be delayed.

If Immunic experiences delays in the completion of, or termination of, any clinical trials of its product candidates, the commercial prospects of its product candidates could be harmed, and its ability to generate product revenue from any of these product candidates could be delayed or prevented. In addition, any delays in completing its clinical trials would likely increase its overall costs, impair product candidate development and jeopardize its ability to obtain regulatory approval relative to its current plans. Any of these occurrences may harm its business, financial condition, and prospects significantly.

 

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Even if Immunic receives marketing approval for its product candidates, such approved products will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, Immunic’s product candidates, if approved, could be subject to labeling and other restrictions, and Immunic may be subject to penalties and legal sanctions if it fails to comply with regulatory requirements or experience unanticipated problems with its approved products.

If the FDA approves any of Immunic’s product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP regulations and GCP for any clinical trials that Immunic conducts post-approval. Any marketing approvals that Immunic receives for its product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to conditions of approval, or contain requirements for potentially costly post-marketing testing, including phase 4 clinical trials, and surveillance to monitor safety and efficacy.

Later discovery of previously unknown problems with an approved product, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, or evidence of acts that raise questions about the integrity of data supporting the product approval, may result in, among other things:

 

   

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

 

   

fines, warning letters, or holds on clinical trials;

 

   

refusal by the FDA to approve pending applications or supplements to approved applications filed by Immunic, or suspension or revocation of product approvals;

 

   

product seizure or detention, or refusal to permit the import or export of products; 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 marketing approval, manufacturing or commercialization of Immunic’s product candidates. Immunic cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If Immunic is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or not able to maintain regulatory compliance, it may lose any marketing approval that may have been obtained and it may not achieve or sustain profitability, which would adversely affect Immunic’s business.

If Immunic fails to obtain regulatory approval in jurisdictions outside the United States, it will not be able to market its products in those jurisdictions.

Immunic intends to market its product candidates, if approved, in international markets, or in conjunction with collaborators. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary from country to country and may require testing in addition to what is required for a marketing application in the United States. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. In addition, in many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The failure to obtain approval in one jurisdiction may negatively impact Immunic’s ability to obtain approval in another jurisdiction. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and additional or different risks. Immunic may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize its products in any market.

 

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Agencies like the FDA and national competition regulators in European countries regulate the promotion and uses of drugs not consistent with approved product labeling requirements. If Immunic is found to have improperly promoted its current product candidates for uses beyond those that are approved, Immunic may become subject to significant liability.

Regulatory authorities like the FDA and national competition laws in Europe strictly regulate the promotional claims that may be made about prescription products, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or comparable foreign regulatory authorities as reflected in the product’s approved labeling, known as “off-label” use, nor may it be promoted prior to obtaining marketing approval. If Immunic receives marketing approval for its product candidates for Immunic’s proposed indications, physicians may nevertheless use Immunic’s products for their patients in a manner that is inconsistent with the approved label if the physicians personally believe in their professional medical judgment it could be used in such manner. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses.

In addition, the FDA requires that promotional claims not be “false or misleading” as such terms are defined in the FDA’s regulations. For example, the FDA requires substantial evidence, which generally consists of two adequate and well-controlled head-to-head clinical trials, for a company to make a claim that its product is superior to another product in terms of safety or effectiveness. Generally, unless Immunic performs clinical trials meeting that standard comparing its product candidates to competitive products and these claims are approved in Immunic’s product labeling, Immunic will not be able promote its current product candidates as superior to other products. If Immunic is found to have made such claims it may become subject to significant liability. In the United States, the federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in improper promotion. The FDA has also requested that companies enter into consent decrees or corporate integrity agreements. The FDA could also seek permanent injunctions under which specified promotional conduct is monitored, changed or curtailed.

Immunic’s current and future relationships with healthcare professionals, investigators, consultants, collaborators, actual customers, potential customers and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency, health information privacy and security and other healthcare laws and regulations, which could expose Immunic to sanctions.

Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any drug candidates for which Immunic obtains marketing approval. Immunic’s current and future arrangements with healthcare professionals, investigators, consultants, collaborators, actual customers, potential customers and third-party payors may expose Immunic to broadly applicable fraud and abuse and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, that may constrain the business or financial arrangements and relationships through which Immunic sells, markets and distributes any drug candidates for which it obtains marketing approval. In addition, Immunic may be subject to physician payment transparency laws and patient privacy and security regulation by the federal government and by the U.S. states and foreign jurisdictions in which Immunic conducts its business. The applicable federal, state and foreign healthcare laws that may affect Immunic’s ability to operate include the following:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under federal and state healthcare programs such as Medicare and Medicaid;

 

   

federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam

 

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actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

   

the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and its implementing regulations, which impose obligations on covered entities, including healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

   

the federal Open Payments program, created under Section 6002 of the Affordable Care Act and its implementing regulations, which imposed new annual reporting requirements for manufacturers of drugs, devices, biologicals and medical supplies for certain payments and “transfers of value” provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately and completely the required information for all covered payments, transfers of value and ownership or investment interests may result in civil monetary penalties; and

 

   

analogous state and foreign laws, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Further, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

Efforts to ensure that Immunic’s future business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will

 

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conclude that Immunic’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws. If Immunic’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to it, Immunic may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of Immunic’s operations, which could significantly harm its business. If any of the physicians or other healthcare providers or entities with whom Immunic expects to do business, including its current and future collaborators, if any, are found not to be in compliance with applicable laws, those persons or entities may be subject to criminal, civil or administrative sanctions, including exclusion from participation in government healthcare programs, which could also affect Immunic’s business.

The impact of recent and future healthcare reform legislation and other changes in the healthcare industry and healthcare spending on Immunic is currently unknown, and may adversely affect its business model.

In the United States and some foreign jurisdictions, legislative and regulatory changes and proposed changes regarding the healthcare system could prevent or delay marketing approval of Immunic’s drug candidates, restrict or regulate post-approval activities and affect its ability to profitably sell any drug candidates for which Immunic obtains marketing approval.

Immunic’s revenue prospects could be affected by changes in healthcare spending and policy in the United States and abroad. Immunic operates in a highly regulated industry and new laws, judicial decisions, or new interpretations of existing laws, or decisions, related to healthcare availability, the method of delivery or payment for healthcare products and services could negatively impact Immunic’s business, financial condition, results of operations and prospects. There is significant interest in promoting health care reform, as evidenced by the enactment in the United States of the Affordable Care Act. Among other things, the Affordable Care Act contains provisions that may reduce the profitability of drug products, including, for example, revising the methodology by which rebates owed by manufacturers for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, extending the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans, imposing mandatory discounts for certain Medicare Part D beneficiaries, and subjecting drug manufacturers to payment of an annual fee.

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of 2% per fiscal year, which started in April 2013, and, due to subsequent legislative amendments, will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, also reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers.

Immunic expects that additional healthcare reform measures and drug pricing regulations that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that it receives for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent Immunic from being able to generate revenue or commercialize Immunic’s drugs.

It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. Immunic cannot predict the reform initiatives that may be

 

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adopted in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

 

   

the demand for any drug products for which Immunic may obtain marketing approval;

 

   

Immunic’s ability to set a price that Immunic believes is fair for its products;

 

   

Immunic’s ability to obtain coverage and reimbursement approval for a product;

 

   

Immunic’s ability to generate revenues and achieve or maintain profitability; and

 

   

the level of taxes that Immunic is required to pay.

If Immunic fails to comply with environmental, health and safety laws and regulations, Immunic could become subject to fines or penalties or incur costs that could have a material adverse effect on its business, financial condition or results of operations.

Immunic’s research and development activities and its third-party manufacturers’ and suppliers’ activities involve the controlled storage, use, and disposal of hazardous materials, including the components of its product candidates and other hazardous compounds. Immunic and its manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at Immunic’s and its manufacturers’ facilities pending their use and disposal. Immunic cannot eliminate the risk of contamination, which could cause an interruption of its commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Although Immunic believes that the safety procedures utilized by it and its third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, Immunic cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, Immunic may be held liable for any resulting damages and such liability could exceed its resources and state or federal or other applicable authorities may curtail Immunic’s use of specified materials and/or interrupt its business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. Immunic cannot predict the impact of such changes and cannot be certain of its future compliance. Immunic does not currently carry biological or hazardous waste insurance coverage.

Other Risks Related to Immunic’s Business

Due to Immunic’s limited resources and access to capital, it must decide to prioritize development of its current product candidates for certain indications and at certain doses. These decisions may prove to have been wrong and may materially adversely affect Immunic’s business, financial condition, results of operations and prospects.

Because Immunic has limited resources and access to capital to fund its operations, it must decide which dosages and indications to pursue for the clinical development of its current product candidates and the amount of resources to allocate to each. Immunic’s decisions concerning the allocation of research, collaboration, management and financial resources toward dosages or therapeutic areas may not lead to the development of viable commercial products and may divert resources away from better opportunities. If Immunic makes incorrect determinations regarding the market potential of its current product candidates or misreads trends in the pharmaceutical industry, Immunic’s business, financial condition, results of operations and prospects could be materially adversely affected.

Immunic may not be able to win government, academic institution or non-profit contracts or grants.

From time to time, Immunic may apply for contracts or grants from government agencies, non-profit entities and academic institutions. Such contracts or grants can be highly attractive because they provide capital to fund the

 

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ongoing development of Immunic’s product candidates without diluting its shareholders. However, there is often significant competition for these contracts or grants. Entities offering contracts or grants may have requirements to apply for or to otherwise be eligible for certain contracts or grants that Immunic’s competitors may be able to satisfy that Immunic cannot. In addition, such entities may make arbitrary decisions as to whether to offer contracts or make grants, to whom the contracts or grants may or will be awarded and the size of the contracts or grants to each awardee. Even if Immunic is able to satisfy the award requirements, there is no guarantee that Immunic will be a successful awardee. Therefore, Immunic may not be able to win any contracts or grants in a timely manner, if at all.

If Immunic fails to attract and retain key management and scientific personnel, it may be unable to successfully develop or commercialize its product candidates.

Immunic’s success as a specialty pharmaceutical company depends on its continued ability to attract, retain and motivate highly qualified management and scientific and clinical personnel. The loss of the services of any of Immunic’s senior management could delay or prevent obtaining marketing approval or commercialization of its product candidates.

Immunic may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among specialty pharmaceutical businesses, and other pharmaceutical, biotechnology and other businesses. Immunic’s failure to attract, hire, integrate and retain qualified personnel could impair its ability to achieve its business objectives.

If a successful product liability claim or series of claims is brought against Immunic for uninsured liabilities or in excess of insured liabilities, Immunic could be forced to pay substantial damage awards.

The use of any of Immunic’s product candidates in clinical trials, and the sale of any approved products, may expose Immunic to product liability claims. Immunic currently maintains product liability insurance. Immunic intends to monitor the amount of coverage it maintains as the size and design of its clinical trials evolve and adjust the amount of coverage it maintains accordingly. However, there is no assurance that such insurance coverage will fully protect Immunic against some or all of the claims to which it might become subject. Immunic might not be able to maintain adequate insurance coverage at a reasonable cost or in sufficient amounts or scope to protect it against potential losses. In the event a claim is brought against Immunic, it might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against Immunic.

Furthermore, whether or not Immunic is ultimately successful in defending any such claims, Immunic might be required to direct financial and managerial resources to such defense and adverse publicity could result, all of which could harm Immunic’s business.

Immunic’s employees, independent contractors, investigators, contract research organizations, consultants, collaborators and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

Immunic is exposed to the risk that its employees and other third parties may engage in fraudulent conduct or other illegal activity. Misconduct by employees and other third parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to Immunic that violate FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, or laws that require the reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws 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,

 

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marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Immunic’s reputation. It is not always possible to identify and deter employee and other third-party misconduct, and the precautions Immunic takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Immunic from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against Immunic, and Immunic is not successful in defending itself or asserting its rights, those actions could have a significant impact on Immunic’s business, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of Immunic’s operations, any of which could adversely affect Immunic’s ability to operate.

Immunic will need to expand its organization and Immunic may experience difficulties in managing this growth, which could disrupt its operations.

As of December 31, 2018, Immunic had 12 full-time employees. As Immunic’s development and commercialization plans and strategies develop, Immunic expects to need additional managerial, operational, sales, marketing, financial, legal and other resources. Its management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these growth activities. As Immunic advances its product candidates through clinical trials, it will need to expand its development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for Immunic. As Immunic’s operations expand, Immunic expects that it will need to manage additional relationships with such third parties, as well as additional collaborators and suppliers.

Immunic may not be able to effectively manage the expansion of its operations, which may result in weaknesses in its infrastructure, operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Immunic’s expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If its management is unable to effectively manage its growth, its expenses may increase more than expected, its ability to generate and/or grow revenue could be reduced and Immunic may not be able to implement its business strategy. Immunic’s future financial performance and its ability to commercialize product candidates and compete effectively will depend, in part, on its ability to effectively manage any future growth.

Immunic’s internal computer systems, or those of its development collaborators, third-party clinical research organizations or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of Immunic’s product development programs.

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

 

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Risks Related to Commercialization of Immunic’s Product Candidates

Even if Immunic obtains the required regulatory approvals in the United States and other territories, the commercial success of its product candidates will depend on market awareness and acceptance of its product candidates.

Even if Immunic obtains marketing approval for its current product candidates or any other product candidates that it may develop or acquire in the future, the products may not gain market acceptance among physicians, key opinion leaders, healthcare payors, patients and the medical community. Market acceptance of any approved products depends on a number of factors, including:

 

   

the timing of market introduction;

 

   

the efficacy and safety of the product, as demonstrated in clinical trials;

 

   

the clinical indications for which the product is approved and the label approved by regulatory authorities for use with the product, including any precautions, warnings or contraindications that may be required on the label;

 

   

acceptance by physicians, key opinion leaders and patients of the product as a safe and effective treatment;

 

   

the cost, safety and efficacy of treatment in relation to alternative treatments;

 

   

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

 

   

the number and clinical profile of competing products;

 

   

the growth of drug markets in Immunic’s various indications;

 

   

relative convenience and ease of administration;

 

   

marketing and distribution support;

 

   

the prevalence and severity of adverse side effects; and

 

   

the effectiveness of Immunic’s sales and marketing efforts.

Market acceptance is critical to Immunic’s ability to generate revenue. Any product candidate, if approved and commercialized, may be accepted in only limited capacities or not at all. If any approved products are not accepted by the market to the extent that Immunic expects, Immunic may not be able to generate revenue and its business would suffer.

Immunic currently has limited marketing and sales experience. If Immunic is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its product candidates, Immunic may be unable to generate any revenue.

Immunic has never commercialized a product candidate, and Immunic currently has no marketing and sales organization. To the extent Immunic’s product candidates are approved for marketing, if Immunic is unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell its product candidates, Immunic may not be able to effectively market and sell its product candidates or generate product revenue.

Immunic has never commercialized a product candidate, and Immunic currently does not have marketing, sales or distribution capabilities for its product candidates. In order to commercialize any of Immunic’s products that receive marketing approval, it would have to build marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and Immunic may

 

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not be successful in doing so. In the event of successful development of Immunic’s product candidates, if Immunic elects to build a targeted specialty sales force, such an effort would be expensive and time consuming. Any failure or delay in the development of Immunic’s internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. Immunic may choose to collaborate with third parties that have their own sales forces and established distribution systems, in lieu of or to augment any sales force and distribution systems Immunic may create. If Immunic is unable to enter into collaborations with third parties for the commercialization of approved products, if any, on acceptable terms or at all, or if any such collaborator does not devote sufficient resources to the commercialization of Immunic’s product or otherwise fails in commercialization efforts, Immunic may not be able to successfully commercialize its product candidates if it receives marketing approval. If Immunic is not successful in commercializing its product candidates, either on its own or through collaborations with one or more third parties, its future revenue will be materially and adversely impacted.

If Immunic fails to enter into strategic relationships or collaborations, its business, financial condition, commercialization prospects and results of operations may be materially adversely affected.

Immunic’s product development programs and the potential commercialization of its current product candidates will require substantial additional cash to fund expenses. Therefore, in addition to financing the development of Immunic’s product candidates through additional equity financings or through debt financings, Immunic may decide to enter into collaborations with pharmaceutical or biopharmaceutical companies for the development and potential commercialization of its product candidates.

Immunic faces significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. Immunic may also be restricted under existing and future collaboration agreements from entering into agreements on certain terms with other potential collaborators. Immunic may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, Immunic may have to curtail the development of a particular product, reduce or delay its development program or one or more of its other development programs, delay its potential commercialization or reduce the scope of its sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Immunic elects to increase its expenditures to fund development or commercialization activities on its own, Immunic may need to obtain additional capital, which may not be available to Immunic on acceptable terms or at all. If Immunic does not have sufficient funds, Immunic will not be able to bring its product candidates to market and generate product revenue. If Immunic does enter into a new collaboration agreement, it could be subject to the following risks, each of which may materially harm Immunic’s business, commercialization prospects and financial condition:

 

   

Immunic may not be able to control the amount or timing of resources that the collaborator devotes to the product development program;

 

   

the collaborator may experience financial difficulties and thus not commit sufficient financial resources to the product development program;

 

   

Immunic may be required to relinquish important rights such as marketing, distribution and intellectual property rights;

 

   

a collaborator could move forward with a competing product developed either independently or in collaboration with third parties, including Immunic’s competitors; or

 

   

business combinations or significant changes in a collaborator’s business strategy may adversely affect Immunic’s willingness to complete its obligations under any arrangement.

Coverage and reimbursement may be limited or unavailable in certain market segments for Immunic’s product candidates, which could make it difficult for Immunic to sell its products profitably.

The pricing, coverage, and reimbursement of Immunic’s approved products, if any, must be sufficient to support its commercial efforts and other development programs, and the availability and adequacy of coverage and

 

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reimbursement by third-party payors, including governmental and private insurers, are essential for most patients to be able to afford expensive treatments. Sales of Immunic’s approved products, if any, will depend substantially, both domestically and abroad, on the extent to which the costs of its approved products, if any, will be paid for or reimbursed by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or government payors and private payors. If coverage and reimbursement are not available, or are available only in limited amounts, Immunic may have to subsidize or provide products for free or Immunic may not be able to successfully commercialize its products.

In addition, there is significant uncertainty related to the insurance coverage and reimbursement for newly approved products. In the United States, the principal decisions about coverage and reimbursement for new drugs are typically made by the CMS, an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel product candidates such as Immunic’s and what reimbursement codes its product candidates may receive if approved.

Outside the United States, international operations are generally subject to extensive governmental price controls and other price-restrictive regulations, and Immunic believes the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing and usage of products. In many countries, the prices of products are subject to varying price control mechanisms as part of national health systems. Price controls or other changes in pricing regulation could restrict the amount that Immunic is able to charge for its products, if any. Accordingly, in markets outside the United States, the potential revenue may be insufficient to generate commercially reasonable revenue and profits.

Moreover, increasing efforts by governmental and private payors in the United States and abroad to limit or reduce healthcare costs may result in restrictions on coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for its products. Immunic expects to experience pricing pressures in connection with products due to the increasing trend toward managed healthcare, including the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, and prescription drugs in particular, has and is expected to continue to increase in the future. As a result, profitability of Immunic’s products, if any, may be more difficult to achieve even if they receive regulatory approval.

Immunic faces substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than Immunic does.

The development and commercialization of new drug products is highly competitive. Immunic faces competition from major pharmaceutical companies, specialty pharmaceutical companies, biotechnology companies, universities and other research institutions worldwide with respect to its product candidates that it may seek to develop or commercialize in the future.

Many of Immunic’s competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than it does. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in its competitors. Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with Immunic’s competitors.

If Immunic’s competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than Immunic does, it could result in Immunic’s competitors

 

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establishing a strong market position before Immunic is able to enter the market. Third-party payors, including governmental and private insurers, also may encourage the use of generic products. Failure of Immunic’s product candidates to effectively compete against established treatment options or in the future with new products currently in development would harm Immunic’s business, financial condition, results of operations and prospects.

Price controls may be imposed in foreign markets, which may adversely affect Immunic’s future profitability.

In some countries, particularly member states of the European Union, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, Immunic may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of its product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of Immunic’s products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, Immunic’s business could be adversely affected.

Risks Related to Third Parties

Immunic relies on third-party suppliers and other third parties for production of its product candidates and Immunic’s dependence on these third parties may impair the advancement of its research and development programs and the development of its product candidates.

Immunic does not currently own or operate manufacturing facilities for clinical or commercial production of its product candidates. Immunic lacks the resources and the capability to manufacture any of its product candidates on a clinical or commercial scale. Instead, Immunic relies on, and expects to continue to rely on, third parties for the supply of raw materials and manufacture of drug supplies necessary to conduct its preclinical studies and clinical trials. Immunic’s reliance on third parties may expose Immunic to more risk than if Immunic was to manufacture its current product candidates or other products itself. Delays in production by third parties could delay Immunic’s clinical trials or have an adverse impact on any commercial activities. In addition, the fact that Immunic is dependent on third parties for the manufacture of and formulation of its product candidates means that Immunic is subject to the risk that the products may have manufacturing defects that Immunic has limited ability to prevent or control. Although Immunic oversees these activities to ensure compliance with its quality standards, budgets and timelines, Immunic has had and will continue to have less control over the manufacturing of its product candidates than potentially would be the case if it was to manufacture its product candidates. Further, the third parties Immunic deals with could have staffing difficulties, might undergo changes in priorities or may become financially distressed, which would adversely affect the manufacturing and production of Immunic’s product candidates. In addition, a third party could be acquired by, or enter into an exclusive arrangement with, one of Immunic’s competitors, which would adversely affect Immunic’s ability to access the formulations it requires.

The facilities used by Immunic’s current contract manufacturers and any future manufacturers to manufacture Immunic’s product candidates must be inspected by the FDA after Immunic submits its NDA. Immunic does not control the manufacturing process of, and is completely dependent on, its contract manufacturers for compliance with the regulatory requirements, known as cGMPs, for manufacture of both active drug substances and finished drug products. If Immunic’s contract manufacturers cannot successfully manufacture material that conforms to Immunic’s specifications and the strict regulatory requirements of the FDA or others, the FDA may refuse to

 

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approve Immunic’s NDA. If the FDA or a comparable foreign regulatory authority does not approve Immunic’s NDA because of concerns about the manufacture of its product candidates or if significant manufacturing issues arise in the future, Immunic may need to find alternative manufacturing facilities, which would significantly impact its ability to develop its product candidates, obtain marketing approval of its NDA or to continue to market its product candidates, if approved. Although Immunic is ultimately responsible for ensuring compliance with these regulatory requirements, Immunic does not have day-to-day control over a contract manufacturing organization, or CMO, or other third-party manufacturer’s compliance with applicable laws and regulations, including cGMPs and other laws and regulations, such as those related to environmental health and safety matters. Any failure to achieve and maintain compliance with these laws, regulations and standards could subject Immunic to the risk that Immunic may have to suspend the manufacturing of its product candidates or that obtained approvals could be revoked, which would adversely affect Immunic’s business and reputation. In addition, third-party contractors, such as Immunic’s CMOs, may elect not to continue to work with Immunic due to factors beyond Immunic’s control. They may also refuse to work with Immunic because of their own financial difficulties, business priorities or other reasons, at a time that is costly or otherwise inconvenient for Immunic. If Immunic was unable to find adequate replacement or another acceptable solution in time, Immunic’s clinical trials could be delayed or its commercial activities could be harmed.

Problems with the quality of the work of third parties, may lead Immunic to seek to terminate its working relationships and use alternative service providers. However, making this change may be costly and may delay clinical trials. In addition, it may be very challenging, and in some cases impossible, to find replacement service providers that can develop and manufacture Immunic’s drug candidates in an acceptable manner and at an acceptable cost and on a timely basis. The sale of products containing any defects or any delays in the supply of necessary services could adversely affect Immunic’s business, financial condition, results of operations, and prospects.

Growth in the costs and expenses of components or raw materials may also adversely affect Immunic’s business, financial condition, results of operations, and prospects. Supply sources could be interrupted from time to time and, if interrupted, supplies may not be resumed (whether in part or in whole) within a reasonable timeframe and at an acceptable cost or at all.

Immunic plans to rely on third parties to conduct clinical trials for its product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, it may cause delays in commencing and completing clinical trials of Immunic’s product candidates or Immunic may be unable to obtain marketing approval for or commercialize its product candidates.

Clinical trials must meet applicable FDA and foreign regulatory requirements. Immunic does not have the ability to independently conduct phase 2 or phase 3 clinical trials for any of its product candidates. Immunic expects to rely on third parties, such as CROs, medical institutions, clinical investigators and contract laboratories, to conduct all of its clinical trials of its product candidates; however, Immunic remains responsible for ensuring that each of its clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other foreign regulatory authorities require Immunic to comply with IND and human subject protection regulations and current good clinical practice standards, commonly referred to as GCPs, for conducting, monitoring, recording, and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Immunic’s reliance on third parties does not relieve Immunic of these responsibilities and requirements. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If Immunic or any of its third-party contractors fail to comply with applicable GCPs, the clinical data generated in Immunic’s clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Immunic to perform additional clinical trials before approving its marketing applications. There is no assurance that upon inspection by a given regulatory authority, such regulatory authority will determine that any of Immunic’s clinical trials comply with GCPs. Immunic’s failure to comply with these regulations may require Immunic to repeat clinical trials, which would delay the marketing approval process.

 

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There are significant requirements imposed on Immunic and on clinical investigators who conduct clinical trials that Immunic sponsors. Although Immunic is responsible for selecting qualified CROs or clinical investigators, providing them with the information they need to conduct the clinical trials properly, ensuring proper monitoring of the clinical trials, and ensuring that the clinical trials are conducted in accordance with the general investigational plan and protocols contained in the IND, Immunic cannot ensure that the CROs or clinical investigators will maintain compliance with all regulatory requirements at all times. The pharmaceutical industry has experienced cases where clinical investigators have been found to incorrectly record data, omit data, or even falsify data. Immunic cannot ensure that the CROs or clinical investigators in Immunic’s trials will not make mistakes or otherwise compromise the integrity or validity of data, any of which would have a significant negative effect on Immunic’s ability to obtain marketing approval, its business, and its financial condition.

Immunic or the third parties it relies on may encounter problems in clinical trials that may cause Immunic or the FDA or foreign regulatory agencies to delay, suspend or terminate Immunic’s clinical trials at any phase. These problems could include the possibility that Immunic may not be able to manufacture sufficient quantities of materials for use in its clinical trials, conduct clinical trials at its preferred sites, enroll a sufficient number of patients for its clinical trials at one or more sites, or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, Immunic, the FDA or foreign regulatory agencies may suspend clinical trials of Immunic’s product candidates at any time if Immunic or they believe the subjects participating in the trials are being exposed to unacceptable health risks, whether as a result of adverse events occurring in Immunic’s trials or otherwise, or if Immunic or they find deficiencies in the clinical trial process or conduct of the investigation.

The FDA and foreign regulatory agencies could also require additional clinical trials before or after granting of marketing approval for any products, which would result in increased costs and significant delays in the development and commercialization of such products and could result in the withdrawal of such products from the market after obtaining marketing approval. Immunic’s failure to adequately demonstrate the safety and efficacy of a product candidate in clinical development could delay or prevent obtaining marketing approval of the product candidate and, after obtaining marketing approval, data from post-approval studies could result in the product being withdrawn from the market, either of which would likely have a material adverse effect on Immunic’s business.

Immunic may be unable to realize the potential benefits of any collaboration.

Even if Immunic is successful in entering into a collaboration with respect to the development and/or commercialization of one or more product candidates, there is no guarantee that the collaboration will be successful. Collaborations may pose a number of risks, including:

 

   

collaborators often have significant discretion in determining the efforts and resources that they will apply to the collaboration, and may not commit sufficient resources to the development, marketing or commercialization of the product or products that are subject to the collaboration;

 

   

collaborators may not perform their obligations as expected;

 

   

any such collaboration may significantly limit Immunic’s share of potential future profits from the associated program, and may require it to relinquish potentially valuable rights to its current product candidates, potential products or proprietary technologies or grant licenses on terms that are not favorable to Immunic;

 

   

collaborators may cease to devote resources to the development or commercialization of Immunic’s product candidates if the collaborators view its product candidates as competitive with their own products or product candidates;

 

   

disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the course of development, might cause delays or termination of the development or commercialization of product candidates, and might result in legal proceedings, which would be time consuming, distracting and expensive;

 

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collaborators may be impacted by changes in their strategic focus or available funding, or business combinations involving them, which could cause them to divert resources away from the collaboration;

 

   

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

 

   

the collaborations may not result in Immunic achieving revenues to justify such transactions; and

 

   

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

As a result, a collaboration may not result in the successful development or commercialization of Immunic’s product candidates.

Immunic enters into various contracts in the normal course of its business in which Immunic indemnifies the other party to the contract. In the event Immunic has to perform under these indemnification provisions, it could have a material adverse effect on its business, financial condition and results of operations.

In the normal course of business, Immunic periodically enters into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification provisions. With respect to Immunic’s academic and other research agreements, Immunic typically indemnifies the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which Immunic has secured licenses, and from claims arising from Immunic’s or its sublicensees’ exercise of rights under the agreement.

Should Immunic’s obligation under an indemnification provision exceed applicable insurance coverage or if Immunic were denied insurance coverage, Immunic’s business, financial condition and results of operations could be adversely affected. Similarly, if Immunic is relying on a collaborator to indemnify Immunic and the collaborator is denied insurance coverage or the indemnification obligation exceeds the applicable insurance coverage, and if the collaborator does not have other assets available to indemnify Immunic, its business, financial condition and results of operations could be adversely affected.

If Immunic’s contractors fail to comply with continuing regulations, Immunic or they may be subject to enforcement action that could adversely affect Immunic.

If any of Immunic’s contractors fail to comply with the requirements of the FDA and other applicable U.S. or foreign governmental or regulatory authorities or previously unknown problems with Immunic’s products, manufacturers or manufacturing processes are discovered, Immunic or the contractor could be subject to administrative or judicially imposed sanctions, including: restrictions on the products, the manufacturers or manufacturing processes Immunic uses, warning letters, civil or criminal penalties, fines, injunctions, product seizures or detentions, import bans, voluntary or mandatory product recalls and publicity requirements, suspension or withdrawal of regulatory approvals, total or partial suspension of production, and refusal to approve pending applications for marketing approval of new products to approved applications.

Risks Related to Immunic’s Intellectual Property

Immunic’s proprietary rights may not adequately protect its technologies and product candidates.

Immunic’s commercial success will depend in part on its ability to obtain additional patents and protect its existing patent position as well as its ability to maintain adequate protection of other intellectual property for its technologies, product candidates, and any future products in the United States and other countries. If Immunic does not adequately protect its intellectual property, competitors may be able to use Immunic’s technologies and erode or negate any competitive advantage Immunic may have, which could harm Immunic’s business and

 

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ability to achieve profitability. The laws of some foreign countries do not protect Immunic’s proprietary rights to the same extent or in the same manner as U.S. laws, and Immunic may encounter significant problems in protecting and defending its proprietary rights in these countries. Immunic will be able to protect its proprietary rights from unauthorized use by third parties only to the extent that Immunic’s proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

Immunic applies for patents covering both its technologies and product candidates, as it deems appropriate. However, Immunic may fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Immunic’s existing patents and any future patents it obtains may not be sufficiently broad to prevent others from practicing its technologies or from developing competing products and technologies. Immunic cannot be certain that its patent applications will be approved or that any patents issued will adequately protect Immunic’s intellectual property.

Moreover, the patent positions of pharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles are evolving and remain unresolved. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, Immunic does not know whether:

 

   

Immunic or its licensors were the first to make the inventions covered by each of Immunic’s issued patents and pending patent applications;

 

   

Immunic or its licensors were the first to file patent applications for these inventions;

 

   

any of the patents that cover Immunic’s product candidates will be eligible to be listed in the FDA’s compendium of “Approved Drug Products with Therapeutic Equivalence Evaluation,” sometimes referred to as the FDA’s Orange Book;

 

   

others will independently develop similar or alternative technologies or duplicate any of Immunic’s technologies;

 

   

any of Immunic’s or its licensors’ pending patent applications will result in issued patents;

 

   

any of Immunic’s or its licensors’ patents will be valid or enforceable;

 

   

any patents issued to Immunic or its licensors and collaborators will provide Immunic with any competitive advantages, or will be challenged by third parties;

 

   

Immunic will develop additional proprietary technologies that are patentable;

 

   

the U.S. government will exercise any of its statutory rights to Immunic’s intellectual property that was developed with government funding; or

 

   

Immunic’s business may infringe the patents or other proprietary rights of others.

The actual protection afforded by a patent varies based on products or processes, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country, the validity and enforceability of the patents and Immunic’s financial ability to enforce its patents and other intellectual property. Immunic’s ability to maintain and solidify its proprietary position for its products will depend on its success in obtaining effective claims and enforcing those claims once granted. Immunic’s issued patents and those that may issue in the future, or those licensed to Immunic, may be challenged, narrowed, invalidated or circumvented, and the rights granted under any issued patents may not provide Immunic with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of Immunic’s product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

 

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Immunic may also rely on trade secrets to protect some of its technology, especially where Immunic does not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While Immunic uses reasonable efforts to protect its trade secrets, Immunic’s or any of its collaborators’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose Immunic’s proprietary information to competitors and Immunic may not have adequate remedies in respect of that disclosure. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than U.S. courts to protect trade secrets. If Immunic’s competitors independently develop equivalent knowledge, methods and know-how, Immunic would not be able to assert its trade secrets against them and Immunic’s business could be harmed.

Immunic is a party to license agreements under which Immunic licenses intellectual property and receives commercialization rights relating to certain of its Product Candidates. If Immunic fails to comply with obligations in such agreements or otherwise experience disruptions to its business relationships with its licensors, Immunic could lose license rights that are important to its business; any termination of such agreements would adversely affect Immunic’s business.

For instance, in October 2018, Immunic and Daiichi Sankyo Co., Ltd., Tokyo, Japan, entered into a license and option agreement which grants Immunic an exclusive option to obtain the exclusive right to license a group of compounds, designated by Immunic as IMU-856. Under this agreement, Immunic has the rights for commercialization of IMU-856 in all countries including the U.S., Europe and Japan.

The loss of the licenses granted to Immunic under its agreements with these licensors or the rights provided therein would prevent Immunic from developing, manufacturing or marketing products covered by the license or subject to supply commitments, and could materially harm Immunic’s business, financial condition, results of operations and prospects. See “Immunic Business—Intellectual Property Licenses and Royalties” for a description of the material terms of these agreements.

Immunic may not be able to protect its intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and Immunic’s intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, Immunic may not be able to prevent third parties from practicing Immunic’s inventions in all countries outside the United States, or from selling or importing products made using Immunic’s inventions in and into the United States or other jurisdictions. Competitors may use Immunic’s technologies in jurisdictions where Immunic has not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where Immunic has patent protection, but enforcement rights are not as strong as those in the United States. These products may compete with Immunic’s product candidates in jurisdictions where Immunic does not have any issued patents and Immunic’s patent claims or other intellectual rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for Immunic to stop the infringement of its patents generally. Proceedings to enforce Immunic’s patent rights in foreign jurisdictions could result in substantial costs and divert Immunic’s efforts and attention from other aspects of its business, could put its patents at risk of being invalidated or interpreted narrowly and its patent applications at risk of not issuing and could provoke third parties to assert claims against Immunic. Immunic may not prevail in any lawsuits that it initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Immunic’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that it develops or licenses.

 

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If Immunic does not obtain patent term extension in the United States under the Hatch-Waxman Act and in foreign countries under similar legislation, thereby potentially extending the term of marketing exclusivity for its product candidates, Immunic’s business may be materially harmed.

Depending on the timing, duration and specifics of FDA marketing approval of Immunic’s product candidates, if any, one of the U.S. patents covering each of such approved product(s) or the use thereof may be eligible for up to five years of patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be extended per FDA-approved product. Patent term extension or special protection certificates (SPC) also may be available in certain foreign countries upon regulatory approval of Immunic’s product candidates. Nevertheless, Immunic may not be granted patent term extension either in the United States or in any foreign country because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or this being impossible or otherwise failing to satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority could be less than Immunic requests.

If Immunic is unable to obtain patent term extension or restoration, or the term of any such extension is less than Immunic or its collaborators request, the period during which Immunic will have the right to exclusively market its product will be shortened and Immunic’s competitors may obtain approval of competing products following Immunic’s patent expiration, and Immunic’s revenue could be reduced, possibly materially.

Immunic may not identify relevant patents or may incorrectly interpret the relevance, scope or expiration of a patent, which may adversely affect Immunic’s ability to develop and market its product candidates.

Immunic cannot guarantee that any of its patent searches or analyses, including but not limited to the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can Immunic be certain that Immunic has identified each and every patent and pending application in the United States and abroad that is relevant to or necessary for the commercialization of its product candidates in any jurisdiction.

The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Immunic’s interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact its ability to market its product candidates. Immunic may incorrectly determine that its product candidates are not covered by a third-party patent.

Many patents may cover a marketed product, including but not limited to patents covering the composition, methods of use, formulations, production processes and purification processes of or for the product. The identification of all patents and their expiration dates relevant to the production and sale of a therapeutic product is extraordinarily complex and requires sophisticated legal knowledge in the relevant jurisdiction. It may be impossible to identify all patents in all jurisdictions relevant to a marketed product. Immunic’s determination of the expiration date of any patent in the United States or abroad that it considers relevant may be incorrect, which may negatively impact its ability to develop and market its product candidates.

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

The United States Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent prosecution process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patent and/or pending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a patent or patent application. Immunic employs an outside firm and relies on its outside counsel to pay these fees. While an inadvertent lapse may sometimes be

 

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cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If Immunic fails to maintain the patents and patent applications directed to its product candidates, Immunic’s competitors might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect on Immunic’s business.

The patent protection for Immunic’s product candidates may expire before Immunic is able to maximize their commercial value, which may subject Immunic to increased competition and reduce or eliminate its opportunity to generate product revenue.

The patents for Immunic’s product candidates have varying expiration dates and, if these patents expire, Immunic may be subject to increased competition and Immunic may not be able to recover its development costs or market any of its approved products profitably. In some of the larger potential market territories, such as the United States and Europe, patent term extension or restoration may be available to compensate for time taken during aspects of the product’s development and regulatory review. However, Immunic cannot be certain that such an extension will be granted, or if granted, what the applicable time period or the scope of patent protection afforded during any extension period will be. In addition, even though some regulatory authorities may provide some other exclusivity for a product under their own laws and regulations, Immunic may not be able to qualify the product or obtain the exclusive time period. If Immunic is unable to obtain patent term extension/restoration or some other exclusivity, Immunic could be subject to increased competition and its opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, Immunic may not have sufficient time to recover its development costs prior to the expiration of its U.S. and foreign patents.

Immunic may become involved in lawsuits to protect its patents or other intellectual property rights, which could be expensive, time-consuming and ultimately unsuccessful.

Competitors may infringe Immunic’s patents or other intellectual property rights. To counter infringement or unauthorized use, Immunic may be required to file infringement claims, directly or through its licensors, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of Immunic’s licensor is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that Immunic’s patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of the patents Immunic licenses at risk of being invalidated or interpreted narrowly and could put Immunic’s licensors’ patent applications at risk of not issuing.

Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to patents of Immunic’s licensors and patent applications or those of Immunic’s current or future collaborators. An unfavorable outcome could require Immunic to cease using the technology or to attempt to license rights to it from the prevailing party. Immunic’s business could be harmed if a prevailing party does not offer Immunic a license on terms that are acceptable to Immunic. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of Immunic’s management and other employees. Immunic may not be able to prevent, alone or with its collaborators, misappropriation of its proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

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

 

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Third-party claims of intellectual property infringement or misappropriation may adversely affect Immunic’s business and could prevent Immunic from developing or commercializing its product candidates.

Immunic’s commercial success depends in part on Immunic not infringing the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex-parte review and inter-parte reexamination and post-grant review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which Immunic is developing and may develop its product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that Immunic’s product candidates may be subject to claims of infringement of the patent rights of third parties. If a third party claims that Immunic infringes on their products or technology, Immunic could face a number of issues, including:

 

   

infringement and other intellectual property claims which, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from Immunic’s core business;

 

   

substantial damages for past infringement, which Immunic may have to pay if a court decides that its product infringes on a competitor’s patent;

 

   

a court prohibiting Immunic from selling or licensing its product unless the patent holder licenses the patent to Immunic, which the collaborator would not be required to do;

 

   

if a license is available from a patent holder, Immunic may have to pay substantial royalties or grant cross licenses to Immunic’s patents; and

 

   

redesigning Immunic’s processes so they do not infringe, which may not be possible or could require substantial funds and time.

Third parties may assert that Immunic is employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Immunic’s product candidates, that Immunic failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until issued as patents. Except for the preceding exceptions, patent applications in the United States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering Immunic’s product candidates could have been filed by others without the knowledge of Immunic or its licensors. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover Immunic’s product candidates or the use or manufacture of its product candidates. Immunic may also face a claim of misappropriation if a third party believes that it inappropriately obtained and used trade secrets of such third party. If Immunic is found to have misappropriated a third party’s trade secrets, Immunic may be prevented from further using such trade secrets, limiting its ability to develop its product candidates, and Immunic may be required to pay damages.

If any third-party patents were held by a court of competent jurisdiction to cover aspects of Immunic’s materials, formulations, methods of manufacture or methods for treatment, the holders of any such patents would be able to block Immunic’s ability to develop and commercialize the applicable product candidate until such patent expired or unless Immunic obtains a license. These licenses may not be available on acceptable terms, if at all. Even if Immunic was able to obtain a license, the rights may be nonexclusive, which could result in Immunic’s competitors gaining access to the same intellectual property.

Ultimately, Immunic could be prevented from commercializing a product, or be forced to cease some aspect of its business operations, if, as a result of actual or threatened patent infringement claims, Immunic is unable to enter into licenses on acceptable terms. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim

 

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proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of Immunic’s product candidates, programs, or intellectual property could be diminished. Accordingly, the market price of Immunic’s common stock may decline.

Parties making claims against Immunic may obtain injunctive or other equitable relief, which could effectively block Immunic’s ability to further develop and commercialize one or more of its product candidates. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if Immunic was to ultimately prevail, or to settle at an early stage, such litigation could burden Immunic with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of Immunic’s management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against Immunic, Immunic may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign its infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. In addition, the uncertainties associated with litigation could have a material adverse effect on Immunic’s ability to raise the funds necessary to continue its clinical trials, continue its research programs, license necessary technology from third parties, or enter into development collaborations that would help Immunic bring its product candidates to market.

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

As is the case with other pharmaceutical companies, Immunic’s success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents and patent rights. Obtaining and enforcing patents and patent rights in the specialty pharmaceutical industry involves both technological and legal complexity, and therefore, is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, several recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Immunic’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents and patent rights, once obtained.

For Immunic’s U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, or the America Invents Act, or AIA, was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted, reviewed after issuance, and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associated with the AIA. It is not clear what other, if any, impact the AIA will have on the operation of Immunic’s business. Moreover, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of patent rights, all of which could have a material adverse effect on Immunic’s business and financial condition.

An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-inventor-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before a licensor or Immunic could therefore be awarded a patent covering an invention of Immunic’s even if said licensor Immunic had made the invention before it was made by the third party. This will require Immunic to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, Immunic’s ability to obtain and maintain valid and enforceable patent rights depends on whether the differences between the licensor’s or Immunic’s technology and the prior art allow Immunic’s technology to be patentable over the prior art. Since patent applications in the United States and most other

 

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countries are confidential for a period of time after filing, Immunic cannot be certain that a licensor or it was the first to either (a) file any patent application related to Immunic’s product candidates or (b) invent any of the inventions claimed in Immunic’s patents or patent applications.

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO. This applies to all U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid as unpatentable even though the same evidence may be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate patent rights that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Immunic’s ability to obtain new patents or to enforce its existing patents and patents that Immunic might obtain in the future.

Because of the expense and uncertainty of litigation, Immunic may not be in a position to enforce its intellectual property rights against third parties.

Because of the expense and uncertainty of litigation, Immunic may conclude that even if a third party is infringing the patents of Immunic’s licensors or Immunic or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of Immunic or its shareholders. In such cases, Immunic may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.

Intellectual property rights do not address all potential threats to Immunic’s competitive advantage.

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

 

   

Others may be able to make products that are similar to Immunic’s product candidates but that are not covered by the claims of the patents that Immunic licenses from others or may license or own in the future.

 

   

Others may independently develop similar or alternative technologies or otherwise circumvent any of Immunic’s technologies without infringing its intellectual property rights.

 

   

Any of Immunic’s collaborators might not have been the first to conceive and reduce to practice the inventions covered by the patents or patent applications that Immunic licenses or will, in the future, own or license.

 

   

Any of Immunic’s collaborators might not have been the first to file patent applications covering certain of the patents or patent applications that Immunic licenses or will, in the future, license.

 

   

Issued patents that have been licensed to Immunic may not provide Immunic with any competitive advantage, or may be held invalid or unenforceable, as a result of legal challenges by Immunic’s competitors.

 

   

Immunic’s competitors might conduct research and development activities in countries where Immunic does not have license rights, or in countries where research and development safe harbor laws exist, and then use the information learned from such activities to develop competitive products for sale in Immunic’s major commercial markets.

 

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Ownership of patents or patent applications licensed to Immunic may be challenged by third parties.

 

   

The patents of third parties or pending or future applications of third parties, if issued, may have an adverse effect on Immunic’s business.

Some of Immunic’s intellectual property relies on trade secrets.

Immunic has not filed patents for or has publicly disclosed some of the important properties of its development candidates. Despite adequate efforts by Immunic, those trade secrets may become public knowledge thereby potentially allowing competitors to develop similar products.

Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and protect other proprietary information.

Immunic considers proprietary trade secrets and/or confidential know-how and unpatented know-how to be important to its business. Immunic may rely on trade secrets and/or confidential know-how to protect its technology, especially where patent protection is believed by Immunic to be of limited value. However, trade secrets and/or confidential know-how can be difficult to maintain as confidential.

To protect this type of information against disclosure or appropriation by competitors, Immunic’s policy is to require its employees, consultants, contractors and advisors to enter into confidentiality agreements with Immunic. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose Immunic’s confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party obtained illegally and is using trade secrets and/or confidential know-how is expensive, time consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction.

Failure to obtain or maintain trade secrets and/or confidential know-how trade protection could adversely affect Immunic’s competitive position. Moreover, Immunic’s competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, Immunic’s competitors could limit Immunic’s use of its trade secrets and/or confidential know-how.

Immunic may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of Immunic’s product candidates. It may be necessary for Immunic to use the patented or proprietary technology of third parties to commercialize its product candidates, in which case Immunic would be required to obtain a license from these third parties. Such a license may not be available on commercially reasonable terms or at all, which could materially harm Immunic’s business.

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

Immunic has received confidential and proprietary information from third parties. In addition, Immunic employs individuals who were previously employed at other biotechnology or pharmaceutical companies. Immunic may be subject to claims that Immunic or its employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or Immunic’s employees’ former employers.

 

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Further, Immunic may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing Immunic’s product candidates. Immunic may also be subject to claims that former employees, consultants, independent contractors, collaborators or other third parties have an ownership interest in Immunic’s patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging Immunic’s right to and use of confidential and proprietary information. If Immunic fails in defending any such claims, in addition to paying monetary damages, Immunic may lose its rights therein. Such an outcome could have a material adverse effect on Immunic’s business.

Even if Immunic is successful in defending against these claims, litigation could result in substantial cost and be a distraction to Immunic’s management and employees.

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

Immunic may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in its patents and other intellectual property. Immunic may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing Immunic’s product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Immunic fails in defending any such claims, in addition to paying monetary damages, Immunic may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on Immunic’s business. Even if Immunic is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Immunic’s reliance on third parties requires Immunic to share its trade secrets, which increases the possibility that a competitor will discover them or that Immunic’s trade secrets will be misappropriated or disclosed.

Because Immunic relies on third parties to assist with research and development and to manufacture its product candidates, Immunic must, at times, share trade secrets with them. Immunic seeks to protect its proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with its advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose Immunic’s confidential information, including its trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by Immunic’s competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that Immunic’s proprietary position is based, in part, on its know-how and trade secrets, a competitor’s discovery of Immunic’s trade secrets or other unauthorized use or disclosure would impair Immunic’s competitive position and may have a material adverse effect on its business.

In addition, these agreements typically restrict the ability of Immunic’s advisors, employees, third-party contractors and consultants to publish data potentially relating to Immunic’s trade secrets, although Immunic’s agreements may contain certain limited publication rights. For example, any academic institution that Immunic may collaborate with in the future will usually expect to be granted rights to publish data arising out of such collaboration, provided that Immunic is notified in advance and given the opportunity to delay publication for a limited time period in order for Immunic to secure patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. In the future Immunic may also conduct joint research and development programs that may require Immunic to share trade secrets under the terms of its research and development or similar agreements. Despite Immunic’s efforts to protect its trade secrets, Immunic’s competitors may discover its trade secrets, either through breach of Immunic’s agreements with third parties, independent development or publication of

 

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information by any of Immunic’s third-party collaborators. A competitor’s discovery of Immunic’s trade secrets would impair Immunic’s competitive position and have an adverse impact on its business.

If Immunic’s trademarks and trade names are not adequately protected, then Immunic may not be able to build name recognition in its markets of interest and its business may be adversely affected.

If Immunic’s trademarks and trade names are not adequately protected, then Immunic may not be able to build name recognition in its markets of interest and its business may be adversely affected. Immunic’s unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. Immunic may not be able to protect its rights to these trademarks and trade names, which Immunic needs to build name recognition among potential collaborators or customers in its markets of interest. At times, competitors may adopt trade names or trademarks similar to Immunic’s, thereby impeding Immunic’s ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of Immunic’s unregistered trademarks or trade names. Over the long term, if Immunic is unable to successfully register its trademarks and trade names and establish name recognition based on its trademarks and trade names, then Immunic may not be able to compete effectively and its business may be adversely affected. Immunic’s efforts to enforce or protect its proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact Immunic’s financial condition or results of operations.

Risks Related to the Company following the Transaction

In determining whether you should approve the Transaction, the issuance of shares of Vital Therapies common stock and other matters related to the Transaction you should carefully read the following risk factors in addition to the risks described above.

The market price of the company’s common stock is expected to be volatile, and the market price of its common stock may drop following the Transaction.

The market price of the company’s common stock following the Transaction could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the company’s common stock to fluctuate include:

 

   

reports on or the perception of clinical progress, or the lack thereof;

 

   

the ability of the company to obtain regulatory approvals for its product candidates, and delays or failures to obtain such approvals;

 

   

failure of any of the company’s product candidates, if approved, to achieve commercial success;

 

   

failure to maintain its existing third-party license and supply agreements;

 

   

failure by the company or its licensors to prosecute, maintain, or enforce its intellectual property rights;

 

   

changes in laws or regulations applicable to its product candidates;

 

   

any inability to obtain adequate supply of its product candidates or the inability to do so at acceptable prices;

 

   

adverse regulatory authority decisions;

 

   

introduction of new products, services, or technologies by its competitors;

 

   

failure to meet or exceed financial and development projections that the company may provide to the public;

 

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failure to meet or exceed the financial and development projections of the investment community;

 

   

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

   

announcements of significant acquisitions, strategic collaborations, joint ventures, or capital commitments by the company or its competitors;

 

   

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

 

   

additions or departures of key personnel;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

if securities or industry analysts do not publish research or reports about its business, or if they issue adverse or misleading opinions regarding its business and stock;

 

   

changes in the market valuations of similar companies;

 

   

general market or macroeconomic conditions;

 

   

sales of common stock by the company or its stockholders in the future;

 

   

trading volume of its common stock;

 

   

announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

   

adverse publicity relating to the markets in which the company operates, including with respect to other products and potential products in such markets;

 

   

the introduction of technological innovations or new therapies that compete with potential products of the company;

 

   

changes in the structure of health care payment systems; and

 

   

period-to-period fluctuations in the company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the company’s profitability and reputation.

Additionally, a decrease in the stock price of the company may cause the company’s common stock to no longer satisfy the continued listing standards of The Nasdaq Global Market. If the company is not able to maintain the requirements for listing on The Nasdaq Global Market, it could be delisted, which could have a materially adverse effect on its ability to raise additional funds as well as the price and liquidity of its common stock.

The company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

The company will incur significant legal, accounting and other expenses that Immunic did not incur as a private company, including costs associated with public company reporting requirements. The company will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act,

 

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as well as new rules implemented by the SEC and Nasdaq. These rules and regulations are expected to increase the company’s legal and financial compliance costs and to make some activities more time-consuming and costly. For example, the company’s management team will consist of the executive officers of Immunic prior to the Transaction, some of whom have not previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations may also make it difficult and expensive for the company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the company to attract and retain qualified individuals to serve on the company’s board of directors or as executive officers of the company, which may adversely affect investor confidence in the company and could cause the company’s business or stock price to suffer.

Because the Transaction will have the same effect as a reverse merger, this registration statement may be subject to heightened scrutiny by the SEC, and the company may not be able to attract the attention of major brokerage firms.

Additional risks may exist as a result of the company becoming a public reporting company through a transaction that will be treated the same as a “reverse merger.” Certain SEC rules are more restrictive when applied to reverse merger companies, such as the ability of stockholders to re-sell their shares of common stock pursuant to Rule 144, and the SEC may subject this registration statement, which is being filed with respect to the shares of Vital Therapies common stock received by investors in the Transaction, to heightened scrutiny.

In addition, security analysts of major brokerage firms may not provide coverage of the company since, because it became public through a “reverse merger” type of transaction, there is no incentive to brokerage firms to recommend the purchase of its common stock. In addition, because of past abuses and fraud concerns stemming primarily from a lack of public information about newly public businesses, there are many people in the securities industry and business in general who view “reverse mergers” and similar transactions with suspicion. Without brokerage firm and analyst coverage, there may be fewer people aware of the company and its business, resulting in fewer potential buyers of its common stock, less liquidity and lower stock prices for its investors than would be the case if it had become a public reporting company in a more traditional manner. There is no assurance that brokerage firms will want to provide analyst coverage of the company’s capital stock or business in the future.

Anti-takeover provisions in the company’s organizational documents and Delaware law might discourage or delay acquisition attempts for the company that you might consider favorable.

The company’s amended and restated certificate of incorporation and bylaws will continue (unless amended after the closing of the Transaction) to contain provisions that may delay or prevent an acquisition or change in control of the company. The company’s amended and restated certificate of incorporation and second amended and restated bylaws include provisions that:

 

   

authorize the company’s board of directors to issue without further action by the stockholders, up to 20,000,000 shares of undesignated preferred stock;

 

   

require that any action to be taken by the company’s stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

specify that special meetings of the company’s stockholders can be called only by a supermajority (75%) vote of the company’s directors then in office;

 

   

provide that the company’s board of directors may amend or repeal the company’s bylaws only pursuant to a supermajority (75%) vote of the company’s directors then in office;

 

   

provide that the company’s stockholders may amend or repeal the company’s bylaws only pursuant to a supermajority (75% and majority of the minority, if applicable) vote of the outstanding shares of the company’s capital stock;

 

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require in general the approval of a supermajority (75% and majority of the minority, if applicable) vote of the company’s outstanding shares of capital stock to amend or repeal certain provisions of the company’s amended and restated certificate of incorporation;

 

   

require the approval of a supermajority (75% and majority of the minority, if applicable) vote of the company’s outstanding shares of capital stock to approve the sale or liquidation of the company;

 

   

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of the company’s stockholders, including proposed nominations of persons for election to the company’s board of directors;

 

   

provide that directors may be removed only for cause by a supermajority (75%) vote of the company’s outstanding shares of capital stock;

 

   

provide that vacancies on the company’s board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

provide that in general the number of directors on the company’s board may only be fixed from time to time by a supermajority (75%) vote of the company’s directors then in office; and

 

   

establish that the company’s board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms.

Further, as a Delaware corporation, the company will also be subject to provisions of Delaware law, which may impair a takeover attempt that the company’s stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of the company, including actions that its stockholders may deem advantageous, or negatively affect the trading price of its common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause the company to take other corporate actions you desire.

The company may experience adverse consequences because of required indemnification of officers and directors.

Provisions of the company’s amended and restated certificate of incorporation and bylaws provide that it will indemnify any director and officer as to liabilities incurred in their capacity as a director or officer and on those terms and conditions set forth therein to the fullest extent of Delaware law. Further, the company may purchase and maintain insurance on behalf of any such persons whether or not the company would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by the company and prevent any recovery from its officers, directors, agents and employees for losses incurred by the company as a result of their actions.

Vital Therapies and Immunic do not anticipate that the company will pay any cash dividends in the foreseeable future.

The current expectation is that the company will retain its future earnings, if any, to fund the development and growth of the company’s business. As a result, capital appreciation, if any, of the common stock of the company will be your sole source of gain, if any, for the foreseeable future.

An active trading market for the company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the Transaction, there has been no public market for Immunic’s common stock. Following the closing of the Transaction, an active trading market for the company’s shares of common stock may never develop or be sustained. If an active market for the company’s common stock does not develop or is not sustained, it may be difficult for stockholders to sell their shares at an attractive price or at all.

 

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Future sales of shares by existing stockholders could cause the company’s stock price to decline.

If existing stockholders of Vital Therapies and Immunic sell, or indicate an intention to sell, substantial amounts of the company’s common stock in the public market after legal restrictions on resale discussed in this proxy statement/prospectus lapse, the trading price of the common stock of the company could decline. Based on shares outstanding as of January 15, 2019, shares expected to be issued upon completion of the Transaction, and assuming completion of Immunic’s concurrent financing in connection with the Transaction, the company is expected to have outstanding a total of approximately 429,802,878 million shares of common stock immediately following the completion of the Transaction, assuming an Exchange Ratio of 735 and without giving effect to the proposed reverse stock split described in Proposal 4 in this proxy statement/prospectus. If a large number of shares are sold following the closing of the Transaction, the trading price of the company’s common stock could decline.

If the ownership of the company common stock is highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the company stock price to decline.

Executive officers and directors of the company and their affiliates and entities that are related to such officers and directors are expected to beneficially own or control approximately 62% of the outstanding shares of common stock of the company following the completion of the Transaction and assuming that Immunic closes its concurrent financing immediately prior to the effective time of the Transaction. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the company assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the company, even if such a change of control would benefit the other stockholders of the company. The significant concentration of stock ownership may adversely affect the trading price of the company’s common stock due to investors’ perception that conflicts of interest may exist or arise, and may adversely affect the liquidity of the company’s common stock.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the company, its business or its market, its stock price and trading volume could decline.

The trading market for the company’s common stock will be influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the company’s common stock after the completion of the Transaction, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the company will not have any control over the analysts or the content and opinions included in their reports. The price of the company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

Because the Transaction will result in an ownership change under Section 382 of the Code for Vital Therapies, Vital Therapies’ pre-Transaction net operating loss carryforwards and certain other tax attributes will be subject to limitation or elimination. The net operating loss carryforwards and certain other tax attributes of Immunic and of the company may also be subject to limitations as a result of ownership changes.

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, or Section 382, the corporation’s net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds fifty percentage points by value over a rolling three-year period. Similar rules may apply under state tax laws. The Transaction will result in an ownership change for Vital Therapies and,

 

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accordingly, Vital Therapies’ net operating loss carryforwards and certain other tax attributes will be subject to limitation and possibly elimination after the Transaction. Additional ownership changes in the future could result in additional limitations on the company’s net operating loss carryforwards and certain other tax attributes. Consequently, even if the company achieves profitability, it may not be able to utilize a material portion of the company’s net operating loss carryforwards and certain other tax attributes, which could have a material adverse effect on cash flow and results of operations.

If Immunic fails to retain accounting and finance staff with appropriate experience, its ability to maintain the financial controls required of a public company may adversely affect its business.

Immunic currently relies on third-party accounting professionals to assist Immunic with its financial accounting and compliance obligations. Immunic is seeking financial professionals with appropriate experience to maintain its financial control and reporting obligations as a public company. If Immunic is unable to identify and retain such qualified and experienced personnel, its business may be adversely affected.

If the company fails to maintain proper and effective internal controls, its ability to produce accurate financial statements on a timely basis could be impaired.

The company will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and Nasdaq rules and regulations. The Sarbanes-Oxley Act requires, among other things, that the company maintain effective disclosure controls and procedures and internal control over financial reporting. Effective internal control over financial reporting is necessary for the company to provide reliable financial reports and, together with adequate disclosure controls and procedures, is designed to prevent fraud.

The company must perform system and process evaluation and testing of its internal control over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Annual Report on Form 10-K for each year, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. As a private company, Immunic has never been required to test its internal controls within a specified period. This will require significant management efforts and will require the company to incur substantial professional fees and internal costs to expand its accounting and finance functions. The company may experience difficulty in meeting these reporting requirements in a timely manner. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause the company to fail to meet its reporting obligations. In addition, any testing by the company, as and when required, conducted in connection with Section 404, or any subsequent testing by the company’s independent registered public accounting firm, as and when required, may reveal deficiencies in the company’s internal control over financial reporting that are deemed to be significant deficiencies or material weaknesses or that may require prospective or retroactive changes to its financial statements or identify other areas for further attention or improvement.

While the company remains an emerging growth company, the company will not be required to include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm as required by Section 404. There is a risk that neither the company, nor the company’s independent registered public accounting firm once the company is required to obtain an attestation report on internal control over financial reporting from such firm, will be able to conclude within the prescribed timeframe that the company’s internal control over financial reporting is effective as required by Section 404.

If the company is not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if it is unable to maintain proper and effective internal controls, the company may not be able to produce timely and accurate financial statements. If that were to happen, the market price of its common stock could decline and it could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus and the documents incorporated by reference into this proxy statement/prospectus contain forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include, but are not limited to statements about:

 

   

the strategies, prospects, plans, expectations and objectives of management of Vital Therapies or Immunic for future operations of the company following the closing of the Transaction;

 

   

the progress, scope or duration of the development of product candidates or programs;

 

   

the benefits that may be derived from product candidates or the commercial or market opportunity in any target indication;

 

   

the ability of Vital Therapies or Immunic to protect their intellectual property rights;

 

   

the ability of Vital Therapies to regain or maintain compliance with Nasdaq listing standards;

 

   

the anticipated operations, financial position, losses, costs or expenses of Vital Therapies, Immunic or the company following the closing of the Transaction;

 

   

statements regarding future economic conditions or performance;

 

   

statements concerning proposed products or product candidates;

 

   

the approval and closing of the Transaction, including the timing of the Transaction, the ability of Vital Therapies to solicit a sufficient number of proxies to approve the Transaction, other conditions to the completion of the Transaction, the Exchange Ratio, and relative ownership levels as of the closing of the Transaction;

 

   

the expected benefits of and potential value created by the Transaction for the stockholders of Vital Therapies;

 

   

Immunic’s ability to complete the concurrent financing in connection with the Transaction; and

 

   

statements of belief and any statement of assumptions underlying any of the foregoing.

For a discussion of the factors that may cause Vital Therapies, Immunic or the company’s actual results, performance or achievements following closing of the proposed Transaction to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of Vital Therapies and Immunic to complete the Transaction and the effect of the Transaction on the business of Vital Therapies, Immunic and the company following the completion of the Transaction, see “Risk Factors” beginning on page 33. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Vital Therapies. See “Where You Can Find More Information” beginning on page 265. There can be no assurance that the Transaction will be completed, or if it is completed, that it will close within the anticipated time period or that the expected benefits of the Transaction will be realized.

 

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If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Vital Therapies, Immunic or the company following completion of the Transaction could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement/prospectus are current only as of the date on which the statements were made. Vital Therapies and Immunic do not undertake any obligation (and expressly disclaim any such obligation to) to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

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THE SPECIAL MEETING OF STOCKHOLDERS OF VITAL THERAPIES

Date, Time and Place

The special meeting will be held on [●], 2019, at 12255 El Camino Real, Suite 300, San Diego, California 92130, commencing at [●] [a.m./p.m.] local time. Vital Therapies is sending this proxy statement/prospectus to its stockholders in connection with the solicitation of proxies by the board of directors for use at the special meeting and any adjournments or postponements of the special meeting. This proxy statement/prospectus is first being furnished to stockholders on or about [●], 2019.

Purposes of the Special Meeting

The purposes of the special meeting are:

 

  1.

To approve the issuance of shares of Vital Therapies common stock to Immunic shareholders pursuant to the terms of the Exchange Agreement, a copy of which is attached as Annex A;

 

  2.

To approve the change in control of Vital Therapies resulting from the Transaction contemplated by the Exchange Agreement;

 

  3.

To approve an amendment to the amended and restated certificate of incorporation of Vital Therapies changing the Vital Therapies corporate name to “Immunic, Inc.” in the form attached as Annex B;

 

  4.

To approve an amendment to the amended and restated certificate of incorporation of Vital Therapies effecting a reverse stock split of Vital Therapies’ issued and outstanding common stock in accordance with a ratio to be determined by the board of directors within a range of 30 to 60 shares (or any number in between) of outstanding Vital Therapies common stock being combined and reclassified into one share of Vital Therapies common stock in the form attached as Annex C, which is referred to as the reverse stock split;

 

  5.

To consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposals set forth above; and

 

  6.

To transact such other business as may properly come before the stockholders at the special meeting or any adjournment or postponement thereof.

Each of Proposals 1, 2, 3 and 4 are conditioned upon each other and the approval of each such proposal is a condition to the completion of the Transaction. Therefore, the Transaction cannot be consummated without the approval of Proposals 1, 2, 3 and 4.

Recommendation of the Board of Directors of Vital Therapies

 

   

The board of directors has determined and believes that the issuance of shares of Vital Therapies common stock pursuant to the Exchange Agreement and the resulting change of control is fair to, and in the best interests of, Vital Therapies and its stockholders and has approved such items. The board of directors recommends that stockholders vote “FOR” Proposals 1 and 2 to approve the issuance of shares of Vital Therapies common stock pursuant to the Exchange Agreement and the change of control of Vital Therapies resulting from the Transaction.

 

   

The board of directors has determined and believes that the amendment to the amended and restated certificate of incorporation of Vital Therapies to change the name of Vital Therapies to “Immunic, Inc.” is advisable to, and in the best interests of, Vital Therapies and its stockholders and has approved such name change. The board of directors recommends that stockholders vote “FOR” Proposal 3 to approve the name change.

 

   

The board of directors has determined and believes that it is advisable to, and in the best interests of, Vital Therapies and its stockholders to approve the amendment to the amended and restated certificate

 

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of incorporation of Vital Therapies effecting the reverse stock split, as described in this proxy statement/prospectus. The board of directors recommends that stockholders vote “FOR” Proposal 4 to approve the reverse stock split.