S-1 1 d623715ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 24, 2014.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

ACHAOGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   68-0533693
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

7000 Shoreline Court, Suite 371

South San Francisco, CA 94080

(650) 800-3636

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

 

 

Kenneth J. Hillan, M.B., Ch.B.

7000 Shoreline Court, Suite 371

South San Francisco, CA 94080

(650) 800-3636

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

 

 

Copies to:

Mark V. Roeder, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, CA 94025

(650) 328-4600

   

Bruce K. Dallas, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

(650) 752-2000

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

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

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

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

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

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

 

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

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class
of Securities to be Registered
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee

Common stock, $0.001 par value

  $74,750,000   $9,628

 

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes offering price of shares that the underwriters have the option to purchase.

 

 

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED JANUARY 24, 2014

PRELIMINARY PROSPECTUS

        Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of our common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $         and $         per share.

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

The underwriters have an option to purchase a maximum of                     additional shares of common stock from us to cover over-allotments, if any.

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

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

 

      

Price to Public

    

Underwriting
Discounts and
Commissions (1)

    

Proceeds to
Achaogen

Per Share

     $                            $                            $                      

Total

     $      $      $
(1) See “Underwriting” beginning on page 162 for additional information regarding underwriting compensation.

Delivery of the shares of common stock will be made on or about                 , 2014.

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

 

Credit Suisse   Cowen and Company
William Blair   Needham & Company

The date of this prospectus is                , 2014


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     11   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     53   

USE OF PROCEEDS

     55   

DIVIDEND POLICY

     56   

CAPITALIZATION

     57   

DILUTION

     60   

SELECTED CONSOLIDATED FINANCIAL DATA

     63   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     65   

BUSINESS

     85   

MANAGEMENT

     125   

EXECUTIVE AND DIRECTOR COMPENSATION

     133   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     145   

PRINCIPAL STOCKHOLDERS

     148   

DESCRIPTION OF CAPITAL STOCK

     150   

SHARES ELIGIBLE FOR FUTURE SALE

     155   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     158   

UNDERWRITING

     162   

LEGAL MATTERS

     167   

EXPERTS

     167   

WHERE YOU CAN FIND MORE INFORMATION

     167   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                 , 2014 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

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PROSPECTUS SUMMARY

This summary does not contain all of the information you should consider before buying our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” section beginning on page 11 and our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock.

Unless the context requires otherwise, references in this prospectus to “Achaogen,” “we,” “us” and “our” refer to Achaogen, Inc., and our consolidated subsidiary.

Overview

We are a clinical-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterials to treat multi-drug resistant, or MDR, gram-negative infections. We are developing plazomicin, our lead product candidate, for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae, or CRE. In 2013, the Centers for Disease Control and Prevention identified CRE as a “nightmare bacteria” and an immediate public health threat that requires “urgent and aggressive action.” We expect to initiate a Phase 3 superiority trial of plazomicin in the first quarter of 2014. Through the Special Protocol Assessment procedure, the U.S. Food and Drug Administration, or FDA, has agreed that the design and planned analyses of our single pivotal Phase 3 trial adequately address objectives in support of a New Drug Application. We have also received FDA fast track designation for the development and regulatory review of plazomicin to treat serious and life-threatening CRE infections. Our plazomicin program is funded in part with a contract from the Biomedical Advanced Research and Development Authority for up to $103.8 million. We have global commercialization rights to plazomicin, which has patent protection in the United States extending through 2031. Plazomicin is the first clinical candidate from our gram-negative antibiotic discovery engine, and we have other programs in early and late preclinical stages focused on other MDR gram-negative infections.

According to government agencies and physician groups, including the Centers for Disease Control and Prevention, or CDC, and the Infectious Disease Society of America, one of the greatest needs for new antibiotics is to treat infections caused by CRE and other drug-resistant gram-negative pathogens. CRE are strains of Enterobacteriaceae that are resistant to many types of antibiotics, including carbapenems, one of the last lines of defense against gram-negative bacteria, leading to mortality rates of up to 50% in patients with bloodstream infections. We estimate that there were approximately 110,000 cases of CRE infections in the United States and five major markets in the European Union in 2013, with approximately one-fourth of these being bloodstream infections or pneumonia. Based on the significant increase in resistance rates in recent years, we anticipate CRE will continue to be a major health problem. For example, CDC surveillance data indicates that the rate of carbapenem resistance in Klebsiella species, a type of Enterobacteriaceae, increased from 1.6% to 10.4% in the hospital setting in the United States between 2001 and 2011. In Italy, Klebsiella pneumoniae carbapenem resistance rates almost doubled from 16% in 2010 to 31% in 2012.

CRE are one of many types of MDR gram-negative pathogens threatening patients. Bacteria such as Pseudomonas aeruginosa, Acinetobacter baumannii, and extended-spectrum beta-lactamase producing Enterobacteriaceae each pose “serious” resistance threats, according to the CDC, and also drive the need for new, safe, and effective antibiotics. The CDC estimates that the excess annual cost resulting from antibiotic-resistant infections in the United States is as high as $20 billion. According to an estimate from a 2012 study of over 5,500 U.S. patients, the average incremental per-patient hospital cost for antibiotic-resistant healthcare-associated infections, as compared to antibiotic-susceptible infections, was over $15,000. In response to these threats, government agencies such as the Biomedical Advanced Research and Development Authority, the U.S. Department of Defense, and the U.S. National Institutes of Health are providing significant funding to support the discovery and development of new antibiotics.

 

 

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Our efforts to develop novel drugs that combat MDR gram-negative infections are led by our executive team that has over 60 years of combined industry experience at companies such as Genentech and Gilead Sciences, and a proven track record of leadership, global registration, and lifecycle management for over 20 products. The executive team is headed by Dr. Kenneth Hillan, who has held research and product development leadership roles during his career at Genentech for multiple products, including Rituxan® and Lucentis®.

Plazomicin

Our most advanced product candidate is plazomicin, a novel semi-synthetic aminoglycoside designed by our scientists to overcome clinically relevant aminoglycoside resistance mechanisms. Aminoglycosides have been used successfully for the treatment of serious bacterial infections for more than 50 years. As a class, aminoglycosides have several important characteristics including rapid bactericidal activity, well-described pharmacokinetics, a lack of metabolism in humans, and excellent solubility and stability. However, the spread of resistance to currently marketed aminoglycosides has decreased their clinical utility. We developed plazomicin by chemically modifying an existing aminoglycoside, sisomicin, a natural product isolated from bacteria, to shield the regions of the molecule that are targeted by the enzymes responsible for aminoglycoside resistance. As a result of these modifications, plazomicin remains active against many MDR pathogens where most other major drug classes, including commercially available aminoglycosides such as gentamicin and amikacin, have limited activity. Based on this profile, we are developing plazomicin as an intravenous therapy for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including CRE, which the CDC considers to be one of the top three urgent resistance threats to public health.

We consider the following to be key attributes that support the clinical utility and commercial value of plazomicin:

 

   

Potent in vitro activity and in vivo efficacy in nonclinical studies against MDR Enterobacteriaceae, including CRE.

 

   

Demonstration of comparable efficacy to levofloxacin and acceptable safety in a Phase 2 clinical trial in patients with complicated urinary tract infections caused primarily by non-MDR Enterobacteriaceae.

 

   

Improved dosing strategy as compared to existing aminoglycosides, and individualized patient dosing using an in vitro assay.

 

   

Potential to demonstrate a mortality benefit over currently available therapy in the treatment of life-threatening CRE infections.

 

   

Potential to reduce the healthcare costs associated with the treatment of such infections.

Our pivotal Phase 3 trial is a pathogen-specific trial that will enroll patients with a high risk of mortality and, if successful, provide clinical evidence of the superiority of plazomicin versus the best currently available therapy for life-threatening bloodstream infections and pneumonia due to CRE. Unlike most antibiotic trials, which are designed to show non-inferiority to the current standard of care, our trial is a superiority trial with a primary efficacy endpoint of all-cause mortality at 28 days. Through the Special Protocol Assessment procedure, the FDA has agreed on the design and planned analyses of our pivotal Phase 3 trial. We expect to report top-line data from our Phase 3 trial in the first half of 2017, with interim analyses projected to occur in 2015 and 2016. The FDA has granted us fast track designation for plazomicin for the treatment of serious and life-threatening CRE infections. We believe our planned development program, if successful, will also be acceptable to support a marketing application for plazomicin in the European Union.

We believe that plazomicin has the potential to become the new standard of care for the treatment of CRE, based on the attributes outlined above. We intend to achieve our pricing and reimbursement objectives through

 

 

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demonstration of a mortality benefit in CRE patients as well as pharmacoeconomic analyses that demonstrate significant cost savings to the healthcare system with the use of plazomicin. We plan to commercialize plazomicin with a targeted U.S. sales force to promote plazomicin to hospital-based healthcare professionals in resistance hotspots. In key markets outside of the United States, including Europe, Asia, and Latin America, we believe we can maximize the value of plazomicin through licensing full product rights to one or more commercialization partners who have local market expertise.

Our Antibacterial Discovery and Development Engine

Since we commenced operations in 2004, we have focused on the discovery and development of antibiotics, including plazomicin, to treat gram-negative infections. Through our work on multiple antibiotic classes, we have developed proprietary know-how about the relationship between chemical structure and potency against gram-negative organisms, which are a subset of bacterial organisms that are encircled by an outer membrane and do not react in the “Gram” dye stain test. Our progress in discovering and developing gram-negative product candidates has been achieved through:

 

   

Knowledge of gram-negative antibiotic chemistry. We are able to engineer the chemical structure of molecules to avoid resistance mechanisms and to penetrate the double membranes of gram-negative pathogens.

 

   

Specialized compound libraries. Our chemistry libraries are designed to contain compounds that have the necessary properties for penetration of gram-negative bacteria and are used in screening campaigns against clinical isolates of MDR gram-negative pathogens.

 

   

Microbiology capabilities in clinically important pathogens. Our microbiological and molecular genetic expertise with key gram-negative pathogens allows us to rapidly validate new antibacterial targets, determine the mode of action of our new agents, and progress promising molecules to advanced testing.

 

   

Use of nonclinical data to predict clinical outcomes. We leverage animal data and computational modeling techniques to predict the clinical efficacy of our early developmental candidates.

 

   

Collaborations with industry-leading advisors and scientific experts. We have established relationships with advisors who include experts in antibacterial drug development and academic researchers in the field of antibiotic pharmacology.

 

 

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Research and Development Pipeline

In addition to plazomicin, our research and development pipeline includes two antipseudomonal programs, which are programs that specifically target infections caused by Pseudomonas aeruginosa. The first is a program to discover and develop small molecule inhibitors of LpxC, which is an enzyme essential for the synthesis of the outer membrane of gram-negative bacteria, and the second is a therapeutic antibody program. We are also pursuing small molecule research programs targeting other essential gram-negative enzymes. The following table summarizes the status of plazomicin and our other research programs:

LOGO

Our Strategy

Our strategy is to discover, develop, and commercialize new antibacterials for the treatment of gram-negative bacterial infections. Key elements of our strategy are as follows:

 

   

Complete our pivotal Phase 3 superiority trial of plazomicin in the treatment of CRE infections and obtain regulatory approval in both the United States and the European Union.

 

   

Demonstrate improved clinical benefit and pharmacoeconomic advantages of our product candidates over existing therapies.

 

   

Commercialize our products directly, either alone or with support from a commercialization partner, in the United States and through commercialization partners elsewhere.

 

   

Establish and leverage collaborations with non-commercial organizations for scientific expertise and funding support.

 

   

Build a portfolio of differentiated products for the treatment of MDR gram-negative infections.

 

 

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Risks Related to Our Business

Our ability to implement our current business strategy is subject to numerous risks, including those described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others:

 

   

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

 

   

We are substantially dependent on the success of our lead product candidate, plazomicin.

 

   

Our pivotal Phase 3 superiority trial for plazomicin is subject to a number of specific risks that may affect the outcome of the trial, including the lack of a prior clinical trial in patients with CRE infections and challenges in enrolling an adequate number of patients with rare infections.

 

   

We may not be able to obtain regulatory approval for plazomicin or any other product candidate, or for our in vitro assay for plazomicin.

 

   

We will need substantial additional funding.

 

   

Even if plazomicin, or any other product candidate, obtains regulatory approval, it may not achieve the level of market acceptance by physicians, patients, hospitals, third-party payors, and others in the medical community necessary for commercial success.

 

   

We may not be able to obtain adequate coverage and reimbursement from government and other third-party payors for plazomicin.

 

   

Our use of government funding adds uncertainty to our research and commercialization efforts and subjects us to additional requirements and costs.

 

   

If our intellectual property for plazomicin or any future product candidates is not adequate, we may not be able to compete effectively.

Corporate Information

We were incorporated in Delaware in 2002 and commenced operations in 2004. Our principal executive offices are located at 7000 Shoreline Court, Suite 371, South San Francisco, California 94080, and our telephone number is (650) 800-3636. Our website address is http://www.achaogen.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

Achaogen and the Achaogen logo are our trademarks. Each of the other trademarks, trade names, or service marks appearing in this prospectus belongs to its respective holder.

Implications of Being an Emerging Growth Company

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

 

   

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

 

   

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

 

 

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

 

   

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

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

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

The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common stock offered by us

                 shares

 

Common stock to be outstanding after this offering

                 shares

 

Option to purchase additional shares

The underwriters have a 30-day option to purchase a maximum of                  additional shares of common stock to cover over-allotments, if any.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full, at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We currently expect to use approximately $         of the net proceeds from this offering, in combination with the expected funding from our BARDA contract, to support our planned registration program for plazomicin and any remaining proceeds to fund our other research and development activities, and for working capital and general corporate expenditures, which may include scheduled repayments of our outstanding loan. See “Use of Proceeds” beginning on page 55.

 

Risk factors

See “Risk Factors” beginning on page 11 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

 

NASDAQ Global Market symbol

“AKAO”

 

 

The number of shares of common stock to be outstanding after this offering is based on 118,577,787 shares of common stock outstanding as of December 31, 2013 and excludes the following:

 

   

15,461,893 shares of common stock issuable upon exercise of stock options outstanding under our Amended and Restated 2003 Stock Plan, at a weighted-average exercise price of $0.52 per share;

 

   

1,398,910 shares of common stock reserved for issuance pursuant to future awards under our Amended and Restated 2003 Stock Plan that will become available for issuance under our 2014 Equity Incentive Award Plan upon the effectiveness of the registration statement to which this prospectus relates;

 

   

                 additional shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective upon the effectiveness of the registration statement to which this prospectus relates;

 

   

10,000 shares of common stock issuable upon the exercise of a warrant outstanding to purchase common stock, at an exercise price of $0.14 per share, which warrant was exercised in January 2014; and

 

 

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445,028 shares of common stock issuable upon the exercise of warrants outstanding to purchase convertible preferred stock, assuming their conversion into warrants to purchase common stock immediately prior to the completion of this offering, at a weighted-average exercise price of $1.12 per share, which warrants are expected to remain outstanding following the completion of this offering.

Except as otherwise indicated, all information in this prospectus:

 

   

reflects the conversion immediately prior to the completion of this offering of all of our outstanding shares of convertible preferred stock into an aggregate of 114,256,264 shares of common stock, which includes 9,174,314 shares of common stock issuable upon conversion of the shares of Series D convertible preferred stock issued in November 2013;

 

   

reflects a                 -for-                 reverse stock split of our capital stock to be effected prior to the effectiveness of the registration statement of which this prospectus is a part;

 

   

assumes the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

   

assumes that the underwriters do not exercise their option to purchase additional shares of common stock.

 

 

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Summary Consolidated Financial Data

The following summary consolidated financial data for the years ended December 31, 2011 and 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated financial data for the nine months ended September 30, 2012 and 2013 and as of September 30, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus and are not necessarily indicative of results to be expected for the full year. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2013 and the results of operations for the nine months ended September 30, 2012 and 2013. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (in thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

        

Contract revenue

   $ 22,474      $ 17,941      $ 13,971      $ 12,320   

Operating expenses:

        

Research and development

     35,210        26,581        23,036        16,685   

General and administrative

     7,979        7,349        5,668        5,418   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     43,189        33,930        28,704        22,103   

Loss from operations

     (20,715     (15,989     (14,733     (9,783

Interest expense and other, net

     (166     (2,427     (1,799     (1,104

Interest income and other, net

     15        51        47        261   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,866   $ (18,365   $ (16,485   $ (10,626
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share, basic and diluted(1)

   $ (5.97   $ (4.80   $ (4.39   $ (2.50
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net loss per common share, basic and diluted(1)

     3,494,897        3,828,104        3,755,025        4,243,898   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     $ (0.21     $ (0.10
    

 

 

     

 

 

 

 

(1)   See Note 2 to our audited financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per common share and pro forma net loss per common share.

The table below presents our consolidated balance sheet data as of September 30, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

   

the issuance and sale of 9,174,314 shares of our Series D convertible preferred stock in November 2013 with gross proceeds to us of $10.0 million, and the conversion of such shares into common stock as described below;

 

   

the conversion immediately prior to the completion of this offering of all of our outstanding shares of convertible preferred stock into an aggregate of 114,256,264 shares of common stock, which includes the 9,174,314 shares of common stock issuable upon conversion of the shares of Series D convertible preferred stock issued in November 2013;

 

 

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the exercise of a common stock warrant for 10,000 shares at an exercise price of $0.14 per share in January 2014, which shares are excluded from the number of shares outstanding as of September 30, 2013 on an actual basis;

 

   

the reclassification to additional paid-in capital of our convertible preferred stock warrant liabilities included in other long-term liabilities in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants immediately prior to the completion of this offering; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

   

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

 

     As of September 30, 2013
     Actual     Pro Forma     Pro Forma
As  Adjusted(1)
     (unaudited)
     (in thousands)

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 8,212      $ 18,212     

Working capital

     2,147        12,147     

Total assets

     13,821        23,821     

Notes payable

     7,786        7,786     

Other long-term liabilities

     176        —       

Convertible preferred stock

     122,287        —       

Accumulated deficit

     (126,238     (126,238  

Total stockholders’ (deficit) equity

     (122,317     10,146     

 

(1)   Each $1.00 increase or decrease in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets and stockholders’ equity by approximately $         million, assuming the assumed initial public offering price per share, as set forth on the cover page of this prospectus, remains the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all other information set forth in this prospectus and any related free writing prospectus. The following risks and the risks described elsewhere in this prospectus, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, operating results, cash flow and prospects. If that occurs, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Capital Requirements

We have a limited operating history, have incurred net losses in each year since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, and if we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.

We are a clinical-stage biopharmaceutical company with a limited operating history. We have not generated any revenue from the sale of products and have incurred losses in each year since we commenced operations in 2004. All of our product candidates are in development, and none has been approved for sale. In the years ended December 31, 2011 and 2012, and the nine months ended September 30, 2013, we derived all of our revenue from government contracts for research and development. Our net losses for the years ended December 31, 2011 and 2012 were $20.9 million and $18.4 million, respectively. Our net loss for the nine months ended September 30, 2013 was $10.6 million. As of September 30, 2013, we had an accumulated deficit of $126.2 million.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we conduct our pivotal Phase 3 superiority trial of our lead product candidate, plazomicin, seek marketing approval for plazomicin, and continue the development of our other product candidates. Our expenses will also increase substantially if and as we:

 

   

conduct additional clinical trials for our product candidates;

 

   

continue to discover and develop additional product candidates;

 

   

establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain marketing approval;

 

   

establish a manufacturing and supply chain sufficient for commercial quantities of any product candidates for which we may obtain marketing approval;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

hire additional clinical, scientific and commercial personnel;

 

   

add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts, as well as to support our transition to a public reporting company; and

 

   

acquire or in-license other product candidates and technologies.

If our product candidates fail to demonstrate safety and efficacy in clinical trials, do not gain regulatory approval, or do not achieve market acceptance following regulatory approval and commercialization, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline. Because of the numerous risks and uncertainties associated with developing biopharmaceutical products, we are unable to predict the extent of any future losses or when, if ever, we will become profitable.

 

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We are substantially dependent on the success of our lead product candidate, plazomicin, which is in Phase 3 clinical development. If we are unable to develop, obtain marketing approval for and successfully commercialize plazomicin or experience significant delays in doing so, our business could be materially harmed.

We currently have no products approved for sale, and since 2007, we have invested a significant portion of our efforts and financial resources in the development of plazomicin. Our future success is substantially dependent on our ability to successfully develop, obtain regulatory approval for and, ultimately, successfully commercialize plazomicin. In the first quarter of 2014, we expect to initiate a pivotal Phase 3 superiority trial to evaluate the efficacy and safety of plazomicin in treating patients with serious gram-negative bacterial infections due to carbapenem-resistant Enterobacteriaceae, or CRE. We have not conducted a clinical trial of plazomicin in patients with CRE infections, and we have no direct clinical evidence that plazomicin is effective in treating CRE infections in humans. Our Phase 2 trial evaluated the efficacy of plazomicin compared with levofloxacin in patients with complicated urinary tract infections, or cUTI. Our ability to develop, obtain regulatory approval for, and successfully commercialize plazomicin effectively will depend on several factors, including the following:

 

   

successful completion of our Phase 3 trial or other clinical trials, which will depend substantially upon the satisfactory performance of third-party contractors;

 

   

successful achievement of the objectives of our Phase 3 trial for plazomicin, including the demonstration of a mortality benefit, pharmacoeconomic benefits and a favorable risk-benefit outcome;

 

   

receipt of marketing approvals from the U.S. Food and Drug Administration, or FDA, and similar regulatory authorities outside the United States;

 

   

establishing commercial manufacturing and supply arrangements;

 

   

establishing a commercial infrastructure;

 

   

identifying and successfully establishing one or more collaborations to commercialize plazomicin;

 

   

acceptance of the product by patients, the medical community and third-party payors;

 

   

establishing market share while competing with other therapies;

 

   

successfully executing our pricing and reimbursement strategy;

 

   

a continued acceptable safety and adverse event profile of the product following regulatory approval; and

 

   

qualifying for, identifying, registering, maintaining, enforcing and defending intellectual property rights and claims covering the product.

In addition, our product development program includes the development of an in vitro assay, which must itself be approved or cleared for marketing by the FDA and certain other foreign regulatory agencies before we may commercialize plazomicin in the associated markets. If we are unable to develop or receive marketing approval for plazomicin or the in vitro assay in a timely manner or at all, we could experience significant delays or an inability to commercialize plazomicin, which would materially and adversely affect our business, financial condition, and results of operations.

Clinical drug development involves a lengthy and expensive process with uncertain outcomes that may lead to delayed timelines and increased cost, and may prevent us from being able to complete clinical trials.

Clinical testing is expensive, can take many years to complete, and its outcome is inherently uncertain. The results of preclinical and clinical studies of our product candidates may not be predictive of the results of later-stage clinical trials. For example, the positive results generated to date in nonclinical and clinical studies for plazomicin do not ensure that our Phase 3 trial will demonstrate similar results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant

 

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setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we will not face similar setbacks.

Although we expect to initiate our pivotal Phase 3 superiority trial for plazomicin in the first quarter of 2014, we cannot be certain that the trial, or any other future clinical trials for plazomicin or other product candidates, will begin on time, not need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all, or that any interim analyses with respect to such trials will be completed on schedule or support continued clinical development of the associated product candidate.

Clinical trials can be delayed or aborted for a variety of reasons, including delay or failure:

 

   

to obtain regulatory approval to commence a trial;

 

   

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;

 

   

to obtain institutional review board, or IRB, approval at each site;

 

   

to recruit suitable patients to participate in a trial;

 

   

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

 

   

of clinical sites to adhere to trial protocols or continue to participate in a trial;

 

   

to address any patient safety concerns that arise during the course of a trial;

 

   

to address any conflicts with new or existing laws or regulations;

 

   

to add a sufficient number of clinical trial sites; or

 

   

to manufacture sufficient quantities of product candidate for use in clinical trials.

Enrollment delays in our clinical trials may result in increased development costs for our product candidates, slow down or halt our product development and approval processes, and jeopardize our ability to commence product sales and generate revenue, which would cause the value of our company to decline and limit our ability to obtain additional financing if needed. Although we will continue to look for opportunities for faster regulatory approval of plazomicin or our other product candidates, including potential additional clinical trials, we cannot guarantee that such opportunities will arise, that the FDA or other regulatory authorities will agree with any proposals we make or that such proposals, even if approved, will be successful.

We could also encounter delays if a clinical trial is suspended or terminated by us upon recommendation of the data monitoring committee for such trial, by the IRBs of the institutions in which such trials are being conducted, or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions, or lack of adequate funding to continue the clinical trial.

If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate revenue from the sale of any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval processes, and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may significantly harm our business, financial condition and prospects significantly.

 

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Our pivotal Phase 3 trial for plazomicin is subject to a number of specific risks that may affect the outcome of the trial, including the lack of a prior clinical trial in patients with CRE infections and challenges in enrolling an adequate number of patients with rare infections.

Our pivotal Phase 3 trial for plazomicin is subject to a number of specific risks arising from our clinical program and the design of the trial. We have not conducted a clinical trial of plazomicin in patients with CRE infections or with bloodstream infections or pneumonia, who are the subjects of our Phase 3 trial, and we have no direct clinical evidence that plazomicin is effective in treating CRE infections in humans. Our Phase 2 trial demonstrated that plazomicin was as effective as the comparator drug in treating cUTI arising from non-CRE bacteria. Although we believe that plazomicin will be effective in treating CRE infections in humans based upon our nonclinical in vitro and in vivo animal model study results, together with our Phase 2 trial results, these results are not necessarily predictive of the results in humans and we cannot guarantee that plazomicin will demonstrate the expected efficacy in our Phase 3 trial patients. We also cannot guarantee that the projections made from our pharmacokinetic and pharmacodynamic models we developed from our nonclinical and clinical plazomicin studies will be validated in our Phase 3 trial.

Because our pivotal Phase 3 trial for plazomicin is enrolling patients with rare infections, finding a sufficient number of suitable patients with CRE infections to enroll in the trial will be a potential challenge. In addition, we may face competition in enrolling suitable patients as a result of other companies conducting clinical trials for antibiotic product candidates treating similar infections, resulting in slower than anticipated enrollment in our trial. Enrollment delays in this trial may result in increased development costs for plazomicin, or slow down or halt our product development and approval process for plazomicin.

Our Phase 3 trial also involves dosing of patients with plazomicin for longer durations (7–14 days) than in our Phase 1 and 2 trials at the comparable dosage (up to five days), which may lead to additional or more severe adverse events than were reported in our Phase 1 and 2 trials, including as a result of toxicity in the kidneys, inner ear, or hypotension. See the risk factor entitled “Serious adverse events or undesirable side effects or other unexpected properties of plazomicin or any other product candidate may be identified during development or after approval that could delay, prevent or cause the withdrawal of regulatory approval, limit the commercial potential, or result in significant negative consequences following marketing approval.”

Our Phase 3 trial will use a superiority design rather than a non-inferiority design. In order to meet our primary endpoint, we must show that plazomicin is superior to the comparator therapy with respect to all-cause mortality at 28 days. This is a different standard than most other antibiotic clinical trials, which are designed to show that the antibiotic is not inferior to the comparator therapy. We may be unable to demonstrate superiority or the anticipated pharmacoeconomic benefits of plazomicin therapy in our Phase 3 trial. Our choice of a mortality endpoint means that success will depend to a significant degree on the accuracy of our assumptions about mortality rates in the comparator and plazomicin arms of our Phase 3 trial. Although we believe we have been conservative in our assumptions, if, for example, patients in the comparator arm of our trial have significantly lower mortality than we expect, we may find that our trial is unfeasible or may have to enroll more patients at additional cost and delay.

Any failure to meet our endpoints in the Phase 3 trial or adequately address safety concerns would jeopardize our ability to obtain regulatory approval for and commercialize plazomicin and significantly harm our business, financial condition, and prospects.

See also the risk factor entitled “Clinical drug development involves a lengthy and expensive process with uncertain outcomes that may lead to delayed timelines and increased cost, and may prevent us from being able to complete clinical trials.”

 

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If we fail to demonstrate the safety and efficacy of plazomicin or any other product candidate that we develop to the satisfaction of the FDA or comparable foreign regulatory authorities we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of plazomicin or such other product candidate. This would adversely impact our ability to generate revenue, our business and our results of operations.

We are not permitted to commercialize, market, promote, or sell any product candidate in the United States without obtaining marketing approval from the FDA or in other countries without obtaining approvals from comparable foreign regulatory authorities, such as the European Medicines Agency, or EMA, and we may never receive such approvals. To gain approval to market a drug product, we must complete extensive preclinical development and clinical trials that demonstrate the safety and efficacy of the product for the intended indication to the satisfaction of the FDA or other regulatory authority.

We have not previously submitted a New Drug Application, or NDA, to the FDA, or similar drug approval filings to comparable foreign authorities, for any product candidate, and we cannot be certain that plazomicin will be successful in clinical trials or receive regulatory approval. Further, plazomicin may not receive regulatory approval even if it is successful in clinical trials. If we do not receive regulatory approval for plazomicin, we may not be able to continue our operations. Even if we successfully obtain regulatory approval to market plazomicin, our revenue will be dependent, in part, upon our or a commercial partner’s ability to obtain regulatory approval of an in vitro assay to be used with plazomicin, as well as upon the size of the markets in the territories for which we gain regulatory approval and have commercial rights.

The FDA or any foreign regulatory agencies can delay, limit, or deny approval of plazomicin for many reasons, including:

 

   

our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory agency that plazomicin is safe and effective for the requested indication;

 

   

the FDA’s or the applicable foreign regulatory agency’s disagreement with the interpretation of data from preclinical studies or clinical trials;

 

   

our inability to demonstrate that the clinical and other benefits of plazomicin outweigh any safety or other perceived risks;

 

   

the FDA’s or the applicable foreign regulatory agency’s requirement for additional preclinical or clinical studies;

 

   

the FDA’s or the applicable foreign regulatory agency’s non-approval of the formulation, labeling or the specifications of plazomicin;

 

   

the FDA’s or the applicable foreign regulatory agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or

 

   

the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data insufficient for approval.

Even if we eventually complete clinical testing and receive approval of an NDA or foreign regulatory filing for plazomicin, the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional clinical trials which may be required after approval. The FDA or the applicable foreign regulatory agency also may approve plazomicin for a more limited indication or a narrower patient population than we originally requested, and the FDA, or applicable foreign regulatory agency, may not approve the labeling that we believe is necessary or desirable for the successful commercialization of plazomicin. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of plazomicin and would materially adversely impact our business and prospects. Any other product candidate we advanced to the marketing approval stage would also be subject to the risks delineated above.

 

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Although we have entered into a Special Protocol Assessment agreement with the FDA relating to our pivotal Phase 3 superiority trial of plazomicin, and have obtained feedback from the EMA through their scientific advice procedure, this agreement and feedback do not guarantee any particular outcome with respect to regulatory review of the pivotal trial or with respect to regulatory approval of plazomicin.

In September 2013, the protocol for our pivotal Phase 3 superiority trial of plazomicin was reviewed and agreed upon by the FDA under a Special Protocol Assessment agreement, or SPA, which creates a written agreement between the sponsoring company and the FDA regarding clinical trial design and other clinical trial issues, such as the trial endpoints, that can be used to support approval of a product candidate. The SPA is intended to provide assurance that if the agreed upon clinical trial protocols are followed and the clinical trial endpoints are achieved, the data may serve as the primary basis for an efficacy claim in support of an NDA. Agreement on an SPA is not a guarantee of approval, and there is no assurance that the design of, or data collected from, the trial will be adequate to obtain the requisite regulatory approval. The SPA is not binding on the FDA if public health concerns unrecognized at the time the SPA was entered into become evident, if other new scientific concerns regarding product safety or efficacy arise, if the information provided by the sponsoring company in the SPA request changes or is found to be false or misleading or omit relevant facts, or if the sponsoring company fails to comply with the agreed upon clinical trial protocols. Moreover, SPA agreements do not address all of the variables and details that may go into planning for or conducting a clinical trial, and any change in the protocol for a clinical trial can invalidate the SPA agreement. In addition, upon written agreement of both parties, the SPA may be changed, and the FDA retains significant latitude and discretion in interpreting the terms of an SPA and any resulting trial data. As a result, we do not know how the FDA will interpret the parties’ respective commitments under the SPA, how it will interpret the data and results from the pivotal Phase 3 superiority trial, whether the FDA will require that we conduct or complete one or more additional clinical trials to support potential approval, including the completion of our ongoing clinical trial of plazomicin, or whether plazomicin will receive any regulatory approvals.

Similarly, we have solicited feedback on our planned development program for plazomicin through the EMA’s scientific advice procedure and believe that our program, if successful, will be acceptable to support a marketing application in the European Union, or EU. However, this feedback is not a guarantee of approval, and we do not know how the EMA will interpret the data and results from our Phase 3 trial and other elements of our development program, whether they will require that we conduct one or more additional clinical trials or nonclinical studies to support potential approval, or whether plazomicin will receive any regulatory approvals in the EU.

Serious adverse events or undesirable side effects or other unexpected properties of plazomicin or any other product candidate may be identified during development or after approval that could delay, prevent or cause the withdrawal of regulatory approval, limit the commercial potential, or result in significant negative consequences following marketing approval.

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

To date, plazomicin has generally been well tolerated in clinical trials conducted in healthy subjects, subjects with renal impairment, and in patients with complicated urinary tract infections, and there have been no

 

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reports of serious adverse events related to plazomicin in our completed clinical trials. However, our planned pivotal Phase 3 superiority trial for plazomicin will involve more extended dosing (7–14 days) than our Phase 1 and 2 trials at the comparable dosage (up to five days), which may lead to additional or more severe adverse events than were reported in our Phase 1 and 2 trials. Toxicity in the kidneys and inner ear are the most significant identified risks for plazomicin, which are well-known risks for the aminoglycoside class of antibiotics. Hypotension is also a potential risk for plazomicin.

Undesirable side effects or other unexpected adverse events or properties of plazomicin or any of our other product candidates could arise or become known either during clinical development or, if approved, after the approved product has been marketed. If such an event occurs during development, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of, or deny approval of, plazomicin or our other product candidates. If such an event occurs after plazomicin or such other product candidates are approved, a number of potentially significant negative consequences may result, including:

 

   

regulatory authorities may withdraw the approval of such product;

 

   

regulatory authorities may require additional warnings on the label or impose distribution or use restrictions;

 

   

regulatory authorities may require one or more post-market studies;

 

   

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

 

   

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

 

   

our reputation may suffer.

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

We cannot predict when bacteria may evolve resistance to plazomicin, which could affect the revenue potential for plazomicin.

We are developing plazomicin to treat multi-drug resistant infections. The bacteria responsible for these infections evolve quickly and readily transfer their resistance mechanisms within and between species. We cannot predict when bacterial resistance to plazomicin may become prevalent.

As with some other commercially available aminoglycosides, plazomicin is not active against organisms expressing a resistance mechanism known as ribosomal methyltransferase. Although occurrence of this resistance mechanism among CRE is currently rare outside of certain countries in Asia, there have been isolated cases of infections by bacteria carrying ribosomal methyltransferase elsewhere, including in the United States. We cannot predict whether ribosomal methyltransferase will become widespread in regions where we intend to market plazomicin if it is approved. The growth of MDR infections in community settings or in countries with poor public health infrastructures, or the potential use of plazomicin outside of controlled hospital settings, could contribute to the rise of plazomicin resistance. If resistance to plazomicin becomes prevalent, our ability to generate revenue from plazomicin could suffer.

Failure to successfully validate, develop and obtain regulatory clearance or approval for our in vitro assay could harm our product development strategy.

An important element of our clinical development strategy for plazomicin is the development of an in vitro assay to measure levels of plazomicin in the blood, which will enable patients to receive safe and efficacious

 

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doses of plazomicin. In collaboration with ARK Diagnostics, Inc., or ARK, we are co-developing such an assay, which will be utilized during our pivotal Phase 3 superiority trial as well as in connection with the commercialization of plazomicin, if approved.

In vitro diagnostic assays are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and therefore require separate regulatory clearance or approval prior to commercialization. An in vitro diagnostic that is required for safe and effective use of a drug is referred to as a companion diagnostic. The clinical development of novel therapeutics with a companion diagnostic is complex from an operational and regulatory perspective because of the need for both the drug and the diagnostic to receive regulatory clearance or approval. Specifically, on July 14, 2011, the FDA issued for comment a draft guidance document addressing the development and approval processes for “In Vitro Companion Diagnostic Devices.” According to the draft guidance, for novel therapeutic products such as plazomicin, a companion diagnostic device should be developed and approved or cleared contemporaneously with the therapeutic. If the regulatory clearance or approval process for our diagnostic assay is delayed, our ability to commercialize plazomicin could be delayed until we receive regulatory clearance or approval for the companion diagnostic.

It may be necessary to resolve issues such as selectivity/specificity, analytical validation, reproducibility, or clinical validation of our assay during the development and regulatory approval process. We, ARK or our future collaborators may encounter difficulties in developing, obtaining regulatory approval for and manufacturing assays similar to those we face with respect to our drug product candidates themselves, including issues with achieving regulatory clearance or approval, or producing sufficient quantities of the assay with appropriate quality standards. Failure to overcome these hurdles could have an adverse effect on our ability to obtain regulatory approval for or to obtain market acceptance for and to commercialize our assay or plazomicin.

We will be dependent on ARK to develop and manufacture our in vitro assay for our pivotal Phase 3 superiority trial for plazomicin, and may become dependent on ARK to commercialize such in vitro assay.

We will be dependent on the sustained cooperation and effort of ARK in the development and manufacture of our in vitro assay for plazomicin for our pivotal Phase 3 superiority trial, including in the generation of analytical data for regulatory approval of such assay. We have also agreed to negotiate with ARK for a commercialization agreement for the in vitro assay, and have agreed that any such commercialization agreement would provide ARK with the first right to commercialize the assay in the United States and the EU, and to manufacture and supply the assay worldwide for commercialization, while we would have the first right to commercialize the assay in any other country or territory, in addition to rights to commercialize the assay in the United States and the EU if ARK elects not to do so. Should we enter into such an agreement with ARK, we will be dependent on ARK with respect to such manufacturing and supply and with respect to commercialization in the U.S. and the EU. This will reduce our control over these activities but does not relieve us of our responsibility to ensure compliance with all required legal, regulatory and scientific standards with respect to the assay.

If ARK does not successfully carry out its contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, we may not be able to complete, or may be delayed in completing, clinical trials required to support approval of our product candidates and clearance or approval of the assay. We or ARK may encounter difficulties in developing the assay for commercial application in one or more countries, including issues in relation to automation, selectivity/specificity, analytical validation, reproducibility, or clinical validation of such assay. If we do not enter into such a commercialization agreement with ARK, and ARK elects not to participate in the commercialization of the assay in the U.S. and/or the EU, we would have to find an alternative collaborator, which we may not be able to do on commercially reasonable terms, or at all. If ARK or any such alternative collaborator does not perform its contractual duties or obligations, experiences work stoppages, does not meet expected deadlines, terminates its agreements with us or needs to be replaced, or if they otherwise do not meet our expectations for development, manufacture or commercialization of the assay, we may need to enter into new arrangements with one or more alternative third parties for development, manufacture or commercialization of the assay or an alternative assay. We may not be able to do so on commercially reasonably

 

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terms, or within the terms of the commercialization agreement without amending such terms, or at all, which could adversely impact our business and results of operations.

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

Developing biopharmaceutical products, including conducting preclinical studies and clinical trials, is an expensive and highly uncertain process that takes years to complete. We expect our expenses to increase substantially as we conduct our pivotal Phase 3 superiority trial of our lead product candidate, plazomicin, seek marketing approval for plazomicin and continue the development of our other product candidates. If we obtain marketing approval of plazomicin, we also expect to incur significant sales, marketing, manufacturing and supply expenses.

As of September 30, 2013, we had working capital of $2.1 million and cash and cash equivalents of $8.2 million. Assuming we receive the full amount of allocated funding under our contract with the Biomedical Advanced Research and Development Authority, or BARDA, together with the proceeds from this offering, we expect such funds will be sufficient to fund our Phase 3 trial of plazomicin through receipt of top-line data. However, our operating plan may change as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. We anticipate that we will need to raise substantial additional financing in the future to fund our operations, including for obtaining marketing approval for plazomicin.

We may obtain additional financing through public or private equity offerings, debt financings, a credit facility or strategic collaborations. Additional financing may not be available to us when we need it or it may not be available to us on favorable terms, if at all. In addition, although we currently anticipate being able to generate additional financing through non-dilutive means, we may be unable to do so. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. Our future financing requirements will depend on many factors, some of which are beyond our control, including:

 

   

continued funding under our contract with BARDA;

 

   

the size and type of the nonclinical and clinical trials that we decide to pursue in the development of our product candidates, including plazomicin;

 

   

the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

 

   

the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;

 

   

the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals;

 

   

our ability to enter into additional collaboration, licensing or other arrangements and the terms and timing of such arrangements;

 

   

the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, including litigation costs and the results of such litigation;

 

   

the emergence of competing technologies and other adverse market developments;

 

   

the resources we devote to marketing, and, if approved, commercializing our product candidates;

 

   

the scope, progress, expansion, and costs of manufacturing our product candidates;

 

   

our ability to enter into additional government contracts, or other collaborative agreements, to support the development of our product candidates and development efforts;

 

   

the amount of funds we receive in this offering; and

 

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the costs associated with being a public company.

Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies. We currently have no understandings, commitments or agreements relating to any of these types of transactions.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

If we are not successful in discovering, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our efforts will focus on our pivotal Phase 3 superiority trial and potential approval of our lead product candidate, plazomicin, a key element of our strategy is to discover, develop and commercialize a portfolio of therapeutics to treat multi-drug resistant bacterial infections. We are seeking to do so through our internal research programs and are exploring, and intend to explore in the future, strategic partnerships for the development of new products. Other than plazomicin, all of our other potential product candidates remain in the discovery and preclinical stages.

Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

   

the research methodology used may not be successful in identifying potential product candidates;

 

   

we may be unable to successfully modify candidate compounds to be active in gram-negative bacteria or defeat bacterial resistance mechanisms or identify viable product candidates in our screening campaigns;

 

   

competitors may develop alternatives that render our product candidates obsolete;

 

   

product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

   

a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

   

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;

 

   

a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors; and

 

   

the development of bacterial resistance to potential product candidates may render them ineffective against target infections.

We withdrew ACHN-975, one of the product candidates from our LpxC inhibitor development program, from clinical trials due to inflammation at the infusion site in some of our Phase 1 subjects. Although we are exploring reformulations and prodrugs of ACHN-975 to address the issue, we cannot guarantee that these efforts will be successful or that any alternative backup compounds we turn to will avoid the issue or otherwise prove to be viable product candidates. We would have to submit a new Investigational New Drug application for any modified or backup compound we seek to advance to clinical trials, which would incur further delay.

 

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If we are unsuccessful in identifying and developing additional product candidates, our potential for growth may be impaired.

Even if a product candidate does obtain regulatory approval it may never achieve market acceptance by physicians, patients, hospitals, third-party payors and others in the medical community necessary for commercial success and the market opportunity may be smaller than we estimate.

Even if we obtain FDA or other regulatory approvals, and are able to launch plazomicin or any other product candidate commercially, the product candidate may not achieve market acceptance among physicians, patients, hospitals (including pharmacy directors) and third-party payors and, ultimately, may not be commercially successful. Market acceptance of any product candidate for which we receive approval depends on a number of factors, including:

 

   

the efficacy and safety of the product candidate as demonstrated in clinical trials;

 

   

relative convenience and ease of administration;

 

   

the clinical indications for which the product candidate is approved;

 

   

the potential and perceived advantages and disadvantages of the product candidates, including cost and clinical benefit relative to alternative treatments;

 

   

the willingness of physicians to prescribe the product;

 

   

the willingness of hospital pharmacy directors to purchase our products for their formularies;

 

   

acceptance by physicians, operators of hospitals and treatment facilities and parties responsible for reimbursement of the product;

 

   

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

 

   

the effectiveness of our sales and marketing efforts;

 

   

the strength of marketing and distribution support;

 

   

limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling or an approved risk evaluation and mitigation strategy;

 

   

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

 

   

the approval of other new products for the same indications;

 

   

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

 

   

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

 

   

the emergence of bacterial resistance to the product candidate; and

 

   

the rate at which resistance to other drugs in the target infections grow.

Any failure by plazomicin or any other product candidate that obtains regulatory approval to achieve market acceptance or commercial success would adversely affect our business prospects.

The availability of adequate third-party coverage and reimbursement for newly approved products is uncertain, and failure to obtain adequate coverage and reimbursement from government and other third-party payors could impede our ability to market any future products we may develop and could limit our ability to generate revenue.

There is significant uncertainty related to the third-party payor coverage and reimbursement of newly approved medical products. The commercial success of our future products in both domestic and international

 

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markets depends on whether third-party coverage and reimbursement is available for our future products. Governmental payors, including Medicare and Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to manage their healthcare expenditures by limiting both coverage and the level of reimbursement of new drugs and biologics and, as a result, they may not cover or provide adequate reimbursement for our future products. These payors may not view our future products as cost-effective, and coverage and reimbursement may not be available to our customers or may not be sufficient to allow our future products to be marketed on a competitive basis.

Third-party payors are exerting increasing influence on decisions regarding the use of, and coverage and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party payors limit or delay coverage and reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could cause us to decrease the price we might establish for products, which could result in lower than anticipated revenue from the sale of our product candidates. If we decrease the prices for our product candidates because of competitive pressures or if governmental and other third-party payors do not provide adequate coverage or reimbursement, our prospects for revenue and profitability will suffer.

In addition, to the extent that our product candidates will be used in a hospital inpatient setting, hospitals often receive fixed reimbursement for all of a patient’s care, including the cost of our drug products and in vitro assay, based on the patient’s diagnosis. For example, Medicare reimbursement for hospital inpatient stays is generally made under a prospective payment system that is determined by a classification system known as the Medicare severity diagnosis-related groups, or MS-DRGs. Our patients’ access to adequate coverage and reimbursement by government and private insurance plans is central to the acceptance of our future products. We may be unable to sell our products on a profitable basis if third-party payors reduce their current levels of payment, or if our costs of production increase faster than increases in reimbursement levels.

We are developing our lead product candidate plazomicin for the treatment of serious CRE infections, which constitute a growing but relatively small patient population. Antibiotics have historically been marketed towards broad patient populations at relatively low prices. We intend to seek pricing and reimbursement for plazomicin based on the superior mortality benefit and pharmacoeconomic advantages over existing treatments we will seek to demonstrate in our Phase 3 trial. If we are unable to demonstrate such benefits, or if governmental or other third-party payors do not view the benefits as worth the cost, we will be unable to achieve our pricing and reimbursement objectives and our prospects for revenue and profitability will suffer.

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

We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct our preclinical studies and clinical trials on our product candidates in compliance with applicable regulatory requirements. These third parties are not our employees and, except for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our preclinical studies and clinical trials, we remain responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol and the applicable legal, regulatory, and scientific standards, and our reliance on these third parties does not relieve us of our regulatory responsibilities. The FDA and regulatory authorities in other jurisdictions require us to comply with regulations and standards, commonly referred to as current good clinical practices, or cGCPs, for conducting, monitoring, recording and reporting the results of clinical trials, in order 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. If we or any of our third party contractors fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory

 

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authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, we are required to report certain financial interests of our third party investigators if these relationships exceed certain financial thresholds and meet other criteria. The FDA or comparable foreign regulatory authorities may question the integrity of the data from those clinical trials conducted by principal investigators who previously served or currently serve as scientific advisors or consultants to us from time to time and receive cash compensation in connection with such services. Our clinical trials must also generally be conducted with products produced under current good manufacturing practice, or cGMP, regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

Many of the third parties with whom we contract may also have relationships with other commercial entities, some of which may compete with us. If the third parties conducting our preclinical studies or our clinical trials do not perform their contractual duties or obligations or comply with regulatory requirements we may need to enter into new arrangements with alternative third parties. This could be costly, and our preclinical studies or clinical trials may need to be extended, delayed, terminated or repeated, and we may not be able to obtain regulatory approval in a timely fashion, or at all, for the applicable product candidate, or to commercialize such product candidate being tested in such studies or trials. If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third party contractors or to do so on commercially reasonable terms. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

We rely on third-party contract manufacturing organizations to manufacture and supply plazomicin and other product candidates for us, as well as certain raw materials used in the production thereof. If one of our suppliers or manufacturers fails to perform adequately we may be required to incur significant delays and costs to find new suppliers or manufacturers.

We currently have limited experience in, and we do not own facilities for, manufacturing our product candidates, including plazomicin. We rely upon third-party manufacturing organizations to manufacture and supply our product candidates and certain raw materials used in the production thereof. Some of our key components for the production of plazomicin have a limited number of suppliers. In particular, sisomicin, the aminoglycoside precursor for plazomicin, is supplied by a single manufacturer in China for which we do not have a commercial supply agreement.

The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with cGMP regulations for manufacture of our drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

We do not have commercial supply agreements with our suppliers. In the event that we and our suppliers cannot agree to the terms and conditions for them to provide clinical and commercial supply needs, we would not be able to manufacture our product or candidates until a qualified alternative supplier is identified, which could also delay the development of, and impair our ability to commercialize, our product candidates.

Our third party suppliers may not be able to meet our supply needs or timelines and this may negatively affect our business. A majority of the manufacturing process is operated internationally, and therefore may be

 

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subject to similar risks of the sort described by the risk factor entitled “A variety of risks associated with international operations could materially adversely affect our business.”

The failure of third-party manufacturers or suppliers to perform adequately or the termination of our arrangements with any of them may adversely affect our business.

We may be subject to costly product liability claims related to our clinical trials and product candidates and, if we are unable to obtain adequate insurance or are required to pay for liabilities resulting from a claim excluded from, or beyond the limits of our insurance coverage, a material liability claim could adversely affect our financial condition.

Because we conduct clinical trials with human patients, we face the risk that the use of our product candidates may result in adverse side effects to patients in our clinical trials. We face even greater risks upon any commercialization of our product candidates. Although we have product liability insurance, which covers our clinical trials for up to $5.0 million, our insurance may be insufficient to reimburse us for any expenses or losses we may suffer, and we will be required to increase our product liability insurance coverage for our advanced clinical trials that we plan to initiate. We do not know whether we will be able to continue to obtain product liability coverage and obtain expanded coverage if we require it, on acceptable terms, if at all. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limits of, our insurance coverage. Where we have provided indemnities in favor of third parties under our agreements with them, there is also a risk that these third parties could incur liability and bring a claim under such indemnities. An individual may bring a product liability claim against us alleging that one of our product candidates or products causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any product liability claim brought against us, with or without merit, could result in:

 

   

withdrawal of clinical trial volunteers, investigators, patients or trial sites;

 

   

the inability to commercialize our product candidates;

 

   

decreased demand for our product candidates;

 

   

regulatory investigations that could require costly recalls or product modifications;

 

   

loss of revenue;

 

   

substantial costs of litigation;

 

   

liabilities that substantially exceed our product liability insurance, which we would then be required to pay ourselves;

 

   

an increase in our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, if at all;

 

   

the diversion of management’s attention from our business; and

 

   

damage to our reputation and the reputation of our products.

Product liability claims may subject us to the foregoing and other risks, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

If we fail to establish an effective distribution process, which includes utilizing cold chain logistics for plazomicin and the associated in vitro assay, our business may be adversely affected.

We do not currently have the infrastructure necessary for distributing pharmaceutical products to patients. We intend to contract with a third-party logistics company to warehouse these products and distribute them, and we will require plazomicin and the associated in vitro assay to be maintained at a controlled temperature for some of the distribution chain. Failure to secure contracts with a logistics company could negatively impact the

 

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distribution of plazomicin or the in vitro assay. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of plazomicin and the associated in vitro assay will be delayed or severely compromised and our results of operations may be harmed.

In addition, the use of third party distributors, including with respect to cold chain logistics for plazomicin and the associated in vitro assay, involves certain risks, including, but not limited to, risks that distributors or pharmacies will:

 

   

not provide us with accurate or timely information regarding their inventories, the number of patients who are using plazomicin or the in vitro assay, or complaints regarding them;

 

   

not effectively sell or support plazomicin or the associated in vitro assay with sufficient cold storage;

 

   

reduce their efforts or discontinue to sell or support plazomicin or the in vitro assay;

 

   

not devote the resources necessary to sell plazomicin or the in vitro assay in the volumes and within the time frames that we expect;

 

   

be unable to satisfy financial obligations to us or others; or

 

   

cease operations.

Plazomicin is still undergoing evaluation for, and we expect our in vitro assay will have, a room temperature shelf life. Currently cold chain is required and if we do not effectively maintain our cold chain supply logistics, then we may experience an unusual number of product returns or out of date product. Any such failure may result in decreased product sales and lower product revenue, which would harm our business.

We currently have no sales and marketing staff or distribution organization. If we are unable to develop a sales and marketing and distribution capability on our own or through third parties, we will not be successful in commercializing our future products.

We currently have no sales, marketing or distribution organization or history. To achieve commercial success for any approved product candidate, we must either develop a sales, marketing and distribution organization or outsource these functions to third parties. If we rely on third parties for marketing and distributing our approved products, any revenue we receive will depend upon the efforts of third parties, which may not be successful and are only partially within our control, and our product revenue may be lower than if we directly marketed or sold our products. If we are unable to enter into arrangements with third parties to sell, market and distribute product candidates for which we have received regulatory approval on acceptable terms or at all, we will need to market these products ourselves. This is likely to be expensive and logistically difficult, as it would require us to build our own sales, marketing and distribution capacity. We have no historical operations in this area, and if such efforts were necessary, we may not be able to successfully commercialize our future products. If we are not successful in commercializing our future products, either on our own or through third parties, any future product revenue will be materially and adversely affected.

We face substantial competition and our competitors may discover, develop or commercialize products faster or more successfully than us.

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

 

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candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

There are a variety of available therapies marketed for the treatment of multi-drug resistant infections that we would expect would compete with plazomicin, including tigecycline, which is marketed by Pfizer as Tygacil, other aminoglycosides that are generically available (such as gentamicin, amikacin, tobramycin), and polymixins that are generically available (colistin and polymixin B). Many of the available therapies are well-established and widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. If plazomicin is approved, it may be priced at a premium over other competitive products. This may limit plazomicin’s adoption for MDR gram-negative infections.

There are also a number of products in clinical development by third parties to treat multi-drug resistant infections. Forest Laboratories and AstraZeneca are developing ceftazidime/avibactam and ceftaroline/avibactam for pneumonia and complicated urinary and intra-abdominal infections. Tetraphase Pharmaceuticals is developing eravacycline for complicated urinary and intra-abdominal infections. The Medicines Company is developing Carbavance™ for complicated urinary tract infections and MDR gram-negative infections, including CRE. We may also eventually face competition from products currently in the research or preclinical development stage. If our competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than us, it could result in our competitors establishing a strong market position before we are able to enter the market.

In July 2012, the Food and Drug Administration Safety and Innovation Act was passed, which included the Generating Antibiotics Incentives Now Act, or the GAIN Act. The GAIN Act provides incentives for the development of new, qualified infectious disease products, including adding five years to the otherwise applicable regulatory exclusivity period. These incentives, along with government contract funding and other incentives for antibiotic research, may result in more competition in the market for new antibiotics.

Many of our competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than we do. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our 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 our competitors.

Finally, the success of any product that is successfully commercialized will depend in large part on our ability to prevent competitors from launching a generic version that would compete with such product. If such competitors are able to establish that our patents are invalid or not infringed by the generic version of our product, they may be able to launch a generic product prior to the expected expiration of our relevant patents, and any generic competition could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may attempt to form collaborations in the future with respect to our product candidates, but we may not be able to do so, which may cause us to alter our development and commercialization plans.

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties with respect to our programs that we believe will complement or augment our existing business. For example, we currently intend to identify one or more strategic partners for the commercialization of plazomicin, and we may also attempt to find one or more strategic partners for the development or commercialization of one or more of our other product candidates. We face significant competition in seeking appropriate strategic partners, and the negotiation process to secure appropriate terms is time-consuming and complex. We may not be

 

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successful in our efforts to establish such a strategic partnership for any product candidates and programs on terms that are acceptable to us, or at all.

Any delays in identifying suitable collaborators and entering into agreements to develop or commercialize our product candidates could negatively impact the development or commercialization of our product candidates in geographic regions where we do not have development and commercialization infrastructure. Absent a collaboration partner, we would need to undertake development or commercialization activities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we are unable to do so, we may not be able to develop our product candidates or bring them to market and our business may be materially and adversely affected.

We may be unable to realize the potential benefits of any collaboration.

Even if we are successful in entering into a collaboration with respect to the development 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;

 

   

collaborators may cease to devote resources to the development or commercialization of our product candidates if the collaborators view our 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;

 

   

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 us to litigation and potential liability;

 

   

the collaborations may not result in us achieving revenue to justify such transactions; and

 

   

collaborations may be terminated and, if terminated, may result in a need for us 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 our product candidates.

Our operating activities may be restricted as a result of covenants related to the outstanding indebtedness under our loan agreement and we may be required to repay the outstanding indebtedness in an event of default, which could have a materially adverse effect on our business.

As of September 30, 2013, we had $7.8 million of indebtedness outstanding under our loan and security agreement with Silicon Valley Bank and Oxford Finance LLC. The loan agreement subjects us to various customary covenants, including requirements as to financial reporting and insurance, and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property,

 

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to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock, or to redeem capital stock. Our business may be adversely affected by these restrictions on our ability to operate our business.

Additionally, we may be required to repay the outstanding indebtedness under the loan facility if an event of default occurs under the loan agreement. Under the loan agreement, an event of default will occur if, among other things, we fail to make payments under the loan agreement; we breach any of our covenants under the loan agreement, subject to specified cure periods with respect to certain breaches; a lender determines in good faith that we are unable to satisfy our obligations under the loan agreement as they become due and that our principal investors do not intend to fund amounts necessary to satisfy such obligations; we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to pay our debts as they become due; or we default on contracts with third parties which would permit the holder of indebtedness to accelerate the maturity of such indebtedness or that could have a material adverse change on us. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In this case, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant to others, rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Oxford Finance LLC could also exercise its rights as collateral agent to take possession of and to dispose the collateral of the loan for the benefit of the lenders, which collateral includes all of our property other than our intellectual property. Our business, financial condition and results of operations could be materially adversely affected as a result of any of these events.

We may need to grow our organization, and we may experience difficulties in managing growth.

As of September 30, 2013, we had 38 employees. We will need to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities, commercialize plazomicin or other product candidates and transition to becoming a public reporting company. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our business strategy requires that we:

 

   

manage our pivotal Phase 3 superiority trial, which is expected to be conducted at multiple trial sites, and manage any other clinical trials;

 

   

manage our internal discovery and development efforts effectively while carrying out our contractual obligations to licensors, contractors, government agencies, any future collaborators and other third parties;

 

   

continue to improve our operational, financial and management controls, reporting systems and procedures; and

 

   

identify, recruit, maintain, motivate and integrate additional employees.

If we are unable to expand our managerial, operational, financial and other resources to the extent required to manage our development and commercialization activities, our business will be materially adversely affected.

We are highly dependent on the services of our Chief Executive Officer, Kenneth J. Hillan, M.B., Ch.B. and our ability to attract and retain qualified personnel.

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco Bay Area. We are highly dependent on the principal members of our management and scientific staff, particularly our Chief Executive Officer, Dr. Hillan. If we are not able to retain Dr. Hillan or are not able to attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow. Although we have executed employment agreements with each member of our current executive management team, including Dr. Hillan, we may not be able to retain their services as expected. In addition to the competition for personnel, the San Francisco Bay Area in particular is characterized by a high cost of living. Although we historically have

 

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not had any material difficulty attracting experienced personnel to our company, we could in the future have such difficulties and may be required to expend significant financial resources in our employee recruitment and retention efforts.

In addition, we have scientific and clinical advisors who assist us in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours.

If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials, including the components of our pharmaceutical product candidates, test samples and reagents, biological materials and other hazardous compounds. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and/or interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.

Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage or disruption from computer viruses, software bugs, unauthorized access, natural disasters, terrorism, war, and telecommunication, equipment and electrical failures. While we have not, to our knowledge, experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure or theft of confidential or proprietary information, we could incur liability, the further development of our product candidates could be delayed or our competitive position could be compromised.

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

We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates:

 

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(1) FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA; (2) manufacturing standards; (3) federal and state healthcare fraud and abuse laws and regulations; or (4) laws that require the true, complete and accurate reporting of financial information or data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. 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 our reputation. It is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws 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 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.

Requirements associated with being a public company will increase our costs significantly, as well as divert significant company resources and management attention.

Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or the other rules and regulations of the SEC or any securities exchange relating to public companies. We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that will be required in order to adequately prepare for being a public company could be material, particularly after we cease to be an “emerging growth company.” Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management. In addition, the changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be subject to sanctions by regulatory authorities.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our annual report for the year ending December 31, 2015, provide a management report on the internal control over financial reporting. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be evaluating our internal controls systems to allow management to report on, and eventually our independent auditors will attest to, the effectiveness of the operation of our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and eventual auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The aforementioned auditor attestation requirements will not apply to us until we are no longer an “emerging growth company.”

 

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To date, we have not conducted a review of our internal controls for the purpose of providing the reports required by these rules. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC or The NASDAQ Stock Market LLC, or NASDAQ. Any such action could adversely affect our financial results or investors’ confidence in us and could cause our stock price to fall. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources and could materially adversely affect our stock price. Deficient internal controls could also cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could have a negative effect on our stock price.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon completion of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

A variety of risks associated with international operations could materially adversely affect our business.

Certain of our existing suppliers are located outside of the United States, including our sole source supplier for sisomicin, a key raw material for the production of plazomicin, which is located in China, and for which we do not have a commercial supply agreement. Additionally, if plazomicin is approved for commercialization outside the United States we will likely seek to enter into agreements with third parties to market plazomicin outside the United States. We are, or we expect that we will be, subject to additional risks related to these international business relationships, including:

 

   

different regulatory requirements for drug approvals in foreign countries;

 

   

differing United States and foreign drug import and export rules;

 

   

reduced protection for intellectual property rights in certain foreign countries;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

different reimbursement systems;

 

   

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

 

   

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

 

   

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

 

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potential liability resulting from development work conducted by these third parties; and

 

   

business interruptions resulting from geopolitical events, including war and terrorism, or natural disasters.

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters is located in the San Francisco Bay Area, which in the past has experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our information technology systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Furthermore, integral parties in our supply chain are geographically concentrated and operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.

Risks Related to Our United States Government Contracts

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

Our development of plazomicin as a countermeasure for diseases caused by antibiotic-resistant pathogens and biothreats is currently being funded in significant part through a contract with BARDA. We have also received funding in the past for other programs from the U.S. Department of Defense’s Defense Threat Reduction Agency, or DTRA, and from the National Institute of Health’s National Institute of Allergy and Infectious Diseases, or NIAID, division. Contracts funded by the U.S. government and its agencies, including our contract with BARDA, include provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

control and potentially prohibit the export of products; and

 

   

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

We may not have the right to prohibit the U.S. government from using or allowing others to use certain technologies developed by us, and we may not be able to prohibit third party companies, including our competitors, from using those technologies in providing products and services to the U.S. government. The U.S. government generally obtains the right to royalty-free use of technologies that are developed under U.S. government contracts. For further information, see “Risks Related to Intellectual Property—Provisions in our United States government contracts, including our contract with BARDA, may affect our intellectual property rights.

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

 

   

specialized accounting systems unique to government contracts;

 

   

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

 

   

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

 

   

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

If we fail to maintain compliance with these requirements, we may be subject to potential contract or FCA liability and to termination of our contracts.

We are dependent on our BARDA contract to fund our pivotal Phase 3 superiority trial of plazomicin, and if we do not receive all of the funds under this contract, we may be forced to suspend or terminate this program or obtain alternative sources of funding.

We expect a significant portion of the funding for our pivotal Phase 3 superiority trial of plazomicin to come from our BARDA contract. BARDA may terminate our contract at any time for convenience and there can be no assurances that this contract will not be terminated. Changes in government budgets and agendas may result in a decreased and de-prioritized emphasis on supporting the development of antibacterial products such as plazomicin. Although we intend to use a portion of the proceeds from this offering to fund our plazomicin development program, any reduction or delay in BARDA funding may force us to suspend or terminate the program or seek alternative funding, which may not be available on non-dilutive terms, terms favorable to us or at all. Further, although our BARDA contract contains an unexercised option for additional funding to support, among other things, our planned additional safety trial of plazomicin, we have not determined the dollar amount of this option and cannot make any assurances as to when or whether the option will be exercised.

United States government agencies have special contracting requirements that give them the ability to unilaterally control our contracts.

U.S. government contracts typically contain unfavorable termination provisions and are subject to audit and modification by the government at its sole discretion, which will subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:

 

   

audit and object to our BARDA contract-related costs and fees, and require us to reimburse all such costs and fees;

 

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suspend or prevent us for a set period of time from receiving new contracts or extending our existing contracts based on violations or suspected violations of laws or regulations;

 

   

cancel, terminate or suspend our contracts based on violations or suspected violations of laws or regulations;

 

   

terminate our contracts if in the government’s interest, including if funds become unavailable to the applicable governmental agency;

 

   

reduce the scope and value of our contract; and

 

   

change certain terms and conditions in our contract.

The U.S. government will be able to terminate any of its contracts with us, either for convenience or if we default by failing to perform in accordance with or to achieve the milestones set forth in the contract schedules and terms. Termination-for-convenience provisions generally enable us to recover only our costs incurred or committed and settlement expenses on the work completed prior to termination. Except for the amount of services received by the government, termination-for-default provisions do not permit these recoveries and would make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source.

The United States government’s determination to award a future contract or contract option may be challenged by an interested party, such as another bidder, at the United States Government Accountability Office, or the GAO, or in federal court. If such a challenge is successful, our BARDA contract or any future contract we may be awarded may be terminated.

The laws and regulations governing the procurement of goods and services by the U.S. government provide procedures by which other bidders and interested parties may challenge the award of a government contract. If we are awarded a government contract, such challenges or protests could be filed even if there are not any valid legal grounds on which to base the protest. If any such protests are filed, the government agency may decide to suspend our performance under the contract while such protests are being considered by the GAO or the applicable federal court, thus potentially delaying delivery of payment. In addition, we could be forced to expend considerable funds to defend any potential award. If a protest is successful, the government may be ordered to terminate any one or more of our contracts and reselect bids. The government agencies with which we have contracts could even be directed to award a potential contract to one of the other bidders.

Our business is subject to audit by the United States government, including under our contracts with BARDA and DTRA, and a negative outcome in an audit could adversely affect our business.

U.S. government agencies such as the Department of Health and Human Services, or DHHS, the Defense Contract Audit Agency, or the DCAA, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.

The DHHS and the DCAA also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be paid, while such costs already paid must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:

 

   

termination of contracts;

 

   

forfeiture of profits;

 

   

suspension of payments;

 

   

fines; and

 

   

suspension or prohibition from conducting business with the U.S. government.

 

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In addition, we could suffer serious reputational harm if allegations of impropriety were made against us, which could cause our stock price to decrease.

There is no assurance that we will receive payment from DTRA for additional expenses related to our LpxC inhibitor program, and the audit being conducted in connection with our proposal for such payments may require us to refund a portion of past payments.

In November 2012, DTRA terminated for convenience a contract with us that provided funding for our LpxC inhibitor program. In connection with the termination, we are seeking payment from DTRA for additional expenses we have incurred. We cannot be certain that we will be able to prevail upon DTRA to make such payments or that we would be successful in any subsequent legal proceeding to challenge DTRA’s decision.

In connection with our claim for payment from DTRA, we are undergoing an audit by the DCAA of the expenses for which we are seeking payment, as well as of $33.4 million previously paid to us under the DTRA contract. The results of the audit may lead certain expenses to be disallowed under the contract, which may reduce the size of any payment we may receive from DTRA, or may require us to refund some of the previously paid amounts we received from DTRA, which would adversely affect our financial position and results of operations.

Laws and regulations affecting government contracts make it more costly and difficult for us to successfully conduct our business.

We must comply with numerous laws and regulations relating to the formation, administration and performance of government contracts, which can make it more difficult for us to retain our rights under our BARDA contract. These laws and regulations affect how we conduct business with government agencies. Among the most significant government contracting regulations that affect our business are:

 

   

the Federal Acquisition Regulations, or FAR, and agency-specific regulations supplemental to the FAR, which comprehensively regulate the procurement, formation, administration and performance of government contracts;

 

   

business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying activities and include other requirements such as the Anti-Kickback Statute and Foreign Corrupt Practices Act;

 

   

export and import control laws and regulations; and

 

   

laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

Any changes in applicable laws and regulations could restrict our ability to maintain our existing BARDA contract and obtain new contracts, which could limit our ability to conduct our business and materially adversely affect our results of operations.

Risks Related to Intellectual Property

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

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. In particular, our success depends in large part

 

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on our ability to obtain and maintain patent protection in the United States and other countries with respect to our product candidates. However, we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection.

Further, the patentability of inventions, and the validity, enforceability and scope of patents in the biotechnology and pharmaceutical field involve complex legal and scientific questions and can be uncertain. As a result, patent applications that we own or license may fail to result in issued patents in the United States or in other foreign countries for many reasons. For example, there is no assurance that we were the first to invent or the first to file patent applications in respect of the inventions claimed in our patent applications. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. We may also be unaware of certain prior art relating to our patent applications and patents, which could prevent a patent from issuing from a pending patent application, or result in an issued patent being invalidated. Even if patents have issued, or do successfully issue, from patent applications, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents and patent applications we hold, license or pursue with respect to our product candidates is threatened, it could threaten our ability to commercialize our product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market any of our product candidates under patent protection, if approved, would be reduced. Changes to the patent laws in the United States and other jurisdictions could also diminish the value of our patents and patent applications or narrow the scope of our patent protection.

Furthermore, certain of the patents that we license from the University of Washington are co-owned by Novartis. The exclusivity of our license from the University of Washington is therefore subject to Novartis’ rights to use the licensed patents and technology for its own purposes, and to grant licenses to others to do so. We therefore rely primarily on our owned patent rights to provide patent protection for ACHN-975. However, none of these owned patent rights have yet issued, and if these fail to result in issued patents, our competitive position could be adversely affected.

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

In addition to the protection afforded by patents, we rely on confidential proprietary information, including trade secrets, and know-how to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and collaborators. These agreements are designed to protect our proprietary information. However, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Further, the laws of some foreign countries, including China, where we currently source raw materials for plazomicin, do not

 

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protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

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

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

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

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

Competitors may infringe or otherwise violate our patents, the patents of our licensors, or our other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, in whole or in part, or may refuse to stop the other party in such infringement proceeding from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated,

 

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held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent.

Interference or derivation proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may be necessary to determine the priority of inventions or other matters of inventorship with respect to our patents or patent applications. We may also become involved in other proceedings, such as re-examination or opposition proceedings, before the USPTO or its foreign counterparts relating to our intellectual property or the intellectual property rights of others. An unfavorable outcome in any such proceedings could require us to cease using the related technology or to attempt to license rights to it from the prevailing party, or could cause us to lose valuable intellectual property rights. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may also become involved in disputes with others regarding the ownership of intellectual property rights. For example, we jointly develop intellectual property with certain parties, and disagreements may therefore arise as to the ownership of the intellectual property developed pursuant to these relationships. If we are unable to resolve these disputes, we could lose valuable intellectual property rights.

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

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and/or management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

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

Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the United States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property 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, including China, where we currently source raw materials for plazomicin. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

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If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates from third parties, we could lose license rights that are important to our business.

While the primary patent family covering plazomicin is Achaogen-owned, our development and commercialization of plazomicin is subject to our license agreement with Isis Pharmaceuticals, Inc., and a portion of the patent portfolio for our LpxC inhibitor program, including ACHN-975, is in-licensed from the University of Washington. Under our existing license agreements, we are subject to various obligations, including diligence obligations with respect to development and commercialization activities, payment obligations for achievement of certain milestones and royalties on product sales, as well as other material obligations. If we fail to comply with any of these obligations or otherwise breach our license agreements, our licensing collaborators may have the right to terminate the applicable license in whole or in part. The loss of our license agreement with Isis Pharmaceuticals, Inc. could materially adversely affect our ability to proceed with the development or potential commercialization of plazomicin as currently planned, while the loss of our license agreement with the University of Washington could materially adversely affect our ability to proceed with any development or potential commercialization of our LpxC inhibitor program, including ACHN-975.

The risks described elsewhere pertaining to our patents and other intellectual property rights also apply to the intellectual property rights that we license, and any failure by us or our licensors to obtain, maintain and enforce these rights could have a material adverse effect on our business. In some cases we do not have control over the prosecution, maintenance or enforcement of the patents that we license, and may not have sufficient ability to consult and input into the patent prosecution and maintenance process with respect to such patents, and our licensors may fail to take the steps that we believe are necessary or desirable in order to obtain, maintain and enforce the licensed patents.

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

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

 

   

others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we own or license;

 

   

we or our licensors or collaborators might not have been the first to make the inventions covered by an issued patent or pending patent application that we own or license;

 

   

we or our licensors or collaborators might not have been the first to file patent applications covering an invention;

 

   

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

 

   

pending patent applications that we own or license may not lead to issued patents;

 

   

issued patents that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;

 

   

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

 

   

we may not develop or in-license additional proprietary technologies that are patentable; and

 

   

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

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

 

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

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to use our technologies and this circumstance would have a material adverse effect on our business.

Provisions in our United States government contracts, including our contract with BARDA, may affect our intellectual property rights.

Certain of our activities have been funded, and may in the future be funded, by the U.S. government. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use or allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, U.S. government-funded inventions must be reported to the government, U.S. government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States.

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

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has promulgated regulations and developed procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not come into effect until March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

We may be subject to claims that our employees or consultants have wrongfully used or disclosed alleged trade secrets of former or other employers.

Many of our employees and consultants, including our senior management, have been employed or retained by other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees or consultants have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s or consultant’s former or other employer. We are not aware of any material threatened or pending claims related to these matters, but in the future litigation may be necessary to defend against such claims. If we

 

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fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

If we do 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 our marketing exclusivity for our product candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, if any, one or more our U.S. patents covering our 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 also may be available in certain foreign countries upon regulatory approval of our product candidates. Nevertheless, we 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 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 we request.

If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.

Risks Related to Government Regulation

The regulatory approval process is expensive, time consuming and uncertain and may prevent us from obtaining, or cause delays in obtaining, approvals for the commercialization of some or all of our product candidates, which will materially impair our ability to generate revenue.

The design, development, research, testing, manufacturing, labeling, storage, recordkeeping, approval, selling, import, export, advertising, promotion, and distribution of drug products are subject to extensive and evolving regulation by federal, state and local governmental authorities in the United States, principally by the FDA, and foreign regulatory authorities, with regulations differing from country to country. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. Neither we nor any future collaboration partner is permitted to market plazomicin or any other product candidate in the United States until we receive regulatory approval of an NDA from the FDA.

We have not submitted an application or obtained marketing approval for plazomicin or any other product candidate anywhere in the world. An NDA must include extensive preclinical and clinical data and supporting information to establish to the FDA’s satisfaction the product candidate’s safety and efficacy for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product candidate. Obtaining regulatory approval of an NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including:

 

   

warning letters;

 

   

civil and criminal penalties;

 

   

injunctions;

 

   

withdrawal of approved products;

 

   

product seizure or detention;

 

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product recalls;

 

   

total or partial suspension of production; and

 

   

refusal to approve pending NDAs or supplements to approved NDAs.

Prior to receiving approval to commercialize any of our product candidates in the United States or abroad, we and any applicable collaboration partners must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities abroad, that such product candidates are safe and effective for their intended uses. Preclinical testing and clinical trials are long, expensive and uncertain processes. We may spend several years completing our testing for any particular product candidate, and failure can occur at any stage. Negative or inconclusive results or adverse medical events during a clinical trial could also cause the FDA or us to terminate a clinical trial or require that we repeat it or conduct additional clinical trials. Additionally, data obtained from preclinical studies and clinical trials can be interpreted in different ways and the FDA or other regulatory authorities may interpret the results of our studies and trials less favorably than we do. Even if we believe the preclinical or clinical data for a product candidate is promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any product candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials of such product candidates and result in the FDA or other regulatory authorities denying approval of such product candidates for any or all targeted indications. The FDA or other regulatory authorities may determine that plazomicin or any other product candidate that we develop is not effective, or is only moderately effective, or has undesirable or unintended side effects, toxicities, safety profile or other characteristics that preclude marketing approval or prevent or limit commercial use. In addition, any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

The regulatory approval process is expensive and may take several years to complete. The FDA and foreign regulatory entities have substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for FDA approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular product candidate. The FDA can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to, the following:

 

   

product candidate may not be deemed safe or effective;

 

   

FDA officials may not find the data from preclinical studies and clinical trials sufficient;

 

   

the FDA may request additional analyses, reports, data and studies;

 

   

the FDA may ask questions regarding, or adopt different interpretations of, data and results;

 

   

the FDA might not approve our or our third-party manufacturer’s processes or facilities; or

 

   

the FDA may change its approval policies or adopt new regulations.

Although we have received FDA fast track designation for our development of plazomicin to treat serious CRE infections, we cannot guarantee that we will experience a faster review or approval process compared to conventional FDA procedures. The FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.

If any of our product candidates fails to demonstrate safety and efficacy in clinical trials or does not gain regulatory approval, or if we experience delays in obtaining regulatory approval, our business and results of operations will be materially and adversely harmed.

 

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Even if we receive regulatory approval for a product candidate, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and subject us to restrictions, withdrawal from the market, or penalties if we fail to comply with applicable regulatory requirements or if we experience unanticipated problems with our product candidates, when and if approved.

Once regulatory approval has been granted, the approved product and its manufacturer are subject to continual review by the FDA and/or non-U.S. regulatory authorities. Any regulatory approval that we receive for our product candidates may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up studies or surveillance to monitor the safety and efficacy of the product. In addition, if the FDA and/or non-U.S. regulatory authorities approve any of our product candidates, we will be subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to labeling, packaging, adverse event reporting, storage, distribution, advertising, promotion, recordkeeping and submission of safety and other post-market information. Manufacturers of our products and manufacturers’ facilities are required to comply with cGMP regulations, which include requirements related to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must approve these manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and to comply with requirements concerning advertising and promotion for our products. If we, any future collaboration partner or a regulatory authority discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product, the collaboration partner, the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing.

The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling and regulatory requirements. The FDA also imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not restrict the marketing of our products only to their approved indications, we may be subject to enforcement action for off-label marketing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with regulatory requirements of the FDA and/or other non-U.S. regulatory authorities, we could be subject to administrative or judicially imposed sanctions, including:

 

   

warning letters or untitled letters;

 

   

mandated modifications to promotional materials or the required provision of corrective information to healthcare practitioners;

 

   

restrictions imposed on the product or its manufacturers or manufacturing processes;

 

   

restrictions imposed on the labeling or marketing of the product;

 

   

restrictions imposed on product distribution or use;

 

   

requirements for post-marketing clinical trials;

 

   

suspension of any ongoing clinical trials;

 

   

suspension of or withdrawal of regulatory approval;

 

   

voluntary or mandatory product recalls and publicity requirements;

 

   

refusal to approve pending applications for marketing approval of new products or supplements to approved applications filed by us;

 

   

restrictions on operations, including costly new manufacturing requirements;

 

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seizure or detention of our products;

 

   

refusal to permit the import or export of our products;

 

   

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

 

   

civil or criminal penalties; or

 

   

injunctions.

Widely publicized events concerning the safety risk of certain drug products have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and the imposition by the FDA of risk evaluation and mitigation strategies, or REMS, to ensure that the benefits of the drug outweigh its risks. In addition, because of the serious public health risks of high profile adverse safety events with certain products, the FDA may require, as a condition of approval, costly REMS programs.

The regulatory requirements and policies may change and additional government regulations may be enacted for which we may also be required to comply. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or in other countries. If we or any future collaboration partner are not able to maintain regulatory compliance, we or such collaboration partner, as applicable, will not be permitted to market our future products and our business will suffer.

Failure to obtain regulatory approvals in foreign jurisdictions will prevent us from marketing our product candidates internationally.

We may seek a distribution and marketing collaborator for plazomicin or other product candidates commercialized outside of the United States. In order to market our product candidates in the European Economic Area, or EEA (which is comprised of the 28 Member States of the EU, plus Norway, Iceland and Liechtenstein), and many other foreign jurisdictions, we or our collaboration partners must obtain separate regulatory approvals. More concretely, in the EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:

 

   

the Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use of the European Medicines Agency, or EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as for drugs produced through certain specified biotechnological processes (such as recombinant DNA technology, controlled expression of genes coding for biologically active proteins in prokaryotes and eukaryotes including transformed mammalian cells, and hybridoma and monoclonal antibody methods), advanced therapy medicinal products, orphan medicinal products, and medicinal products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.

 

   

national MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.

 

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Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

We have had limited interactions with foreign regulatory authorities, and approval procedures vary among countries and can involve additional clinical testing. In addition, the time required to obtain approval from foreign regulatory authorities may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on our ability to obtain approval in other countries. The foreign regulatory approval process generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may or may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and even if we file, we may not receive necessary approvals to commercialize our product candidates in any market.

Healthcare reform measures could hinder or prevent our product candidates’ commercial success.

In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which is intended to contain or reduce the costs of medical products and services. For example, in March 2010, the President signed one of the most significant healthcare reform measures in decades, the Affordable Care Act. It contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things:

 

   

imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs”;

 

   

increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%;

 

   

requires collection of rebates for drugs paid by Medicaid managed care organizations;

 

   

addresses new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs that are line extension products;

 

   

requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; and

 

   

mandates a further shift in the burden of Medicaid payments to the states.

Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reductions to several government programs. These reductions include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year,

 

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which went into effect on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

We are subject to healthcare laws, regulation and enforcement and our failure to comply with those laws could adversely affect our business, operations and financial condition.

Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include, without limitation:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

   

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entities that provide coding and billing advice to customers;

 

   

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

   

the federal physician sunshine requirements under the Affordable Care Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the Centers for Medicare & Medicaid Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state 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 laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In

 

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addition, recent healthcare reform legislation has strengthened these laws. For example, the recently enacted Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

Achieving and sustaining compliance with these laws may prove costly. In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the exclusion from participation in federal and state healthcare programs, imprisonment, or the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.

Risks Related to Our Common Stock and This Offering

The price of our common stock may be volatile, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for the shares of our common stock sold in this offering has been determined by negotiation between the underwriters and us. This price may not reflect the market price of our common stock following this offering. You may be unable to sell your shares of common stock at or above the initial public offering price due to fluctuations in the market price of our common stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

 

   

ability to commercialize or obtain regulatory approval for our product candidates, or delays in commercializing or obtaining regulatory approval;

 

   

announcements relating to our Phase 3 trial for plazomicin, including any periodic updates relating to enrollment of trial subjects, adverse events, site initiation, and timing of release of interim analyses and final trial results;

 

   

results from, or any delays in, clinical trial programs relating to our product candidates, including our Phase 3 trial for plazomicin;

 

   

any need to suspend or discontinue clinical trials due to side effects or other safety risks, or any need to conduct studies on the long-term effects associated with the use of our product candidates;

 

   

manufacturing issues related to our product candidates for clinical trials or future products for commercialization;

 

   

commercial success and market acceptance of our product candidates following regulatory approval;

 

   

undesirable side effects caused by product candidates after they have entered the market;

 

   

spread of bacterial resistance to our product candidates;

 

   

ability to discover, develop and commercialize additional product candidates;

 

   

announcements relating to collaborations that we may enter into with respect to the development or commercialization of our product candidates, or the timing of payments we may make or receive under these arrangements;

 

   

announcements relating to the receipt, modification or termination of government contracts or grants, or the timing of payments we may receive under these arrangements;

 

   

success of our competitors in discovering, developing or commercializing products;

 

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strategic transactions undertaken by us;

 

   

additions or departures of key personnel;

 

   

product liability claims related to our clinical trials or product candidates;

 

   

prevailing economic conditions;

 

   

business disruptions caused by earthquakes or other natural disasters;

 

   

disputes concerning our intellectual property or other proprietary rights;

 

   

FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

   

healthcare reform measures in the United States;

 

   

sales of our common stock by our officers, directors or significant stockholders;

 

   

future sales or issuances of equity or debt securities by us;

 

   

fluctuations in our quarterly operating results; and

 

   

the issuance of new or changed securities analysts’ reports or recommendations regarding us.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that have been often unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

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

Based on the beneficial ownership of our common stock as of December 31, 2013, after this offering, our officers and directors, together with holders of 5% or more of our outstanding common stock before this offering and their respective affiliates, will beneficially own approximately         % of our common stock (assuming no exercise of the underwriters’ option to purchase additional shares of common stock). Accordingly, these stockholders will continue to have significant 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 our assets or any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with your interests. For example, these stockholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

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

We are an “emerging growth company,” as defined in the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not

 

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previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 102 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Future sales of our common stock or securities convertible or exchangeable for our common stock may depress our stock price.

If our existing stockholders or holders of our options or warrants sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. The perception in the market that these sales may occur could also cause the trading price of our common stock to decline. Based on the number of shares of common stock outstanding as of December 31, 2013, upon the completion of this offering, we will have outstanding a total of                 shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares of common stock. Of these shares, only the shares of common stock sold by us in this offering, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares of common stock, will be freely tradable without restriction, unless held by our affiliates, in the public market immediately following this offering.

A total of                 shares of common stock are not subject to lock-up agreement with the underwriters and therefore will be eligible for sale in the public market 90 days after the date of this prospectus. We expect that the lock-up agreements with the underwriters pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, up to an additional                 shares of common stock will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, with respect to shares held by directors, executive officers and other affiliates. The underwriters may, however, in their sole discretion, permit our officers, directors and other stockholders and the holders of our outstanding options and warrants who are subject to the lock-up agreements to sell shares prior to the expiration of the lock-up agreements. Sales of these shares, or perceptions that they will be sold, could cause the trading price of our common stock to decline.

In addition, based on the number of shares subject to outstanding awards under our Amended and Restated 2003 Stock Plan, or 2003 Plan, or available for issuance thereunder, as of December 31, 2013, and including the initial reserves under our 2014 Equity Incentive Award Plan, or 2014 Plan,                 shares of common stock that are either subject to outstanding options, outstanding but subject to vesting, or reserved for future issuance under the 2003 Plan or 2014 Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. We also plan to file a registration statement permitting shares of common stock issued in the future pursuant to the 2003 Plan and 2014 Plan to be freely resold by plan participants in the public market, subject to the lock-up agreements, applicable vesting schedules and, for shares held by directors, executive officers and other affiliates, volume limitations under Rule 144 for shares. The 2014 Plan also contains a provision for the annual increase of the number of shares reserved for issuance under such plan, as described elsewhere in this prospectus, which shares we also intend to register. If the shares we may issue from time to time under the 2003 Plan, or 2014 Plan are sold, or if it is perceived that they will be sold, by the award recipient in the public market, the trading price of our common stock could decline.

 

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Certain holders of 114,115,833 shares of our common stock, warrants to purchase our capital stock and the 445,028 shares of common stock issuable upon exercise of those warrants will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Sales of such shares could also cause the trading price of our common stock to decline.

If there is no viable public market for our common stock, you may not be able to sell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock will not decline below the initial public offering price. The initial public offering price was determined through negotiations between us and the underwriters and may not be indicative of the market price of our common stock following this offering. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. See “Underwriting” for additional information.

Investors in this offering will suffer immediate and substantial dilution of their investment.

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

We have also issued warrants and options in the past to acquire common stock at prices significantly below the initial offering price. As of December 31, 2013, there were 430,275 shares of convertible preferred stock subject to outstanding warrants with a weighted-average exercise price of $1.16 per share (such warrants would be converted into warrants for 445,028 shares of common stock with a weighted-average exercise price of $1.12 as a result of this offering), 10,000 shares of common stock subject to an outstanding warrant with an exercise price of $0.14 per share (which warrant was exercised in January 2014) and 15,461,893 shares of common stock subject to outstanding options with a weighted-average exercise price of $0.52 per share. To the extent that these outstanding warrants and options are ultimately exercised, you will incur further dilution, and our stock price may decline.

Raising additional capital may cause dilution to our existing stockholders or involve the issuance of securities with rights, preferences and privileges senior to those of holders of our common stock.

To raise capital, we may from time to time issue additional shares of common stock at a discount from the then-current trading price of our common stock. As a result, our common stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. Whether or not we issue additional shares of common stock at a discount, any issuance of common stock will, and any issuance of other equity securities or of options, warrants or other rights to purchase common stock may, result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline. New investors could also gain rights, preferences and privileges senior to those of holders of our common stock, which could cause the price of our common stock to decline.

 

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

Our management will have broad discretion over the use of the net proceeds from this offering. Because of the number and variability of factors that will determine our use of such proceeds, you may not agree with how we allocate or spend the proceeds from this offering. We may pursue collaborations, clinical trials or discovery and development programs that do not result in an increase in the market value of our common shares and that may increase our losses. Our failure to allocate and spend the net proceeds from this offering effectively would have a material adverse effect on our financial condition and business. Until the net proceeds are used, they may be placed in investments that do not produce significant investment returns or that may lose value.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

 

   

a classified board of directors so that not all directors are elected at one time;

 

   

a prohibition on stockholder action through written consent;

 

   

no cumulative voting in the election of directors;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director;

 

   

a requirement that special meetings of stockholders be called only by the board of directors, the chairman of the board of directors, the chief executive officer or, in the absence of a chief executive officer, the president;

 

   

an advance notice requirement for stockholder proposals and nominations;

 

   

directors may not be removed without cause and may only be removed with cause by the affirmative vote of 66 2/3% of all outstanding shares of our capital stock with the power to vote in the election of directors;

 

   

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and

 

   

a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock with the power to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the last three years has owned 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company. Furthermore, our amended and restated certificate of incorporation will specify that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. We believe this provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens

 

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of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action.

Provisions in our charter and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future; therefore capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, the terms of any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

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

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

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

   

our expectations regarding the timing of initiation, enrollment and completion of our pivotal Phase 3 superiority trial for plazomicin, including our expectations regarding the timing of receipt and release of interim and full trial results;

 

   

our expectations regarding the timing of submission of an NDA for plazomicin following our pivotal Phase 3 superiority trial;

 

   

our expectations regarding the receipt of approvals to market plazomicin;

 

   

our expectations regarding the pricing, reimbursement and commercial potential of plazomicin and our other product candidates;

 

   

our expectations regarding our ability to validate, develop, and obtain regulatory approval for our in vitro assay to measure plazomicin levels;

 

   

the initiation, timing, progress and results of any preclinical studies and clinical trials we may initiate;

 

   

our ability to discover and develop additional product candidates and advance such product candidates through preclinical and clinical studies

 

   

our future research and development programs;

 

   

our ability to advance product candidates into, and successfully complete, clinical trials;

 

   

the implementation of our business model, strategic plans for our business, product candidates and technology;

 

   

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

 

   

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

 

   

the timing or likelihood of regulatory filings and approvals or of alternative regulatory pathways for any of our product candidates;

 

   

our ability to establish collaborations or obtain additional government funding or receive funding under existing contracts;

 

   

our use of proceeds from this offering;

 

   

our financial performance; and

 

   

developments relating to our competitors and our industry.

Any forward-looking statements in this prospectus reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

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This prospectus also contains estimates, projections and other information concerning our industry, our business, and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates, the incidence of certain medical conditions, statements that certain drugs, classes of drugs or dosages are the most widely prescribed in the United States or other markets, the perceptions and preferences of patients and physicians regarding certain therapies and other prescription, prescriber and patient data, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of              shares of our common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share (the midpoint of the price range shown on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds from this offering will be approximately $         million after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $         would increase or decrease, respectively, our net proceeds by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $         million, assuming the assumed initial public offering price stays the same. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may affect the amount of time prior to which we may need to seek additional capital.

We plan to use approximately $         million of the net proceeds from this offering in combination with the expected funding from our BARDA contract, to support our planned registration program for plazomicin. We plan to use the remainder to fund our other research and development activities, and for working capital and general corporate expenditures. We may use a portion of the proceeds to make scheduled payments of principal and interest on our outstanding loan with Oxford Finance LLC and Silicon Valley Bank, which is scheduled to be fully repaid by February 2015. For additional information related to our outstanding loan, including the interest rate and maturity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contrctual Obligations and Commitments—Notes Payable.”

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. Assuming we receive the full amount of funding from our BARDA contract, including under the unexercised option, we expect such funds, together with the proceeds from this offering, will be sufficient to fund our development of plazomicin through receipt of top-line data from our Phase 3 trial. We anticipate that we will need to raise substantial additional financing in the future to fund our operations, including for obtaining marketing approval for plazomicin. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the timing and speed of enrollment of our pivotal Phase 3 superiority trial of plazomicin, the status of our research and development programs, the continued receipt of funding under our contract with BARDA, and whether regulatory authorities require us to perform additional clinical trials of plazomicin in order to obtain marketing approvals. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds.

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

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors. In addition, unless waived, the terms of our loan from Silicon Valley Bank and Oxford Finance prohibit us from paying any cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of September 30, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

   

the issuance and sale of 9,174,314 shares of our Series D convertible preferred stock with gross proceeds to us of $10.0 million in November 2013, and the conversion of such shares into common stock as described below;

 

   

the conversion immediately prior to the completion of this offering of all of our outstanding shares of convertible preferred stock into an aggregate of 114,256,264 shares of common stock, which includes the 9,174,314 shares of common stock issuable upon conversion of the shares of Series D convertible preferred stock issued in November 2013;

 

   

the exercise of a common stock warrant for 10,000 shares at an exercise price of $0.14 per share in January 2014, which shares are excluded from the number of shares outstanding as of September 30, 2013 on an actual basis;

 

   

the reclassification to additional paid-in capital of our convertible preferred stock warrant liabilities included in other long-term liabilities in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants, immediately prior to the completion of this offering; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.

 

   

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

 

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

 

     As of September 30, 2013  
     Actual       Pro Forma       Pro Forma as
Adjusted(1)
 
           (unaudited)        
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 8,212      $ 18,212      $     
  

 

 

   

 

 

   

 

 

 

Notes payable

   $ 7,786      $ 7,786      $ 7,786   

Other long-term liabilities

     176        —          —     

Convertible preferred stock, par value $0.001 per share: 132,202,910 shares authorized, 98,585,753 shares issued and outstanding, actual; no shares authorized, issued and outstanding pro forma and pro forma as adjusted

     122,287        —          —     

Stockholders’ equity (deficit):

      

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

     —          —          —     

Common stock, par value $0.001 per share: 163,000,000 shares authorized, 4,321,523 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding pro forma;             shares issued and outstanding pro forma as adjusted

     4        119     

Additional paid-in capital

     3,917        136,265     

Accumulated deficit

     (126,238     (126,238  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (122,317     10,146     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 7,756      $ 17,932      $     
  

 

 

   

 

 

   

 

 

 

 

(1)   Each $1.00 increase or decrease in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, respectively, the amount of additional paid-in capital, total stockholders’ equity and total capitalization by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and commissions, and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the amount of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming the assumed initial public offering price per share, as set forth on the cover page of this prospectus, remains the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above excludes the following shares as of September 30, 2013:

 

   

15,461,893 shares of common stock issuable upon exercise of stock options outstanding under our Amended and Restated 2003 Stock Plan, at a weighted-average exercise price of $0.52 per share;

 

   

1,398,910 shares of common stock reserved for issuance pursuant to future awards under our Amended and Restated 2003 Stock Plan, will become available for issuance under our 2014 Equity Incentive Award Plan upon the effectiveness of the registration statement to which this prospectus relates;

 

   

                 additional shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective upon the effectiveness of the registration statement to which this prospectus relates; and

 

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445,028 shares of common stock issuable upon the exercise of warrants outstanding to purchase convertible preferred stock, assuming their conversion into warrants to purchase common stock immediately prior to the completion of this offering, at a weighted-average exercise price of $1.12 per share, which warrants are expected to remain outstanding following the completion of this offering.

 

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DILUTION

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

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value as of September 30, 2013 was $(30,000), or $(0.01) per share. Our pro forma net tangible book value as of September 30, 2013 was $         million, or $         per share. Pro forma net tangible book value per share, before the issuance and sale of shares in this offering, gives effect to:

 

   

the issuance and sale of 9,174,314 shares of our Series D convertible preferred stock with gross proceeds to us of $10.0 million in November 2013, and the conversion of such shares into common stock as described below;

 

   

the conversion immediately prior to the completion of this offering of all of our outstanding shares of convertible preferred stock into an aggregate of 114,256,264 shares of common stock, which includes 9,174,314 shares of common stock issuable upon conversion of the shares of Series D convertible preferred stock issued in November 2013;

 

   

the exercise of a common stock warrant for 10,000 shares at an exercise price of $0.14 per share in January 2014, which shares are excluded from the number of shares outstanding as of September 30, 2013 on an actual basis;

 

   

the reclassification to additional paid-in capital of our convertible preferred stock warrant liabilities included in other long-term liabilities in connection with the conversion of our outstanding convertible preferred stock warrants into common stock warrants immediately prior to the completion of this offering; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2013 would have been $         million, or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution in net tangible book value of $         per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

     $                

Historical net tangible book value per share as of September 30, 2013

   $ (0.01  

Pro forma increase in net tangible book value per share attributable to pro forma transactions and other adjustments described above, as of September 30, 2013

    

Pro forma net tangible book value per share as of September 30, 2013

    

Increase in pro forma net tangible book value per share attributable to new investors

    
  

 

 

   

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

    
    

 

 

 

Dilution per share to investors participating in this offering

     $     
    

 

 

 

Each $1.00 increase or decrease in the assumed public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, respectively, our pro forma

 

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as adjusted net tangible book value by $         million, or $         per share, and the pro forma dilution per share to investors in this offering by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $         per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $         per share and the dilution to new investors purchasing shares in this offering would be $         per share. We may also increase or decrease the number of shares we are offering. At the assumed offering price, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, an increase of 1,000,000 in the number of shares we are offering would increase our pro forma as adjusted net tangible book value by approximately $         million, or $         per share, and would decrease the pro forma dilution per share to investors in this offering by $         per share, and a decrease of 1,000,000 in the number of shares we are offering would decrease our pro forma as adjusted net tangible book value by approximately $         million, or $         per share, and would increase the pro forma dilution per share to investors in this offering by $         per share. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters fully exercise their option to purchase additional shares, pro forma as adjusted net tangible book value after this offering would increase to approximately $         per share, and there would be an immediate dilution of approximately $         per share to new investors.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following table presents, on the pro forma as adjusted basis described above, as of September 30, 2013, the differences between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid, which includes net proceeds received from the issuance of common and preferred stock, cash received from the exercise of stock options and warrants and the value of any stock issued for services and the average price paid per share (in thousands, except per share amounts and percentages):

 

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

Existing stockholders

                   $                                 $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Totals

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing stockholders would be approximately $         million, or     %, and the total consideration paid by our new investors would be $         million, or     %.

The information and tables in this section are based on shares of common stock outstanding as of September 30, 2013 and exclude the following:

 

   

15,461,893 shares of common stock issuable upon exercise of stock options outstanding under our Amended and Restated 2003 Stock Plan, at a weighted-average exercise price of $0.52 per share;

 

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1,398,910 shares of common stock reserved for issuance pursuant to future awards under our Amended and Restated 2003 Stock Plan, will become available for issuance under our 2014 Equity Incentive Award Plan upon the effectiveness of the registration statement to which this prospectus relates;

 

   

                 additional shares of common stock reserved for issuance pursuant to future awards under our 2014 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective upon the effectiveness of the registration statement to which this prospectus relates; and

 

   

445,028 shares of common stock issuable upon the exercise of warrants outstanding to purchase convertible preferred stock, assuming their conversion into warrants to purchase common stock immediately prior to the completion of this offering, at a weighted-average exercise price of $1.12 per share, which warrants are expected to remain outstanding following the completion of this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements included elsewhere in this prospectus.

The selected consolidated statement of operations data for the nine months ended September 30, 2012 and 2013 and the selected consolidated balance sheet data as of September 30, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial information has been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our consolidated financial position as of September 30, 2013 and the consolidated results of operations for the nine months ended September 30, 2012 and 2013.

Our historical results are not necessarily indicative of the results that may be expected in the future and interim results are not necessarily indicative of results to be expected for the full year. You should read the selected historical consolidated financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
                 (unaudited)  
     (in thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

        

Contract revenue

   $ 22,474      $ 17,941      $ 13,971      $ 12,320   

Operating expenses:

        

Research and development

     35,210        26,581        23,036        16,685   

General and administrative

     7,979        7,349        5,668        5,418   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     43,189        33,930        28,704        22,103   

Loss from operations

     (20,715     (15,989     (14,733     (9,783

Interest expense and other, net

     (166     (2,427     (1,799     (1,104

Interest income and other, net

     15        51        47        261   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,866   $ (18,365   $ (16,485   $ (10,626
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share, basic and diluted(1)

   $ (5.97   $ (4.80   $ (4.39   $ (2.50
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net loss per common share, basic and diluted(1)

     3,494,897        3,828,104        3,755,025        4,243,898   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     $ (0.21     $ (0.10
    

 

 

     

 

 

 

 

(1)   See Note 2 to our audited financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net loss per common share and pro forma net loss per common share.

 

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     As of December 31,     As of
September 30,
 
     2011     2012     2013  
                 (unaudited)  
           (in thousands)        

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 12,528      $ 7,073      $ 8,212   

Working capital (deficit)

     10,760        (306     2,147   

Total assets

     19,478        13,266        13,821   

Notes payable

     3,947        10,847        7,786   

Other long-term liabilities

     126        237        176   

Convertible preferred stock

     100,354        100,354        122,287   

Accumulated deficit

     (97,247     (115,612     (126,238

Total stockholders’ deficit

     (95,216     (112,578     (122,317

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with the section of this prospectus entitled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterials to treat multi-drug resistant, or MDR, gram-negative infections. We are developing plazomicin, our lead product candidate, for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae, or CRE. In 2013, the Centers for Disease Control and Prevention identified CRE as a “nightmare bacteria” and an immediate public health threat that requires “urgent and aggressive action.” We expect to initiate a Phase 3 superiority trial of plazomicin in the first quarter of 2014. Through the Special Protocol Assessment procedure, the U.S. Food and Drug Administration, or FDA, has agreed that the design and planned analyses of our single pivotal Phase 3 trial adequately address objectives in support of a New Drug Application. We have also received FDA fast track designation for the development and regulatory review of plazomicin to treat serious and life-threatening CRE infections. Our plazomicin program is funded in part with a contract from the Biomedical Advanced Research and Development Authority for up to $103.8 million. We have global commercialization rights to plazomicin, which has patent protection in the United States extending through 2031. Plazomicin is the first clinical candidate from our gram-negative antibiotic discovery engine, and we have other programs in early and late preclinical stages focused on other MDR gram-negative infections.

Since commencing operations in 2004, we have devoted substantially all of our resources to identifying and developing our product candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these functions. In addition to plazomicin, our research team is focused on discovering medicines with novel mechanisms of action for serious infections caused by MDR Pseudomonas aeruginosa. We are taking a multifaceted approach to identify new antipseudomonal agents through our small molecule program, or LpxC inhibitor program, and therapeutic antibody discovery program. We expect to nominate at least one clinical candidate from our antipseudomonal program in 2014 and to file an investigational new drug application, or IND, in 2015. We also maintain an active discovery and development program in infections caused by gram-negative bacteria, drawing on knowledge gained through our work on LpxC inhibitors to identify compounds that bind and inhibit additional essential enzymes in the gram-negative outer membrane biosynthesis pathway.

We have financed our operations primarily through private placements of our equity securities, funding under our contracts with government agencies and certain debt related financing arrangements. We have never been profitable and have incurred net losses in each year since the commencement of our operations. Our net losses were $20.9 million and $18.4 million for the years ended December 31, 2011 and 2012, respectively, and $16.5 million and $10.6 million for the nine months ended September 30, 2012 and 2013, respectively. As of September 30, 2013, we had an accumulated deficit of $126.2 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and associated general and administrative costs. We expect to incur substantial losses from operations in the foreseeable future as we advance plazomicin and other product candidates through preclinical and clinical development, seek regulatory approval, and prepare for, and, if approved, proceed to commercialization.

 

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In July 2012, we initiated a restructuring that included a reduction in workforce, decrease in office and lab space occupied, and a related sublease of the vacated space resulting in an aggregate restructuring charge of $0.9 million. We have completed substantially all restructuring activities, and we recognized all anticipated restructuring charges in the year ended December 31, 2012 and nine months ended September 30, 2013. See Note 14 to our consolidated financial statements for additional information.

We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party clinical research organizations, or CROs, to carry out our clinical development and we do not yet have a sales organization. We will need substantial additional funding to support our operating activities and adequate funding may not be available to us on acceptable terms, or at all.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the respective reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are most critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We recognize revenue when: (i) evidence of an arrangement exists, (ii) fees are fixed or determinable, (iii) services have been delivered, and (iv) collectability is reasonably assured. We currently generate revenue solely from funding pursuant to government contracts. Our government contracts provide us with payments for certain types of expenditures in return for research and development activities over a contractually defined period. Revenue from these government contracts are recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable conditions under the government contracts have been met.

Funds received from third parties under contract arrangements are recorded as revenue if we are deemed to be the principal participant in the contract arrangements because the activities under the contracts are part of our development programs. If we are not the principal participant, the funds from contracts are recorded as a reduction to research and development expense. Contracts funds received are not refundable and are recognized when the related qualified research and development costs are incurred and when there is reasonable assurance that the funds will be received. Funds received in advance are recorded as deferred revenue. Management has determined that we are the principal participant under our government contract arrangements, and accordingly, we record amounts earned under the arrangements as revenue.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, and allocated overhead, including rent, equipment depreciation, and utilities and relate to both programs sponsored by us as well as costs incurred pursuant to collaboration agreements and government contracts. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities on our behalf are deferred and expensed as the goods are delivered or the related services are performed.

 

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For certain research and development services where we have not yet been invoiced or otherwise notified of actual cost from the third-party contracted service providers, we are required to estimate the extent of the services that have been performed on our behalf and the associated costs incurred at each reporting period. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include services from:

 

   

contract research organizations and other service providers in connection with clinical studies;

 

   

contract manufacturers in connection with the production of clinical trial materials; and

 

   

vendors in connection with preclinical development activities.

We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage such studies and trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which these services will be performed and the level of effort to be expended and costs to be incurred during each reporting period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Our estimation of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. To date, there have been no material adjustments from our estimates to the amount actually incurred.

Stock-Based Compensation

Stock-based compensation costs related to stock options granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model for stock options with time-based vesting and Monte-Carlo simulations for market-based stock option awards. The estimated grant date fair value of our employee stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards except for our market-based stock options, which are recognized over the implicit service period derived from the Monte-Carlo simulation model. Stock options we grant to employees generally vest over four years.

For non-employee stock-based awards, the measurement date on which the estimated fair value of the stock-based award is calculated is equal to the earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached or (ii) the date at which the counterparty’s performance is complete. We recognize stock-based compensation expense for the estimated fair value of the vested portion of non-employee awards in our statements of operations and comprehensive loss.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. If we had made different assumptions, our stock-based compensation expense, net loss, and net loss per share of common stock could have been significantly different. These assumptions include:

 

   

Fair Value of our Common Stock. Because our stock is not publicly traded, we must estimate its fair value, as discussed in “—Common Stock Valuations” below.

 

   

Expected Term. We do not believe we are able to rely on our historical exercise and post-vesting termination activity to provide accurate data for estimating the expected term for use in determining the

 

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fair value-based measurement of our options. Therefore, we have opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.

 

   

Expected Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the weighted-average historic price volatility for a group of similar companies that are publicly traded based on daily price observations over a period equivalent to the expected term of the stock option grants. When selecting these public companies on which we based expected stock price volatility, we chose companies with comparable characteristics, including enterprise value, stages of clinical development, risk profiles and position within the industry. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

   

Risk-free Interest Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options.

 

   

Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.

The fair value of the employee stock options was estimated using the following assumptions for the periods presented:

 

     Year Ended December 31,    Nine Months Ended September 30,
     2011    2012    2012    2013

Expected term

   5.8 – 7.9 years    6.0 – 6.1 years    6.0 – 6.1 years    5.4 – 6.1 years

Expected volatility

   56% – 61%    56% – 69%    56% – 69%    68% – 69%

Risk-free interest rate

   1.1% – 2.6%    0.8% – 1.2%    0.9% – 1.2%    1.2% – 1.8%

Expected dividend yield

   0%    0%    0%    0%

Expected forfeiture rate

   6%    9%    7%    8%

The fair value of stock options granted to non-employees was estimated using the following assumptions for the periods presented:

 

     Year Ended December 31,    Nine Months Ended September 30,
     2011    2012    2012    2013

Remaining contractual term

   7.3 – 10.0 years    6.3 – 9.9 years    6.6 – 7.1 years    6.1 – 9.9 years

Expected volatility

   56% – 63%    56% – 70%    56% – 70%    68% – 69%

Risk-free interest rate

   1.6% – 3.4%    0.9% – 1.8%    1.0% – 1.4%    1.1% – 2.4%

Expected dividend yield

   0%    0%    0%    0%

During the period from January 1, 2012 through September 30, 2013, we granted stock options to purchase common stock that vest upon the achievement of market-based stock price targets. For these options, we estimated the fair value on the original grant date using a Monte-Carlo simulation, and we are recognizing the stock based compensation expense over the implicit service period as derived under that simulation.

 

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For the years ended December 31, 2011 and 2012, stock-based compensation expense was $0.9 million and $0.8 million, respectively. For the nine month periods ended September 30, 2012 and 2013, stock-based compensation expense was $0.6 million and $0.8 million, respectively. As of December 31, 2012 and September 30, 2013, we had approximately $2.1 million and $1.9 million, respectively, of total unrecognized compensation expense, net of related forfeiture estimates, which we expect to recognize over a weighted-average period of approximately 2.9 years and 2.7 years, respectively.

The intrinsic value of all outstanding options as of September 30, 2013 was $         million based on the estimated fair value of our common stock of $         per share, the midpoint of the price range set forth on the cover of this prospectus.

Common Stock Valuations

We are required to periodically estimate the fair value of our common stock when issuing stock options and computing our estimated stock based compensation expense. The fair value of our common stock was determined on a periodic basis by our board of directors, with the assistance of an independent third-party valuation expert. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of significant levels of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. In determining the fair value of our common stock, our board of directors considered valuation methods intended to comply with Section 409A of the Internal Revenue Code that create a presumption that the resulting valuation is reasonable for federal tax purposes.

The fair value of the common stock underlying our stock options was estimated at each grant date by our board of directors. Our board of directors intended all options granted to be exercisable at a price per share not less than the estimated per share fair value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, which we refer to as the Practice Aid.

The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise by employing the following widely accepted valuation methods:

 

   

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

 

   

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

In conducting these valuations, our board of directors considered all objective and subjective factors that it believed to be relevant, including its and management’s best estimates of our business condition, prospects, and operating performance at each grant date. The valuations, assumptions, and methodologies included, among other things:

 

   

any recent contemporaneous third-party valuations prepared in accordance with the methodologies outlined in the Practice Aid;

 

   

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

 

   

progress of research and development activities, including our clinical trials;

 

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our operating and financial performance, including our available capital resources;

 

   

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of comparable companies;

 

   

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

 

   

equity market conditions affecting comparable public companies;

 

   

the achievement of development and other company milestones;

 

   

the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering, or IPO, given prevailing market and biotechnology sector conditions; and

 

   

business risks.

The per share common stock value was estimated by allocating our enterprise value using the PWERM method in August 2011, August 2012, and September 2013. In determining the fair value of our common stock, our board of directors used a combination of the IPO approach and the market multiple approach to estimate the enterprise value of our company.

PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns. We considered each of four possible categories of scenarios—IPO, sale, private financing, and failure. The value per share under each scenario was then probability weighted and the resulting weighted values per share were summed to determine the estimated fair value per share of our common stock. In the failure, sale, and private financing scenarios, the value per share was allocated taking into account the liquidation preferences and participation rights of our convertible preferred stock in accordance with applicable elements of the Practice Aid. In the IPO scenarios, it was assumed that all outstanding shares of our convertible preferred stock and warrants would convert into common stock. Over time, as we achieved certain company-related milestones, the probability of each scenario was evaluated and adjusted accordingly.

In the IPO scenarios, we analyzed IPOs that had occurred since January 2010 and considered both an earlier- and a later-term IPO scenario. For the earlier IPO scenario, we relied on IPO peer group data and reviewed the pre-money IPO values of a group of companies that effectuated a recent IPO while in Phase 3 clinical development. For the later IPO scenario, we relied on valuations for companies that were in post-Phase 3 and/or had submitted their New Drug Application, or NDA, as of their IPO or that were publicly-traded and in post-Phase 3 and/or had submitted their NDA as of the date of valuation. For the various IPO scenarios, we estimated our IPO value based on the comparable company data and added our expected cash at the time of the expected IPOs.

For the sale scenarios, we analyzed merger and acquisition transactions involving certain targets that were in Phase 3 clinical development at the time of their acquisition. After deriving the present value of a future acquisition, we allocated the value per share by taking into account the liquidation preferences and participation rights of our convertible preferred stock.

For the failure scenarios, we analyzed the possibility that our Company would fail during the next few years. Failure can be caused by regulatory, clinical, or financial reasons. We examined statistics regarding the successful outcome of clinical trials in various disease areas, provided by a Federal Trade Commission working paper. We looked specifically at trials for product candidates by small pharmaceutical companies and at trials for product candidates derived from biologicals and concluded that 54% to 70% of Phase 3 trials succeed, implying that there is a 30% to 46% chance that a single Phase 3 trial will fail.

In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied

 

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discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

We granted stock options during the period from January 1, 2011 through the date of this prospectus as summarized below:

 

Grant Date

   Shares Issued      Exercise Price
Per Share
     Estimated Fair Value of
Common Stock Per
Share Used to
Determine Stock-
Based Compensation
Expense
 

February 23, 2011

     296,800       $ 0.63       $ 0.63   

June 7, 2011

     2,334,000       $ 0.63       $ 0.63   

June 22, 2011

     255,000       $ 0.63       $ 0.63   

September 14, 2011

     1,258,000       $ 0.66       $ 0.66   

December 13, 2011

     75,000       $ 0.66       $ 0.66   

March 8, 2012

     5,020,000       $ 0.66       $ 0.66   

June 12, 2012

     210,000       $ 0.66       $ 0.66   

September 20, 2012

     1,380,000       $ 0.43       $ 0.43   

November 8, 2012

     530,600       $ 0.43       $ 0.43   

December 4, 2012

     1,549,000       $ 0.43       $ 0.43   

June 10, 2013

     1,275,900       $ 0.43       $ 0.60   

June 20, 2013

     33,000       $ 0.43       $ 0.60   

September 26, 2013

     541,800       $ 0.60       $ 0.60   

At each grant date the board of directors reviewed any recent events and their potential impact on the estimated fair value per share of the common stock. As is provided for in Internal Revenue Code Section 409A, we generally rely on our valuations for up to twelve months unless we have experienced a material event that would have affected the estimated fair value per common share.

For grants of stock awards made on dates for which there was no valuation performed by an independent valuation specialist, our board of directors determined the fair value of our common stock on the date of grant based upon the immediately preceding valuation and other pertinent information available to it at the time of grant.

August 1, 2011 Valuation. A contemporaneous valuation was performed by management and our board of directors with the assistance of an independent valuation specialist as of August 1, 2011 that determined the fair value of our common stock to be $0.66 per share. This valuation was performed in accordance with applicable elements of the Practice Aid. In accordance with the Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock at each valuation date. In this valuation we used the PWERM approach with estimates of the common stock value to our stockholders under each of seven possible future scenarios, including three IPO scenarios, three merger or strategic acquisition scenarios and one failure scenario, depending on the success of our product candidates in clinical trials during the ensuing three years. We applied a discount of 37% to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

Our board of directors determined there were no events or circumstances that warranted a change in fair value from the August 1, 2011 valuation at each of the grant dates of stock options that took place from August 1, 2011 through June 12, 2012.

August 31, 2012 Valuation. A contemporaneous valuation was performed by management and our board of directors with the assistance of an independent valuation specialist as of August 31, 2012 that determined the fair

 

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value of our common stock to be $0.43 per share, a decrease of $0.23 from the August 2011 valuation. The change in valuation reflected changes in the underlying assumptions regarding potential outcomes for an IPO or a merger or acquisition transaction for us. The August 31, 2012 valuation involved two IPO scenarios, one sale scenario, one Series D financing scenario and one failure scenario. We estimated the per share common stock fair value by allocating the enterprise value using the PWERM approach for the August 2012 valuation as described above. In the potential future private financing scenario, we used the OPM to estimate the common stock value using informed assumptions for an upcoming preferred stock round. In each scenario where present value calculations were required we used a risk-adjusted rate of return, as determined using the capital asset pricing model, of 21% to reflect risks associated with achievement of clinical goals and of being a clinical development company. We applied a discount of 37% to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

Our board of directors determined there were no events or circumstances that warranted a change in the fair value from the August 31, 2012 valuation and each of the grant dates of stock options that took place from August 31, 2012 through December 31, 2012.

September 24, 2013 Valuation. We estimated that our common stock had a value of $0.60 per share as of September 24, 2013, an increase of $0.17 from the prior August 31, 2012 valuation. In this contemporaneous valuation we used both the PWERM and OPM approach with estimates of the common stock value to our stockholders under each of seven possible future scenarios, including two IPO scenarios: 60% probability of an earlier IPO; 13% probability of a later IPO following a mezzanine financing round; 13% probability of the later IPO following a venture capital round of financing; and lower probabilities for a strategic acquisition in June 2015 following a mezzanine financing round, a strategic acquisition in June 2015 following a venture capital round of financing, a company failure following a mezzanine financing round, or company failure following a venture capital round. In establishing this exercise price, our board of directors considered input from management, including the valuation of our common stock as of the prior valuation date in August 2012, as well as the objective and subjective factors described above, including:

 

   

capital market conditions for biotechnology companies continued to improve as evidenced by a recent increase in the number of IPOs and their valuations, including increased valuations;

 

   

the NASDAQ Biotechnology (^NBI) index increased 17% from July 1, 2013 to September 30, 2013;

 

   

an increase in the likelihood of our board of directors pursuing an IPO as determined during board meetings conducted in September 2013; and

 

   

a decrease in the time to a prospective liquidity event.

We applied a discount of 17% to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

Retrospective Value Used for Financial Reporting Purposes

In September 2013, we decided to pursue an IPO. As a result, in connection with the preparation of our consolidated financial statements for the nine-month period ended September 30, 2013 included in this prospectus, and in preparing for our proposed IPO, we reexamined the estimated fair value of our common stock associated with our stock option grants during 2013 for financial reporting purposes as follows:

June 2013 Grants. Our board of directors granted options to purchase common stock on June 10, 2013 and June 20, 2013 to employees who were recently hired during the prior six months since we last issued option grants, with each option having an exercise price of $0.43 per share. In establishing this exercise price, our board of directors considered input from management, including the previously issued contemporaneous valuation of our common stock which was performed on August 31, 2012, as well as various objective and subjective factors including:

 

   

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

 

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the capital raising transactions in May 2013 that were at the same valuations as prior rounds;

 

   

the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our preferred stock;

 

   

the impact of significant ongoing expenses associated with research and development and ongoing clinical trials; and

 

   

the low likelihood of achieving a liquidity event for holders of our common stock, such as an IPO or sale of our company, given our early stage of development and prevailing market conditions.

At the time of the grants, our board of directors determined that, at the grant date, the collective effect of these events and circumstances did not indicate a significant change in the fair value of our common stock. Based on these factors, our board of directors determined that the fair value of our common stock on the grant dates listed above was $0.43 per share. In preparation for filing a registration statement with the Securities and Exchange Commission in connection with this offering, we evaluated whether or not in retrospect the value of the common stock on grant dates during 2013 was appropriate. We determine that in retrospect, the valuation of the common stock as determined by the valuation report issued on September 24, 2013 provided a closer approximation of the fair value of the common stock as it was closer to the grant date than the valuation report dated August 31, 2012. For the calculation of stock-based compensation expense for financial reporting purposes, we have used a market value of $0.60 per share for the June 2013 stock option awards.

Income Taxes

As of December 31, 2012, we had net operating loss carryforwards of approximately $102.6 million to offset future federal income taxes and approximately $102.5 million that may offset future state income taxes. The federal and state net operating loss carryforwards are available to reduce future taxable income, if any. If not utilized, the federal and state net operating loss carryforwards will begin to expire in various amounts beginning 2023 and 2013, respectively. Current federal and state tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of certain ownership changes. Even if the carryforwards are available, they may be subject to annual limitations, lack of future taxable income, or future ownership changes that could result in the expiration of the carryforwards before they are utilized. At December 31, 2012, we recorded a 100% valuation allowance against our deferred tax assets of approximately $48.5 million, as at that time our management believed it was uncertain that they would be fully realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss carryforwards, an adjustment to our net operating loss carryforwards would increase net income in the period in which we make such a determination.

Financial Overview and Results of Operations

General

We have not generated net income from operations and, at September 30, 2013, we had an accumulated deficit of $126.2 million, primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including product sales, license fees, milestone payments and research and development payments in connection with strategic partnerships, our current revenue is generated solely from research and development funding pursuant to government contracts. Our product candidates are still in clinical development and may never be successfully developed or commercialized. Other than the government funding described below, we do not expect to derive any revenue from any product candidates that we develop until we obtain regulatory approval and commercialize such products, which we do not expect will occur before 2017, if at all, or until such time that we potentially enter into collaboration agreements with third parties for the development and commercialization of such product candidates. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

 

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Contract Revenue

Our contract revenue represents services performed for the development of our product candidates under government contracts. For the years ended December 31, 2011, and 2012, and the nine months ended September 30, 2012 and 2013, contract revenue was $22.5 million, $17.9 million, $14.0 million, and $12.3 million, respectively. We have derived all of our revenue to date from funding provided under U.S. government contracts in connection with the development of our product candidates.

Biomedical Advanced Research and Development Authority (BARDA). We have received funding for our lead product candidate, plazomicin, under a contract with the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services for the development, manufacturing, nonclinical and clinical evaluation of, and regulatory filings for, plazomicin as a countermeasure for disease caused by antibiotic-resistant pathogens and biothreats. In August 2010, BARDA awarded us a contract, which we refer to as the BARDA Contract, that included committed funding of $27.6 million for the first two years of the contract and subsequent options exercisable by BARDA to provide additional funding. In September 2012, BARDA modified the contract to increase the total committed funding to $43.4 million through March 2014. In April 2013, we were awarded an additional $60.4 million under the contract to support our Phase 3 clinical trial of plazomicin, for total committed funding of $103.8 million. Our BARDA Contract provides for payments to us based on direct costs incurred and allowances for overhead, plus a fee, where applicable. In November 2013, we modified the most recent awarded option such that payments under this option would not exceed $60.4 million, even though the cost of the Phase 3 trial and related expenses are expected to exceed the amount available to us under the BARDA Contract for direct costs incurred. We currently anticipate that the estimated costs of the plazomicin development program, through the receipt of top-line data, that are not funded by the BARDA Contract will approximate the allocated portion of proceeds from this offering, as described in the “Use of Proceeds” section of this prospectus. We intend to utilize such allocated proceeds to fund the cost of the Phase 3 trial and related expenses that are in excess of the payments to us under the BARDA Contract for the direct costs of the trial.

For the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012 and 2013, total revenue recognized under the BARDA Contract was $9.3 million, $11.6 million, $9.5 million and $11.9 million, respectively, of which $2.0 million, $1.8 million, and $4.3 million were included in contracts receivable at December 31, 2011 and 2012, and September 30, 2013, respectively. As of September 30, 2013, a total of $33.4 million under the BARDA Contract has been recorded as revenue, with $70.4 million remaining available under the contract.

National Institute of Allergy and Infectious Diseases (NIAID). We received funding for a previous research and development program that we currently do not intend to advance, under a contract with the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, or NIH. In September 2008, NIAID awarded us a contract, which we refer to as the NIAID Contract, which as amended in September 2011 provided up to a total of $22.2 million in funding over five years through August 2013.

For the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012 and 2013, we recognized revenue under the NIAID Contract of $6.2 million, $2.6 million, $2.3 million, and $0.2 million, respectively, of which $1.7 million, $0.2 million and $40,000 were included in contracts receivable at December 31, 2011 and 2012, and September 30, 2013, respectively.

Defense Threat Reduction Agency (DTRA). We received funding from the Defense Threat Reduction Agency, or DTRA, a division of the Department of Defense, to develop novel antibacterials for the treatment of biodefense pathogens. In June 2007, DTRA awarded us a contract, which we refer to as the DTRA Contract, that provided up to a total of $18.8 million in funding over two years. The DTRA Contract was subsequently modified to extend through the end of November 2012 and to provide for a total of $35.4 million of funding for drawdown. In November 2012, DTRA terminated the contract for convenience. In connection with the termination, we are seeking payment from DTRA for additional expenses we have incurred. We have not

 

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recognized any revenue with respect to these additional amounts. The payments we have received under the DTRA Contract are subject to an ongoing audit by the Defense Contract Audit Agency, which may reduce the size of our requested payments or require us to refund some of the amounts previously paid to us.

For the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012, we recognized revenue under the DTRA Contract of $6.8 million, $1.5 million and $0.7 million, respectively, of which $1.2 million and $0.8 million were included in contracts receivable at December 31, 2011 and 2012, respectively. No revenue was recognized in the nine months ended September 30, 2013.

U.S. Army Medical Research Acquisition Authority (USAMRAA). In May 2012, we were awarded a one-year $2.5 million contract from the U.S. Army Medical Research Acquisition Authority to support our Phase 1 clinical trial of ACHN-975. Total revenue recognized was $2.2 million, $1.6 million, and $0.3 million, for the year ended December 31, 2012 and for the nine-month periods ended September 30, 2012 and 2013, respectively, of which $1.4 million and $0.1 million were included in contracts receivable at December 31, 2012 and September 30, 2013, respectively.

Research and Development Expenses

For the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013, research and development expenses were $35.2 million, $26.6 million, $23.0 million, and $16.7 million, respectively. We expense both internal and external research and development costs as incurred. We currently track our external costs by project. Our external research and development expenses consist primarily of:

 

   

expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;

 

   

the cost of acquiring and manufacturing clinical trial and other materials; and

 

   

other costs associated with development activities, including additional studies.

Internal research and development costs consist primarily of salaries and related fringe benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, and overhead expenses. Internal costs, except direct labor, generally benefit multiple projects and are not separately tracked by project.

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we continue the development of our product candidates. In particular, we expect our research and development costs associated with our plazomicin program to increase significantly as we initiate our pivotal Phase 3 superiority trial. As product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, we expect that our research and development expenses will increase in the future.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. For the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013, general and administrative expenses were $8.0 million, $7.3 million, $5.7 million, and $5.4 million, respectively. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure and increased professional fees in preparation for becoming and operating as a public company.

 

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Comparison of Nine Months Ended September 30, 2012 and 2013

 

     Nine Months Ended
September 30,
    Increase
(Decrease)
 
     2012     2013    
     (in thousands)  

Contract revenue

   $ 13,971      $ 12,320      $ (1,651

Operating expenses:

      

Research and development

     23,036        16,685        (6,351

General and administrative

     5,668        5,418        (250
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (14,733     (9,783     4,950   

Interest income and other, net

     47        261        214   

Interest expense and other, net

     (1,799     (1,104     695   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (16,485   $ (10,626   $ 5,859   
  

 

 

   

 

 

   

 

 

 

Contract Revenue

Contract revenue in each period related solely to funding pursuant to our government contracts. Contract revenue decreased $1.7 million, from $14.0 million for the nine months ended September 30, 2012 to $12.3 million for the nine months ended September 30, 2013. This decrease was mainly attributable to a reduction in research and development services performed under our DTRA and NIAID Contracts as we wound down activities under those contracts, offset in part by increased funding under our BARDA Contract.

Research and Development Expenses

Research and development expenses decreased $6.4 million, from $23.0 million for the nine months ended September 30, 2012 to $16.7 million for the nine months ended September 30, 2013. This was primarily due to a $2.4 million decrease in nonclinical research and development costs, a $1.9 million decrease in clinical trial costs as a result of the completion of our Phase 2 clinical trial of plazomicin in the second quarter of 2012, and a $1.5 million decrease in personnel-related costs as a result of a headcount reduction of 26 employees in our research and development organization in the second half of 2012.

External research and development expenses for plazomicin decreased $2.0 million from $9.6 million for the nine months ended September 30, 2012 to $7.6 million for the nine months ended September 30, 2013. This decrease was primarily due to a $3.1 million decrease in clinical trial costs associated with Phase 1 and Phase 2 trials, offset by a $1.6 million increase in the Phase 3 trial design and start-up activities. After completing our Phase 2 clinical trial of plazomicin in the second quarter of 2012, we incurred $1.4 million and $7.5 million in plazomicin-related expenses during the nine month periods ended September 30, 2012 and 2013, respectively, for nonclinical studies on biothreat pathogens, manufacturing process development work, and the design and start-up activities for the Phase 3 CRE clinical trial.

 

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The following table illustrates the components of our research and development expenses during the periods indicated:

 

     Nine Months Ended
September 30,
     Increase
(Decrease)
 
     2012      2013     
     (in thousands)  

External research and development expenses by program:

        

Plazomicin

   $ 9,595       $ 7,642       $ (1,953

Other research programs

     4,689         2,851         (1,838
  

 

 

    

 

 

    

 

 

 

Subtotal external program costs

     14,284         10,493         (3,791
  

 

 

    

 

 

    

 

 

 

Internal costs:

        

Research and development personnel costs

     5,704         3,776         (1,928

Indirect research and development expenses

     3,048         2,416         (632
  

 

 

    

 

 

    

 

 

 

Subtotal internal costs

     8,752         6,192         (2,560
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 23,036       $ 16,685       $ (6,351
  

 

 

    

 

 

    

 

 

 

General and Administrative Expenses

General and administrative expenses decreased $0.3 million, from $5.7 million for the nine months ended September 30, 2012 to $5.4 million for the nine months ended September 30, 2013. The decrease in general and administrative expenses was primarily due to a decrease of $0.9 million in personnel-related costs from a headcount reduction of nine employees in our general and administrative organization in the second half of 2012.

Interest Income and Other, Net

Interest income and other, net increased from $47,000 for the nine months ended September 30, 2012 to $261,000 for the nine months ended September 30, 2013. The increase in interest income and other, net was due to a payment received from a potential sublessee for improvements made to our leased facilities in connection with negotiations for a sublease arrangement.

Interest Expense and Other, Net

Interest expense and other, net decreased $0.7 million from $1.8 million to $1.1 million for the nine-month periods ended September 30, 2012 and 2013, respectively. The decrease was primarily a result of the full amortization of the beneficial conversion features of our convertible loans with The Wellcome Trust Limited in March 2013, concurrent with the conversion of those loans into 6.4 million shares of our Series D convertible preferred stock.

 

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Comparison of Years Ended December 31, 2011 and 2012

 

     Year Ended
December 31,
    Increase
(Decrease)
 
     2011     2012    
     (in thousands)  

Contract revenue

   $ 22,474      $ 17,941      $ (4,533

Operating expenses:

      

Research and development

     35,210        26,581        (8,629

General and administrative

     7,979        7,349        (630
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (20,715     (15,989     4,726   

Interest income and other, net

     15        51        36   

Interest expense and other, net

     (166     (2,427     (2,261
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,866   $ (18,365   $ 2,501   
  

 

 

   

 

 

   

 

 

 

Contract Revenue

Contract revenue in each period related solely to funding pursuant to our government contracts. Contract revenue decreased $4.5 million from the year ended December 31, 2011 to the year ended December 31, 2012. This decrease was primarily attributable to reduced research and development services performed under our government contracts with DTRA and NIAID as we wound down those contracts.

Research and Development Expenses

Research and development expenses decreased $8.6 million from $35.2 million for the year ended December 31, 2011 to $26.6 million for the year ended December 31, 2012. After completing our Phase 2 clinical trial of plazomicin in the second quarter of 2012, we incurred $2.4 million in plazomicin-related expenses during the year ended December 31, 2012, for nonclinical studies for biothreat pathogens, manufacturing process development work, and the design and start-up activities for the Phase 3 CRE clinical trial. The decrease in plazomicin external expenses was primarily due to a decrease of $1.9 million in clinical trial costs as a result of the completion of our Phase 2 clinical trial and a decrease of $1.5 million in manufacturing and nonclinical costs. The decreased external expenses in other research programs were attributable to a decrease of $4.0 million in the manufacturing costs of clinical and preclinical materials, and a decrease in nonclinical costs of $2.2 million as we wound down the activities under our contracts with DTRA and NIAID, offset by increased clinical costs of $1.4 million. The decrease in personnel-related expenses was primarily attributed to a reduction of 26 employees in our research and development organization in the second half of 2012.

 

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The following table illustrates the components of our research and development expenses during the periods indicated:

 

     Year Ended
December 31,
     Increase
(Decrease)
 
     2011      2012     
     (in thousands)  

External research and development expenses by program:

        

Plazomicin

   $ 13,807       $ 10,606       $ (3,201

Other research programs

     9,879         5,217         (4,662
  

 

 

    

 

 

    

 

 

 

Subtotal external program costs

     23,686         15,823         (7,863
  

 

 

    

 

 

    

 

 

 

Internal costs:

        

Research and development personnel costs

     7,704         6,813         (891

Indirect research and development expenses

     3,820         3,945         125   
  

 

 

    

 

 

    

 

 

 

Subtotal internal costs

     11,524         10,758         (766
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 35,210       $ 26,581       $ (8,629
  

 

 

    

 

 

    

 

 

 

General and Administrative Expenses

General and administrative expenses decreased $0.6 million from the year ended December 31, 2011 to the year ended December 31, 2012. This decrease is primarily attributable to a decrease in consulting and personnel related expenses of $1.0 million resulting from headcount reduction of 9 employees in our general and administrative organization in the second half of 2012, offset in part by increased expenses from plazomicin-related market research activities.

Interest Expense and Other, Net

Interest expense and other, net increased approximately $2.3 million from $0.2 million to $2.4 million for the years ended December 31, 2011 and 2012, respectively. The increase is primarily the result of $1.1 million of interest expense associated with amortization of the beneficial conversion features of our convertible loans with The Wellcome Trust and $1.2 million of interest expense associated with a loan and security agreement with Oxford Finance LLC and Silicon Valley Bank.

Liquidity and Capital Resources

Since our inception and through September 30, 2013, we have financed our operations primarily through private placements of our equity securities, funding under our contracts with government agencies, and certain debt related financing arrangements. Between March and May 2013, we issued 13,844,040 shares of Series D convertible preferred stock at $1.09 per share, resulting in net proceeds of $12.2 million. In November 2013, under the terms of the March 2013 stock purchase agreement, we issued an additional 9,174,314 shares of Series D convertible preferred stock, with gross proceeds to us of $10.0 million.

At September 30, 2013, we had working capital of $2.1 million and cash and cash equivalents of $8.2 million. In addition to our existing cash and cash equivalents, we have historically received funding provided under U.S. government contracts in connection with the development of our product candidates. In particular, we have received funding for our lead product candidate, plazomicin, under a contract with BARDA for the development, manufacturing, nonclinical and clinical evaluation of, and regulatory filings for, plazomicin as a countermeasure for disease caused by antibiotic-resistant pathogens and biothreats. In April 2013, we were awarded an additional $60.4 million under the contract to support our pivotal Phase 3 trial of plazomicin, for total committed funding of $103.8 million.

 

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Plan of Operations and Future Funding Requirements

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our pivotal Phase 3 trial of plazomicin. We believe our existing cash and cash equivalents, together with the proceeds from this offering, combined with the funds from the BARDA Contract, will allow us to fund our operating plan through at least the next 12 months. Assuming we receive the full amount of funding under the BARDA Contract, including under the unexercised option, we expect such funds, together with the proceeds from this offering, will be sufficient to fund our development of plazomicin through receipt of top-line data from our Phase 3 trial. Upon dosing our first patient in the trial, we will be obligated to make a $4.0 million payment to Isis Pharmaceuticals, Inc., or Isis, under our license agreement. See “—Contractual Obligations and Commitments—Other Commitments” below. However, our operating plan may change as a result of factors currently unknown to us, and we may need to seek additional funds sooner than planned. We anticipate that we will need to raise substantial additional financing in the future to fund our operations, including for obtaining marketing approval for plazomicin.

We will be required to obtain additional financing in the future, which we may obtain through public or private equity offerings, debt financings, a credit facility, government contracts and/or strategic collaborations. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. Our future financing requirements will depend on many factors, some of which are beyond our control, including:

 

   

continued funding under our contract with BARDA;

 

   

the size and type of the nonclinical and clinical trials that we decide to pursue in the development of our product candidates, including plazomicin;

 

   

the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

 

   

the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;

 

   

the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals;

 

   

our ability to enter into additional collaboration, licensing or other arrangements and the terms and timing of such arrangements;

 

   

the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, including litigation costs and the results of such litigation;

 

   

the emergence of competing technologies and other adverse market developments;

 

   

the resources we devote to marketing, and, if approved, commercializing our product candidates;

 

   

the scope, progress, expansion, and costs of manufacturing our product candidates;

 

   

our ability to enter into additional government contracts, or other collaborative agreements, to support the development of our product candidates and development efforts;

 

   

the amount of funds we receive in this offering; and

 

   

the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

 

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Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2011     2012     2012     2013  
     (In thousands)  

Net cash (used in) provided by:

        

Operating activities

   $ (17,117   $ (16,762   $ (13,905   $ (7,573

Investing activities

     (1,237     (533     (249     (120

Financing activities

     3,979        11,840        10,156        8,832   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (14,375   $ (5,455   $ (3,998   $ 1,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

Net cash used in operating activities was $17.1 million and $16.8 million for the years ended December 31, 2011 and 2012, respectively. The primary use of cash in each of these periods was to fund our operations related to the development of our product candidates. The decrease in 2012 was primarily due to changes in operating assets and liabilities.

Net cash used in operating activities was $13.9 million and $7.6 million for the nine months ended September 30, 2012 and 2013, respectively. The primary use of cash in each of these periods was to fund our operations related to the development of our product candidates. Cash used for the nine months ended September 30, 2013 decreased compared to the same period in 2012, primarily due to lower net loss from operations.

Investing Activities

Cash used in investing activities was $1.2 million and $0.5 million for the years ended December 31, 2011 and 2012, respectively, consisting primarily of purchases of property and equipment. The decrease in purchases of property and equipment was related to a reduction of capital expenditures as part of the corporate restructuring plan in 2012.

Cash used in investing activities was $0.2 million and $0.1 million for the nine months ended September 30, 2012 and 2013, consisting primarily of purchases of property and equipment.

Financing Activities

Cash provided by financing activities amounted to $4.0 million and $11.8 million for the years ended December 31, 2011 and 2012, respectively. The net cash provided by financing activities in 2011 consisted of $4.0 million in notes payable issued in December 2011 to Oxford Finance LLC and Silicon Valley Bank under a loan and security agreement, or the Loan Agreement. The net cash provided by financing activities in 2012 consisted primarily of the net proceeds from the issuance of $2.7 million of convertible notes issued to a group of existing investors in November 2012 as part of a bridge financing, $8.0 million in notes payable issued in April 2012 to Oxford Finance LLC and Silicon Valley Bank under the Loan Agreement, and $2.4 million received from our funding agreement with The Wellcome Trust, offset by $1.5 million for the repayment of notes payable to Oxford Finance LLC and Silicon Valley Bank.

Cash provided by financing activities amounted to $10.2 million and $8.8 million for the nine months ended September 30, 2012 and 2013, respectively. The net cash provided by financing activities for the nine months ended September 30, 2012 of $10.2 million consisted primarily of the net proceeds from the issuance of

 

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$8.0 million in notes payable to Oxford Finance LLC and Silicon Valley Bank under the Loan Agreement and $2.4 million from our funding agreement with The Wellcome Trust. The net cash provided by financing activities for the nine months ended September 30, 2013 of $8.8 million consisted primarily of the $12.2 million net proceeds from the issuance of convertible preferred stock in the first tranche of our Series D convertible preferred stock financing in March and May 2013, offset by $3.4 million for the repayment of notes payable to Oxford Finance LLC and Silicon Valley Bank.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2012:

 

     Payments due by period  
     Total      Less than
1 year
     1 to 3
years
     4 to 5
years
     After 5
years
 
     (in thousands)  

Lease obligations

   $ 1,508       $ 1,200       $ 308       $ —         $ —     

Notes payable principal and interest

     12,528         5,325         7,203         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,036       $ 6,525       $ 7,511       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our contractual obligations as of September 30, 2013:

 

     Payments due by period  
     Total      Less than
1 year
     1 to 3
years
     4 to 5
years
     After 5
years
 
     (in thousands)  

Lease obligations

   $ 2,099       $ 616       $ 1,155       $ 328       $ —     

Notes payable principal and interest

     8,534         5,325         3,209         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,633       $ 5,941       $ 4,364       $ 328       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Lease Obligations

We lease our operating facility in South San Francisco, California under an operating lease agreement that commenced in December 2010, which covers approximately 35,000 square feet. We also sublease approximately 19,000 square feet of our leased space to a third party. In June 2013, we amended the lease to extend the term to April 2017. The lease extension does not include the space currently being subleased.

Notes Payable

In November 2011, we entered into the Loan Agreement with Oxford Finance LLC and with Silicon Valley Bank, collectively the Lenders, under which we could borrow up to $12.0 million through June 30, 2012, with $8.0 million being drawable at our option, and the remaining $4.0 million being drawable upon the occurrence of an IND event, as defined in the Loan Agreement. We borrowed $4.0 million in November 2011, and the remaining $8.0 million in April 2012. The interest rate, which was fixed at the closing of each tranche, equals the three-month LIBOR plus 7.75%. The interest rates for the loans under the Loan Agreement are 8.18% and 8.22% per annum. Payments are monthly in arrears and interest only until September 1, 2012, followed by 30 equal monthly payments of principal and interest through the scheduled maturity date of February 1, 2015. In addition, a final payment equal to 8.25% of the aggregate amount drawn will be due on February 1, 2015, or when the Loan Agreement terminates, which is being accreted as interest expense over the term of the loan using the effective-interest method. The Loan Agreement contains various covenants. As of December 31, 2012 and September 30, 2013, we were in compliance with all required covenants.

In accordance with the terms of the Loan Agreement, we agreed to issue to the Lenders upon each drawdown warrants to purchase preferred stock equal to 3% of the advanced amount using a share strike price equal to the lower of the price per share of our Series C convertible preferred stock or the price per share in our

 

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next round of convertible preferred stock financing. During 2011 and 2012, we issued warrants to purchase 110,092 and 220,183 shares, respectively, of our Series C convertible preferred stock at an exercise price of $1.09 per share. The fair value of these warrants at the dates of issuance was approximately $86,000 and $163,000, was recorded as a debt discount within notes payable and is being amortized as interest expense over the term of the loan using the effective-interest method.

Other Commitments

We have obligations to make future payments to third parties under license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development, regulatory and commercialization milestones. However, because the achievement of these milestones is not fixed and determinable, such commitments have not been included on our balance sheet or in the Contractual Obligations and Commitments table above. In the near term, upon dosing our first patient in our Phase 3 trial for plazomicin, we will be obligated to make a milestone payment of $4.0 million to Isis pursuant to our license agreement, which we anticipate paying from our existing cash resources. For additional information regarding future payments to third parties, including milestone and royalty payments to Isis, please see “Business—Commercial Agreements.”

Indemnification

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

In accordance with our amended and restated certificate of incorporation and our amended and restated bylaws, we have indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. We have also entered into indemnification agreements with our directors and executive officers. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims.

Off-Balance Sheet Arrangements

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

JOBS Act Accounting Election

The Jumpstart our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to limited market risk related to fluctuations in interest rates and market prices. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit

 

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quality. As of September 30, 2013, we had cash and cash equivalents of $8.2 million consisting of cash and money market funds deposited in highly rated financial institutions in the United States. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.

We contract for the conduct of certain clinical development and manufacturing activities with vendors outside the United States. We are subject to exposure due to fluctuations in foreign exchange rates in connection with these agreements. For the nine months ended September 30, 2013, the effect of the exposure to these fluctuations in foreign exchange rates was not material.

We do not believe that inflation or fluctuations in foreign exchange rates had a significant impact on our results of operations for any periods presented in our financial statements.

 

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BUSINESS

Overview

We are a clinical-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterials to treat multi-drug resistant, or MDR, gram-negative infections. We are developing plazomicin, our lead product candidate, for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae, or CRE. In 2013, the Centers for Disease Control and Prevention identified CRE as a “nightmare bacteria” and an immediate public health threat that requires “urgent and aggressive action.” We expect to initiate a Phase 3 superiority trial of plazomicin in the first quarter of 2014. Through the Special Protocol Assessment procedure, the U.S. Food and Drug Administration, or FDA, has agreed that the design and planned analyses of our single pivotal Phase 3 trial adequately address objectives in support of a New Drug Application. We have also received FDA fast track designation for the development and regulatory review of plazomicin to treat serious and life-threatening CRE infections. Our plazomicin program is funded in part with a contract from the Biomedical Advanced Research and Development Authority for up to $103.8 million. We have global commercialization rights to plazomicin, which has patent protection in the United States extending through 2031.

According to government agencies and physician groups, including the Centers for Disease Control and Prevention, or CDC, and the Infectious Disease Society of America, one of the greatest needs for new antibiotics is to treat CRE and other drug-resistant gram-negative pathogens. CRE are strains of Enterobacteriaceae that are resistant to many types of antibiotics, including carbapenems, one of the last lines of defense against gram-negative bacteria, leading to mortality rates of up to 50% in patients with bloodstream infections. We estimate that there were approximately 110,000 cases of CRE infections in the United States and five major markets in the European Union in 2013, with approximately one-fourth of these being bloodstream infections or pneumonia. Based on the significant increase in resistance rates in recent years, we anticipate CRE will continue to be a major health problem. For example, CDC surveillance data indicates that the rate of carbapenem resistance in Klebsiella species, a type of Enterobacteriaceae, increased from 1.6% to 10.4% in the hospital setting in the United States between 2001 and 2011. In Italy, K. pneumoniae carbapenem resistance rates almost doubled from 16% in 2010 to 31% in 2012. Governments, in collaboration with the private sector, have begun to respond by progressing regulatory reform and economic incentives to spur development of new antibiotics.

Plazomicin is a novel intravenous, semi-synthetic aminoglycoside antibiotic. Aminoglycosides have been used successfully for the treatment of serious infections for more than 50 years. However, the widespread clinical resistance to currently marketed aminoglycosides has increasingly limited their utility. We developed plazomicin by chemically modifying sisomicin, a naturally occurring aminoglycoside, in order to overcome common aminoglycoside resistance mechanisms. In MDR Enterobacteriaceae, including CRE, plazomicin remains active where most other antibiotics, including the commercially available aminoglycosides, have limited potency due to resistance.

We consider the following to be key attributes that support the clinical utility and commercial value of plazomicin:

 

   

Potent in vitro activity and in vivo efficacy in nonclinical studies against MDR Enterobacteriaceae, including CRE.

 

   

Demonstration of comparable efficacy to levofloxacin and acceptable safety in a Phase 2 clinical trial in patients with complicated urinary tract infections caused primarily by non-MDR Enterobacteriaceae.

 

   

Improved dosing strategy as compared to existing aminoglycosides, and individualized patient dosing using an in vitro assay.

 

   

Potential to demonstrate a mortality benefit over currently available therapy in the treatment of life-threatening CRE infections.

 

   

Potential to reduce the healthcare costs associated with the treatment of such infections.

 

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Our pivotal Phase 3 trial is a pathogen-specific trial that will enroll patients with a high risk of mortality and, if successful, provide clinical evidence of the superiority of plazomicin versus the best currently available therapy for life-threatening bloodstream infections and pneumonia due to CRE. We expect to report top-line data from our Phase 3 trial in the first half of 2017, with interim analyses projected to occur in 2015 and 2016. We believe that positive efficacy data from this trial will provide the basis for FDA approval and position plazomicin as the standard of care for the treatment of serious CRE infections.

CRE are one of many types of MDR gram-negative pathogens threatening patients. Bacteria such as Pseudomonas aeruginosa, Acinetobacter baumannii, and extended-spectrum beta-lactamase producing Enterobacteriaceae, which are organisms with resistance to all beta-lactam antibiotics except for carbapenems, each pose “serious” resistance threats, according to the CDC, and also drive a great need for new, safe, and effective antibiotics. We have assembled the chemistry and microbiology expertise and capabilities required to develop new agents for the treatment of gram-negative infections. Plazomicin was the first clinical candidate from our gram-negative antibiotic discovery engine. In addition, our research and development pipeline includes two antipseudomonal programs, which are programs that specifically target P. aeruginosa infections: a program to discover and develop small molecule inhibitors of LpxC, which is an enzyme essential for the synthesis of the outer membrane of gram-negative bacteria, and a therapeutic antibody program. We are also pursuing small molecule research programs targeting other essential gram-negative enzymes.

We have built an exceptional research and development team of approximately 30 individuals, who collectively have deep expertise in the discovery and development of new drugs from research through commercialization. Our executive team has over 60 years of combined industry experience, and a proven track record of leadership, global registration, and lifecycle management for over 20 products. Our Chief Executive Officer and Chief Medical Officer, Dr. Kenneth Hillan, held research and product development leadership roles during his career at Genentech for multiple products, including Rituxan®, Xolair®, Lucentis®, and Pulmozyme®. Becki Filice, who leads our development operations, was previously Genentech’s project team leader for both Avastin® and Nutropin AQ®. Christine Murray leads our regulatory affairs and quality activities and has held key roles during the development and global registration of Viread®, Emtriva®, Truvada®, Atripla®, and Hepsera® while with Gilead Sciences.

Strategy

Our strategy is to discover, develop, and commercialize new antibacterials for the treatment of gram-negative bacterial infections. Key elements of our strategy are as follows:

 

   

Complete our pivotal Phase 3 superiority trial of plazomicin in the treatment of CRE infections and obtain regulatory approval in both the United States and the European Union. We expect to report top-line data from our Phase 3 trial and to have gathered required safety data in the first half of 2017 to support an NDA. If the trial is successful, we expect to submit a New Drug Application, or NDA, to the FDA and a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, concurrently in the second half of 2017. Through the Special Protocol Assessment, or SPA, procedure, the FDA has agreed that the design and planned analyses of our pivotal Phase 3 trial adequately address objectives in support of an NDA. We have also received FDA fast track designation for the development and regulatory review of plazomicin to treat serious and life-threatening CRE infections.

 

   

Demonstrate improved clinical benefit and pharmacoeconomic advantages of our product candidates over existing therapies. By selecting product candidates with potency against MDR pathogens, we have the opportunity to demonstrate superior clinical outcomes against the current standard of care. This is in contrast to most other antibiotics currently marketed or under clinical development, which were tested, or are being tested, in non-inferiority trial designs. We also plan to demonstrate the economic benefits of our product candidates based on pharmacoeconomic outcomes such as fewer days on mechanical ventilation, less time in the ICU, or shorter total hospital stay. For example, our Phase 3 trial of plazomicin is designed to demonstrate improved mortality outcomes of plazomicin over comparator therapy and will allow us to assess improved pharmacoeconomic outcomes from plazomicin treatment.

 

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Commercialize our products directly, either alone or with support from a commercialization partner, in the United States and through commercialization partners elsewhere. We have global commercialization rights to all of our drug candidates. We intend to commercialize plazomicin directly, either alone or with support from a commercialization partner, using a targeted hospital-based sales force in the United States, where CRE infections are concentrated in resistance hotspots, including New York City, Chicago, and other major population centers. Outside the United States, we intend to license full product rights to global and regional commercialization partners who can help us develop and market our products. By collaborating with companies that have an existing commercial presence and experience in targeted geographic markets, we believe we can efficiently maximize the commercial potential of our products.

 

   

Establish and leverage collaborations with non-commercial organizations for scientific expertise and funding support. We collaborate with government agencies and non-profit foundations to support our discovery efforts and advance the product candidates in our pipeline. We are currently receiving funding support for up to $103.8 million from a contract with the Biomedical Advanced Research and Development Authority, or BARDA, for the development of plazomicin as a countermeasure for diseases caused by antibiotic-resistant pathogens and biothreats, such as pneumonic plague and tularemia. We have also received funding support from government agencies such as the U.S. Department of Defense, or DOD, the U.S. National Institutes of Health, or NIH, and The Wellcome Trust, a global charitable foundation. We also partner with leading academics, scientists, and clinicians to enhance our internal discovery and development expertise, and to jointly sponsor funding proposals.

 

   

Build a portfolio of differentiated products for the treatment of MDR gram-negative infections. Since we commenced operations in 2004, we have focused on the discovery and development of antibiotics to treat gram-negative infections and have developed proprietary know-how about the relationship between compound structure and potency against gram-negative bacteria through our work on multiple antibiotic classes. We are using this expertise to build a portfolio of product candidates for the treatment of infections due to MDR pathogens. Patients with these infections often have limited or inadequate therapeutic options leading to high rates of mortality. We believe the greatest unmet medical needs lie among infections due to MDR gram-negative bacteria, where there is a significant and growing problem and the industry pipeline of drug candidates is sparse.

Antibacterials Background

Antibacterials, which we refer to interchangeably as antibiotics, are drugs used to treat infections that are caused by bacteria. The introduction of antibiotics is recognized as one of the most transformative events in medicine. Prior to the introduction of the first antibiotics in the 1930s and 1940s, bacterial infections were often fatal, and invasive surgery was accompanied by a high risk of infectious complications. Today, antibacterials are used routinely to treat and prevent infection. According to IMS Health, antibiotics accounted for $38.8 billion in sales globally in 2012, with healthcare providers prescribing 268 million courses of antibacterials in the United States alone.

There are two main varieties of bacteria, designated based on how they behave in a common laboratory staining test known as the “Gram stain.” Gram-positive bacteria are surrounded by a single lipid membrane and a thick cell wall. Common gram-positive pathogens include Staphylococcus aureus (including methicillin-resistant strains, or MRSA), Streptococcus species, and Clostridium difficile. In contrast, gram-negative bacteria are encircled by two lipid membranes, an inner membrane and an outer membrane, with a thinner cell wall in between. Gram-negative bacteria include P. aeruginosa, A. baumannii, and the Enterobacteriaceae, a family of related organisms that includes E. coli, K. pneumoniae, Enterobacter, Salmonella, and Shigella species. Drugs that act in the cytoplasm of gram-negative bacteria must cross both the inner and outer membranes, as distinct from drugs that just act on gram-positive bacteria, which only have to cross one membrane. Each membrane in gram-negative bacteria excludes different types of chemical entities, requiring gram-negative active antibiotics to be specifically designed to permeate both membranes. A 2007 study found that in hospital intensive care units

 

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worldwide, approximately 54% of bacterial infections were caused by gram-negative organisms and 41% by gram-positive organisms, with the remainder caused by other types of bacteria.

Antibiotics are evaluated according to several criteria:

 

   

Spectrum. Antibiotics that are effective against a wide variety of bacteria, including both gram-negative and gram-positive organisms, are considered to be broad-spectrum, while those that act upon only a limited number of species are considered to be narrow-spectrum. Narrow-spectrum antibiotics are most often selected if a specific pathogen is suspected or confirmed.

 

   

Cidality. Antibiotic action generally falls into two categories: bacteriostatic and bactericidal. Bacteriostatic antibiotics halt the growth of bacteria, allowing the human immune system to clear the infection. Bactericidal antibiotics kill the bacterial pathogen directly.

 

   

Microbiological activity. Also referred to as potency, this is the ability of the antibiotic to kill or inhibit growth of bacteria in vitro. In vitro experiments and assays are performed outside of a complex organism such as an animal or human, and include bacterial growth inhibition assays conducted in the laboratory. Potency is commonly expressed as the minimum inhibitory concentration, or MIC, in µg/mL, which is the lowest concentration at which the drug inhibits growth of the bacteria. Antibiotics with lower MICs are considered more potent.

 

   

Susceptibility/non-susceptibility. The relationship between microbiological activity and the clinical utility of an antibiotic in the hospital setting can be described in terms of susceptibility or non-susceptibility. A susceptible MIC value means an antibiotic can be used to treat a particular infection. A non-susceptible MIC value from in vitro testing means the antibiotic should not be used to treat the infection because the antibiotic is unlikely to be effective against the causative pathogen. These values are established by medical standards organizations including the Clinical Laboratory and Standards Institute, or CLSI, and the European Committee on Antimicrobial Susceptibility Testing, or EUCAST.

 

   

Resistance. Resistance refers to the inability of an antibiotic to effectively control bacterial growth. Some bacteria are naturally resistant to certain types of antibiotics. Resistance can also occur due to genetic mutations or changes in gene expression. Mechanisms responsible for resistance are often found together and can be transferred between different bacteria, leading to multi-drug resistance.

New Antibiotics Are Needed for Resistant Gram-negative Infections

According to the CDC, at least two million people each year in the United States acquire serious infections with bacteria that are resistant to one or more of the antibiotics designed to treat those infections, and each year, over 20,000 patients in the United States die from these infections. In the European Union, the annual burden posed by resistant healthcare associated bacterial infections is approximately 2.5 million hospital days and 25,000 deaths. Similar problems exist throughout the world, and the World Health Organization has declared antibiotic resistance a threat to global health security. The development and spread of resistance is driven by the use of antibiotics. Once they arise, resistant bacteria can be transferred between patients and antibiotic resistance mechanisms can be transferred between bacterial species, thus increasing the problem.

Antibiotic-resistant infections not only cause significant morbidity and mortality, but also place a substantial cost burden on the healthcare system. In most cases, antibiotic-resistant infections require prolonged and/or costlier treatments, extend hospital stays, and necessitate additional doctor visits and healthcare expenditures compared with infections that are easily treatable with antibiotics. The CDC estimates that the excess annual cost resulting from these infections in the United States is as high as $20 billion. According to an estimate from a 2012 study of over 5,500 U.S. patients, the average incremental per-patient hospital cost for antibiotic-resistant healthcare-associated infections, as compared to antibiotic-susceptible infections, was over $15,000.

According to government agencies and physician groups such as the CDC and the Infectious Disease Society of America, one of the greatest needs is for new antibiotics to treat infections caused by drug-resistant

 

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gram-negative pathogens, including CRE, P. aeruginosa, and A. baumannii. These pathogens are associated with significant mortality, as growing antibiotic resistance has left limited effective treatment options. There have been few approvals for new gram-negative antibiotics in recent decades, and there are to our knowledge only three other antibiotics currently in Phase 3 development for infections due to gram-negative pathogens.

Governments, in collaboration with the private sector, have begun to respond to this significant and growing unmet medical need by progressing regulatory reform and offering economic incentives. With the passage of the Generating Antibiotic Incentives Now Act, or the GAIN Act, in July 2012, qualifying antibiotics in the United States are eligible for priority review and the potential for a five-year extension of any existing non-patent market exclusivity that has been awarded. Additionally, the FDA has issued a new draft guidance document with proposed approaches to streamline development of new antibiotics addressing serious diseases with limited treatment options. Similar developments are occurring in parallel in other regulatory bodies, most notably in Europe. Government agencies such as BARDA, the DOD’s Defense Threat Reduction Agency, or DTRA, and the NIH are also providing significant funding to support the discovery and development of new antibiotics.

Our Antibiotic Discovery and Development Engine

The challenge of discovering and developing a new antibacterial for the treatment of gram-negative infections is that such treatments need to overcome resistance mechanisms to existing antibiotics and to permeate the inner and outer membranes of the bacteria. Since we began operations in 2004, we have focused on the discovery and development of antibiotics to treat gram-negative infections and have developed proprietary know-how about the relationship between chemical structure and gram-negative potency through our work on multiple antibiotic classes.

Our progress in discovering and developing gram-negative product candidates has been achieved through:

 

   

Knowledge of gram-negative antibiotic chemistry. We are able to modify the chemical structure of molecules from existing classes, such as the aminoglycosides, to avoid resistance mechanisms that inactivate other members of these classes. Further, by studying the properties of existing antibiotics that are effective against gram-negative bacteria, we believe we elucidated the first set of “rules” for modifying the chemical structure of compounds to increase penetration across both membranes. We are applying these rules in our discovery efforts to engineer molecules to be active against gram-negative bacteria.

 

   

Specialized compound libraries. Our chemistry libraries are designed to contain compounds that have the necessary properties for penetration of gram-negative bacteria and are used in screening campaigns against clinical isolates of MDR gram-negative pathogens.

 

   

Microbiology capabilities in clinically important pathogens. Our current focus is on today’s major unmet needs such as CRE and P. aeruginosa. We have compiled an extensive collection of bacterial isolates, including both clinical and engineered strains, and use them to direct our modifications of compounds. Our molecular genetic expertise with these pathogens allows us to rapidly validate new antibacterial targets and determine the mode of action of our new agents across multiple pathogens.

 

   

Use of nonclinical data to predict clinical outcomes. We leverage in vivo animal data and computational modeling techniques to project the clinical efficacy of our early developmental candidates. In vivo refers to experiments and assays involving complex organisms, such as animals. As compared to other therapeutic areas, animal models of infection treatment are highly predictive of clinical efficacy. Utilizing these results, and pharmacokinetics, or PK, and safety established in initial clinical trials, we use pharmacometric modeling approaches to estimate clinical efficacy and predict our clinical dosing regimens.

 

   

Collaborations with industry-leading advisors and scientific experts. Our advisors include experts in antibacterial drug development such as Lynn Silver, Ph.D. (former Senior Investigator at Merck Research Laboratories), George H. Talbot, M.D. (Chief Medical Officer, Cerexa, acquired by Forest Laboratories), and Paul Reider, Ph.D. (Former Vice President, Process Chemistry at Merck and Amgen and current faculty member in the Department of Chemistry at Princeton University). We have also established

 

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collaborations with academic researchers in the field of antibiotic pharmacology, such as George Drusano, M.D., Henry Heine, Ph.D., and Arnold Louie, M.D., all with the Institute for Therapeutic Innovation, University of Florida. We maintain external collaborations with specialized scientific resources for the conduct of studies with dangerous biodefense pathogens, such as the U.S. Army Medical Research Institute for Infectious Diseases. We leverage these relationships and our own in-house expertise in biodefense countermeasure development to secure funding that supports our antibacterial programs targeting both antibiotic-resistant pathogens and biothreats.

Research and Development Pipeline

The following table summarizes the status of plazomicin and our other research programs:

 

LOGO

Plazomicin

Overview

Our most advanced product candidate is plazomicin, a novel semi-synthetic aminoglycoside designed by our scientists to overcome clinically relevant aminoglycoside resistance mechanisms. Aminoglycosides have been used successfully for the treatment of serious bacterial infections for more than 50 years. As a class, aminoglycosides have several important characteristics including rapid bactericidal activity, well-described PK, a lack of metabolism in humans, and excellent solubility and stability. However, the spread of resistance to currently marketed aminoglycosides has decreased their clinical utility. We developed plazomicin by chemically modifying an existing aminoglycoside, sisomicin, a natural product isolated from bacteria, to shield the regions of the molecule that are targeted by the enzymes responsible for aminoglycoside resistance. As a result of these modifications, plazomicin remains active against multi-drug resistant organisms where most other major drug classes, including commercially available aminoglycosides such as gentamicin and amikacin, have limited activity. Based on this profile, we are developing plazomicin as an intravenous, or IV, therapy for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including CRE, which the CDC considers to be one of the top three urgent resistance threats to public health.

 

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We consider the following to be key attributes that support the clinical utility and commercial value of plazomicin:

 

   

Potent in vitro activity and in vivo efficacy in nonclinical studies against MDR Enterobacteriaceae, including CRE. Plazomicin retains activity in nonclinical studies against clinical Enterobacteriaceae isolates possessing most varieties of carbapenem resistance mechanisms, as well as most types of resistance to other key antibiotics, including commercially available aminoglycosides, colistin, and tigecycline.

 

   

Demonstration of comparable efficacy to levofloxacin and acceptable safety in a Phase 2 clinical trial in patients with complicated urinary tract infections caused primarily by non-MDR Enterobacteriaceae. We have completed a successful Phase 2 clinical trial of plazomicin in patients with complicated urinary tract infections, or cUTI, as well as required Phase 1 PK and safety clinical trials. In patients with cUTI, plazomicin demonstrated efficacy that was similar to levofloxacin in microbiological eradication of the causative pathogen of the infection, which were primarily non-MDR Enterobacteriaceae, and in clinical outcome, specifically, resolution of baseline signs and symptoms.

 

   

Improved dosing strategy compared to existing aminoglycosides, and individualized patient dosing using an in vitro assay. We have used recent innovations in PK and pharmacodynamic, or PD, modeling to create dosing regimens designed to achieve the drug exposures in the body we project to be efficacious in treating serious CRE infections. As a consequence, plazomicin is dosed in higher amounts relative to MIC than other commercially available aminoglycosides. Patient dosing in the Phase 3 trial population will also be individualized by using a proprietary in vitro assay to measure levels of plazomicin in the bloodstream and adjusting the dose to achieve the targeted drug exposure.

 

   

Potential to demonstrate a mortality benefit over currently available therapy in the treatment of life-threatening CRE infections. We have designed our pivotal Phase 3 trial for plazomicin as a superiority trial with a primary efficacy endpoint of all-cause mortality at 28 days. The trial will compare a plazomicin-based regimen versus a colistin-based regimen for the treatment of CRE bloodstream infections and pneumonia. Through the SPA procedure, the FDA has agreed that the design and planned analyses of the trial adequately address objectives in support of an NDA. Most antibiotics are approved based on demonstrating non-inferiority to the current standard of care in the treatment of a specific type of infection (such as cUTI, intra-abdominal infection, and pneumonia) caused by a range of pathogens against which both the treatment and comparator are active. By focusing the Phase 3 plazomicin trial on patients with a high unmet medical need where the efficacy of the current standard of care is poor, and enrolling based on infections caused by the target pathogen (CRE), we have the opportunity to demonstrate differentiated efficacy of plazomicin in the clinical setting.

 

   

Potential to reduce the healthcare costs associated with the treatment of serious infections. Treatment of antibiotic-susceptible infections is associated with lower overall costs as compared to the treatment of antibiotic-resistant infections. Our Phase 3 trial of plazomicin will permit us to document improved pharmacoeconomic outcomes from plazomicin treatment of MDR Enterobacteriaceae, which may include fewer days on mechanical ventilation, less time in the ICU, and shorter total hospital stay.

Based on these attributes, we believe that plazomicin has the potential to become the new standard of care for the treatment of CRE.

Carbapenem-Resistant Enterobacteriaceae Pose an Urgent Threat to Patients

The need for new antibiotics to treat CRE is particularly acute, as CRE are one of the top global threats in infectious disease. In 2013, the CDC labeled CRE as “nightmare bacteria” and indicated that CRE pose a public health threat requiring “urgent and aggressive action.” These bacteria are commonly MDR, exhibiting resistance to not only carbapenems, but also to nearly all antibiotics commonly used to treat gram-negative infections, including cephalosporins, beta-lactam/beta-lactamase inhibitor combinations, fluoroquinolones, and currently-marketed aminoglycosides. Resistance to carbapenems, which we define as non-susceptibility to a carbapenem

 

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antibiotic, has been highlighted because these drugs are one of the last lines of defense against resistant gram-negative infections. Most CRE express enzymes called carbapenemases which break down the carbapenem antibiotic molecule before it can kill the bacteria. Due to the lack of effective therapies, CRE infections are associated with significant mortality, with up to 50% mortality observed in patients with bloodstream infections.

With limited treatment options available for CRE infections, physicians have resorted to older drugs such as colistin or more recently approved drugs such as tigecycline. However, there is evidence that these antibiotics are failing patients. For example, in bloodstream infections due to carbapenemase-producing K. pneumoniae, all-cause mortality for treatment with colistin, tigecycline, or combinations of antibiotics that do not include a carbapenem active in vitro against the infecting isolate were reported to be 46%, 47%, and 37%, respectively. Recently, resistance to even these last-resort treatments has begun to be reported, further increasing the urgency for new therapeutic options.

The CRE problem is global and the incidence has increased significantly over the last decade. For example, CDC surveillance data indicates that the rate of carbapenem resistance among Klebsiella species increased from 1.6% to 10.4% in the United States between 2001 and 2011. In Italy, 31% of K. pneumoniae strains were carbapenem-resistant in 2012, a sharp increase from 2010 when the rate was 16%. The problem is even more pronounced in Greece, with more than 60% of K. pneumoniae strains exhibiting resistance in 2012. In Latin America, 11% of Klebsiella species were resistant to carbapenems in Brazil, 8% in Argentina, and 5% in Chile, according to surveillance data gathered from 2008 to 2010.

We estimate that there were approximately 110,000 cases of CRE infections in the United States and five major markets in the European Union in 2013, with approximately one-fourth of these being bloodstream infections or pneumonia. We believe that CRE incidence will continue to increase in the future. A key driver of resistance growth, the use of carbapenems, is increasing. Once restricted in use to limit the emergence of resistance, hospitals are changing their policies due to the pressing need for carbapenems to treat the growing number of MDR infections. In a recent survey, two-thirds of U.S. hospital pharmacy directors reported that carbapenems are now unrestricted on their hospital formularies, likely a reflection of the increasing incidence of difficult-to-treat gram-negative infections. Additionally, the spread of CRE among patients, between healthcare facilities, and across geographic regions is exacerbated by the ability of CRE to readily transfer their resistance genes to other bacteria. Spread is especially dangerous when encountered in the outpatient setting, as it could lead to an epidemic of community-based CRE infections. Among outpatients in the United States, almost 2% of K. pneumoniae isolates were resistant to carbapenems in 2010, up from nearly 0% in 2005. Finally, CRE are very difficult to eradicate once they establish a foothold in the healthcare setting.

Commercial Strategy for Plazomicin in CRE

Our overall goal is to establish plazomicin as the standard of care for the treatment of serious CRE infections. Through our clinical development approach to demonstrate plazomicin’s superiority to the current standard of care, and our regulatory filing strategy under an SPA, we plan to establish the utility of plazomicin in treating bloodstream infections and pneumonia caused by gram-negative bacteria. This strategy is intended to support plazomicin’s differentiated profile from both approved and development-stage antibacterials.

We believe that the commercial opportunity for plazomicin will be significant if our pivotal Phase 3 superiority trial demonstrates a mortality benefit against currently available antibacterial treatment. To our knowledge, plazomicin would be the first antibiotic to be approved on the basis of such a design. We anticipate that the expected mortality benefit of plazomicin will create significant physician demand for plazomicin in treating presumed and documented CRE infections based on our primary market research. A demonstrated mortality benefit in a patient population with a high risk of death, and a potential to circumvent spread of CRE in the hospital setting, will be key product differentiators that drive adoption. We intend to achieve our pricing and reimbursement objectives through demonstration of a mortality benefit in CRE patients as well as pharmacoeconomic analyses that demonstrate significant cost savings to the healthcare system with the use of plazomicin. At a 2013 forum sponsored by The Pew Charitable Trusts, a nonprofit organization, which brought

 

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together payors, the FDA, and industry, panelists supported an approximate price points of $15,000 per treatment course for new antibacterial agents for resistant infections as long as clinical and economic benefits were clearly demonstrated. We will collect data in our Phase 3 trial that is designed to enable us to compare medical resource utilization between patients treated with plazomicin and those treated with comparator therapy. For example, we will determine whether plazomicin-based therapy results in fewer days on mechanical ventilation, less time in the ICU, and shorter total hospital stays. As a reference for the potential cost-savings that could accumulate, a study using 2002 cost data estimated that the total cost of a single day in the ICU without mechanical ventilation was over $3,000, and that the incremental cost of a day of mechanical ventilation in the ICU was over $1,500. Accordingly, we believe an effective treatment for CRE infections has the potential to yield substantial cost-savings relative to existing therapy based on these key cost drivers.

We intend to focus our initial commercial efforts on the U.S. market, which we believe represents the largest single market opportunity for plazomicin. We plan to employ a targeted U.S. sales force to promote plazomicin to hospital-based healthcare professionals in resistance hotspots. In key markets outside of the United States, including Europe, Asia, and Latin America, we believe we can maximize the value of plazomicin through licensing full product rights to one or more commercialization partners who have local market expertise.

Plazomicin Development Program

We are developing plazomicin, our lead product candidate, for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including CRE. We have not conducted a clinical trial of plazomicin in patients with CRE infections, and we have no direct clinical evidence that plazomicin is effective in treating CRE infections in humans. However, based on the strength of our nonclinical data against CRE, and supported by the clinical pharmacokinetic, efficacy and safety data generated by our completed clinical trials, including our successful Phase 2 trial evaluating the efficacy of plazomicin compared with levofloxacin in patients with cUTI, the FDA agreed through the SPA procedure and other communications that our single pivotal Phase 3 trial, a total safety database of approximately 300 patients, and additional nonclinical studies would be acceptable to support an NDA for plazomicin. While we were originally developing plazomicin for a broad range of gram-negative infections, including cUTI, we recognized it had exciting potential to address the urgent public health threat of CRE that has emerged in recent years. We also received FDA fast track designation for plazomicin for the treatment of serious and life-threatening CRE infections. We believe our planned development program, if successful, will also be acceptable to support a marketing application for plazomicin in the EU, based on feedback obtained through the EMA scientific advice procedure.

Key elements of our program to develop plazomicin for the treatment of CRE infections are outlined in the table below:

 

CRE Clinical Program

 

Phase

  

Objectives

   Planned
Enrollment
(approximate)
     Initiation— Receipt
of Top-Line Data
 

3

  

Primary: Demonstrate superiority of plazomicin as compared to colistin with respect to all-cause mortality at 28 days in patients with serious CRE infections

Secondary: Safety, PK of plazomicin

     360         Q1 2014 – 1H 2017   

Safety Trial

   Demonstrate safety of plazomicin in patients with serious CRE infections      120         2H 2015 – 1H 2017   

 

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Nonclinical Studies Supporting Success of CRE Program

Study

  

Methods

  

Key Result

In vitro activity

against CRE

   Standard microbiology assays    Plazomicin demonstrated strong potency against CRE isolates resistant to other antibiotics.

In vivo efficacy

against CRE

   Mouse models of lung and thigh muscle infection    Plazomicin demonstrated strong efficacy against CRE, including as compared to colistin or tigecycline.

In vivo efficacy

against plague and

tularemia

   Non-human primate models of pneumonic plague and tularemia    Animals receiving plazomicin demonstrated survival at doses below the level equivalent to our Phase 3 clinical dose.

In vivo and in vitro

toxicology studies

   In vitro and animal model studies of toxicities and potential side effects    Plazomicin demonstrated impacts on kidney function similar to other aminoglycosides. No other significant effects were observed.

 

Completed Phase 1 and Phase 2 Clinical Studies
Study
No.
 

Objectives

   Number
Enrolled
  

Key Result

001   Phase 1 trial of safety and PK after single and multiple doses in healthy subjects    39    Plazomicin was well tolerated at doses of up to 15 mg/kg for 3 days.
003   Phase 1 trial of safety, plasma PK and lung penetration in healthy subjects    40    Plazomicin was well tolerated at doses of up to 15 mg/kg for 5 days. Plazomicin penetrated into the lung.
004   Phase 1 trial of safety and PK in healthy and impaired kidney function subjects    24    As with other aminoglycosides, plazomicin’s dose needs to be adjusted in patients with moderately or severely impaired kidney function.
006   Phase 1 thorough QT/QTc trial in healthy subjects1    64    Plazomicin showed no clinically relevant potential to increase risk for cardiac arrhythmias at single doses of up to 20 mg/kg.
002   Phase 2 safety, efficacy, and PK in patients with cUTI    145    Plazomicin displayed efficacy similar to the comparator antibiotic treatment (levofloxacin). Plazomicin was generally well tolerated at doses of up to 15 mg/kg for 5 days.
1 

The “thorough QT/QTc study” is used to determine whether or not the effect of a drug on the QT/QTc interval in target patient populations should be studied intensively during later stages of drug development. The QT/QTc interval is a measure of the time between the start of the Q wave and the end of the T wave in the heart’s electrical cycle.

As part of our drug development strategy, we monitor changes in the competitive landscape and new opportunities that may result from regulatory reform regarding approval pathways for new antibiotics. As appropriate, we may consider performing additional clinical trials if we believe such trials might result in more rapid regulatory approval of plazomicin or our other product candidates.

Pivotal Phase 3 Superiority Trial of Plazomicin for the Treatment of CRE

Given the critical need for new drugs to treat infections caused by CRE and given plazomicin’s differentiated in vitro activity and in vivo efficacy against this pathogen, we have designed our pivotal Phase 3 trial to position plazomicin as a superior drug for the treatment of CRE. By focusing on the pathogen against

 

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which plazomicin has superior nonclinical activity, instead of a broader population of pathogens, we believe we have a greater probability of demonstrating the clinical differentiation of plazomicin. In addition, unlike most antibiotic trials that are designed to show non-inferiority to the current standard of care, this trial is a superiority study with a primary efficacy endpoint of all-cause mortality at 28 days. This superiority approach is consistent with recent FDA draft guidance regarding the development of antibacterial therapies to treat patients with unmet medical need. We have reached agreement with the FDA through the SPA procedure on the design and planned analyses of this pivotal Phase 3 trial.

We expect to initiate our global Phase 3 trial for the treatment of serious CRE infections in the first quarter of 2014. We expect to have top-line data from this pivotal Phase 3 trial and to have gathered requisite safety data by the first half of 2017. If the trial is successful, we expect to submit an NDA to the FDA and an MAA to the EMA in the second half of 2017, and subsequently submit marketing applications in other global regions. Our Phase 3 trial for plazomicin will be funded in part by BARDA, which has awarded us an option for $60.4 million in funding for the trial, as part of our $103.8 million contract.

Trial Design

Our pivotal Phase 3 trial is a randomized, open-label superiority trial of the efficacy and safety of plazomicin as compared to colistin when each is combined with a second antibiotic in the treatment of patients with bloodstream infections or hospital-acquired pneumonia due to CRE. The trial will enroll patients whose causative pathogen is either presumed or documented to have an MIC ³ 4 µg/mL for the broadest spectrum carbapenems, which are referred to as type 2 carbapenems. These patients are reported to have high mortality rates when treated with currently available therapeutic options, providing us with the opportunity to demonstrate a statistically significant improvement in mortality with plazomicin.

The following figure provides an overview of our pivotal Phase 3 superiority trial:

 

LOGO

Patients with presumed or confirmed infection with CRE based on local laboratory testing will be enrolled and randomized 1:1 to a plazomicin- or colistin-based regimen. Presumed CRE infections are those with a high probability of being CRE based on diagnostic testing (for example, mass spectrometry or molecular testing), while confirmed CRE infections for purposes of our Phase 3 trial are those with isolates confirmed to have an MIC ³ 4 µg/mL to a type 2 carbapenem. At the time of randomization, one adjunctive antibiotic, either

 

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tigecycline or meropenem, will be selected by the investigator to be added to plazomicin or colistin. Prior to randomization, patients may receive treatment with empirical therapy according to the local standards of care. However, patients who have received more than 72 hours of empirical therapy for presumed CRE infection will not be eligible for the trial.

Patients randomized to plazomicin will receive an initial dose up to 15 mg/kg as a 30-minute IV infusion. The initial dose and dosing interval will be determined by baseline renal function. Subsequent plazomicin doses will be individualized based on changes in renal function and by therapeutic drug management, or TDM, using our in vitro assay.

Colistin will be administered in the form of its IV prodrug as a 5 mg/kg IV loading dose followed by maintenance dosing of 5 mg/kg divided every eight or every 12 hours for up to 14 days. Colistin dosing will be adjusted according to renal function.

The trial comprises a screening period of up to 72 hours, an active-treatment period of 7 to 14 days, and a post-treatment period through the end of study on Day 28. Efficacy will be determined by assessments of survival, clinical response, and microbiological response. The primary efficacy endpoint is all-cause mortality at 28 days. Secondary efficacy parameters include time to death through Day 28, all-cause mortality at 14 days after randomization and assessment of clinical response at end of treatment, test of cure, and end of study. Additional efficacy endpoints include early assessment of the resolution of fever, improvement of oxygenation in pneumonia patients, and clearance of bacteremia in patients with bloodstream infections. Microbiological assessments include the evaluation of microbiological response and the incidence of development of decreased susceptibility to plazomicin or colistin.

Prior to the completion of enrollment, an independent data monitoring committee will conduct and review two unblinded interim analyses of efficacy and futility. The interim analyses will occur when 33% and 67% of the required patients in the primary analysis population have reached the end of study on Day 28, which we anticipate to occur in 2015 and 2016, respectively. The interim analyses will determine whether the trial should be stopped early based on either efficacy or futility criteria.

Dosing Strategy for Phase 3 Using Pharmacometric Modeling

We used recent innovations in PK/PD modeling to predict that the plazomicin dosing regimen in the Phase 3 trial will be adequate for efficacious treatment of CRE infections. This approach integrates information on the distribution of MICs for the target pathogen based on recent microbiology surveillance data, the results of exposure-response assessments in animal models, and PK data from our Phase 1 and 2 trials to define the appropriate dosing regimen for efficacy. Based on this analysis, we predict that with our Phase 3 dosing regimen 92% of patients will achieve the levels of plazomicin in their blood or lung tissue associated with successful treatment of CRE infection in vivo. Compared to exposures achieved with current dosing of other aminoglycosides, the targeted plazomicin exposure is typically two to three times higher relative to the MIC of the infecting pathogen.

In addition, dosing of plazomicin in our Phase 3 trial will be individualized for each patient based on changes in renal function and by TDM. The use of TDM for currently marketed aminoglycosides, combined with real-time PK assessments, has been shown to help achieve target drug exposures, leading to improved patient outcomes and reduced length of hospital stays. Plazomicin concentration in plasma will be determined using an investigational in vitro assay. In November 2013, we received an Investigational Device Exemption, or IDE, approval from the FDA for use of the assay in the trial.

Projected Mortality Benefit of Plazomicin

To estimate the potential size of the treatment effect for plazomicin over colistin in our pivotal Phase 3 superiority trial, we performed a meta-analysis of data from three observational studies describing the clinical

 

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outcome of 309 patients with bloodstream infections due to carbapenemase-producing Enterobacteriaceae. We segregated patients into two groups:

 

   

High MIC”: Patients whose infections were caused by an isolate with a carbapenem MIC ³ 4 µg/ml, our target MIC for inclusion in our Phase 3 trial, and who received combination antibiotic therapy.

 

   

“Low MIC”: Patients whose infections were caused by an isolate with a carbapenem MIC < 4 µg/ml, and who received combination antibiotic therapy containing a carbapenem.

We observed a 35% mortality rate in the High MIC group and a lower 14% mortality rate in the Low MIC group. We interpret the absolute mortality difference of 21% (95% confidence interval: 11%-30%) between the two groups to be an indication of the potential magnitude of the treatment effect that might be observed when an effective antibiotic therapy is used to treat patients whose isolates have a carbapenem MIC ³ 4 µg/ml.

Our trial design assumes a more conservative treatment effect size than suggested by this meta-analysis. Specifically, we assumed that a plazomicin-based regimen would result in a 12% absolute reduction in mortality from a baseline mortality rate of 35% in the colistin comparator group. Based on this projection, as well as additional statistical considerations, we estimate that the trial will need to enroll 286 treated patients with laboratory confirmed CRE infections to complete the primary analysis population. We estimate that it will require approximately 360 randomized patients over a 36-month period to reach this enrollment target.

Open Label Safety Trial

We intend to conduct an additional safety trial to supplement the Phase 3 trial in order to complete the safety database of 300 patients treated with plazomicin as agreed with the FDA to support the NDA. The study will be a single-treatment arm safety trial. We expect to initiate this safety trial following our first interim analysis of the Phase 3 trial in 2015. Our BARDA contract includes an unexercised option for additional funding to support this safety trial, among other things. The dollar value of this unexercised option has not yet been determined.

Nonclinical Data Support the Use of Plazomicin for the Treatment of CRE Infections

Plazomicin has been tested extensively in vitro, in animal efficacy models, and in safety pharmacology and toxicology studies. As noted above, nonclinical assays are generally predictive of clinical efficacy for antibacterials, particularly in the case of a well understood class such as aminoglycosides.

In vitro Activity Against MDR Enterobacteriaceae, Including CRE

Results from multiple susceptibility testing studies against MDR Enterobacteriaceae demonstrate that plazomicin remains potent against strains resistant to several other classes of antibiotics, including carbapenems and other aminoglycosides. We can determine the likely activity of plazomicin against MDR Enterobacteriaceae, including CRE, encountered in the hospital setting globally by testing a large number of clinical isolates collected from unique patients with different types of infections from hospitals around the world.

 

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In these studies, we measured the potency of each drug by determining the concentration of drug required to inhibit the growth of 50% and 90% of the isolate set. We refer to these measurements as the MIC50 and MIC90, respectively. The table below summarizes the in vitro activity of plazomicin and several other commercially-available antibiotics from various different drug classes commonly used to treat Enterobacteriaceae infections against a large number of clinical CRE isolates.

 

Compound

  

Class

           N              

MIC50

(µg/mL)

  MIC90
(µg/mL)

Plazomicin

  

Aminoglycoside

   807    

0.5

  2

Gentamicin

  

Aminoglycoside

   807    

4

  128

Amikacin

  

Aminoglycoside

   806    

32

  64

Ciprofloxacin

  

Fluoroquinolone

   767    

8

  8

Ceftazidime

  

Cephalosporin

   510    

64

  >128

Piperacillin/tazobactam

  

Beta-lactam/Beta-lactamase  inhibitor

   731    

>128

  >128

Tigecycline

  

Glycycline

   723    

1

  2

Colistin/polymyxin B

  

Polymyxin

   692    

1

  4

 

Key:

 

Susceptible    Non-susceptible

 

     N=number of strains within the overall set of 807 strains tested vs. the given antibiotic.
     Notes: CLSI 2012 susceptibility criteria were used except for tigecycline and colistin, for which EUCAST 2013 criteria were used because CLSI criteria were not available. Isolates selected had an MIC ³ 2 µg/mL for any type 2 carbapenem, a value defined as non-susceptible for this class according to CLSI 2012 susceptibility criteria. Plazomicin has not yet been assigned susceptibility criteria by these organizations.

As shown in this table, at least 50% of the tested isolates were non-susceptible to all of the marketed drugs except for gentamicin, tigecycline, and colistin, while plazomicin remained potent (MIC of 0.5 µg/mL or less). This shows the high degree of multi-drug resistance in CRE and the reason tigecycline and colsitin are considered among the only options for treatment of infections caused by CRE. All of the MIC90 values of the marketed drugs were non-susceptible, meaning that a significant percentage of infections caused by these isolates would be untreatable with available antibiotics. Plazomicin maintained an MIC90 of 2, meaning that at least 90% of these isolates were inhibited by a concentration of 2 µg/mL or less. Overall, 96% of these isolates had a plazomicin MIC of 2 µg/mL or less.

 

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The graphs below display the activity of each of plazomicin and two commercially available aminoglycosides, amikacin and gentamicin, against clinical isolates of Enterobacteriaceae that are resistant to carbapenems due to the expression of two of the three main types of carbapenemases, serine carbapenemase and oxacillinase. The MIC of each of the tested drugs is expressed along the horizontal axis of the graph and the percent of the strains inhibited by the tested drug at a given MIC is expressed along the vertical axis. The number specified in the title indicates the number of strains that were included in each study.

 

LOGO

As exemplified in the above graphs, plazomicin retained activity against 90% or more of the tested isolates at an MIC of less than or equal to 1 µg/mL. Amikacin and gentamicin display poor activity overall because the tested strains also expressed aminoglycoside resistance mechanisms.

The following set of graphs displays the activity of each of plazomicin, amikacin, and gentamicin against clinical isolates of Enterobacteriaceae that are resistant to carbapenems due to the expression of the third main type of carbapenemase, metallo-beta-lactamase, or MBL. Activity against isolates with NDM-1, which is a particular type of MBL, is shown separately from isolates with other MBLs.

 

LOGO

Plazomicin retained activity with an MIC of less than or equal to 1 µg/mL against 90% or more of the tested isolates with an MBL, except for those with NDM-1, where plazomicin was only active against one of the 17 isolates tested. Plazomicin, amikacin, and gentamicin each display very poor activity against the NDM-1 isolates because this resistance mechanism and a particular aminoglycoside resistance mechanism, ribosomal methyltransferase, commonly occur together in the same isolate. Ribosomal methyltransferase, which renders plazomicin and most commercially available aminoglycosides inactive, and NDM-1 are generally limited to some countries in Asia, including India, although there have been isolated cases of infections by bacteria carrying such resistance mechanisms elsewhere, including the United States.

We also studied the activity of plazomicin in vitro against eight clinical CRE isolates in combination with meropenem and tigecycline, as we are planning to use plazomicin in combination with these two antibiotics during our Phase 3 trial. In our studies, we did not observe any reduced activity of plazomicin in combination with either of these antibiotics.

 

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In vivo Efficacy Against CRE

Plazomicin has demonstrated efficacy against CRE in multiple efficacy studies in animal models, and was consistently more potent than either tigecycline or colistin at doses equivalent to the clinical dose for each drug. In these studies, the PK of plazomicin was measured so the effect of its concentration in blood or lung tissue could be evaluated. Because animals and humans metabolize and excrete drugs at different rates, the dose of plazomicin was “humanized” so the concentration of plazomicin over time in the animal closely matched the human concentration over time measured from our clinical studies. We used two different mouse models of bacterial infection in which a measured amount, or inoculum, of a CRE strain was introduced into either the thigh muscle or lung of the animal, allowed to grow for two hours, and then treated with an antibiotic for one day. We determined efficacy in the animal model by measuring the amount of bacteria, expressed as colony-forming units per gram (CFU/g), in treated as compared to untreated tissues, and then comparing either the increase or decrease in the amount of bacteria versus the original inoculum, or stasis.

The graph below shows the results of plazomicin, colistin administered as its prodrug used in the treatment of patients, and tigecycline against eight CRE strains in a mouse thigh infection model.

 

LOGO

For these thigh infection studies, we selected CRE isolates from hospitalized patients that were primarily susceptible (MIC £ 1 µg/mL) to colistin and tigecycline by EUCAST criteria. The MICs of the antibiotics against the eight tested CRE isolates are shown in the table below.

 

     Number of Strains with the Given MIC  
     £ 1 µg/mL      ³ 2 µg/mL  

Plazomicin

     8         0   

Colistin

     6         2   

Tigecycline

     7         1   

Plazomicin demonstrated efficacy by reducing the amount of bacteria by up to 100 times compared to the original inoculum at doses lower than the equivalent clinical dose. In contrast, colistin and tigecycline displayed poor efficacy, despite having MICs against most of the isolates at or below the value considered to be susceptible. This result is consistent with the high mortality rates observed when colistin and tigecycline are used to treat serious CRE infections.

 

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Efficacy Against Rapidly Lethal Plague and Tularemia Pneumonia in Non-Human Primate Models

Plazomicin has demonstrated efficacy in non-human primate models against infections caused by the biothreat pathogens Yersinia pestis and Francisella tularensis. These two bacteria species are considered potential bioweapons and are the causative agents for plague and tularemia, respectively. The primary site of infection in these models is the lung, and the pathogens cause a rapidly lethal pneumonia that spreads to other organs in the absence of effective therapy. In these models, animals were exposed to an aerosol spray of the pathogen and monitored for signs of fever indicating an active infection. PK was also measured. Once fever was detected, treatment was started with either a fixed dose of plazomicin (six animals for each treatment group) or a placebo and continued for 10 days. In one arm of the tularemia study, treatment was withheld until 24 hours after fever was observed allowing additional time for the infection to establish and worsen. Across these studies, almost all plazomicin-treated animals were cleared of their bloodstream and lung infections even when dosed below levels equivalent to our Phase 3 clinical dose. However, in the plague studies some plazomicin-treated animals died due to infections that spread to the central nervous system, or CNS, where we believe plazomicin does not penetrate. Like other aminoglycosides, intravenous plazomicin would not be suitable for the treatment of CNS infections. In contrast, none of the placebo control-treated animals in these studies survived. The strong efficacy of plazomicin against these diseases in a primate model suggests that it would likely be effective in similar serious infections in humans. Our BARDA contract includes an unexercised option for funding, among other things, additional non-human primate studies of plazomicin’s efficacy against Yersinia pestis and Francisella tularensis. The dollar value of this unexercised option has not yet been determined.

Nonclinical Safety Studies

We have studied plazomicin in industry-standard in vitro and in vivo toxicology models designed to characterize the potential side effects and safety parameters of drugs. These studies are typically required by regulatory agencies such as the FDA prior to use of the drug in humans. In our studies, plazomicin’s primary toxicological effect was on the kidney. In animals, damage to the kidney increased and organ function deteriorated in proportion to plazomicin dose. This effect was observed to be reversible. After plazomicin dosing ceased, kidney function returned to normal or near normal, and the kidney damage was repaired. These results are consistent with the nonclinical toxicity and clinical safety of other aminoglycosides. Reversible kidney toxicity is a known side effect of these drugs. In head to head studies in animals, we observed the relationship between plazomicin dose and effect on the kidney and its function to be similar to that of gentamicin.

Aminoglycosides are also associated with hearing loss and impaired balance. Both of these functions are controlled by organs in the inner ear. To evaluate the potential for hearing loss with plazomicin treatment, we studied plazomicin in an animal model designed to detect hearing loss associated with drug treatment. In this study, plazomicin did not impact hearing function or cause detectable damage to the inner ear. The ability of this model or other available nonclinical models to predict drug-related hearing loss has not been firmly established. Therefore, we carefully monitored hearing and balance in our completed clinical trials of plazomicin.

Additional Nonclinical Studies to Support an NDA

We intend to conduct additional nonclinical studies to support an NDA for plazomicin. We plan to perform further microbiological studies of plazomicin in order to assess its activity against contemporary clinical isolates of Enterobacteriaceae and other bacterial species from the United States and other countries. We plan to conduct these studies no earlier than three years prior to the NDA filing. Our BARDA contract includes an unexercised option for additional funding to support these studies. The FDA has agreed that these additional nonclinical studies, when combined with our single pivotal Phase 3 trial and a total safety database of approximately 300 patients, would be acceptable to support an NDA for plazomicin. Other studies we plan to conduct include industry-standard experiments to characterize the distribution and excretion of plazomicin in vivo, as well as in vitro studies of the potential for plazomicin to interact with enzymes associated with drug distribution and metabolism.

 

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Plazomicin Clinical Data Are Supportive of Further Trials of Plazomicin in Patients with CRE

Our clinical trial data to date for plazomicin indicate an acceptable safety profile, predictable PK, and lung penetration that is similar to other aminoglycosides. In addition, our Phase 2 trial demonstrates that plazomicin has microbiological and clinical efficacy in treating cUTI that is similar to levofloxacin, an approved antibiotic in the fluoroquinolone class commonly used in hospitals for the treatment of this infection.

Plazomicin has been studied in four Phase 1 clinical trials and one Phase 2 clinical trial. To date, a total of 239 healthy subjects and patients have received plazomicin at doses ranging between 1 and 20 mg/kg administered as an IV infusion. In the Phase 1 trials, 82 subjects received 15 mg/kg administered either as a single dose or once daily for up to five days. In the Phase 2 trial, 74 patients with cUTI received 15 mg/kg of plazomicin administered once daily for up to five days.

Phase 1 Clinical Trials

In our Phase 1 trials we demonstrated that plazomicin displays good tolerability and safety in single doses up to 20 mg/kg and multiple doses of up to 15 mg/kg of plazomicin administered once daily for five days. Common adverse events in the Phase 1 studies (occurring at a frequency greater than 5% in all subjects) were headache, numbness or tingling, dizziness, nausea, and drowsiness. All adverse events were mild or moderate in severity, and the overall frequency of events was similar between the plazomicin and placebo groups. In a substudy of our second Phase 1 trial (003) that investigated lung penetration of plazomicin, five subjects experienced mild to moderate transient hypotension at the end or soon after a single dose, consisting of a 10-minute infusion of 15 mg/kg of plazomicin. Following this trial, the infusion period was increased to 30 minutes for all subsequent trials. In a focused cardiovascular trial, plazomicin showed no clinically significant potential to cause arrhythmias, and all adverse events were mild or moderate in severity.

Pharmacokinetic data collected in these trials showed dose proportionality and linearity in plasma within the tested plazomicin dose range. Lung penetration of plazomicin based on epithelial lining fluid, or ELF, levels was similar to the range of values reported for amikacin, another aminoglycoside agent, in bronchial secretions of normal and infected subjects. Phase 1 trials also showed that, as with other aminoglycosides, plazomicin is mainly cleared through the kidneys. A trial in subjects with moderate or severe kidney function impairment confirmed that plazomicin PK is significantly altered in these subjects relative to subjects with mild or normal kidney function. This trial demonstrated that, as with other aminoglycosides, dose adjustment will be necessary in patients with moderate or severe impairment.

Phase 2 Clinical Trial

Our Phase 2 multicenter, double-blind, randomized, active comparator-controlled trial, evaluated the efficacy of plazomicin compared with levofloxacin in 145 patients with cUTI including acute pyelonephritis. We selected cUTI as the target infection for our Phase 2 trial because cUTIs are one of the most common hospital-acquired infections, and the majority of cUTIs across all geographic regions are caused by Enterobacteriaceae, most commonly E. coli. We selected levofloxacin as the comparator drug for this trial since it is considered an empiric standard of care for cUTI and it shares many similar properties to plazomicin, such as concentration-dependent killing of bacteria, once-daily dosing, and achievement of high urinary concentrations.

During the first phase of the trial, patients were randomized 1:1:1 to 10 mg/kg plazomicin, 15 mg/kg plazomicin, or 750 mg levofloxacin, each treatment being administered once daily for five consecutive days. During the second phase of the trial, the 10 mg/kg treatment arm was eliminated and patients were randomized 2:1 to 15 mg/kg plazomicin or levofloxacin 750 mg.

Efficacy was assessed through microbiological and clinical outcomes at end of treatment, at test of cure, and at a long-term follow-up visit. The primary efficacy endpoint was the proportion of patients who attained microbiological eradication at the test of cure visit. This endpoint was determined for two analysis populations: a

 

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modified intent-to-treat, or MITT, population which included all randomized patients with at least one causative pathogen isolated from an acceptable urine specimen before treatment; and a microbiologically evaluable, or ME, population which was a smaller subset of the MITT population and included patients who met key study inclusion criteria, received study treatment for a pre-specified duration and had an acceptable urine specimen at test of cure.

As shown in the table below, the proportion of patients who achieved microbiological eradication was similar for each of the plazomicin (10 mg/kg and 15 mg/kg) and levofloxacin treatment groups in both analysis populations. Microbiological eradication rates for the MITT population in our Phase 2 trial were lower than the ME population. This is in part due to the fact that the MITT population, but not the ME population, had a proportion of patients with an unknown/indeterminate microbiologic outcome primarily because samples at the test of cure visit were not obtained.

 

By-Patient
Microbiological Response 1

   Plazomicin
10 mg/kg
   Plazomicin
15 mg/kg
   Levofloxacin
750 mg

Microbiologically Evaluable (ME)

N

   7    35    21

Eradication, n (%)

   6 (85.7%)    31 (88.6%)    17 (81.0%)

95% CI

   42.1%–99.6%    73.3%–96.8%    58.1%–94.6%

Difference (95% CI)2

         –7.6% (–31.3%, 16.0%)

 

  

 

  

 

  

 

Modified Intent-to-Treat (MITT)

N

   12    51    29

Eradication, n (%)

   6 (50.0%)    31 (60.8%)    17 (58.6%)

95% CI

   21.1%–78.9%    46.1%–74.2%    38.9%–76.5%

Difference (95% CI)2

         –2.2% (–27.2%, 22.9%)

 

1 

N = number of patients in the treatment group; n=number of patients within a specified microbiological response category.

2 

Difference in microbiological eradication rates between levofloxacin 750 mg and plazomicin 15 mg/kg as calculated by the levofloxacin eradication percentage minus the plazomicin 15 mg/kg eradication percentage. The 95% CI for the difference is based on a normal approximation with a continuity correction.

The secondary efficacy endpoint of the trial was clinical outcome. In the plazomicin and levofloxacin treatment groups, a majority of the clinically evaluable patients (66.7%–78.6%) were assessed as cured, with resolution of baseline signs and symptoms of infections. Results for the ME and MITT groups were similar. The majority of isolates collected from patients in these populations during the trial were non-MDR Enterobacteriaceae.

Overall in the Phase 2 trial, plazomicin administered at doses of 10 or 15 mg/kg once daily for five days was generally well tolerated. There were no serious adverse events assessed as related to treatment with plazomicin. Five patients (four in the plazomicin 15 mg/kg group and one in the levofloxacin group) prematurely discontinued study drug due to adverse events. Overall, adverse events were experienced by 7 of 22 patients (31.8%) in the plazomicin 10 mg/kg groups, 26 of 74 patients (35.1%) of patients in the plazomicin 15 mg/kg

 

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group, and 21 of 44 patients (47.7%) in the levofloxacin 750 mg group. Most of these were assessed as mild or moderate in severity. Adverse events occurring in at least two patients are shown in the table below.

 

Adverse Event, number of patients (%)

   Plazomicin
10 mg/kg
(22 patients)
     Plazomicin
15 mg/kg
(74 patients)
     Levofloxacin
750 mg
(44 patients)
 

Headache

     2 (9.1%)         6 (8.1%)         3 (6.8%)   

Diarrhoea

     0 (0.0%)         4 (5.4%)         2 (4.5%)   

Dizziness

     0 (0.0%)         4 (5.4%)         0 (0.0%)   

Nausea

     0 (0.0%)         4 (5.4%)         0 (0.0%)   

Vomiting

     0 (0.0%)         4 (5.4%)         1 (2.3%)   

Gastritis

     1 (4.5%)         2 (2.7%)         0 (0.0%)   

Abdominal pain upper

     0 (0.0%)         1 (1.4%)         1 (2.3%)   

Cough

     1 (4.5%)         1 (1.4%)         1 (2.3%)   

Dyspepsia

     1 (4.5%)         1 (1.4%)         1 (2.3%)   

Dyspnoea

     1 (4.5%)         1 (1.4%)         0 (0.0%)   

Hypokalaemia

     0 (0.0%)         1 (1.4%)         2 (4.5%)   

Insomnia

     0 (0.0%)         1 (1.4%)         1 (2.3%)   

Dysgeusia

     0 (0.0%)         0 (0.0%)         2 (4.5%)   

Hypertension

     1 (4.5%)         0 (0.0%)         1 (2.3%)   

Pruritus

     1 (4.5%)         0 (0.0%)         2 (4.5%)   

Tachycardia

     1 (4.5%)         0 (0.0%)         1 (2.3%)   

Upper respiratory tract infection

     0 (0.0%)         0 (0.0%)         2 (4.5%)   

The hearing and balance of patients were closely assessed, as aminoglycosides are known to have safety liabilities associated with these functions. One plazomicin-treated patient reported mild transient vertigo and another plazomicin-treated patient reported mild unilateral tinnitus that persisted and was considered permanent. Neither patient tested positive for changes in hearing function or balance. Kidney function as measured by mean serum creatinine values remained generally stable over the trial. Two patients treated with 15 mg/kg plazomicin had adverse events associated with renal function. Both events were assessed as mild in severity and involved increases in serum creatinine of 0.5 mg/dL and 0.7 mg/dL respectively, which returned to near-baseline values by the last follow-up visit. Two additional patients treated with 15 mg/kg plazomicin experienced serum creatinine abnormalities (an increase from 1.2 to 2.0 mg/dL and an increase from 0.8 to 1.5 mg/dL), neither of which were classified as adverse events, and that returned towards baseline at the last follow-up visit.

The results of this Phase 2 trial demonstrated the efficacy of plazomicin in patients with cUTI that was similar to the efficacy of levofloxacin in terms of achieving both microbiological eradication of the causative pathogen of the infection and clinical cure. Furthermore, plazomicin was generally well tolerated in this patient population.

Antipseudomonal Discovery and Development Program

Beyond our plazomicin program, our research team is focused on discovering medicines with novel mechanisms of action for serious infections caused by MDR Pseudomonas aeruginosa. This pathogen is one of the most common causes of healthcare-associated infections and was responsible for approximately 20% of the three million hospital-treated pneumonia cases in the United States, EU and Japan in 2012. According to the CDC, approximately 13% of healthcare-associated infections caused by P. aeruginosa are multi-drug resistant, and these infections are associated with high morbidity and mortality rates, as well as increased healthcare costs. As a result, the CDC has categorized P. aeruginosa as a “serious” threat requiring prompt and sustained action. We are taking a multifaceted approach to identify new antipseudomonal agents through our small molecule drug and therapeutic antibody discovery programs.

We expect to nominate at least one clinical candidate from our antipseudomonal program in 2014 and to file an IND in 2015. Based on our current operating plans and our planned use of proceeds from this offering, we anticipate that advancement of more than one clinical candidate to an IND will require additional funding.

 

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Small Molecule Drug Discovery Program

In 2006, we initiated a program to identify inhibitors of LpxC. LpxC is an essential enzyme for the formation of bacterial membranes in gram-negative bacteria that is highly conserved among gram-negative species. Inhibition of LpxC disrupts the structural integrity of the outer bacterial membrane, reducing its capacity to protect the cell and retain vital molecules in the space between the outer and inner membrane, leading to bacterial cell death.

Using our discovery engine, we made improvements to known LpxC inhibitors to generate a series of promising molecules that showed greater activity against gram-negative pathogens, improved safety in preclinical models, and better pharmaceutical properties. Given their novel mechanism of action, compounds generated in this program demonstrate no cross-resistance with current antibiotics and therefore retain activity against strains harboring resistance mechanisms that inactivate many other marketed antibiotics. This is illustrated in the figure below with respect to the most advanced compound in this program, ACHN-975, which demonstrates potent activity against a large set of almost 1,000 P. aeruginosa clinical isolates. The figure also shows the potency of other antibiotics commonly used to treat infections caused by P. aeruginosa infections. For these drugs, the dotted lines begin at the MIC value considered non-susceptible, according to 2012 CLSI criteria, demonstrating the current scarcity of effective therapeutic options for P. aeruginosa infections. None of the other drugs had a susceptible MIC90 against the test set.

 

LOGO

In 2012, we conducted a first-in-human Phase 1 clinical trial of ACHN-975, which demonstrated linear, dose-dependent PK and good tolerability when administered intravenously in single doses at levels predicted to be effective in treating P. aeruginosa infections. In a subsequent multiple-dose trial, the first three subjects that received multiple doses of ACHN-975 developed inflammation at the infusion site, with venous thrombosis at the infusion site in one of these subjects, and the trial was terminated early. No subjects had signs or symptoms of a systemic inflammatory reaction and no other safety findings were observed. All three subjects were discharged from the Phase 1 unit after demonstrating resolution or substantial improvement of the infusion site reactions. We are working to establish preclinical models that reproduce this toxicity. If we are able to validate a model, we intend explore alternative formulations or prodrugs of ACHN-975 to address the local infusion site tolerability. We also have several backup compounds that we may turn to if the reformulation and prodrug efforts are unsuccessful.

Therapeutic Antibody Discovery Program

Therapeutic monoclonal antibodies, or mAbs, have several distinguishing features that make them attractive as antibacterial agents. First, we believe they will not be impacted by resistance mechanisms that inactivate

 

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existing small molecule-based antibiotics. Second, they are highly specific to their target, greatly reducing the potential for toxicity due to off-target binding. Third, humanized or fully human mAbs are well tolerated with low immunogenicity in patients. Finally, mAb therapeutics can achieve sustained exposure with a typical half-life of around 3 weeks, potentially enabling an antibacterial antibody to prevent or cure an infection following a single intramuscular or intravenous dose.

Our goal is to generate mAbs that can be deployed as a monotherapy to treat infections caused by MDR P. aeruginosa. Many of the antibacterial antibodies currently in development by others will likely be limited to prophylactic use for preventing infections or require adjunctive therapy with an effective antibiotic. Based on our experience developing agents for gram-negative pathogens, we have identified a set of targets and a corresponding screening funnel for each target that we believe to be well suited for therapeutic mAb discovery. Our unique approach has the potential to transform the way gram-negative infections are treated by enabling a safe, single-dose primary cure of infection or long-lasting step-down therapy upon discharge from the hospital.

Additional Gram-negative Discovery and Development Program

We are drawing on knowledge gained through our work on LpxC inhibitors to identify compounds that bind and inhibit additional essential enzymes in the gram-negative outer membrane biosynthesis pathway. These targets are attractive for many of the same reasons as LpxC: their inhibition leads to rapid cell death, they are highly conserved among the gram-negative bacteria, and they have no similar mammalian genes, reducing the potential for mechanism-based toxicity in patients. We are seeking to identify these compounds by using structure-guided design and virtual fragment screening based on the crystal structures of these enzymes.

Another one of our programs seeks to identify compounds that bind and inhibit a metabolic enzyme that is essential to gram-negative bacteria. The starting point for this medicinal chemistry campaign is a published series of molecules known to bind the target enzyme, but lacking in microbiological activity against pathogens of interest. We are deploying our discovery platform to design and synthesize novel molecules based on published structural information with enhanced gram-negative activity. We have generated a set of novel compounds with improved activity compared to published compounds against our key target gram-negative species (for instance, MICs of 0.5 µg/mL and 2 µg/mL against wild-type E. coli and K. pneumoniae, respectively), and have identified several lead compound series for further optimization. This improvement in activity has reinforced our understanding and proprietary knowledge of this space, and further validated our small molecule discovery approach.

Government Contracts

BARDA

Our program to develop plazomicin for the treatment of CRE infections of the bloodstream and lung, as well as for disease caused by certain bacterial biothreat pathogens, is partially funded under a contract with BARDA. This contract was awarded in August 2010 and consists of a base amount as well as three options, two of which have been exercised. The base amount and the two exercised options total $103.8 million of committed funding, of which $33.4 million has been recorded as revenues as of September 30, 2013, with $70.4 million remaining available. The potential funding amount under the unexercised option has not yet been determined. The unexercised option relates to the conduct of an open-label safety trial, certain nonclinical studies to support an NDA and certain nonclinical biodefense studies, all of which are discussed above, and we anticipate that BARDA will evaluate award of this option by mid-2015.

Overall, the contract calls for the development, manufacturing, nonclinical and clinical evaluation of, and regulatory filings for, plazomicin as a countermeasure for diseases caused by antibiotic-resistant pathogens. These pathogens include bacteria associated with serious hospital-acquired infections, such as CRE, as well as biothreats, such as F. tularensis, which causes tularemia, and Y. pestis, which causes plague. As the prime contractor, we are

 

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responsible for all technical and regulatory activities under a research plan proposed by us and accepted by BARDA. From time to time, we may propose a change to the research plan to BARDA, and BARDA may or may not choose to accept the change to the research plan, along with any associated additional costs, subject to the availability of funding, as well as other factors. We are also obligated under the contract to satisfy various federal reporting requirements, including technical reporting with respect to our plazomicin development activities, reporting with respect to intellectual property and financial reporting. In addition, technical documents and regulatory filings may be reviewed by BARDA prior to their finalization and/or submission.

Payments under the contract with BARDA are made in installments as activities are conducted in accordance with the research plan. Payments to us are based on direct costs incurred and allowances for overhead, plus a fee, where applicable. In November 2013, we modified the most recent awarded option such that payments under this option would not exceed $60.4 million, even though the cost of the Phase 3 trial and related expenses are expected to exceed the amount available to us under our BARDA contract for direct costs incurred. We currently anticipate that the estimated costs of the plazomicin development program, through the receipt of top-line data, that are not funded by our BARDA contract will approximate the allocated portion of proceeds from this offering, as described in the “Use of Proceeds” section of this prospectus. We intend to utilize such allocated proceeds to fund the cost of the Phase 3 trial and related expenses that are in excess of the payments to us under our BARDA contract for the direct costs of the trial. Under standard government contracting terms, the government receives only limited rights for government use of certain of our pre-existing data and certain data produced with non-federal funding, to the extent such data are required for delivery to BARDA under the project. The U.S. government receives unlimited rights to use and disclose new data first produced under the project with BARDA funding. The U.S. government is entitled to a nonexclusive, worldwide, royalty-free license to practice or have practiced any patent on an invention that is conceived or first reduced to practice under the project, and may obtain additional rights if we do not elect to retain ownership of a subject invention or if we do not satisfy certain disclosure and patent prosecution obligations with respect to a subject invention. The government’s rights do not include the composition of matter patents related to plazomicin, as these were developed and prosecuted prior to our entry into the BARDA contract and without government funding. The BARDA contract does not entitle the government to any sales royalties or other post-commercialization financial rights.

BARDA is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond current year amounts allotted from Congressionally approved annual appropriations.

DTRA

In June 2007, we entered into a contract with DTRA to develop novel antibacterials for the treatment of biodefense pathogens. To date, we have received $33.4 million out of $35.4 million that was available for drawdown under this contract. In November 2012, DTRA terminated this contract for convenience. We are seeking payment from DTRA for additional expenses we have incurred in connection with this contract. We have not recognized any revenue with respect to these additional amounts. The payments we have received under the DTRA contract and the payments we are requesting are subject to an ongoing audit by the Defense Contract Audit Agency.

The DTRA contract related to the funding of our LpxC program, including ACHN-975. Under the contract’s terms, the U.S. government received rights to use and disclose new data first produced under the project with DTRA funding only to the extent they are related to government applications connected with certain select pathogens. In addition, the U.S. government is entitled to a nonexclusive, worldwide, royalty-free license to practice or have practiced any patent on an invention that was conceived or first reduced to practice under the project, including the composition of matter patent related to ACHN-975, and may obtain additional rights if we do not elect to retain ownership of a subject invention or if we do not satisfy certain disclosure and patent prosecution obligations with respect to a subject invention.

NIAID

In September 2008, we entered into a five-year contract with the U.S. National Institute of Allergy and Infectious Diseases, or NIAID, to develop novel antibacterials for the treatment of biodefense pathogens. We