S-1/A 1 d816226ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on April 23, 2015

Registration No. 333-203178

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

GELESIS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE   2834   20-4909933

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer
Identification Number)

500 Boylston Street, Suite 1600

Boston, Massachusetts 02116

(617) 456-4718

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

Yishai Zohar

Chief Executive Officer

Gelesis, Inc.

500 Boylston Street, Suite 1600

Boston, Massachusetts 02116

(617) 456-4718

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

Copies to:

 

James T. Barrett, Esq.

Stacie S. Aarestad, Esq.

Locke Lord LLP

111 Huntington Avenue

Boston, Massachusetts 02199

(617) 239-0100

 

Michael D. Maline, Esq.

Ettore A. Santucci, Esq.

Goodwin Procter LLP

The New York Times Building

620 Eighth Avenue

New York, New York 10018

(212) 813-8800

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

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, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

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

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

 

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

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
To Be Registered
  Proposed Maximum
Aggregate
Offering Price(1)
  Amount of
Registration Fee(2)(3)

Common Stock, $0.0001 Par Value Per Share

  $64,400,000   $7,483.28

 

 

 

(1) 

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

(2) 

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

(3) 

Of this amount $6,972 has been previously paid.

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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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

 

Subject to completion, dated April 23, 2015

 

4,000,000 Shares

 

 

GELESIS, INC.    LOGO

 

Common Stock

$         per share

 

 

 

 

 

•  Gelesis, Inc. is offering 4,000,000 shares.

 

•  We anticipate that the initial public offering price will be between $12.00 and $14.00 per share.

 

•  This is our initial public offering and no public market currently exists for our shares.

 

•  Proposed trading symbol: NASDAQ Global Market: GLSS

 

 

 

 

This investment involves risk. See “Risk Factors” beginning on page 12.

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

 

 

 

     Per share      Total  

Initial public offering price

   $                    $          

Underwriting discounts and commissions(1)

   $         $     

Proceeds to Gelesis, before expenses

   $         $     

 

 

 

 

(1) 

We refer you to “Underwriting” beginning on page 148 of this prospectus for additional information regarding underwriters’ compensation.

Certain of our existing principal stockholders have indicated an interest in purchasing shares of our common stock with an aggregate purchase price of up to approximately $17.5 million in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering, or any of these parties may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these parties as they will on any other shares sold to the public in this offering.

The underwriters have a 30-day option to purchase up to 600,000 additional shares of common stock from us.

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

The underwriters expect to deliver the shares on or about                     , 2015.

 

Piper Jaffray

  Stifel   

Guggenheim Securities

 

The date of this prospectus is                     , 2015


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     47   

Use of Proceeds

     49   

Dividend Policy

     50   

Capitalization

     51   

Dilution

     54   

Selected Consolidated Financial Data

     57   

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

     59   

Business

     76   

Management

     113   

Executive Compensation

     121   

Related Party Transactions

     127   

Principal Stockholders

     132   

Description of Capital Stock

     135   

Shares Eligible for Future Sale

     141   

Material U.S. Federal Tax Considerations For Non-U.S. Holders of Common Stock

     144   

Underwriting

     148   

Legal Matters

     156   

Experts

     156   

Where You Can Find More Information

     156   

Index To Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

Through and including                     , 2015 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside of 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 the United States. Persons outside of 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 of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the more detailed information set forth under “Risk Factors” and our financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. Some of the statements in this prospectus are forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” In this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” or “Gelesis” refer to Gelesis, Inc.

Our Company

We are a biotechnology company focused on the development of first-in-class products to induce weight loss and improve glycemic control, or management of blood sugar levels, in overweight and obese patients, including those with prediabetes and type 2 diabetes. Our product candidates are based on our proprietary hydrogel technology that works mechanically, as opposed to via a chemical mode of action, and exclusively in the gastrointestinal, or GI, tract rather than systemically or through surgical intervention. We believe our product candidates, if approved, have the potential to address the obesity and diabetes epidemics by providing safe and effective treatments that can help large patient populations, including those not served by existing treatments.

Our lead product candidate, Gelesis100, is an orally administered capsule that contains small hydrogel particles designed to employ multiple mechanisms of action along the GI tract to induce weight loss and improve glycemic control. For optimal safety and efficacy, these hydrogel particles are engineered to rapidly absorb and release water at specific locations in the GI tract. We have completed our 3 month proof of concept, or POC, FLOW study, a 128-patient, randomized, double-blind, placebo-controlled, parallel-group, clinical trial for Gelesis100 that demonstrated statistically significant, defined by a p value < 0.05, weight loss and improvement of glycemic parameters in overweight and obese patients, including prediabetics. As used herein, p value is a measure of statistical significance. The lower the p value, the more likely it is that the results are statistically significant rather than an experimental anomaly. Gelesis100 exhibited a safety profile that was similar to that of placebo with no serious adverse events observed. In November 2014, we initiated the GLOW study, a 168-patient, randomized, double-blind, placebo-controlled, parallel-group, 6 month clinical trial to study the ability of Gelesis100 to induce weight loss and improve glycemic control in overweight and obese patients, including those with prediabetes and mild type 2 diabetes. We expect to report data from this trial in the first half of 2016. Although Gelesis100 is an orally administered capsule, we anticipate it will be regulated as a medical device.

In addition to efficacy, safety is valued as a key weight loss product property by physicians and patients. We believe Gelesis100 will provide the following safety advantages over available therapies:

 

   

acts mechanically in the GI tract and is not absorbed into the blood stream, avoiding acute and chronic side effects caused by systemically acting therapies;

 

   

passes with food through the GI tract; no procedure is required for introduction or removal;

 

   

has a natural cycling effect similar to food, preventing habituation, adaptation, and irritation of the GI tract associated with some therapies; and

 

   

is engineered using components that are Generally Recognized as Safe, or GRAS, by the U.S. Food and Drug Administration, or FDA, and widely used in the food industry.

We currently retain worldwide sales and marketing rights for our product candidates. If approved by regulatory authorities, we intend to launch our product candidates by establishing internal sales and marketing teams or collaborating with strategic partners. We currently expect our lead product

 

 

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candidate, Gelesis100, if approved for the initial indication of weight loss in overweight and obese patients, will be launched in 2019 in the United States. If the GLOW study is successful, we intend to file for a CE Mark for Gelesis100 in Europe for the initial indication of weight loss for overweight and obese patients. Upon receipt of a CE Mark, we intend to launch Gelesis100 in certain European countries as early as 2018 through strategic collaborations with established sales and marketing partners.

Obesity and Type 2 Diabetes Markets

Obesity and obesity-related metabolic diseases represent a global health challenge for which there are few safe and effective interventions. These conditions are associated with comorbidities such as type 2 diabetes, hypertension, and heart disease. In 2012, based on a report from the U.S. Centers for Disease Control and Prevention, or CDC, 35% of the U.S. adult population 20 years of age and older was obese and an additional 34% was overweight. Of the overweight population, many of these individuals are expected to cross the threshold into obesity in the near future. The treatment of obesity, and its associated comorbidities, cost the U.S. healthcare system approximately $190 billion, or 21% of medical spending, in 2005. Globally, there were more than 1.9 billion adults 18 years of age and older who were overweight or obese in 2014, according to the World Health Organization, or WHO.

One of the most prevalent comorbidities in overweight and obese individuals is type 2 diabetes. In 2012, according to the CDC, approximately 26 million Americans had type 2 diabetes and 85% of these individuals were overweight or obese. Furthermore, there were an additional 86 million American adults 20 years of age and older that were considered prediabetic in 2012, with approximately 1.7 million new cases of type 2 diabetes diagnosed that year.

There are limited available treatments that address the overweight and obesity epidemic safely and effectively. Available therapies include pharmaceuticals and surgical interventions, including device implantation. These approaches are associated with safety concerns that limit their use. We believe that our product candidates, if approved, can be used to safely induce clinically relevant weight loss and improve glycemic control in overweight and obese populations, including those with prediabetes and type 2 diabetes.

Our Product Candidates

The following table summarizes the development status of our product candidates.

 

 

LOGO

 

 

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Gelesis100 is a novel hydrogel engineered to rapidly absorb and release water at specific locations in the GI tract. The hydrogel particles are synthesized through our multi-step, proprietary process using a specific form of modified cellulose and citric acid, both of which are considered GRAS by the FDA and commonly used in the food industry. In this process, we crosslink the modified cellulose with citric acid to form a three dimensional matrix, resulting in the desired properties of Gelesis100. Each Gelesis100 capsule contains thousands of hydrogel particles and each particle is approximately the size of a grain of salt. We designed the Gelesis100 capsule to be ingested with water before a meal. Once in the stomach, the hydrogel particles are released from the capsules and rapidly absorb water, hydrating to approximately 100 times their original size. When fully hydrated, each gel particle is, on average, approximately 2 mm in diameter and its elastic response (a measurement of the ability of matter to recover its original shape after deformation) is similar to that of ingested solid food. The hydrogel particles mix homogeneously with food and travel through the GI tract, inducing satiety and improving glycemic control. Once in the large intestine, the particles release most of the water, which is reabsorbed by the body. The microscopic degraded particles are then safely eliminated by the body in the same manner as food.

Gelesis100 capsules are administered orally like a drug but we expect that Gelesis100 will be regulated as a medical device because it does not achieve its primary intended purpose through chemical action within or on the body, and is not dependent upon being metabolized for the achievement of its primary intended purposes. Additionally, we have engaged in discussions with the Center for Devices and Radiological Health, or CDRH, a division of the FDA, which has indicated that Gelesis100 will be regulated as a medical device. However, we expect our product to be marketed, detailed, and prescribed through the same channels as orally administered weight loss therapeutics.

We have completed our 3 month proof of concept First Loss Of Weight, or FLOW study, which was a 128-patient, randomized, double-blind, placebo-controlled, parallel-group study of Gelesis100 in overweight and obese patients, including prediabetics. This study was designed to demonstrate Gelesis100’s ability to induce weight loss in the target population. The study achieved statistically significant weight loss of 6.1% (2.0% placebo-adjusted) at 3 months with a 2.25 g dose of Gelesis100 administered twice daily. Placebo adjusted weight loss refers to weight lost by patients taking Gelesis100 after taking into account the weight lost by patients on placebo. Patients in the Gelesis100 3.75 g arm had a total body weight loss of 4.5% (0.4% placebo-adjusted). In the Gelesis100 2.25 g arm, 43% of patients lost ³ 5% of their body weight and 26% lost ³ 10%. In a post-hoc analysis, the small subset of prediabetic patients, defined as patients with a fasting blood glucose level ³ 100 mg/dL and < 126 mg/dL, showed the most dramatic weight loss of 10.9% (5.3% placebo-adjusted) in the 2.25 g arm. Gelesis100 exhibited a safety profile that was similar to placebo with no serious adverse events observed.

In addition to weight loss, we observed statistically significant and clinically relevant improvement in glycemic control parameters. In a post hoc analysis, we observed conversion from prediabetes status at baseline to normal glucose status at the end of treatment, as measured by fasting blood glucose levels, in 56% of the prediabetic patients in the Gelesis100 2.25 g arm and 78% of the prediabetic patients in the Gelesis100 3.75 g arm as compared to 27% in the placebo arm. This improvement, which was observed in both individuals who lost weight, or weight responders, and individuals who did not lose weight, or weight non-responders, suggests that both weight-dependent and weight-independent mechanisms may be involved in glycemic control. Patients in the Gelesis100 arms also showed improvement in insulin levels and insulin resistance as compared to placebo. We believe that these exploratory findings may provide an opportunity for us to pursue additional studies and a potentially separate glycemic control indication for our product candidates in the future.

We held a pre-submission meeting with the FDA to review the results of our FLOW study and to discuss the requirements for potential regulatory approval. In this meeting, the FDA stated that, at a minimum, the following co-primary endpoints would be required for a 6 month weight loss trial to support

 

 

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approval for a weight loss indication: (i) 3% placebo-adjusted weight loss with super superiority and (ii) 5% weight loss in at least 35% of patients on Gelesis100, regardless of placebo results. These endpoints take into account the safety profile demonstrated in the FLOW study and an assumption that a similar safety profile would be observed in the pivotal study. In addition, we have had preliminary discussions with certain European notified bodies and have received initial feedback that they may require at least 5% placebo-adjusted, statistically significant weight loss for a CE Mark.

We initiated our 6 month Gelesis Loss Of Weight, or GLOW study, in November 2014. The GLOW study is a randomized, double-blind, placebo-controlled, parallel-group study being conducted in four European countries, to assess the effect of repeated administration of Gelesis100 on body weight and glycemic control in 168 overweight and obese patients, including those with prediabetes and mild type 2 diabetes. We define mild type 2 diabetics as patients with a fasting blood glucose level ³ 126 mg/dL and £ 145 mg/dL for those that are untreated and £ 145 mg/dL for those that are treated with metformin, a drug commonly prescribed for type 2 diabetes. The co-primary endpoints for the GLOW study are : (i) 3% placebo-adjusted weight loss and (ii) 5% weight loss in at least 35% of patients on Gelesis100, regardless of placebo results. The secondary endpoints include changes in key glycemic control parameters, including insulin levels, insulin resistance (HOMA-IR), fasting blood glucose and glycosylated hemoglobin, or HbA1c. We expect to report data from this study in the first half of 2016, and it could, subject to the outcome of our discussions with European notified bodies, be the pivotal study for obtaining a CE Mark for a weight loss indication.

On March 4, 2015 we held a second pre-submission meeting with the FDA to discuss the statistical analysis plan for the GLOW study. In advance of this pre-submission meeting, the FDA provided us with initial feedback in which it designated the GLOW study as a significant risk study. During the meeting, we discussed their feedback and, as a result of these discussions, we believe that with limited protocol amendments per the FDA’s request, we will receive nonsignificant risk, or NSR, status for the GLOW study. If granted, this designation would allow us to expand the GLOW trial to include sites in the United States, in addition to the European sites. If we do not receive NSR status, we intend to complete the GLOW study in the European sites with no change in the scheduled data readout. Whether we receive NSR status or not, once we have completed the GLOW study, we intend to file for an Investigational Device Exemption, or IDE, for the FDA pivotal trial so that we can include a broader patient population, including those treated with medications for comorbidities. We expect to initiate the FDA pivotal trial in the second half of 2016 and submit data to the FDA in the first half of 2018, which would allow us to potentially launch Gelesis100 in the United States in first half of 2019.

With regards to the pediatric indication, we believe the Gelesis100 preclinical studies that have been conducted and described herein are sufficient to support initiating a pediatric clinical trial. We expect that we will meet with the FDA to discuss the results of the preclinical studies in 2016 and carry out a safety and tolerability study followed by a POC study for weight loss, both beginning in 2017.

Our second product candidate, Gelesis200, is also a novel hydrogel developed from the same proprietary hydrogel technology platform as Gelesis100. Gelesis200 was engineered to have different physical properties than Gelesis100 that we believe could provide additional benefits for specific subpopulations and indications. When compared to Gelesis100, Gelesis200 hydrates more rapidly and creates a higher elastic response and viscosity but occupies a slightly smaller volume in the stomach. We believe that these properties could make Gelesis200 more suitable as a glycemic control product for prediabetics and type 2 diabetics, who may or may not require weight loss. Gelesis200 is in pre-clinical development and we anticipate initiating clinical studies, including a 3 month proof of concept study, in the second half of 2015. We expect to report data for these clinical studies in the second half of 2016.

 

 

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Manufacturing

We have developed proprietary in-house manufacturing processes and know-how for the production of our product candidates. Our manufacturing facility operates under applicable quality system regulation, or QSR, requirements and has the capacity to supply clinical trial material for all current and planned trials through launch. We are currently in the advanced testing and process engineering stage of a new manufacturing line to produce commercial-scale quantities of Gelesis100. We plan to initiate the construction of this commercial-scale manufacturing line in North America in 2016, following successful completion of the GLOW study.

Intellectual Property

We own five families of patents and patent applications, both issued and pending, covering composition of matter, methods of use and methods of production for our product candidates, including Gelesis100 and Gelesis200. Patents covering use of our technology for treating obesity and reducing calorie consumption have been granted or allowed in the United States, Europe, and several other territories providing protection until at least 2027 and potentially longer based on regulatory extensions, if applicable, or our pending patent applications, should they be granted. In addition, we also rely on know-how, trade secrets, and continuing technological innovation to develop and maintain our proprietary position.

Our Strategy

Our goal is to be a leader in the discovery, development, and commercialization of hydrogel products that safely induce weight loss in overweight and obese patients. We also seek to expand the application of our product candidates for the improvement of glycemic control in prediabetic and type 2 diabetic patients. We seek to address these patient populations by developing effective products that have a favorable safety profile and will avoid the risk of serious side effects and complications associated with systematically acting and surgical treatment options, enabling widespread use. Our strategy has the following elements:

 

   

continue clinical development and seek regulatory approval of Gelesis100 for weight loss in overweight and obese patients, including those with prediabetes and type 2 diabetes;

 

   

expand the potential applications of our technology to include glycemic control in the prediabetic and type 2 diabetic patient populations;

 

   

continue to develop a strong intellectual property position to maintain our leadership in hydrogel products for weight loss and the improvement of glycemic control;

 

   

expand our existing manufacturing efforts to provide commercial scale manufacturing capability; and

 

   

maximize the commercial value of our product candidates by establishing internal sales and marketing teams or collaborating with strategic partners.

Risk Factors

Our business is subject to a number of risks you should be aware of before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

   

Our recently initiated GLOW trial may not demonstrate the ability of Gelesis100 to produce statistically significant and clinically meaningful weight loss in our target patient populations. If Gelesis100 does not show statistically significant and clinically meaningful weight loss in the GLOW trial, we may be required to conduct additional clinical trials and will incur increased costs, and our ability to generate product sales could be delayed or limited.

 

 

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In addition to the net proceeds of this offering, we will need to obtain financing prior to the commercialization of Gelesis100 in order to complete clinical development, seek regulatory approval, complete the construction of a commercial scale manufacturing line and support the marketing and launch of Gelesis100 and our other product candidates.

 

   

We have incurred significant losses since our inception in 2006 and as of December 31, 2014, we had an accumulated deficit of $45.4 million. We expect to incur increasing levels of operating losses over at least the next several years as we seek to develop our product candidates, including Gelesis100, and we may never achieve or maintain profitability.

 

   

Before we can market or sell Gelesis100 in the United States, we must obtain approval of a premarket approval application, or PMA. Obtaining a PMA is generally more costly and uncertain than the other regulatory approval pathways for medical devices and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until approval is obtained.

 

   

We do not have experience in manufacturing Gelesis100 on a commercial scale. If we are unable to successfully construct a commercial-scale manufacturing line and manufacture commercial quantities of Gelesis100 or if we encounter failures or difficulties in doing so, we may never achieve profitability and our business may be materially harmed.

 

   

Even if we obtain the required regulatory approval in the United States and Europe, the commercial success of Gelesis100 will depend upon market awareness and acceptance of Gelesis100. Market acceptance of Gelesis100 will depend on a number of factors, including its efficacy, perceived advantages and disadvantages in comparison to competitors, limitations or warning labels, pricing, and the willingness of patients to pay out-of-pocket if we are unable to secure third-party reimbursement.

 

   

We have limited experience establishing sales, marketing and distribution capabilities. If we encounter problems establishing these capabilities or are unable to enter into collaborations with one or more parties on acceptable terms to sell, market and/or distribute our products, including Gelesis100, the commercialization of our products may be impaired.

Corporate History and Information

Gelesis was founded in 2006 to develop products that safely induce weight loss in overweight and obese patients. In conjunction with our formation, we gathered key obesity opinion leaders to identify the characteristics of an ideal anti-obesity product. The key attributes identified through this process were a non-systemic mechanism of action and a balanced profile of safety and efficacy. In particular, these experts focused on a product profile with a natural cycling effect similar to ingested food that would be non-invasive and require no procedure for introduction or removal. With these parameters in mind, we initiated a worldwide search, identified potential technologies, and evaluated each through extensive research, which resulted in our hydrogel technology. We committed our full resources to further develop the hydrogel technology that enables our products. We believe this technology is a breakthrough in material science as it is the first and only superabsorbent hydrogel that is constructed from building blocks used in foods and specifically engineered to achieve its medical purpose.

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 of 2012, or the JOBS Act, and we may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure and other requirements that are applicable to other public companies that are not emerging growth

 

 

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companies. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. We may take advantage of the exemptions provided by the JOBS Act for up to five years or such earlier time that we are no longer an emerging growth company. The JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1.0 billion of non-convertible debt over a three year period.

The Gelesis name and logo are our trademarks. This prospectus also includes trademarks, trade names and service marks of other persons. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Issuer

   Gelesis, Inc.

Common stock offered by us

   4,000,000 shares

Common stock to be outstanding immediately after this offering

  

13,748,785 shares

Options to purchase additional shares

   The underwriters have an option for a period of 30 days to purchase up to 600,000 additional shares of our common stock.

Use of proceeds

   We estimate that the net proceeds from this offering will be approximately $45.9 million, or approximately $53.1 million if the underwriters exercise their option to purchase additional shares in full, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming the shares are offered at $13.00 per share, the midpoint of the estimated price range set forth on the cover of this prospectus. We intend to use the net proceeds from this offering for preclinical and clinical development of our product candidates, the construction of a commercial-scale manufacturing line, new research and development, working capital and other general corporate purposes.

Risk factors

   You should read the “Risk Factors” section starting on page 12 of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market Symbol

  

“GLSS”

The number of shares of our common stock to be outstanding after this offering is based on 2,075,343 shares of our common stock outstanding as of March 15, 2015 and the conversion of all outstanding shares of our convertible preferred stock as of March 15, 2015 into an aggregate of 7,673,442 shares of our common stock upon the closing of this offering.

The number of shares of our common stock to be outstanding after this offering excludes:

 

   

1,700,880 shares of our common stock issuable upon the exercise of stock options outstanding as of March 15, 2015 at a weighted average exercise price of $3.65 per share;

 

   

1,065,130 shares of our common stock issuable upon the exercise of warrants outstanding as of March 15, 2015 on an as-converted basis at a weighted average exercise price of $0.51 per share;

 

   

217,498 shares of common stock issuable upon the exercise of stock options that we expect to award under the 2006 Stock Incentive Plan, referred to as the 2006 Plan, to certain of our executive officers and directors upon the pricing of this offering, exercisable at a per share price equal to the initial public offering price of this offering;

 

   

1,754,431 additional shares of our common stock available for issuance under the 2015 Equity Incentive Plan, referred to as the 2015 Plan, which will become effective immediately

 

 

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prior to the closing of this offering (which includes 75,767 shares available under the 2006 Plan, assuming the options described above for a total of 217,498 shares are awarded as we expect); and

 

   

33,951 shares of our common stock issuable upon conversion of 119,712 shares of our Series A-5 Preferred Stock that were issued in connection with the second closing of our Series A-5 Financing on April 22, 2015 upon the closing of this offering.

Unless otherwise indicated, all information in this prospectus assumes or gives effect to:

 

   

the conversion of all outstanding shares of our convertible preferred stock as of March 15, 2015 into an aggregate of 7,673,442 shares of our common stock upon the closing of this offering;

 

   

no exercise of the outstanding options and warrants described above;

 

   

no exercise by the underwriters of their option to purchase up to 600,000 additional shares of our common stock;

 

   

the amendment and restatement of our amended and restated certificate of incorporation and the amendment and restatement of our bylaws immediately prior to consummation of this offering; and

 

   

the 1-for-3.526 reverse stock split of our common stock effected on April 22, 2015.

Certain of our existing principal stockholders have indicated an interest in purchasing shares of our common stock with an aggregate purchase price of up to approximately $17.5 million in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering, or any of these parties may determine to purchase more, fewer or no shares in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data as of, and for the periods ended on, the dates indicated. We derived the summary statements of operations data for the years ended December 31, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2014 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year. You should read the following summary consolidated financial data in conjunction with the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements, related notes and other financial information included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2013      2014  
     (in thousands, except share
and per share data)
 

Consolidated Statement of Operations Data:

     

Revenues:

     

Collaborative research and development

   $ 4,022       $ —     

Grant revenue

     1,484         209   
  

 

 

    

 

 

 

Total revenues

     5,506         209   
  

 

 

    

 

 

 

Operating expenses:

     

Research and development (includes related party expenses of $177 and $166, respectively)

     2,474         3,409   

General and administrative (includes related party expenses of $342 and $422, respectively)

     1,936         4,853   
  

 

 

    

 

 

 

Total operating expenses

     4,410         8,262   
  

 

 

    

 

 

 

Income (loss) from operations

     1,096         (8,053

Loss from change in the fair value of warrants

     144         9,662   

Interest expense

     —           738   

Other expense (income), net

     95         (525
  

 

 

    

 

 

 

Income (loss) before income taxes

     857         (17,928

Provision for (benefit from) income taxes

     274         (278
  

 

 

    

 

 

 

Net income (loss) attributable to Gelesis, Inc.

   $ 583       $ (17,650
  

 

 

    

 

 

 

Net income (loss) per share attributable to common stockholders – basic and diluted

   $ —         $ (8.91

Weighted average shares outstanding – basic and diluted

     1,976,936         1,981,140   

Pro forma net loss per share attributable to common stockholders (unaudited) – basic and diluted(1)

      $ (0.84

Pro forma weighted average shares outstanding (unaudited) – basic and diluted(1)

        9,654,582   

 

(1)

See Note 4 to our consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock, and pro forma net loss per share of common stock.

 

 

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     As of December 31, 2014  
     Actual     Pro  Forma(1)      Pro Forma
As Adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash

   $ 2,605      $ 20,605       $ 66,693   

Working capital (deficit)

     (2,228     19,630         65,490   

Total assets

     5,294        23,294         68,621   

Warrant liability

     12,441        —           —     

Deferred revenue, net of current portion

     419        419         419   

Notes payable

     1,192        1,192         1,192   

Convertible promissory notes to stockholders

     3,215        —           —     

Derivative liability

     371        —           —     

Other long-term liabilities

     107        107         107   

Convertible preferred stock

     16,138        —           —     

Total stockholders’ equity (deficit)

     (31,451     18,986         64,846   

 

(1) 

The pro forma balance sheet data assumes (i) the conversion of all outstanding shares of our convertible preferred stock as of March 15, 2015 into an aggregate of 7,673,442 shares of our common stock (including 1,943,172 shares of common stock upon the conversion of Series A-5 convertible preferred stock issued in March 2015, including the conversion of the Series A-5 convertible preferred shares issued upon the conversion of our convertible promissory notes); (ii) gross proceeds of $18.0 million received upon the issuance of Series A-5 convertible preferred stock as if the transaction had occurred on December 31, 2014; (iii) the conversion of the warrants to purchase shares of our Series A-1, Series A-3 and Series A-4 convertible preferred stock into warrants to purchase shares of our common stock; (iv) the conversion of our convertible promissory notes and accrued interest to 1,737,989 shares of Series A-5 convertible preferred stock in March 2015 as if the transaction had occurred on December 31, 2014; (v) final adjustment of our derivative liability upon the conversion of our convertible promissory notes to Series A-5 convertible preferred stock in March 2015 as if the transaction had occurred on December 31, 2014 and (vi) the issuance of 94,109 shares of our common stock in connection with the reorganization of Gelesis LLC into a wholly owned subsidiary of Gelesis, as if the reorganization had occurred on December 31, 2014.

(2) 

Pro forma as adjusted balance sheet data gives effect to the pro forma balance sheet data adjustments described in footnote (1) above as well as the sale of 4,000,000 shares of our common stock in this offering at the assumed initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3) 

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of total stockholders’ deficit, cash and total capitalization on a pro forma as adjusted basis by approximately $3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our common stock could decline if one or more of these risks or uncertainties actually occur, causing you to lose all or part of the money you paid to buy our common stock. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this prospectus.

Risks Related to Our Financial Position and Need for Capital

We are a clinical stage biotechnology company with a limited operating history and have not generated any product sales. We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future.

We are a clinical stage biotechnology company with a limited operating history on which to base your investment decision. Clinical development is a highly speculative undertaking and involves a substantial degree of risk. We were incorporated in February 2006. Our operations to date have been limited primarily to organizing and staffing our company and conducting research and development activities for Gelesis100. We have never generated any product sales. We have not obtained regulatory approvals for any of our product candidates.

We have funded our operations to date through proceeds from collaborations and issuance of common and convertible preferred stock, issuance of convertible and non-convertible debt and non-dilutive grants received from government agencies. We have incurred losses in each year since our inception, other than fiscal 2013. Our net loss was $17.7 million for the year ended December 31, 2014 and we had an accumulated deficit of $45.4 million as of December 31, 2014. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. We expect to incur increasing levels of operating losses over at least the next several years. We expect our research and development expenses to significantly increase in connection with our continued development of Gelesis100 and the development of our future product candidates, including Gelesis200 and any other product candidates that we may choose to pursue. In addition, if we obtain marketing approval for Gelesis100, we will incur significant sales and marketing expenses. Once we are a public company, we will incur additional costs associated with operating as a public company. Because of the numerous risks and uncertainties associated with developing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our ability to become profitable depends upon our ability to generate product sales. To date, we have not generated any product sales of our lead product candidate, Gelesis100, and we do not know when, or if, we will generate any product sales from Gelesis100. We will not generate significant product sales unless and until we obtain regulatory approval of, and begin to sell, Gelesis100. Our ability to generate product sales depends on a number of factors, including, but not limited to, our ability to:

 

   

initiate and successfully complete later-stage clinical trials that achieve their clinical endpoints;

 

   

initiate and successfully complete all safety trials required to obtain U.S. and foreign regulatory approval for Gelesis100 to induce weight loss in overweight and obese patients;

 

   

obtain U.S. and foreign regulatory approval for Gelesis100;

 

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commercialize Gelesis100, if approved, by developing a sales force or entering into collaborations with third parties;

 

   

achieve market acceptance of Gelesis100 in the medical community and with patients, many of whom could be required to pay out-of-pocket for Gelesis100; and

 

   

supplement our clinical scale manufacturing facility with a commercial-scale manufacturing line in a facility owned or leased by us or by a strategic collaboration partner or third-party manufacturer.

We expect to incur significant sales and marketing costs as we prepare to commercialize Gelesis100. Even if we initiate and successfully complete our pivotal clinical trials of Gelesis100 and it is approved for commercial sale, Gelesis100 may not be a commercially successful product. We may not achieve profitability soon after generating product sales, if ever, and may be unable to continue operations without continued funding.

Even if this offering is successful, we will need to raise additional funding, which may not be available on acceptable terms, if at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

We are currently advancing Gelesis100 through clinical development. Developing our hydrogel technology is expensive and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance Gelesis100 in clinical trials. Depending on the status of regulatory approval or, if approved, commercialization of Gelesis100, as well as the progress we make in selling Gelesis100, we may require additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for Gelesis100 or otherwise expand more rapidly than we presently anticipate.

As of December 31, 2014, our cash was $2.6 million. In March 2015, the Company raised $18.0 million through the issuance of Series A-5 convertible preferred shares. We estimate that the net proceeds from this offering will be approximately $45.9 million, based on an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We expect that the net proceeds from this offering, together with our existing cash, will be sufficient to fund our current operations through the end of 2017. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these sources. In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, Gelesis100 and our future product candidates. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidate or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

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

We may seek additional capital through a combination of private and public equity and debt offerings, government or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these sources. To the

 

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extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest in our company will be diluted. In addition, the terms of any such securities may include liquidation or other preferences that materially adversely affect your rights as a stockholder. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic partnerships and licensing arrangements with third parties, we may have to relinquish valuable rights to Gelesis100, our intellectual property or future revenue streams or grant licenses on terms that are not favorable to us.

Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.

As of December 31, 2014, we had federal and state net operating loss carryforwards of $14.2 million and $10.3 million, respectively. Our federal net operating loss carryforwards begin to expire in 2026, and our state net operating loss carryforwards began to expire in 2015. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, changes in our ownership may limit the amount of our net operating loss carryforwards and research and development tax credit carryforwards that could be utilized annually to offset our future taxable income, if any. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and research and development tax credit carryforwards before they expire. We have completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership changes since our inception. The results of this study indicate that a cumulative change in ownership of our company greater than 50% has occurred, and, therefore, we have an annual limitation of the amount of net operating losses we can carryforward to offset future taxable income of approximately $0.3 million, and impaired federal and state net operating losses of approximately $9.1 million, federal research tax credits of $0.2 million, and state research tax credits of $0.1 million. This and any other limitations, whether as the result of this offering, prior private placements, sales of our common stock by our existing stockholders or additional sales of our common stock by us after this offering, could have a material adverse effect on the amount of net operating losses we can utilize to offset future taxable income.

Risks Related to Product Development, Regulatory Approval and Commercialization

We are dependent on the success of our hydrogel therapeutics, specifically our lead product candidate, Gelesis100, which is in clinical development. We cannot be certain that we will be able to obtain regulatory approval for Gelesis100 or any other product candidate.

We currently have one product candidate, Gelesis100, in clinical development. Our business depends on the successful clinical development, regulatory approval, and commercialization of Gelesis100 or other product candidates based on our hydrogel technology. We currently have no products for sale and may never be able to develop marketable products. Gelesis100, which is currently in clinical development for its initial indication as a treatment for weight loss in overweight and obese patients, will require substantial additional clinical development, testing and regulatory approval before we are permitted to commercialize it. Our second product candidate, Gelesis200, is still in pre-clinical development. The clinical trials of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market our product candidates. Before obtaining regulatory approval for the commercial sale of any product candidate, we must demonstrate through pre-clinical testing and clinical trials that the product candidate is safe and effective for use in each target indication. This process can take many years and may include post-marketing studies and surveillance, which will require the expenditure of substantial resources beyond the proceeds we raise in this offering. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and clinical trials, we cannot assure you that Gelesis100 or any other of our future product candidates, including Gelesis200, will be successfully developed or commercialized.

 

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We believe that Gelesis100 and any other product candidates based on our hydrogel technology, including Gelesis200, will be regulated as medical devices because they do not achieve their primary intended purposes through chemical action within or on the body and are not dependent upon being metabolized for the achievement of their primary intended purposes. Additionally, we have engaged in discussions with CDRH, which has indicated that Gelesis100 will be regulated as a medical device. Before we can market or sell a new product regulated as a medical device in the United States, we must obtain marketing authorization under one of the three following regulatory pathways (i) Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDC Act, (ii) a premarket approval application, or PMA, or (iii) de novo classification of our product. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data are sometimes required to support substantial equivalence. In the second pathway, the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for products that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. The third pathway is called de novo classification, which is generally used for low- to moderate-risk products that have not previously been classified by the FDA and therefore no predicate device is available. Devices not previously classified by the FDA are automatically placed into Class III; through the de novo process a manufacturer may request reclassification as a Class I or II device. If the FDA agrees to reclassify the device, it will then clear the device through the de novo process, and future devices of a similar nature may use the device cleared through the de novo process as a predicate device for a 510(k) submission. We currently intend to pursue the PMA pathway for Gelesis100. Obtaining a PMA is generally more costly and uncertain than the 510(k) clearance process or the de novo classification process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained.

We recently completed a clinical trial, the FLOW study, evaluating Gelesis100’s ability to induce weight loss in overweight and obese patients. In April 2014, we held a pre-submission meeting with the FDA to discuss the proposed clinical development plan and regulatory pathway to support marketing authorization in the United States. Based on these discussions and additional ongoing discussions with European notified bodies, we have initiated a larger clinical study, which is 6 months in duration and includes overweight and obese patients, including those with prediabetes and mild type 2 diabetes, which we refer to as the GLOW study. We anticipate that the GLOW study could, subject to the outcome of our discussions with European notified bodies, serve as the pivotal study for obtaining a CE Mark, which would permit Gelesis100 to be marketed in the European Economic Area for a weight loss indication for overweight and obese patients. In the United States, we expect the GLOW study will serve as proof of concept for weight loss in overweight and obese patients at 6 months. We received preliminary feedback from a centralized institutional review board, or IRB, that the GLOW study would be considered a nonsignificant risk, or NSR, study. In parallel, on March 4, 2015, we held a pre-submission meeting with the FDA to discuss the protocol and statistical analysis plan for the GLOW study. In advance of this pre-submission meeting, the FDA provided us with initial feedback in which it designated the GLOW study as a significant risk study. We are providing a detailed response, including limited protocol amendments per their request, to support a NSR designation. In addition, we are requesting a formal risk determination from the FDA and believe that, based on the discussions during our pre-submission meeting, we will receive NSR status for the GLOW study. If we do not receive NSR status, we will complete the GLOW study in the non-U.S. sites and expect no change in the scheduled readout of the GLOW study. We intend to use the data from both the FLOW and GLOW studies to design the pivotal study for Gelesis100 in the United States for a weight loss indication. Because we expect to include a broader patient population in the pivotal trial that includes patients that are treated for comorbidities common in overweight and obese populations, we believe that the pivotal trial will have a different risk profile from the GLOW study, and we intend to file for an Investigational Device Exemption, or IDE, for

 

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our FDA pivotal trial. There is no assurance that the data from either the FLOW or GLOW studies will provide support for a premarket submission.

Neither the FDA nor any European notified bodies are bound by any of the discussions that we have had with them to date regarding the scope of our clinical studies and the related endpoints that will be necessary to qualify as pivotal studies and to demonstrate safety and effectiveness for purposes of approval in the United States and Europe. The FDA is not obligated to follow the recommendations it provides to companies as a result of a pre-submission meeting. In addition, any changes to the safety profile of our product candidates, including the level and severity of any adverse events, could result in the FDA or European notified bodies requiring us to conduct additional clinical trials or change the primary endpoints of our clinical trials to support regulatory approval.

The FDA and certain European notified bodies may delay, limit or deny approval of Gelesis100, or other future product candidates, for many reasons, including, among others:

 

   

we may not be able to demonstrate that Gelesis100 or other future product candidates, including Gelesis200, are safe and effective in treating weight loss in overweight and obese patients to the satisfaction of the FDA and certain European notified bodies;

 

   

we may not be able to demonstrate that the clinical and other benefits of Gelesis100 or other future product candidates, including Gelesis200, outweigh the risks to the satisfaction of the FDA and certain European notified bodies;

 

   

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA and certain European notified bodies for marketing approval;

 

   

the FDA and certain European notified bodies may disagree with the number, design, size, conduct or implementation of our clinical trials;

 

   

the FDA and certain European notified bodies may require that we conduct additional clinical trials;

 

   

the FDA and certain European notified bodies may not approve the formulation, labeling or specifications of Gelesis100 or other future product candidates, including Gelesis200;

 

   

the contract research organizations, or CROs, that we retain to conduct our clinical trials may take actions outside of our control that materially adversely impact our clinical trials;

 

   

the FDA and certain European notified bodies may disagree with our interpretation of data from our pre-clinical studies and clinical trials;

 

   

the FDA and certain European notified bodies may not accept data generated at our clinical trial sites;

 

   

the FDA and certain European notified bodies may find deficiencies with our manufacturing processes or facilities; or

 

   

the FDA and certain European notified bodies may change their approval policies or adopt new regulations.

Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market Gelesis100 or our other future product candidates, including Gelesis200. Moreover, because our business is almost entirely dependent upon Gelesis100 and its underlying hydrogel technology, any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

 

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Positive results from early clinical trials of Gelesis100 in weight loss and glycemic control are not necessarily predictive of the results of later clinical trials of Gelesis100.

Positive results in one of the two doses studied in our FLOW study that showed preliminary evidence of statistically significant weight loss in overweight and obese patients may not necessarily be predictive of the results in the GLOW study or any other required later clinical trials. If we cannot demonstrate more significant weight loss in the GLOW study or other later clinical trials than we did in the FLOW study, we may be unable to successfully develop, obtain regulatory approval for and commercialize Gelesis100 for that indication. For example, the placebo-adjusted total body weight loss in the 2.25 g arm of Gelesis100 was 2% in the FLOW study, but one of the two co-primary endpoints in the GLOW study will be placebo-adjusted weight loss of ³ 3%. Our GLOW study will be for a longer duration (6 months) and includes prediabetic and mild type 2 diabetic patients, to assess the effect of Gelesis100 on weight loss and improvement of certain glycemic parameters, as measured by the study’s secondary endpoints. The FLOW study was a 3 month study and, therefore, its results may not be predictive of the weight loss results that we will obtain in the GLOW study. In addition, although we observed improvement in certain glycemic parameters, such as insulin levels, insulin resistance, and fasting blood glucose levels, the FLOW study did not include any type 2 diabetic patients. Our ability to potentially include limited information regarding weight loss and safety in diabetic patients in approved labeling for Gelesis100 depends on our ability to replicate the improvements in glycemic parameters that were seen in a limited number of prediabetic patients in the FLOW study. Moreover, the more pronounced weight loss seen in the small subset of prediabetic patients was based on an analysis of a group that was not pre-specified, and such exploratory analysis may not be predictive of later trials. In addition, the FDA has stated that a study to support a claim or indication of diabetes management or glycemic control would need to be longer than six months in duration and would have to have HbA1c improvement as the primary endpoint. As our GLOW study is not designed to include these features, it could not support a claim or indication for diabetes management or glycemic control in prediabetic or type 2 diabetic populations and can only serve as a proof of concept study for glycemic control. The FLOW study was conducted at sites in Denmark, the Czech Republic, and Italy, and results gathered there may not be replicated in the GLOW study in which additional sites will be included. If we fail to produce positive results in the GLOW study relative to weight loss, the development timeline and regulatory approval and commercialization prospects for Gelesis100, and, correspondingly, our business and financial prospects, would be materially adversely affected.

Failures or delays in the commencement or completion of our planned clinical trials of Gelesis100 could result in increased costs to us and could delay, prevent or limit our ability to generate product sales and continue our business.

We initiated our GLOW study to assess the effect of Gelesis100 on body weight and glycemic control in overweight and obese patients, including those with prediabetes and mild type 2 diabetes, in November 2014 and expect to report data in the first half of 2016. However, we cannot assure you that the GLOW study will be completed on schedule, if at all. In addition, we designed the primary endpoints of this study based on ongoing conversations with the FDA and certain European notified bodies. Despite the guidance received from, and that which we expect to receive from the FDA, and the European notified bodies, both can change their positions on the acceptability of our trial designs or the clinical endpoints selected, which may require us to complete additional clinical trials or impose stricter approval conditions than we currently expect. Completion of a successful pivotal trial is a prerequisite to submitting a PMA application and, consequently, obtaining authorization to begin commercial marketing of Gelesis100. The commencement and completion of clinical trials, including the GLOW study, could be delayed or prevented for a number of reasons, including, among others:

 

   

the FDA or European regulatory authorities may deny permission to proceed with our planned clinical trials or any other clinical trials that we may initiate or may place a clinical trial on hold;

 

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the FDA or European notified bodies may have concerns about the safety of Gelesis100;

 

   

the expanded length of the GLOW study to 6 months, in combination with the larger number of patients and the inclusion of mild type 2 diabetic patients, could result in safety observations not previously observed in the FLOW trial;

 

   

reports from pre-clinical or clinical testing of other weight loss therapies that raise safety or efficacy concerns;

 

   

delays in filing or receiving approvals or additional testing that could be required;

 

   

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

 

   

inadequate quantity or quality of Gelesis100 or other materials necessary to conduct clinical trials;

 

   

difficulty obtaining Institutional Review Board, or IRB, or Ethics Committee approval to conduct a clinical trial at a prospective site or sites;

 

   

difficulty obtaining IDE approval from the FDA for our pivotal trial;

 

   

difficulty enrolling patients in our clinical trials due to the proximity of patients to trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatments for the relevant indication and competition from other clinical trial programs for similar indications;

 

   

difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues or loss of interest;

 

   

severe or unexpected side effects experienced by patients in a clinical trial, as well as side effects previously identified in our completed clinical trials; and

 

   

the FDA or European notified bodies may disagree with our clinical trial design and our interpretation of data from clinical trials or may change the requirements for approval even after they have reviewed and commented on the design for our clinical trials.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, European regulatory authorities, the IRBs or Ethics Committees at the sites where they are overseeing a clinical trial, a data and safety monitoring board, or DSMB, overseeing the clinical trial due to a number of factors, including, among others:

 

   

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

   

inspection of the clinical trial operations or trial sites by the FDA or European regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;

 

   

unforeseen safety issues, adverse side effects or lack of effectiveness;

 

   

changes in government regulations or administrative actions or policies;

 

   

problems with clinical supply materials; and

 

   

lack of adequate funding to continue the clinical trial.

 

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If drug-device interaction studies, or DDI studies, show that there are interactions between Gelesis100 and certain drugs commonly prescribed for comorbidities in the obese and overweight population, patients using these drugs may be excluded from using Gelesis100, which could have a material adverse effect on our results of operations, financial condition and prospects.

Overweight and obesity are associated with a number of comorbidities, including but not limited to, type 2 diabetes, hypertension, heart disease, and hypercholesterolemia. The treatment of these comorbidities involves chronic administration of various classes of orally administered drugs, including but not limited to, metformin, oral antidiabetics, antihypertensives, antidyslipidemics, and oral anticoagulants. These drugs are absorbed systemically as they travel through the GI tract. In order to treat these patients with Gelesis100, we will be required to perform drug-device interaction studies both in vitro and, if necessary, in patients, to ensure that Gelesis100 does not impede or interfere with the pharmacokinetics or pharmacodynamics of these drugs. If these studies show that the pharmacokinetics of these drugs are affected by Gelesis100, patients using these drugs may be excluded from the product label, which could have a material adverse effect on our results of operations, financial condition and prospects.

We rely, and expect that we will continue to rely, on third parties to conduct any clinical trials for Gelesis100. If these third parties do not successfully carry out their contractual duties or meet expected timelines, we may not be able to obtain regulatory approval for or commercialize Gelesis100 and our future product candidates, including Gelesis200, and our business could be substantially harmed.

We enter into agreements with third party CROs to provide monitors for and to manage data for our ongoing clinical trials. We have and will rely heavily on these parties for execution of clinical trials for Gelesis100 and our future product candidates, including Gelesis200, and control only certain aspects of their activities. As a result, we have less control over the conduct, timing and completion of these clinical trials and the management of data developed through the clinical trials than would be the case if we were relying entirely upon our own employees. Communicating with outside parties, such as CROs, can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:

 

   

fail to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

   

fail to comply with contractual obligations;

 

   

experience staffing difficulties;

 

   

experience regulatory compliance issues;

 

   

undergo changes in priorities or become financially distressed; and/or

 

   

form relationships with other entities, some of which may be our competitors.

These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal and regulatory requirements, and scientific standards, and our reliance on CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with Good Clinical Practices, or GCPs, which are regulations and guidelines enforced by the FDA and European notified bodies for any products in clinical development. The FDA enforces these GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or European notified bodies may require us to perform additional clinical trials before considering our marketing applications for approval. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with GCPs. In addition,

 

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our clinical trials must be conducted with product produced under the QSR requirements. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action, including civil and criminal penalties.

Although we design our clinical trials for Gelesis100 and will design our clinical trials for our future product candidates, including Gelesis200, CROs conduct and will conduct all of the clinical trials. As a result, many important aspects of our product development programs are outside of our direct control. In addition, the CROs may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of Gelesis100 and our future product candidates, including Gelesis200, may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs devote, or will devote, to Gelesis100 and our future product candidates, including Gelesis200. If we are unable to rely on clinical data collected by our CROs, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay approval and commercialization and require significantly greater expenditures by us.

If any of our relationships with these third party CROs terminate, we may not be able to enter into arrangements with alternative CROs. If CROs do not successfully carry out their contractual duties or obligations or meet expected timelines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any such clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for Gelesis100 or our future product candidates, including Gelesis200. As a result, our financial results and the commercial prospects for Gelesis100 and our future product candidates, including Gelesis200, in the subject indication would be harmed, our costs could increase and our ability to generate product sales could be delayed.

Gelesis100 has only been administered to a limited number of patients, and it may ultimately prove to be ineffective or unsafe.

We initiated our GLOW trial in November 2014. Ultimately, the results of our clinical trials to date, in which Gelesis100 has been well tolerated and induced clinically meaningful weight loss in overweight and obese patients, may prove to be incorrect. No assessment of the efficacy, safety or side effects of a product candidate can be considered complete until all clinical trials needed to support a submission for marketing approval are complete, and success in early-stage clinical trials does not mean that subsequent trials will confirm the earlier findings, or that experience with use of a product in large-scale commercial distribution will not identify additional safety or efficacy issues. If we find that Gelesis100 is not safe, or if its efficacy cannot be consistently demonstrated, we will not be able to commercialize, or may be required to cease distribution of, the product. In addition, although the GLOW study protocol incorporates guidance received from the FDA regarding potential use of the study to support approval, it does not incorporate the FDA’s guidance with respect to (i) the size of the study (ii) the appropriate demographic representation of the U.S. population and (iii) the inclusion of patients with comorbidities treated with drugs other than metformin, a drug commonly prescribed for type 2 diabetics. Therefore, our ability to obtain approval for Gelesis100 depends on the results from future studies that meet these criteria.

 

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

Undesirable side effects caused by our product candidates could cause us, the FDA or European regulatory authorities to interrupt, delay or halt clinical trials and could result in more restrictive labeling than anticipated or the delay or denial of regulatory approval by the FDA or European notified bodies. In our FLOW trial evaluating Gelesis100’s ability to induce weight loss in overweight and obese patients, the main adverse events, or AEs, in patients taking Gelesis100 were bloating, flatulence, abdominal pain, and diarrhea.

The safety data we have disclosed to date represent our interpretation of the data at the time of disclosure and are subject to our further review and analysis. There have been no serious adverse events, or SAEs, attributed to Gelesis100 in our clinical trials. However, SAEs that are not characterized by clinical investigators as possibly related to Gelesis100 or SAEs that occur in small numbers may not be disclosed to the public until such time the various documents submitted to the FDA as part of the approval process are made public. We are unable to determine if the subsequent disclosure of SAEs would have an adverse effect on our stock price. In addition, the FDA may not agree with our methods of analysis of the safety data from our clinical trials or our interpretation of the results.

In addition, based on feedback provided by the FDA, the magnitude of the effectiveness the FDA has indicated it would require for a pivotal study of Gelesis100 will be affected by the level and severity of AEs attributed to Gelesis100. Because the AEs seen in the FLOW trial were generally of mild intensity, occurred at different times during the course of the study, and resolved within one week, we believe that the co-primary endpoints sufficient to support U.S. regulatory approval would be (i) 3% weight loss difference between placebo and Gelesis100 groups with super superiority; and (ii) 5% weight loss in at least 35% of patients on Gelesis100 (regardless of placebo results) over a 6 month period. If the level or severity of AEs experienced by patients taking Gelesis100 increases or our prior clinical trial results are found to be inaccurate, the FDA may require more significant effectiveness in order to conclude that Gelesis100 has a benefit:risk profile acceptable to support approval.

If Gelesis100 receives marketing approval and we or others identify undesirable side effects caused by the product (or any other similar product) after the approval, a number of potentially significant consequences could result, including:

 

   

the FDA or European notified bodies may withdraw or limit their approval of the product;

 

   

the FDA or European notified bodies may require the addition of labeling statements, such as a black box warning or a contraindication;

 

   

we may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;

 

   

we may decide to remove the products from the marketplace;

 

   

we could be sued and held liable for injury caused to individuals taking our product candidates; and

 

   

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of Gelesis100 or any future product candidate and could substantially increase the costs of commercializing our product candidates and significantly impact our ability to successfully commercialize our product candidates and generate product sales.

 

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If we obtain FDA approval of Gelesis100 or any future products, we will be subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.

If we obtain FDA approval of Gelesis100 or any future product candidates, including Gelesis200, we will be subject to ongoing FDA requirements and continued regulatory oversight and review, including routine inspections by the FDA of our manufacturing facilities and compliance with requirements such as the QSR, which establishes extensive requirements for quality assurance and control as well as manufacturing procedures; requirements pertaining to the registration of our manufacturing facilities and the listing of Gelesis100 with the FDA; continued complaint, adverse event and malfunction reporting; corrections and removals reporting; and labeling and promotional requirements. The promotional claims we will be able to make for Gelesis100 or any other future products will be limited to the approved indications for use. We may also be subject to additional FDA post-marketing requirements. If we are not able to maintain regulatory compliance, we may not be permitted to market our products and/or may be subject to enforcement by the FDA such as the issuance of warning or untitled letters, the imposition of fines, injunctions, and civil penalties; the recall or seizure of products; the imposition of operating restrictions; and the institution of criminal prosecution. In addition, if we obtain approval of Gelesis100 or any future product candidates, including Gelesis200, from European notified bodies, we will be subject to similar regulatory regimes. Adverse EU Competent Authority or FDA action in any of these areas could significantly increase our expenses and limit our product sales and profitability.

The FDA and other regulatory agencies actively enforce the laws and regulations pertaining to the advertising and promotion of medical devices. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.

The FDA and European regulatory authorities strictly regulate the promotional claims that may be made about prescription products, such as Gelesis100, if approved. In particular, a medical device may not be promoted for uses that are not approved by the FDA or other regulatory agencies as reflected in the product’s approved labeling. For example, we will not be able to make claims for Gelesis100 pertaining to diabetes management or glycemic control in prediabetic and type 2 diabetic patients without approval of specific labeling regarding such use. The FDA has stated that our GLOW study of Gelesis100 as a treatment for weight loss in overweight and obese patients, even though it will include mild type 2 diabetic patients, will not provide information sufficient to obtain a claim or indication for diabetes management or glycemic control in this subset of patients. If we receive marketing approval for Gelesis100 as a treatment for weight loss in overweight and obese patients, physicians may nevertheless prescribe Gelesis100 to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to enforcement action by the FDA, including warning or untitled letters. In addition, the federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of Gelesis100, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of Gelesis100, if approved. Any future arrangements with third party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute

 

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Gelesis100, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

   

The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.

 

   

The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.

 

   

The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.

 

   

The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

   

The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, require manufacturers of drugs, medical devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests.

 

   

Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers. Some state laws require medical device companies to comply with the medical device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring device manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and pricing, with the reported information to be made publicly available on a searchable website.

Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our or a collaborator’s sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

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If Gelesis100 and our other product candidates are not regulated as medical devices, we will be subject to a significantly more time-consuming regulatory approval process in the United States and foreign jurisdictions, which could result in increased costs to us and could delay our development timeline. 

In the United States, the FDA regulates medical devices under the authority granted by the FDCA. Although Gelesis100 is designed to be ingested orally like a drug, it works mechanically, as opposed to via a chemical mode of action. Therefore, we believe that Gelesis100, and our other product candidates based on our hydrogel technology, including Gelesis200, will be regulated as medical devices. While CDRH has not raised any concern with regulating Gelesis100 as a medical device in our interactions to date, we cannot guarantee that the FDA and applicable foreign regulatory agencies will determine that Gelesis100 or any other product candidates that we may seek approval for are medical devices. If our product candidates are regulated as drugs and not as medical devices, we will be required to submit a New Drug Application to the FDA and comply with similar requirements in foreign jurisdictions and need to complete additional clinical trials, which will significantly increase the time, expense and uncertainty related to the process by which we will seek regulatory approval for our product candidates and our ability to generate product revenue will be delayed.

We are responsible for manufacturing Gelesis100 and our other product candidates, including Gelesis200, for our clinical trials. We need to scale up our capabilities to support the production of commercial level quantities of our product candidates. If we encounter failures or difficulties or cannot provide an adequate supply of our product candidates for our clinical trials or for commercialization, it could adversely affect the clinical development or regulatory approval of our product candidates or the production of Gelesis100 for commercialization.

We have developed proprietary processes and manufacturing technologies for the production of Gelesis100. Our wholly owned subsidiary Gelesis S.r.l. operates a manufacturing and research and development facility in southern Italy that produces Gelesis100 and Gelesis200 for our clinical trials. We are currently planning to double the output of this facility to meet the near term demands of our upcoming clinical trials. This facility is currently our sole supplier of Gelesis100 and Gelesis200. Although we believe that this facility, once expanded, is adequate for our clinical supply needs for the immediate future, if we encounter unexpected failures or difficulties in our manufacturing process or require amounts of Gelesis100 in excess of our current estimates we may be unable to manufacture sufficient supplies to support our clinical development, which will adversely affect our expected timeline for completion of our planned clinical trials and the expected timing of any regulatory approval.

In addition, in order to meet anticipated demand for commercial-scale quantities following regulatory approval, if obtained, we intend to construct a commercial-scale manufacturing line in North America, beginning in 2016. We do not expect that we will complete the construction of this line and receive regulatory approval for commercial production until 2018. Our preliminary cost estimates for the construction of this line are approximately $30 million. The new plant will utilize the processes that are currently used in our Italian facility with throughput increases, which we believe can be accomplished primarily through equipment scale and improved drying techniques. We do not have substantial experience in the construction of commercial-scale manufacturing lines, and there can be no assurance that we will succeed in increasing our historical production levels while meeting the required specifications for our product candidates. Therefore, even if we obtain regulatory approval of Gelesis100, our dependence on our ability to develop our own commercial-scale manufacturing lines, and any delays in the construction of those facilities may adversely affect our ability to develop and deliver our product candidates on a timely and competitive basis, if at all. Moreover, since we plan to seek regulatory approval through the PMA process, if we develop such commercial-scale manufacturing facilities after we obtain regulatory approval, we will need to seek a supplemental approval for our manufacturing location.

Any performance failure by us could delay or otherwise adversely affect the clinical development or regulatory approval of Gelesis100 or one or more of our product candidates or commercial sales, if

 

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approved for sale. We may encounter difficulties involving production yields, regulatory compliance, lot release, quality control and quality assurance, as well as shortages of qualified personnel. Approval of Gelesis100, as well as one or more of our product candidates, could be delayed, limited or denied if our manufacturing facilities do not complete successful inspections by the FDA or European regulatory authorities. Moreover, the ability to manufacture and supply our products adequately and in a timely manner is dependent on the uninterrupted and efficient operation of the manufacturing facilities, which is impacted by many manufacturing variables, including, but not limited to:

 

   

availability of raw materials from suppliers;

 

   

contamination of raw materials and components used in the manufacturing process;

 

   

capacity of our facilities or those of our contract manufacturers, if any;

 

   

the ability to adjust to changes in actual or anticipated use of the facility, including with respect to having sufficient capacity and a sufficient number of qualified personnel;

 

   

facility contamination by microorganisms or viruses or cross contamination;

 

   

compliance with regulatory requirements, including inspectional notices of violation and warning letters;

 

   

changes in actual or forecasted demand;

 

   

timing and number of production runs;

 

   

production success rates; and

 

   

timing and outcome of product quality testing.

In addition, we may encounter delays and problems in manufacturing Gelesis100 and our other future product candidates, including Gelesis200, for a variety of reasons, including accidents during operation, failure of equipment, delays in receiving materials, natural or other disasters, political or governmental unrest or changes, social unrest, intentional misconduct or other factors inherent in operating complex manufacturing facilities. We may not be able to operate our respective manufacturing facilities in a cost-effective manner or in a time frame that is consistent with our expected future manufacturing needs. If we cease or interrupt production or if other third parties fail to supply materials, products or services to us for any reason, such interruption could delay progress on our programs, or interrupt the commercial supply, with the potential for additional costs and lost product sales. If this were to occur, we may also need to seek alternative means to fulfill our manufacturing needs.

We will also be subject to ongoing periodic inspection, which may be unannounced, by the FDA, corresponding state authorities and European regulatory authorities to ensure strict compliance with QSR requirements and other applicable government regulations and corresponding foreign standards. If we fail to maintain compliance or otherwise experience setbacks, we could be subject to enforcement action, including warning or untitled letters or civil or criminal penalties, the production of Gelesis100 or one or more of our product candidates could be interrupted or suspended, or our product could be recalled or withdrawn, resulting in delays, additional costs and potentially lost product sales.

Even if we are able to obtain the required regulatory approvals in the United States and the European Economic Area, there is no guarantee that we would be able to successfully commercialize Gelesis100 or our other product candidates.

Even if we obtain the required regulatory approval in the United States and the European Economic Area, our ability to generate product sales in the future will be dependent on our ability to market and sell Gelesis100 or our other future product candidates, including Gelesis200. The commercial success of Gelesis100, if approved by the FDA and/or European notified bodies, will depend upon the awareness

 

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and acceptance of Gelesis100 among the medical community, including physicians and patients. Market acceptance of Gelesis100, if approved, will depend on a number of factors, including, among others:

 

   

Gelesis100’s demonstrated ability to induce weight loss in overweight and obese patients;

 

   

the perceived advantages and disadvantages of Gelesis100 over existing products and other competitive treatments and technologies for weight loss in overweight and obese patients;

 

   

the prevalence and severity of any adverse side effects associated with Gelesis100, such as bloating, flatulence, abdominal pain, and diarrhea;

 

   

limitations or warnings contained in the labeling approved for Gelesis100 by the FDA or certain European notified bodies;

 

   

availability of alternative treatments, including a number of competitive obesity therapies already approved or expected to be commercially launched in the near future;

 

   

the extent to which physicians prescribe Gelesis100;

 

   

the willingness of the target patient population to try new therapies;

 

   

the strength of marketing and distribution support and timing of market introduction of competitive products;

 

   

publicity concerning our products or competing products and treatments;

 

   

pricing and cost effectiveness;

 

   

the effectiveness of our sales and marketing strategies; and

 

   

the willingness of patients to pay out-of-pocket in the absence of third party reimbursement.

If Gelesis100 is approved but does not achieve an adequate level of acceptance by patients and physicians, we will not generate sufficient product sales of Gelesis100 to become or remain profitable. Our efforts to educate the medical community about the benefits of Gelesis100 may require significant resources and may never be successful.

In order to market Gelesis100, we may establish our own sales, marketing and distribution capabilities or we may enter into one or more strategic collaborations with third parties to sell, market and distribute Gelesis100. We have no experience in these areas and, if we have problems establishing these capabilities, the commercialization of Gelesis100 would be impaired.

We do not currently have infrastructure for the sales, marketing and distribution of our products. In order to market Gelesis100, if approved by the FDA or European notified bodies, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. We have no experience in these areas and developing these capabilities will require significant expenditures on personnel and infrastructure. While we may enter into collaborations with one or more third parties to sell, market and distribute Gelesis100, we may not be able to maintain such an arrangement or enter into any future arrangement on acceptable terms, if at all. Any collaboration we enter into may not be effective in generating meaningful product royalties or other revenues for us. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.

Even if Gelesis100 is approved for commercialization, we expect that our success will be dependent on the willingness of patients to pay out-of-pocket, should they not be able to obtain third party reimbursement. If there is not sufficient patient demand for Gelesis100, our financial results and future prospects will be harmed.

We cannot be certain that third party reimbursement will be available for Gelesis100, and, if reimbursement is available, the amount of any such reimbursement. As a result, we expect that our success

 

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will be dependent on the willingness of patients to pay out-of-pocket for Gelesis100. The decision by a patient to elect to undergo treatment with Gelesis100 may be influenced by a number of factors, such as:

 

   

the success of any sales and marketing programs, including direct-to-consumer marketing efforts, that we, or any third parties we engage, undertake, and as to which we have limited experience;

 

   

the extent to which physicians prescribe Gelesis100 for their patients;

 

   

the extent to which Gelesis100 satisfies patient expectations;

 

   

the cost, safety, and effectiveness of Gelesis100 as compared to other treatments; and

 

   

general consumer confidence, which may be impacted by economic and political conditions.

Our financial performance will be materially harmed if we cannot generate significant patient demand for Gelesis100.

Competing technologies could emerge, including pharmaceuticals, devices, and surgical procedures, that adversely affect our opportunity to generate product sales of Gelesis100.

The biotechnology, pharmaceutical and medical device industries are intensely competitive and subject to rapid and significant technological change. We have competitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures and financial, technical and personnel resources than we have. Competitors may invest heavily to quickly discover and develop novel products that could make Gelesis100 obsolete or economically disadvantageous. Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, convenience, tolerability and safety to be commercially successful. Other competitive factors could force us to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to Gelesis100. If we are not able to compete effectively against our competitors, our financial condition and operations will suffer.

Our potential competitors in the obesity market include drugs that are FDA-approved and currently marketed for the treatment of obesity. Gelesis100 will primarily compete with orlistat, phentermine/topiramate, naltrexone/bupropion, and lorcaserin, four orally administered, marketed pharmaceutical products in the United States for the treatment of obesity, and several older products, indicated for short-term administration, including phentermine, phendimetrazine, benzphetamine and diethylpropion. Orlistat is marketed in the United States by Roche Group under the brand name Xenical and over-the-counter under the brand name alli, at half the prescribed dose, by GlaxoSmithKline. In September 2012, Vivus, Inc. launched its combination product, phentermine/topiramate, under the trade name Qsymia and in September 2014, Orexigen Therapeutics, Inc. received FDA approval of naltrexone/bupropion which is marketed under the brand name Contrave in the United States. In December 2014, Orexigen announced that it had received a positive opinion recommending the granting of marketing approval for naltrexone/bupropion under the name Mysimba in the EU. In June 2013, Arena Pharmaceuticals, Inc. and Eisai, Inc. launched lorcaserin, which is marketed in the United States under the name Belviq. Gelesis100 will also compete with injectable pharmaceutical obesity therapies, such as those in development by Zafgen, Inc. and Novo Nordisk. In December 2014, Novo Nordisk received FDA approval for its injectable drug, Saxenda, and is expected to launch Saxenda in the first half of 2015. Neurosearch A/S is also pursuing a pharmaceutical treatment for obesity. In addition, other potential approaches which utilize various implantable devices or surgical tools are in development, by companies such as Allergan, Inc., Boston Scientific Corporation, EnteroMedics, Inc., GI Dynamics, Inc., Johnson & Johnson and Medtronic, Inc.

Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and supply resources or experience than we have. Competing products could present superior treatment alternatives, including by being more effective, safer, less expensive or marketed and sold more effectively

 

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than any products we may develop. Competitive products may make any products we develop obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. Such competitors could also recruit our employees, which could negatively impact our level of expertise and our ability to execute our business plan.

Risks Relating to Our Intellectual Property Rights

If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect Gelesis100 or our other product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage that we may have, which could harm our business and ability to achieve profitability.

We have five families of patents and patent applications which cover composition of matter, methods of use and methods of production for our product candidates, including Gelesis100 and Gelesis200. Uses of Gelesis100 for treating obesity and reducing caloric intake are currently protected in the United States by an issued patent with the priority date of August 10, 2007. Corresponding patents have also been granted or allowed in Europe, Russia, China, Australia, and Mexico. A divisional patent application covering Gelesis100 composition of matter has also been granted in Europe. This patent family is also pending in additional territories around the world. Two recent international patent families and two U.S. provisional applications are also pending. These families are directed to methods for enhancing glycemic control, methods for producing a polymer hydrogel, and methods for treating obesity in a subject involving oral administration of a specific form of cross-linked modified cellulose at particular doses, respectively. We expect to have coverage in the United States, Europe and several other territories until at least 2027, with possible extended coverage from pending applications should they be granted.

We cannot provide any assurances that any of our patents have, or that any of our pending patent applications that mature into issued patents will include, claims with a scope sufficient to protect Gelesis100 or our other product candidates. Other parties have developed technologies that may be related or competitive to our approach and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our patent applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. The patent positions of biotechnology, pharmaceutical and medical device companies, including our patent position, involve complex legal and factual questions and, therefore, the issuance, scope, validity, and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, ex parte reexamination, inter partes review proceedings, post-grant review proceedings, and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we own may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize Gelesis100.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability, and it may not provide us with adequate proprietary protection or

 

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competitive advantages against competitors with similar products. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If these developments were to occur, they could have a material adverse effect on our sales.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components of their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering Gelesis100 are invalidated or found unenforceable, our financial position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered Gelesis100, our financial position and results of operations would also be materially and adversely impacted.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

   

any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect Gelesis100 or any other products or product candidates;

 

   

any of our pending patent applications will issue as patents;

 

   

we will be able to successfully commercialize Gelesis100, if approved, before our relevant patents expire;

 

   

we were the first to make the inventions covered by each of our patents and pending patent applications;

 

   

we were the first to file patent applications for these inventions;

 

   

others will not develop similar or alternative technologies that do not infringe our patents;

 

   

any of our patents will be found to ultimately be valid and enforceable;

 

   

any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

   

we will develop additional proprietary technologies or product candidates that are separately patentable; or

 

   

that our commercial activities or products will not infringe upon the patents of others.

We rely upon unpatented trade secrets, unpatented know-how, and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to

 

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our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

Under our amended and restated master agreement, we have granted One S.r.l., the original owner of our core patent rights, a license to practice the patent rights for noncommercial, research purposes, and we have agreed under certain circumstances to grant limited commercial rights as well. While we believe that the rights we have granted are reasonably limited and not competitive with our core business, there can be no guarantee that the third party’s activities will not in any way overlap or interfere with the development or commercialization of Gelesis100 or our other product candidates, if approved. Additionally, there is always the possibility that we may become dependent on obtaining access to third party intellectual property in the future.

Under the original master agreement and its amendments, we acquired certain patent rights that cover Gelesis100 and our other hydrogel-based product candidates from One S.r.l. Our amended and restated master agreement imposes various obligations on us, including a requirement to make certain milestone and royalty payments and to prosecute and maintain the patent rights. Under this agreement, we granted One S.r.l. a non-exclusive license to practice the patent rights for noncommercial, research purposes, and we have agreed under certain circumstances to grant an additional non-blocking license for the development and commercialization of certain drug delivery products that do not include any composition of matter that is claimed by the patent rights.

Our agreement to grant any future non-blocking license to One S.r.l., excludes products relating to obesity, weight loss, diabetes, metabolic diseases, GI disorders, laxatives and liquid removal. While we believe that the scope of any non-blocking license we might grant to One S.r.l. is clearly distinct from our field of interest, there can be no guarantee that a disagreement will not arise over a particular product area, or that such a disagreement could not materially and adversely impact our business.

One S.r.l. and the inventors of the patent rights are bound by non-competition provisions in our amended and restated master agreement, which prohibit them from developing, manufacturing or commercializing any product or process related to diet, weight loss, food products or obesity during the term of our amended and restated master agreement and for a year after its termination. Additionally, the inventors have agreed to assign to us certain future technology relating to food products that they develop during the term of our amended and restated master agreement, as well as other improvements to our existing intellectual property rights that result from activities they perform under our amended and restated master agreement. There can be no guarantee, however, that One S.r.l. or the inventors will not attempt to act contrary to such obligations or that, if they do, we would succeed in a legal action to stop them from doing so.

We may be required to enter into additional license(s) to third party intellectual property that we find necessary or useful to our business, or that the third party owner asserts we are infringing. In such a case, even if we are successful in obtaining terms that are commercially reasonable, such a future licensor might also allege that we have breached our license agreement and may accordingly seek to terminate our license with them, or may insist on the right to terminate such a license at will. If successful, any such termination could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize a product candidate or product, if approved, as well as harm our competitive business position and our business prospects.

 

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We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing Gelesis100 or our other product candidates, if approved.

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.

The medical device, pharmaceutical and biotechnology industries are characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that Gelesis100 or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing Gelesis100 or our other product candidates.

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

   

cease developing and, if approved, selling or otherwise commercializing Gelesis100;

 

   

pay substantial damages for past use of the asserted intellectual property;

 

   

obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and

 

   

in the case of trademark claims, redesign or rename Gelesis100 to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.

Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may also be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patents or other intellectual property. For example, each of our patents and patent applications names one or more inventors affiliated with other institutions, any of whom may assert an ownership claim. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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

The U.S. Patent and Trademark Office, or U.S. PTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

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

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party 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 or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also 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 material adverse effect on the price of our common stock.

Issued patents covering our product candidates could be found invalid or unenforceable if challenged in court.

If we initiated legal proceedings against a third party to enforce a patent covering our product candidate, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is

 

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no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.

We do not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

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

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

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms for Gelesis100, our business may be materially harmed.

Depending upon the timing, duration, specifics and method of FDA marketing approval of Gelesis100, one of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension 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. In addition, we will only be eligible for patent extension if we receive PMA approval from the FDA. Moreover, even if we are eligible for an extension, the applicable time period or the scope of patent protection afforded 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, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate product sales could be materially adversely affected.

 

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

The United States has recently enacted and is currently implementing the America Invents Act of 2011, wide-ranging patent reform legislation. Further, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents or future patents.

We may be subject to damages resulting from claims that we, our employees, consultants or third parties we engage to manufacture our products have wrongfully used, or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.

Many of our employees were previously employed at pharmaceutical companies and other medical device companies, including our potential competitors, in some cases until recently. We may be subject to claims that we, our employees, consultants or third parties have inadvertently or otherwise used or disclosed alleged trade secrets or proprietary information of these former employers or competitors. In addition, we may be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction for our management. If our defense to those claims fails, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with third parties. A loss of key personnel or their work product could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Our Business and Strategy

We will need to develop and expand our company, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.

As of December 31, 2014, we had 14 full-time employees and 7 consultants and, in connection with becoming a public company, we expect to increase the number of our administrative employees. We also plan to expand the scope of our operations including the development of a commercial-scale manufacturing line and hiring manufacturing staff. To manage our anticipated development and expansion, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. The physical expansion of our operations may lead to significant costs and may divert financial resources from other projects, such as the development of Gelesis100 and our other product candidates. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than expected, our ability to generate or increase our product sales could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize Gelesis100, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.

 

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Our future success depends on our ability to retain our chief executive officer, and to attract and keep senior management and key scientific personnel.

Our success depends, in part, on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, particularly Yishai Zohar, our Chief Executive Officer and President, as well as other employees and consultants. Although none of these individuals has informed us to date that he intends to retire or resign in the near future, the loss of services of any of these individuals or one or more of our other members of senior management could delay or prevent the successful development of our future product candidates.

Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the biotechnology, pharmaceutical and medical device field is intense, and we face competition for the hiring of scientific and clinical personnel from other biotechnology and pharmaceutical companies, as well as universities and research institutions. In addition, the consultants and advisors, including scientific and clinical advisors, upon whom we rely to assist us in formulating our research development and commercialization strategy, may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. In addition, we will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, if at all.

We may not be successful in our efforts to identify or discover additional product candidates.

The success of our business depends primarily upon our ability to identify, develop and commercialize products using our proprietary hydrogel technology. Although Gelesis100 is currently in clinical development and Gelesis200 is in pre-clinical development, our research programs may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

Our employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements or engaging in insider trading, which could significantly harm our business.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and European notified bodies, provide accurate information to the FDA and applicable non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, as well as the Foreign Corrupt Practices Act, or FCPA, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of, including trading on, information obtained in the course of clinical trials, which could result in regulatory sanctions and

 

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serious harm to our reputation. We have adopted a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may be ineffective 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 comply with these 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 significant fines or other sanctions.

We face potential product liability exposure and, if claims are brought against us, we may incur substantial liability.

The use of Gelesis100 in clinical trials and the sale of Gelesis100, if approved, exposes us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or others selling or otherwise coming into contact with Gelesis100. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in, among other things:

 

   

withdrawal of patients from our clinical trials;

 

   

substantial monetary awards to patients or other claimants;

 

   

decreased demand for Gelesis100 or any future product candidates following marketing approval, if obtained;

 

   

damage to our reputation and exposure to adverse publicity;

 

   

increased FDA warnings on product labels;

 

   

litigation costs;

 

   

distraction of management’s attention from our primary business;

 

   

loss of sales; and

 

   

the inability to successfully commercialize Gelesis100 or any future product candidates, if approved.

We maintain product liability insurance coverage for our clinical trials with a $1.0 million annual aggregate coverage limit. Nevertheless, our insurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly expensive. If we obtain marketing approval for Gelesis100, we intend to expand our insurance coverage to include the sale of commercial products at that time; however, we may not be able to obtain this product liability insurance on commercially reasonable terms, if at all. Significant judgments have been awarded in class action lawsuits based on drugs and medical devices that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A product liability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects could be materially adversely affected.

 

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In order to satisfy our obligations as a public company, we will need to hire additional qualified accounting and financial personnel with appropriate public company experience.

As a newly public company, we will need to establish and maintain effective disclosure and financial controls and institute changes in our corporate governance practices, which will cause us to incur significant legal, accounting and other expenses, particularly once we are no longer an “emerging growth company,” that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Given the limited public company experience of our management team, we will need to hire additional accounting and financial personnel with appropriate public company experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences related to the diversion of management resources from product development efforts. The rules and regulations associated with being a public company are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Our internal computer systems, or those of our third party CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our Gelesis100 development programs.

Despite the implementation of security measures, our internal computer systems and those of our third party CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such 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 for Gelesis100 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 other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of Gelesis100 could be delayed.

We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.

 

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Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The 2008 global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the 2008 global financial crisis, could result in a variety of risks to our business, including, weakened demand for any of our future products and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also result in supply disruption or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions, which could have a material adverse effect on our operations.

Changes in federal, state, local or foreign tax law or interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition, results of operations or cash flows.

We are subject to taxation at the federal, state and local levels in the U.S. and other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher taxes than would be incurred under existing tax law or interpretation and could adversely affect our profitability, financial condition, results of operations or cash flows. State and local tax authorities have also increased their efforts to increase revenues through changes in tax law and audits. Such changes and proposals, if enacted, could increase our future effective income tax rates. We are subject to ongoing and periodic tax audits and disputes in various jurisdictions. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interest, thereby adversely impacting our financial condition, results of operations or cash flows.

 

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Risks Related to this Offering and Ownership of Our Common Stock

Market volatility may affect our stock price and the value of your investment.

Following this offering, the market price for our common stock is likely to be volatile, in part because our common stock has not been previously traded publicly. In addition, the stock market in general and the market for biotechnology and pharmaceutical companies in particular has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control including, among others:

 

   

plans for, progress of or results from pre-clinical studies and clinical trials of Gelesis100;

 

   

the failure of the FDA or the European notified bodies to approve Gelesis100;

 

   

announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

   

the success or failure of other weight loss therapies;

 

   

regulatory or legal developments in the United States and other countries;

 

   

failure of Gelesis100, if approved, to achieve commercial success;

 

   

fluctuations in stock market prices and trading volumes of similar companies;

 

   

general market conditions and overall fluctuations in U.S. equity markets;

 

   

variations in our quarterly operating results;

 

   

changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

   

changes in accounting principles;

 

   

our ability to raise additional capital and the terms on which we can raise it;

 

   

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

 

   

additions or departures of key personnel;

 

   

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

 

   

other risks and uncertainties described in these risk factors.

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our common stock. Although we are applying to have our common stock listed on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock was determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

Our executive officers, directors, principal stockholders and their affiliates will continue to exercise significant control over our company after this offering, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.

Immediately following the completion of this offering, and disregarding any shares of common stock that they may purchase in this offering, the existing holdings of our executive officers, directors, principal

 

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stockholders and their affiliates, will represent beneficial ownership, in the aggregate, of approximately 56.65% of our outstanding common stock, assuming no exercise of the underwriters’ option to acquire additional common stock in this offering and assuming we issue the number of shares of common stock as set forth on the cover page of this prospectus. In addition, certain of our existing principal stockholders have indicated an interest in purchasing shares of our common stock with an aggregate purchase price of up to approximately $17.5 million in this offering at the initial public offering price. Based on the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, if these existing parties purchase all the shares they have indicated an interest in purchasing in this offering, our executive officers, directors and existing principal stockholders will, in the aggregate, beneficially own approximately 65.41% of our outstanding common stock upon the closing of this offering (62.95% if the underwriters exercise in full their option to purchase additional shares). As a result, these stockholders, if they act together, will be able to influence our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. These stockholders acquired their shares of common stock for substantially less than the price of the shares of common stock being acquired in this offering, and these stockholders may have interests, with respect to their common stock, that are different from those of investors in this offering and the concentration of voting power among these stockholders may have an adverse effect on the price of our common stock. In addition, this concentration of ownership might adversely affect the market price of our common stock by:

 

   

delaying, deferring or preventing a change of control of us;

 

   

impeding a merger, consolidation, takeover or other business combination involving us; or

 

   

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

See “Principal Stockholders” in this prospectus for more information regarding the ownership of our outstanding common stock by our executive officers, directors, principal stockholders and their affiliates.

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

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the market price of our common stock could decline. Based upon the number of shares of common stock, on an as-converted basis, outstanding as of March 15, 2015, upon the completion of this offering, we will have outstanding a total of 13,748,785 shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. Of these shares, as of the date of this prospectus, approximately 4,133,216 shares of our common stock, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will not be subject to lock-up agreements. The representatives of the underwriters, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus. After the lock-up agreements expire, based upon the number of shares of common stock, on an as-converted basis, outstanding as of March 15, 2015, up to an additional 9,615,569 shares of common stock will be eligible for sale in the public market, of which 6,506,724 shares are held by directors, executive officers and other affiliates and will be subject to certain limitations of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

In addition, as of March 15, 2015, 2,033,836 shares of common stock that are either subject to outstanding options or reserved for future issuance under our equity incentive plans will become eligible

 

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for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.

After this offering, the holders of approximately 9,518,276 shares of our common stock 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. 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. Any sales of securities by these stockholders could have a material adverse effect on the market our common stock.

If we are unable to successfully remediate the existing material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In preparing our consolidated financial statements as of and for the year ended December 31, 2014, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness identified resulted from the fact that we do not have sufficient financial reporting and accounting staff with appropriate training in generally accepted accounting principles in the United States, or GAAP, and SEC rules and regulations to perform an adequate level of review of accounting and financial reporting information or maintain adequate controls related to the risk assessment and information components of the control framework, and there was insufficient oversight of the financial reporting process by those charged with governance due to a lack of internal resources. As such, our controls over financial reporting were not designed or operating effectively and, as a result there were adjustments required in connection with closing our books and records and preparing our December 31, 2014 consolidated financial statements.

The material weakness in our internal control over financial reporting was attributable to our lack of sufficient financial reporting and accounting personnel with the technical expertise to appropriately segregate the preparation and review of the accounting and financial information that is reflected in our consolidated financial statements, and a lack of oversight in the financial reporting process by those charged with governance. In response to this material weakness, we plan to hire additional personnel with public company financial reporting expertise to build our financial management and reporting infrastructure and further develop and document our accounting policies and financial reporting procedures. However, we cannot assure you that we will be successful in pursuing these measures or that these measures will significantly improve or remediate the material weakness described above. We also cannot assure you that we have identified all of our existing material weaknesses, or that we will not in the future have additional material weaknesses. We have not yet remediated our material weakness, and the remediation measures that we intend to implement may be insufficient to address our existing material weakness or to identify or prevent additional material weaknesses.

Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the control deficiencies and the resulting material weakness that were identified as a result of the limited procedures performed, we believe that it is possible that, had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses and significant control deficiencies may have been identified. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of the

 

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exemption permitting us not to comply with the requirement that our independent registered public accounting firm provide an attestation on the effectiveness of our internal control over financial reporting.

If we fail to remediate the material weakness or to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. There is no assurance that we will be able to remediate the material weakness in a timely manner, if at all, or that in the future, additional material weaknesses will not exist or otherwise be discovered. If our efforts to remediate the material weakness identified are not successful, or if other material weaknesses or other deficiencies occur, our ability to accurately and timely report our financial position could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the NASDAQ Global Market, and could adversely affect our reputation, results of operations and financial condition.

We will have broad discretion in how we use the proceeds of this offering. We may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

We will have considerable discretion in the application of the net proceeds of this offering. We intend to use the net proceeds from this offering to advance the clinical development of Gelesis100 as a treatment to induce weight loss in overweight and obese patients, to advance the clinical development of Gelesis200 as a treatment to improve glycemic control in prediabetic and diabetic patients, to continue the development of our other product candidates and to fund new and ongoing research and development activities, working capital and other general corporate purposes, which may include funding for the hiring of additional personnel, capital expenditures and the costs of operating as a public company. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

After the completion of this offering, we may be at an increased risk of securities class action litigation.

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

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, even one that may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or

 

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prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. See “Description of Capital Stock—Anti-Takeover Effects of Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated Bylaws and Delaware Law” for more information.

We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, 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 stockholder approval of any golden parachute payments not previously approved. If we choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. If we choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common stock less attractive because we will 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. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

 

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We will be required to disclose changes made in our internal controls and procedures on a quarterly basis, and our management will be required to assess the effectiveness of these controls annually, beginning with the year ending December 31, 2016. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

The rules governing the standards that must be met for our management to assess our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These standards require that our audit committee be advised and regularly updated on management’s review of internal control over financial reporting. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable to us as a public company. If we fail to staff our accounting and finance function adequately or maintain internal control over financial reporting adequate to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, our business and reputation may be harmed and our stock price may decline. Furthermore, investor perceptions of us may be adversely affected, which could cause a decline in the market price of our common stock.

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

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on the initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, purchasers of common stock in this offering will experience immediate dilution of $8.28 per share, representing the difference between our pro forma as adjusted net tangible book value per share of the common stock as of December 31, 2014 and the assumed initial public offering price. In addition, investors purchasing common stock in this offering will contribute 52% of the total amount invested by stockholders since inception but will only own 29% of the shares of common stock outstanding. In the past, we issued options to acquire common stock at prices significantly below the initial public offering price. In addition, future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall. To the extent these outstanding options are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. See “Dilution” for a more detailed description of the dilution to new investors in the offering.

We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We do not currently intend to pay cash dividends on our common stock and we do not plan do so in the foreseeable future. We currently anticipate that we will retain future earnings, if any, for the development, operation and expansion of our business. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which you purchased them.

 

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If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about us, our business or our market, our stock price and trading volume could decline.

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

Our amended and restated employment agreements with our executive officers that will become effective upon the closing of this offering may require us to pay severance benefits to any of those persons who are terminated in connection with a change of control of us, which could harm our financial condition or results.

Our executive officers are parties to amended and restated employment agreements that will become effective upon the closing of this offering. The agreements provide for aggregate cash payments of up to approximately $1.9 million for severance and other benefits and acceleration of vesting of stock options in the event of a termination of employment in connection with a change of control of our company. Based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, the aggregate intrinsic value of unvested stock options subject to accelerated vesting upon these events was $10.6 million as of March 15, 2015. Such intrinsic value excludes the impact of additional stock options for the purchase of 180,850 shares of common stock at an exercise price equal to the price to the public in this offering, which we expect to issue to our executive officers upon the pricing of this offering. The accelerated vesting of options could result in dilution to our stockholders and harm the market price of our common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

Our bylaws designate a state or federal court located within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a preferred judicial forum for disputes with us or our directors, officers or other employees.

Our bylaws will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Delaware General Corporation Law, our certificate of incorporation (including any certificate of designations for any class or series of our preferred stock) or our bylaws, in each case, as amended from time to time, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the State of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provision. This forum selection provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable or cost-effective for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.

 

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We may not achieve the intended benefits of having an exclusive forum provision if it is found to be unenforceable.

We have included an exclusive forum provision in our bylaws as described above. However, the enforceability of similar exclusive jurisdiction provisions in other companies’ bylaws or certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any action, a court could find the exclusive jurisdiction provision contained in our bylaws to be inapplicable or unenforceable in such action. Although in September 2014 the Delaware Court of Chancery upheld the statutory and contractual validity of exclusive forum-selection bylaw provisions, the validity of such provisions is not yet settled law under the laws of Delaware. Furthermore, the Delaware Court of Chancery emphasized that such provisions may not be enforceable under circumstances where they are found to operate in an unreasonable or unlawful manner or in a manner inconsistent with a board’s fiduciary duties. Also, it is uncertain whether non-Delaware courts consistently will enforce such exclusive forum-selection bylaw provisions. If a court were to find our choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

   

the completion, success and timing of clinical trials of our product candidates, including Gelesis100;

 

   

our ability to obtain and maintain regulatory approval of our product candidates;

 

   

our ability to obtain additional funding;

 

   

the success of competing weight loss therapeutics that are now or later become available or other developments or projections relating to our competitors and our industry;

 

   

the rate and degree of market acceptance of Gelesis100 and any of our other product candidates;

 

   

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

 

   

our ability to obtain and maintain intellectual property protection for our product candidates and operate our business without infringing on the intellectual property rights of others;

 

   

our ability to retain our chief executive officer or any of our senior management or key scientific personnel;

 

   

regulatory developments in the United States and foreign countries affecting indications for our product candidates;

 

   

the construction of a commercial-scale manufacturing line for our product candidates;

 

   

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

 

   

our expectations regarding the time during which we will be an “emerging growth company” under the JOBS Act;

 

   

our financial performance; and

 

   

our use of the proceeds from this offering.

These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating

 

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the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. 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. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find More Information.”

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 4,000,000 shares of our common stock in this offering will be approximately $45.9 million, assuming an initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, 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 $53.1 million.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds from this offering by approximately $3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) 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 $12.1 million, assuming the assumed initial public offering price stays the same.

We intend to use the net proceeds from this offering to fund:

 

   

approximately $20 million to complete the GLOW study and FDA pivotal study, as well as additional clinical development of our lead product candidate, Gelesis100;

 

   

approximately $4 million to fund preclinical and clinical development of our other product candidates, including a 3 month POC trial of Gelesis200;

 

   

approximately $20 million to fund engineering and construction of a commercial-scale manufacturing line to completion; and

 

   

the remaining proceeds, if any, to fund working capital and other general corporate purposes.

This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development efforts, the status of and results from preclinical studies and any ongoing clinical trials or clinical trials we and they may commence in the future, as well as any collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may also use a portion of the net proceeds of this offering for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, but we have no present commitments or agreements to enter into any such transaction.

Pending our use of the net proceeds from this offering, 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 do not intend to pay cash dividends to holders of our common stock in the foreseeable future. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend upon then existing conditions, including our financial condition, operating results, contractual restrictions, restrictions imposed by applicable law, capital requirements, business prospects and other factors our board of directors may deem relevant.

In 2012, to satisfy certain tax obligations incurred by our stockholders in connection with the distribution of equity interests of Gelesis, LLC to our stockholders and option holders, we elected to declare and pay a cash dividend of approximately $215,000 to our stockholders and approximately $120,000 to option and warrant holders under our 2006 Plan.

In January 2015, Gelesis, LLC, an intellectual property holding company controlled by us and our stockholders, was reorganized into a wholly owned subsidiary of Gelesis in connection with the issuance of an aggregate of 94,109 shares of our common stock to our stockholders. See “Business—Gelesis, LLC Reorganization.”

 

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CAPITALIZATION

The following table sets forth our unaudited cash and capitalization as of December 31, 2014:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 7,673,442 shares of our common stock upon the closing of this offering (including 1,943,172 shares of common stock upon the conversion of Series A-5 convertible preferred stock issued in March 2015, including the conversion of the Series A-5 convertible preferred shares issued upon the conversion of our convertible promissory notes) (ii) gross proceeds of $18.0 million received upon the issuance of Series A-5 convertible preferred stock in March 2015 as if the transaction had occurred on December 31, 2014 (iii) the automatic conversion of the warrants to purchase shares of our Series A-1, Series A-3 and Series A-4 convertible preferred stock into warrants to purchase shares of our common stock upon the closing of this offering (iv) the conversion of our convertible promissory notes and accrued interest to Series A-5 convertible preferred stock in March 2015 as if the transaction had occurred on December 31, 2014 (v) the final adjustment of our derivative liability upon the conversion of our convertible promissory notes to Series A-5 convertible preferred stock in March 2015 as if the transaction had occurred on December 31, 2014 and (vi) the issuance of 94,109 shares of our common stock in connection with the reorganization of Gelesis LLC into a wholly owned subsidiary of Gelesis, as if the reorganization had occurred on December 31, 2014; and

 

   

on a pro forma as adjusted basis to give further effect to the issuance and sale by us of 4,000,000 shares of our common stock at an initial offering price of $13.00 per share, the midpoint of the estimated 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 and the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering.

 

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

 

     As of December 31, 2014  
         Actual             Pro Forma         Pro Forma
    As Adjusted    
 
     (in thousands, except share and per share data)  

Cash

   $ 2,605      $ 20,605      $ 66,693   
  

 

 

   

 

 

   

 

 

 

Convertible promissory notes to stockholders

   $ 3,215        —          —     

Notes payable

     1,192        1,192        1,192   

Warrant liability(1)

     12,441        —          —     

Derivative liability

     371        —          —     

Convertible preferred stock (Series A-1, A-2, A-3 and A-4); $0.0001 par value; 26,503,080 shares authorized, 20,204,997 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     16,138        —          —     

Stockholders’ deficit:

      

Preferred stock, $0.0001 par value; no shares authorized, issued or outstanding, actual; no shares authorized, issued or outstanding, pro forma and 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted

      

Common stock $0.0001 par value; 42,000,000 shares authorized, actual; 50,119,712 shares pro forma, 100,000,000 shares pro forma as adjusted; 1,981,234 shares issued and outstanding, actual; 9,748,785 shares issued and outstanding, pro forma; 13,748,785 shares issued outstanding, pro forma as adjusted

     1        1        1   

Additional paid-in capital

     13,698        66,525        112,385   

Non controlling interest

     130                 

Accumulated other comprehensive income

     169        169        169   

Accumulated deficit

     (45,449     (47,709     (47,709
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

     (31,451     18,986        64,846   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 1,906      $ 20,178      $ 66,038   
  

 

 

   

 

 

   

 

 

 

 

(1) 

The warrant liability as of December 31, 2014 consisted of the fair value of contingently issuable warrants for shares of our Series A-1 convertible preferred stock of $801 and the fair value of warrants to purchase shares of our Series A-3 and A-4 convertible preferred stock of $2,447 and $9,193, respectively.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of total stockholders’ deficit, cash and total capitalization on a pro forma as adjusted basis by approximately $3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering costs payable by us.

The number of shares shown as issued and outstanding in the table above is based on 2,075,343 shares of common stock outstanding as of March 15, 2015 as if the March 2015 debt and equity transactions had occurred on December 31, 2014 and excludes:

 

   

1,700,880 shares of our common stock issuable upon the exercise of stock options outstanding as of March 15, 2015 at a weighted average exercise price of $3.65 per share;

 

   

1,065,130 shares of our common stock issuable upon the exercise of warrants outstanding as of March 15, 2015 on an as-converted basis at a weighted average exercise price of $0.51 per share; and

 

 

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217,498 shares of common stock issuable upon the exercise of stock options that we expect to award under the 2006 Stock Incentive Plan, referred to as the 2006 Plan, to certain of our executive officers and directors upon the pricing of this offering, exercisable at a per share price equal to the initial public offering price of this offering;

 

   

1,754,431 additional shares of our common stock available for issuance under the 2015 Equity Incentive Plan, referred to as the 2015 Plan, which will become effective immediately prior to the closing of this offering (which includes 75,767 shares available under the 2006 Plan, assuming the options described above for a total of 217,498 shares are awarded as we expect); and

 

   

33,951 shares of our common stock issuable upon conversion of 119,712 shares of our Series A-5 Preferred Stock that were issued in connection with the second closing of our Series A-5 Financing on April 22, 2015 upon the closing of this offering.

 

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DILUTION

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

Our net tangible book value (deficit) as of December 31, 2014 was $(16.1) million, or $(8.11) per share of common stock. The net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 2014.

Our pro forma net tangible book value on December 31, 2014 was $18.2 million, or $1.87 per share of common stock. Pro forma net tangible book value represents total tangible assets less total liabilities and assumes the automatic conversion of the warrants for Series A-1, Series A-3 and A-4 convertible preferred stock into warrants for common stock upon the closing of this offering, the conversion of our convertible promissory notes and accrued interest into Series A-5 convertible preferred stock in March 2015, the receipt of gross proceeds of $18.0 million upon the issuance of Series A-5 convertible preferred stock in March 2015, the final adjustment of the related derivative liability which results in a reduction in total liabilities of $16.3 million and the issuance of 94,109 shares of our common stock in connection with the reorganization of Gelesis LLC into a wholly owned subsidiary of Gelesis, as if the reorganization had occurred on December 31, 2014. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of December 31, 2014, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 7,673,442 shares of common stock (including 1,943,172 shares upon conversion of Series A-5 convertible preferred stock issued in March 2015) upon the closing of this offering.

After giving further effect to adjustments relating to this offering, our pro forma as adjusted net tangible book value as of December 31, 2014 would have been 64.8 million, or $4.72 per share. The adjustments made to the pro forma net tangible book value per share to determine pro forma as adjusted net tangible book value per share are the following:

 

   

an increase in total assets to reflect our net proceeds of the offering as described under “Use of Proceeds” (assuming that the initial public offering price will be $13.00 per share, the midpoint of the range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering costs payable by us; and

 

   

the addition of the number of shares offered by us pursuant to this prospectus to the number of pro forma shares of common stock outstanding.

The initial public offering price per share will significantly exceed the pro forma as adjusted net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $8.28 per share. The following table illustrates the increase in pro forma as adjusted net tangible book value of $2.85 per share and the dilution (the difference between the initial public offering price per share and pro forma as adjusted net tangible book value per share) to new investors:

 

Assumed initial public offering price per share

      $ 13.00   

Pro forma net tangible book value per share as of December 31, 2014

   $ 1.87      

Increase per share attributable to sale of shares of common stock in this offering

     2.85      
  

 

 

    

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

      $ 4.72   
     

 

 

 

Dilution per share to new investors in this offering

      $ 8.28   
     

 

 

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value will increase to $5.02 per share, representing an immediate dilution of $7.98 per share to new investors, assuming that the initial public offering price will be $13.00 per share, the midpoint of the range set forth on the cover page of this prospectus.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value by $3.7 million, the pro forma as adjusted net tangible book value per share by $0.27 per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering by $0.73 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by approximately $0.50 million and decrease the dilution to investors participating in this offering by approximately $0.50 per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. Similarly, a decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by approximately $0.58 million and increase the dilution to investors participating in this offering by approximately $0.58 per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

If shares are issued in connection with the exercise of all outstanding options and warrants for common stock with exercise prices less than $13.00, the midpoint of the price range set forth on the cover page of this prospectus, you will experience further dilution of $0.44 per share. As of December 31, 2014, we had outstanding options and warrants to purchase a total of 2,665,664 shares of our common stock with exercise prices less than $13.00 per share, including contingently issuable warrants to purchase 2,537,582 shares of Series A-4 Preferred Stock.

The following table summarizes, as of December 31, 2014, on a pro forma as adjusted basis as described above, the differences between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $13.00 per share, the midpoint of the estimated price range set forth on the cover of this prospectus, before the deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    
     (in thousands, except per share amounts)  

Existing stockholders

     9,749         71   $ 47,764         48   $ 4.90   

Investors purchasing common stock in this offering

     4,000         29        52,000         52        13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     13,749         100   $ 99,764         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The tables above assume no exercise of options to purchase shares of common stock outstanding as of December 31, 2014. At December 31, 2014, there were 1,603,160 shares of common stock issuable upon exercise of outstanding options with a weighted average exercise price of $3.12 per share.

The number of shares shown as issued and outstanding in the table above is based on 1,981,234 shares of common stock outstanding as of December 31, 2014 and excludes:

 

   

1,700,880 shares of our common stock issuable upon the exercise of stock options outstanding as of March 15, 2015 at a weighted average exercise price of $3.65 per share;

 

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1,065,130 shares of our common stock issuable upon the exercise of warrants outstanding as of March 15, 2015 on an as-converted basis at a weighted average exercise price of $0.51 per share;

 

   

217,498 shares of common stock issuable upon the exercise of stock options that we expect to award under the 2006 Plan to certain of our executive officers and directors upon the pricing of this offering, exercisable at a per share price equal to the initial public offering price of this offering;

 

   

1,754,431 additional shares of our common stock available for issuance under the 2015 Plan, which will become effective immediately prior to the closing of this offering (which includes 75,767 shares available under the 2006 Plan, assuming the options described above for a total of 217,498 shares are awarded as we expect); and

 

   

33,951 shares of our common stock issuable upon conversion of 119,712 shares of our Series A-5 Preferred Stock that were issued in connection with the second closing of our Series A-5 Financing on April 22, 2015 upon the closing of this offering.

If the underwriters exercise their option to purchase additional shares in full, the number of shares held by new investors will increase to 4,600,000, or 32.1 % of the total number of shares of common stock outstanding after this offering.

Certain of our existing principal stockholders have indicated an interest in purchasing shares of our common stock with an aggregate purchase price of up to approximately $17.5 million in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering, or any of these parties may determine to purchase more, fewer or no shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these parties or their affiliates.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables show selected consolidated financial data as of, and for the periods ended on, the dates indicated. We derived the selected consolidated statement of operations data for the years ended December 31, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year. You should read the following selected consolidated financial data in conjunction with our financial statements, the notes to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected consolidated financial data included in this section are not intended to replace the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Year Ended
December 31,
 
     2013      2014  
     (in thousands, except share
and per share data)
 

Consolidated Statement of Operations Data:

     

Revenues:

     

Collaborative research and development

   $ 4,022       $ —     

Grant revenue

     1,484         209   
  

 

 

    

 

 

 

Total revenues

     5,506         209   
  

 

 

    

 

 

 

Operating expenses:

     

Research and development (includes related party expenses of $177 and $166, respectively)

     2,474         3,409   

General and administrative (includes related party expenses of $342 and $422, respectively)

     1,936         4,853   
  

 

 

    

 

 

 

Total operating expenses

     4,410         8,262   
  

 

 

    

 

 

 

(Loss) income from operations

     1,096         (8,053

(Gains) losses from change in the fair value of warrants

     144         9,662   

Interest expense

     —           738   

Other expense, (income) net

     95         (525
  

 

 

    

 

 

 

(Loss) income before income taxes

     857         (17,928

Provision for (benefit from) income taxes

     274         (278
  

 

 

    

 

 

 

Net (loss) income attributable to Gelesis, Inc.

   $ 583       $ (17,650
  

 

 

    

 

 

 

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

   $ —         $ (8.91

Weighted average shares outstanding – basic and diluted

     1,976,936         1,981,140   

Pro forma net loss per share attributable to common stockholders (unaudited) – basic and diluted(1)

      $ (0.84

Pro forma weighted average shares outstanding (unaudited) – basic and diluted(1)

        9,654,582   

 

(1)

See Note 4 to our consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock, and pro forma net loss per share of common stock.

 

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As of December 31,

 
   2013     2014  
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash

   $ 2,325      $ 2,605   

Working capital (deficit)

     3,674        (2,228

Total assets

     5,569        5,294   

Deferred revenue, net of current portion

     474        419   

Notes payable

     —          1,192   

Convertible promissory notes to stockholders

     —          3,215   

Warrant liability

     2,779        12,441   

Other long-term liabilities

     501        107   

Convertible preferred stock

     16,138        16,138   

Total stockholders’ deficit

     (15,160     (31,451

 

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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 entitled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes appearing in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. 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 biotechnology company focused on the development of first-in-class products to induce weight loss and improve glycemic control in overweight and obese patients. Our product candidates are based on our proprietary hydrogel technology that works mechanically, as opposed to via a chemical mode of action, and exclusively in the gastrointestinal, or GI, tract rather than systemically or through surgical intervention. We believe our product candidates, if approved, have the potential to address the obesity and diabetes epidemics safely and effectively while optimizing convenience and ease of use.

Our lead product candidate, Gelesis100, is an orally administered capsule that contains small hydrogel particles designed to employ multiple mechanisms along the GI tract to induce weight loss and improve glycemic control. These hydrogel particles are engineered to rapidly absorb and release water at specific locations in the GI tract. We have completed a 3 month proof of concept, or POC, 128-patient, randomized, double-blind, placebo-controlled, parallel-group clinical trial for Gelesis100 that demonstrated statistically significant weight loss in overweight and obese patients, including prediabetics. Gelesis100 exhibited a safety profile that was similar to that of placebo with no serious adverse events observed. In November 2014, we initiated a 168-patient, randomized, double-blind, placebo-controlled, parallel-group, 6 month clinical trial to study the ability of Gelesis100 to induce weight loss and improve glycemic control in overweight and obese patients, including those with prediabetes and mild type 2 diabetes. We expect to report data from this trial in the first half of 2016. Although Gelesis100 is an orally administered capsule, we anticipate it will be regulated as a medical device.

Since our inception in 2006, we have devoted substantially all of our resources to licensing and acquiring technology, research and development, and raising capital. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date through proceeds from collaborations and issuance of common and convertible preferred stock, issuance of convertible and non-convertible debt and non-dilutive grants received from government agencies.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities, as we:

 

   

initiate and expand clinical trials for Gelesis100 and Gelesis200;

 

   

establish a commercial manufacturing line;

 

   

seek regulatory approval for our product candidates;

 

   

hire personnel to support our product development, commercialization and administrative efforts; and

 

   

advance the research and development related activities for hydrogels.

We will not generate product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. Additionally, we currently utilize third-party

 

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contract research organizations, or CROs, to carry out our clinical development activities, and we do not yet have a commercial organization. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Accordingly, we will seek to fund our operations through public or private equity or debt financings or other sources, potentially including collaborative commercial arrangements.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

Financial Operations Overview

Revenues

To date, we have not generated any product sales. Our limited revenues have been derived from a license and collaboration agreement and grants from government agencies. The license and collaboration agreement was executed in June 2012 and terminated effective November 2013.

Under previously approved grants from the Puglia Region in Italy and an Italian economic development agency, we are reimbursed for certain qualifying capital investments and expenses incurred for research and development work performed in Italy and other countries in the European Union.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

 

   

expenses incurred under agreements with CROs and investigative sites that conduct our clinical studies;

 

   

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

 

   

costs associated with preclinical activities and regulatory operations; cost of acquiring, developing, and manufacturing clinical study materials; and

 

   

facilities, depreciation, and other expenses, which include direct and allocated expenses for insurance and other supplies.

Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, CROs and clinical sites.

We cannot determine with certainty the duration and completion costs of the current or future clinical studies of our product candidates or if, when, or to what extent we will generate sales from the commercialization of any of our product candidates if they receive regulatory approval. The successful development of our product candidates is highly uncertain and may never result in approved products. The duration, costs, and timing of clinical studies and development of our product candidates will depend on a variety of factors, including:

 

   

scope, rate of enrollment, and expense of our ongoing, as well as any additional clinical studies, and other research and development activities;

 

   

significant and, potentially, changing government regulation; and

 

   

the timing and receipt of regulatory approvals, if any.

 

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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical studies beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, we could be required to expend significant additional financial resources and time on the completion of clinical development.

We plan to increase our research and development expenses for the foreseeable future as we continue the development of Gelesis100 and Gelesis200. Our current planned research and development activities include the following:

 

   

completing the GLOW with data expected to be reported in the first half of 2016;

 

   

assuming the GLOW study proceeds as planned and achieves its study objectives, initiating our pivotal study for potential FDA approval for Gelesis100 in the second half of 2016;

 

   

initiating our first clinical studies for Gelesis200 in the second half of 2015; and

 

   

continuing to manufacture clinical study materials in support of our clinical studies.

To date, substantially all of our research and development efforts have been related to the development of Gelesis100. We do not allocate personnel-related costs, costs associated with our general research platform improvements, depreciation or other indirect costs to specific programs.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance and human resource functions. Other general and administrative expenses include facility-related costs and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining our intellectual property.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, director and officer liability insurance, investor relations costs and other costs associated with being a public company. Additionally, if and when we believe a regulatory approval of Gelesis100 appears likely, we anticipate an increase in staffing and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Other (Income) Expense, Net

Gains (losses) from change in the fair value of warrants.    We have issued warrants for the purchase of preferred stock that contain redemption features that are not solely within our control. Therefore, we have classified these warrants as liabilities that we remeasure to fair value at each reporting period and we record changes in fair value of the warrants as a component of other income (expense), net.

We use the Black-Scholes option pricing model, or Black-Scholes, to estimate the fair value of the warrants. We base the estimates in Black-Scholes, in part, on subjective assumptions, including stock price volatility, risk-free interest rate, dividend yield, and the fair value of the preferred stock underlying the warrants.

Interest expense.    Interest expense consisted of interest accrued in connection with our convertible notes and loans.

 

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Results of Operations

Comparison of the Years Ended December 31, 2013 and 2014

 

     Year ended
December 31,
    Change  
     2013      2014    
     (in thousands)        

Collaborative research and development

   $ 4,022       $ —        $ (4,022

Grant revenue

     1,484         209        (1,275
  

 

 

    

 

 

   

 

 

 

Total revenues

     5,506         209        (5,297
  

 

 

    

 

 

   

 

 

 

Operating expenses:

       

Research and development (includes related party expenses of $177 and $166, respectively)

     2,474         3,409        935   

General and administrative (includes related party expenses of $342 and $442, respectively)

     1,936         4,853        2,917   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     4,410         8,262        3,852   
  

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     1,096         (8,053     (9,149
  

 

 

    

 

 

   

 

 

 

Loss from change in the fair value of warrants

     144         9,662        9,518   

Interest expense

     —           738        738   

Other expense (income), net

     95         (525     (620
  

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     857         (17,928     (18,785

Provision for (benefit from) income taxes

     274         (278     (552
  

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to Gelesis, Inc.

   $ 583       $ (17,650   $ (18,233
  

 

 

    

 

 

   

 

 

 

Revenue.    Revenue was $0.2 million for the year ended December 31, 2014, compared to $5.5 million for the year ended December 31, 2013, a decrease of $5.3 million. The decrease of $4.0 million in collaborative research and development revenue is due to the termination of a license and collaboration agreement in November 2013. Upon termination of the license and collaboration agreement, the remaining unamortized revenue was recognized. There were no such arrangements generating revenue during the year ended December 31, 2014. The decrease of grant revenue by $1.3 million during the year ended December 31, 2014 compared to the year ended December 31, 2013 is due primarily to a grant that was approved by the Italian economic development agency in 2013 for research and development projects that had already been completed.

Research and development.    Research and development expenses were $3.4 million for the year ended December 31, 2014, compared to $2.5 million for the year ended December 31, 2013, an increase of $0.9 million. Stock-based compensation increased $0.6 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, due to a stock-option grant in August 2014, as well as the remeasurement of stock awards previously granted to nonemployees. Salary and personnel related expenses increased by $0.2 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, as we continued to expand headcount to meet the manufacturing requirements of clinical trials. Additionally, we incurred $0.1 million in costs associated with purchasing intellectual property during the year ended December 31, 2014.

General and administrative.    General and administrative expenses were $4.9 million for the year ended December 31, 2014, compared to $1.9 million for the year ended December 31, 2013, an increase of $3.0 million. The increase in spending is due to hiring additional personnel and legal and accounting expenses associated with adding infrastructure to prepare to become a public company.

(Gains) losses from change in the fair value of warrants.    The loss from the change in the fair value of warrants was $9.7 million for the year ended December 31, 2014, compared to $0.1 million for the year

 

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ended December 31, 2013, an increase of $9.6 million. The increase in expense was driven primarily by the increase in the value of the shares underlying the warrants, due to an increase in the probability of a liquidity event.

Interest expense.    Interest expense was $0.7 million for the year ended December 31, 2014, compared to $0.0 for the year ended December 31, 2013. The increase was due to accrued interest on the convertible in 2014. There were no notes or other interest bearing instruments outstanding during 2013.

Other expense (income), net.    We recorded other income of $0.5 million for the year ended December 31, 2014, compared to other expense of $0.1 million for the year ended December 31, 2013. The increase in income was due primarily to a $0.8 million gain on the change in estimated the fair value of a derivative instrument, partially offset by a $0.3 million increase in currency exchange losses in 2014.

Provision for (benefit from) income taxes.    We recorded a benefit from income taxes of $0.3 million for the year ended December 31, 2014, compared to a provision of $0.3 million for the year ended December 31, 2013. The reduction in the tax provision primarily relates to a reduction in the amount of grant income recorded in 2014 as compared to 2013 at our Italian subsidiary.

Liquidity and Capital Resources

Other than fiscal 2013, we have incurred losses and cumulative negative cash flows from operations since our inception in 2006, and as of December 31, 2014, we had an accumulated deficit of $45.4 million. As of December 31, 2014, we had cash of $2.6 million, of which $2.5 million was held in bank checking accounts in the United States and $0.1 million was held in bank checking accounts in Italy. We anticipate that we will continue to incur losses, and that such losses will increase for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations and strategic alliances.

We believe that our cash on-hand of $2.6 million, grants receivable of $0.3 million and unbilled grants receivable of $0.1 million as of December 31, 2014, together with the $18.0 million of gross proceeds received through the issuance of Series A-5 convertible preferred shares in March 2015, should enable us to maintain our current and essential planned operations through June 2016. Our ability to fund all of our planned operations internally beyond that date, including the completion of our ongoing and planned clinical studies, may be substantially dependent upon whether we can obtain sufficient funding at terms acceptable to us.

We have funded our operations principally from the issuance of common stock, convertible preferred stock, convertible notes and loans with warrants to purchase common and preferred stock. In addition, in November 2011, we were awarded a €0.9 million ($1.1 million) grant from the Puglia region of Italy to carry out the development and process scale up of a laboratory and manufacturing facility in Calimera, Italy, and in February 2013, we were awarded a €1.0 million ($1.2 million) grant from an Italian economic development agency to conduct research and development activities, including clinical trials, in Europe. In June 2012, we entered into a license and collaboration agreement with a pharmaceutical company to develop and commercialize a biodegradable superabsorbent hydrogel, for which we received an $8.0 million non-refundable, up-front payment in connection with signing the agreement. The pharmaceutical company terminated the agreement in July 2013 effective November 2013 prior to final clinical data from the FLOW study being available.

From April 2014 through September 30, 2014, we issued convertible promissory notes totaling $3.9 million. The notes have a stated interest rate of 10%, which resets to 18% on September 30, 2015, and are payable within 30 days of demand by the majority of noteholders after September 30, 2015. Principal and unpaid accrued interest due under these notes will automatically be converted into the class of our stock issued in our next qualified financing, as defined, based upon 70% of offering price per share paid by other investors in the financing. There are no covenants associated with these notes.

 

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In May 2014, we entered into a loan agreement with an Italian economic development agency in connection with a grant. Borrowings under the loan totaled €1.0 million ($1.2 million), and the loan bears interest at 0.332% per annum. We are required to make interest payments only in 2014 and 2015, with principal and interest payments from January 2016 through January 2024.

We generally consider all earnings generated in Italy to be indefinitely reinvested. Therefore, we do not accrue U.S. taxes on the repatriation of the foreign earnings we consider to be indefinitely reinvested outside of the U.S. As of December 31, 2014, we have not provided for federal income tax on approximately $80,000 of accumulated undistributed earnings of our foreign subsidiaries.

Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):

 

     Year ended
December 31,
 
     2013     2014  

Net cash provided by (used in):

    

Operating activities

   $ (3,626   $ (4,304

Investing activities

     (438     (320

Financing activities

     4,303        5,041   

Effect of exchange rates on cash

     12        (137
  

 

 

   

 

 

 

Net increase in cash

   $ 251      $ 280   
  

 

 

   

 

 

 

Operating activities.    The increase in cash used in operating activities for the year ended December 31, 2014, compared to the cash used by operating activities for the year ended December 31, 2013, is primarily due to the receipt of approximately $1.0 million in grant proceeds received from the Italian economic development agency in 2014, as well as the timing of cash payments to our vendors, offsetting higher personnel costs and higher accounting and legal expenses during 2014.

Investing activities.    Net cash used in investing activities for the year ended December 31, 2014 was $0.3 million, and consisted entirely of purchases of property and equipment. Net cash used in investing activities for the year ended December 31, 2013 was $0.4 million and consisted primarily of $0.5 million in purchases of property and equipment, partially offset by proceeds from the sale of property and equipment of $0.1 million.

Financing activities.    Net cash provided by financing activities for the year ended December 31, 2014 was $5.0 million, consisting primarily of proceeds from the issuance of convertible notes of $3.9 million and a loan received from an Italian economic development agency of $1.3 million partially offset by $0.2 million in payment of issuance costs for this proposed offering. Net cash provided by financing activities for the year ended December 31, 2013 was $4.3 million, consisting entirely of proceeds from the issuance of convertible preferred stock.

Operating Capital Requirements

To date, we have not generated any product sales. We do not know when, or if, we will generate product sales. We will not generate significant product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to the risks in the development of our products, and we may

 

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encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations. As of December 31, 2014, we do not have any commitments for capital expenditures.

We believe that the net proceeds from this offering and our existing cash will be sufficient to fund our projected operating requirements through the end of 2017. We will require additional capital for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.

Unless and until we can generate and maintain sufficient revenues from our products that results in positive operating cash flow, we expect to finance cash needs through public or private equity or debt offerings. Additional capital may not be available to us on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, and increased fixed payment obligations. Any securities that we may issue in the future may also have rights senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

   

the initiation, progress, timing, costs and results of clinical studies for Gelesis100 and Gelesis200;

 

   

the outcome, timing and cost of regulatory approvals by the FDA and European regulatory authorities, including the potential for these agencies to require that we perform studies in addition to those that we currently have planned;

 

   

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

   

our need to expand our research and development activities;

 

   

our need and ability to hire additional personnel;

 

   

our need to implement additional infrastructure and internal systems;

 

   

the cost of establishing and maintaining a commercial-scale manufacturing line; and

 

   

the cost of establishing sales, marketing and distribution capabilities for any products for which we may receive regulatory approval.

If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

 

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Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We have generated revenue through a concluded license and collaboration agreement and from grant programs.

Revenue is recognized for each unit of accounting when all of the following criteria are met:

 

   

persuasive evidence of an arrangement exists;

 

   

delivery has occurred or services have been rendered;

 

   

seller’s price to the buyer is fixed or determinable; and

 

   

collectability is reasonably assured

Multiple-deliverable arrangements, such as license and development agreements, are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized.

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in our consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, current. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion, as a component on non-current liabilities.

Collaboration Revenue

During 2013, our collaborative research and development revenue was generated exclusively from a license and collaboration agreement we entered into with a pharmaceutical company in June 2012. Effective November 2013, the pharmaceutical company terminated the agreement prior to reviewing final clinical data.

We recognize revenue from such arrangements ratably over the associated period of performance. If there is no discernible pattern of performance and/or objectively measurable performance measures do not

 

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exist, then we recognize revenue under the arrangement on a straight-line basis over the period we expect to complete our performance obligations. We recognized the up-front, non-refundable $8.0 million payment ratably over the estimated non-contingent portion of the arrangement when the research and development activities related to the initial clinical studies were performed, as there was no other discernible pattern of revenue recognition. At the end of each reporting period, we reviewed, and adjusted where necessary, the amounts recognized in revenue for any changes in the estimated non-contingent period over which the research and development activities were performed. Upon termination of the license and collaboration agreement during 2013, the unamortized portion of deferred revenue from the agreement was recognized as revenue.

Grant Revenue

During 2013 and 2014, our grant revenue was generated from government grants awarded from the Puglia Region and the Ministry of Economic Development in Italy. Once we initially qualify for the programs, we are required to submit qualifying expenses and capital purchases for reimbursement, which occurs after we have already made the capital purchases and/or incurred the research and development costs. We record a grant receivable upon incurring such expenses, as approval and reimbursement are considered to be perfunctory once the qualifying program has been approved. Government grants are recognized on a systematic basis over the periods in which we recognize the related costs for which the grant is intended to compensate. Specifically, grant revenue related to research and development costs is recognized as such expenses are incurred. Research and development costs that were incurred prior to the approval of a qualifying program are recognized as grant revenue immediately upon approval of the program by the grantor. Grant revenue related to qualifying capital purchases is recognized in proportion to the depreciation expense incurred on the underlying assets.

Deferred revenue related to capital purchases for which grant revenue will be recognized beyond twelve months from the balance sheet date is classified as long-term deferred revenue on the consolidated balance sheets.

We record grant receivables in the consolidated balance sheets when the amounts are expected to be received from the government agency.

The grant agreements contain certain provisions, including, among others, maintaining a physical presence in the region for defined periods. Failure to comply with these covenants would require either a full or partial refund of the grant to the granting authority.

Accrued Research and Development Expenses

As part of the process of preparing financial statements, we are required to estimate and accrue expenses, which include research and development expenses related to ongoing clinical studies performed for us by CROs. This process involves:

 

   

communicating with applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost;

 

   

estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and

 

   

periodically confirming the accuracy of our estimates with selected service providers and making adjustments, if necessary.

Examples of estimated research and development expenses that we accrue include:

 

   

fees paid to CROs in connection with both preclinical studies and clinical studies;

 

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fees paid to investigative sites in connection with clinical studies; and

 

   

professional service fees for consulting and other services related to the performance of clinical studies and the process of seeking regulatory approval.

We base our expense accruals related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements vary and may result in uneven payment flows. Payments under some of these contracts depend on factors, such as the successful enrollment of patients and the completion of clinical study milestones. Our service providers generally invoice us monthly in arrears for services performed. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period. However, due to the nature of estimates and the expected increased volume of services expected to be performed we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies and other research activities.

Stock-Based Compensation

Stock-Based Awards

We issue stock-based awards to employees and non-employees, generally in the form of stock options and restricted stock. Compensation expense from all stock-based awards to employees, including grants of employee stock options and modifications to existing stock options, are recognized in the consolidated statements of operations and comprehensive loss based on their grant-date fair values. The fair value of stock-based awards to non-employees is re-measured as the award vests. We recognize the compensation cost of stock-based awards to employees on a straight-line basis over the vesting period of the award and use an accelerated attribution model for awards to non-employees. Described below is the methodology we have utilized in measuring stock-based compensation expense. Following the consummation of this offering, stock option and restricted stock values will be determined based on the quoted market price of our common stock.

We estimate the fair value of our stock-based awards to employees and non-employees using the Black-Scholes option pricing model, or Black-Scholes, which requires the input of highly subjective assumptions, including (a) the estimated fair value of the common stock on the grant date and for non-employees on each subsequent measurement date, (b) the expected volatility of our stock, (c) the expected term of the award, (d) the risk-free interest rate, and (e) expected dividends. We have historically been a private company and lack company-specific historical and implied volatility data. Therefore, we estimate our expected volatility based on the historical volatility of a group of similar companies that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected life of our employee stock options granted at-the-money using the “simplified” method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted. We do not anticipate paying dividends in the foreseeable future.

 

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We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from its estimates. The estimation of the number of awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised.

The fair value of each nonemployee stock award is estimated at the grant date using Black-Scholes with assumptions generally consistent with those used for employee stock options, with the exception of expected term, which is the contractual life.

We have computed the fair value of employee stock options at date of grant using the following weighted-average assumptions:

 

     Year ended December 31,  
           2013*                  2014        

Estimated fair value of common stock

     n/a       $ 10.05   

Expected volatility

     n/a         71.7

Expected term (in years)

     n/a         5.6   

Risk-free interest rate

     n/a         1.8

Expected dividend yield

     n/a         0

 

* We did not grant any stock options during 2013.

The following table summarizes by grant date the number of shares of common stock subject to stock options granted from January 1, 2013 through the date of this prospectus, as well as the associated per share exercise price and the per share estimated fair value of the underlying common stock:

 

Date of grant

   Type of award    Number
of shares
     Exercise price
per share
     Common stock fair
value per share on
grant date
     Weighted average fair
value per share of
stock options on grant
date
 

August 29, 2014

   Option      489,128       $ 8.08       $ 10.05       $ 6.91   

February 16, 2015

   Option      97,720       $ 12.42       $ 12.42       $ 8.46   

Stock-based compensation totaled approximately $0.3 million and $1.3 million for the years ended December 31, 2013 and 2014, respectively. As of December 31, 2014, we had $2.7 million of unrecognized compensation expense, which is expected to be recognized over a weighted-average remaining vesting period of approximately 2.1 years. We expect our stock-based compensation expense for stock options granted to employees and non-employees to grow in future periods due to the potential increases in the value of our common stock and future option grants to new and current employees and consultants.

Fair Value of Stock Options

We are a privately held company with no active public market for our common stock. Therefore, our board of directors, with the assistance and upon the recommendation of management, and with assistance from an independent third party valuation firm, has for financial reporting purposes determined the estimated per share fair value of our common stock using a contemporaneous and retrospective valuations consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. Our contemporaneous valuation of our common stock as of December 31, 2014 and our retrospective valuations of our common stock as of June 30, 2014 and September 30, 2014 were based

 

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on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector and the prices at which we sold shares of preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant and the likelihood of achieving a liquidity event such as an initial public offering.

The dates of our contemporaneous and retrospective valuations do not coincide with the date of our stock-based compensation grants. Therefore, our board of directors’ estimates have been based on the most recent valuation of our shares of common stock and, if any, its assessment of additional objective and subjective factors it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.

June 30, 2014 Valuation

Our board of directors with input from management and taking into account a retrospective third-party valuation of our common stock as of June 30, 2014 determined the fair value to be $6.45 per share. We used the probability-weighted expected return method, or PWERM. Under the PWERM, share value is derived from the probability-weighted present value of expected future investment returns, considering possible outcomes available to us, as well as the economic and control rights of each share class. We felt this model was appropriate as we believe the range of possible outcomes of a liquidity event are reasonably estimable and within a relatively close period of time. Our June 30, 2014 valuation considered three possible outcomes:

 

   

a merger/acquisition transaction;

 

   

an initial public offering; and

 

   

a sale of our intellectual property below liquidation values

In order to estimate the investment return for the three scenarios, we considered the economic rights of each share class through a direct waterfall analysis. We also estimated the expected time to the liquidity event based on our board of directors’ assessment of our prospects, our investors’ motivations and market conditions. We then discounted the values of each class of equity in the scenarios at an appropriate risk-adjusted rate. We selected these risk-adjusted rates based on studies of the rates of return expected by venture capital investors, as presented in the AICPA Practice Aid. Finally, we applied a discount for lack of marketability, or DLOM, to the value indicated for our common stock.

In the June 30, 2014 valuation, future projected enterprise value used in the IPO and merger/acquisition scenarios is based upon guideline transactions. The selected enterprise value for both the IPO and merger/acquisition scenarios is between the low and 25th percentile of the guideline transactions as concluded through a comparison of the stage of development, depth of clinical candidates portfolio and number of partnerships. In addition, during May 2014, we were notified by the FDA that our product will be considered a medical device and, therefore, has the economic benefits of a pharmaceutical product with the regulatory requirements of a medical device.

We assessed the probability of each of the scenarios at 30% for the merger/acquisition scenario, 55% for the IPO scenario and 15% for the Sale of Intellectual Property below liquidation values scenario. The estimated per share value of the common stock was $8.53 and $7.12 under the merger/acquisition scenario and the IPO scenario, respectively. For both the merger/acquisition scenario and the IPO scenario, our estimated term to liquidity event was 0.75 years. We used a weighted-average cost of capital (WACC) for common stock of 25% for both the merger/acquisition and IPO scenarios, and 20% for preferred stock in the merger/acquisition scenario. We applied a DLOM of 10% in arriving at the per share values of our common stock under each of the scenarios. Our board of directors considered the retrospective third-party valuations, and our assessment of additional objective and subjective factors we believed were relevant, including the organizational meeting which took place in July 2014 where we determined we would pursue

 

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an IPO, to calculate the fair value of options granted on August 29, 2014. The estimates of fair value of our common stock are highly complex and subjective. There are significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event, the related valuations associated with these events, and the determinations of the appropriate valuation methods at each valuation date. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share applicable to common stockholders could have been materially different.

September 30, 2014 Valuation

Our board of directors with input from management and taking into account a retrospective third-party valuation of our common stock as of September 30, 2014 determined the fair value to be $11.99 per share. The per share increase of $5.54 in the estimated fair value of our common stock from June 30, 2014 to September 30, 2014 was primarily due to two factors. In July 2014 we held an organizational meeting where it was determined that we would immediately begin preparing for an IPO, and in September 2014, we began negotiating a mezzanine round of financing which yielded a higher enterprise value than the value determined in valuing our common stock at June 30, 2014. Similar to our June 30, 2014 valuation, we used the PWERM method, under which share value is derived from the probability-weighted present value of expected future investment returns, considering possible outcomes available to us, as well as the economic and control rights of each share class. We felt this model was appropriate as we believe the range of possible outcomes of a liquidity event are reasonably estimable and within a relatively close period of time. Our September 30, 2014 valuation also considered three possible outcomes:

 

   

a merger/acquisition transaction;

 

   

an initial public offering; and

 

   

a sale of our intellectual property below liquidation values

In order to estimate the investment return for the three scenarios, we once again considered the economic rights of each share class through a direct waterfall analysis. We also estimated the expected time to the liquidity event based on our board of directors’ assessment of our prospects, our investors’ motivations and market conditions. We then discounted the values of each class of equity in the scenarios at an appropriate risk-adjusted rate. We selected these risk-adjusted rates based on studies of the rates of return expected by venture capital investors, as presented in the AICPA Practice Aid. Finally, we applied a discount for lack of marketability to the value indicated for our common stock.

In the September 30, 2014 valuation, future projected enterprise value used in the IPO and merger/acquisition scenarios is based upon guideline transactions. The selected enterprise value of an IPO scenario is between the 25th and 50th percentiles of the guideline transactions and the selected enterprise value of a merger/acquisition scenario is between the low and 25th percentile of the guideline transactions, as concluded through a comparison of the stage of development, depth of clinical candidates portfolio and number of partnerships.

We assessed the probability of each of the scenarios at 30% for the merger/acquisition scenario, 65% for the IPO scenario and 5% for the Sale of Intellectual Property scenario. The estimated per share value of the common stock was $12.20 and $12.80 under the merger/acquisition scenario and the IPO scenario, respectively. For both the merger/acquisition scenario and the IPO scenario, our estimated term to liquidity event was 0.5 years. We used a WACC for common stock of 25% for both the merger/acquisition and IPO scenarios, and 20% for preferred stock in the merger/acquisition scenario. We applied a DLOM of 5% in arriving at the per share values of our common stock under each of the scenarios.

 

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December 31, 2014 Valuation

Our board of directors with input from management and taking into account a contemporaneous third-party valuation of our common stock as of December 31, 2014 determined the fair value to be $12.42 per share. The per share increase of $0.43 in the estimated fair value of our common stock from September 30, 2014 to December 31, 2014 was primarily due to a reduction in the present value factor of the expected future investment returns that resulted from the passage of time. Similar to our September 30, 2014 valuation, we used the PWERM method, under which share value is derived from the probability-weighted present value of expected future investment returns, considering possible outcomes available to us, as well as the economic and control rights of each share class. We felt this model was appropriate as we believe the range of possible outcomes of a liquidity event are reasonably estimable and within a relatively close period of time.

Our December 31, 2014 valuation also considered three possible outcomes:

 

   

a merger/acquisition transaction;

 

   

an initial public offering; and

 

   

a sale of our intellectual property below liquidation values.

In order to estimate the investment return for the three scenarios, we once again considered the economic rights of each share class through a direct waterfall analysis. We also estimated the expected time to the liquidity event based on our board of directors’ assessment of our prospects, our investors’ motivations and market conditions. We then discounted the values of each class of equity in the scenarios at an appropriate risk-adjusted rate. We selected these risk-adjusted rates based on studies of the rates of return expected by venture capital investors, as presented in the AICPA Practice Aid. Finally, we applied a discount for lack of marketability to the value indicated for our common stock.

In the December 31, 2014 valuation, future projected enterprise value used in the IPO and merger/acquisition scenarios is based upon guideline transactions. The selected enterprise value of an IPO scenario is between the 25th and 50th percentiles of the guideline transactions and the selected enterprise value of a merger/acquisition scenario is between the low and 25th percentile of the guideline transactions, as concluded through a comparison of the stage of development, depth of clinical candidates portfolio and number of partnerships.

We assessed the probability of each of the scenarios at 25% for the merger/acquisition scenario, 70% for the IPO scenario and 5% for the Sale of Intellectual Property scenario. The estimated per share value of the common stock was $12.09 and $13.40 under the merger/acquisition scenario and the IPO scenario, respectively. For both the merger/acquisition scenario and the IPO scenario, our estimated term to liquidity event was 0.33 years. We used a WACC for common stock of 25% for both the merger/acquisition and IPO scenarios, and 20% for preferred stock in the merger/acquisition scenario. We applied a DLOM of 5% and 7.5% in arriving at the per share values of our common stock under the IPO and merger/acquisition scenarios, respectively.

On April 22, 2015, we and our underwriters determined the estimated price range for this offering, as set forth on the cover page of this prospectus. The midpoint of the price range is $13.00 per share. In comparison, our estimated fair value of our common stock was $12.42 as of December 31, 2014. We note that, as is typical in IPOs, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined by discussion between us and the underwriters. Among the factors that were considered in setting this price range were our prospects and the history of and prospects for our industry; the general condition of the securities markets and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; an analysis of valuation ranges in initial public offerings for generally comparable companies; an analysis of

 

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valuation ranges in initial public offerings for generally comparable companies in our industry during the past year; and the recent performance of initial public offerings of generally comparable companies.

Convertible Preferred Stock Warrants

As of December 31, 2014, we had warrants outstanding to purchase shares of our Series A-1, Series A-3 and Series A-4 convertible preferred stock. Freestanding warrants that are related to the purchase of redeemable preferred stock are classified as liabilities and recorded at fair value regardless of the timing of the redemption feature or the redemption price or the likelihood of redemption. The warrants are subject to re-measurement at each balance sheet date and any change in fair value is recognized in the consolidated statements of operations. We measure the fair value of the warrants using Black-Scholes. We evaluated whether Black-Scholes would be appropriate for valuing these instruments by performing additional sensitivity testing utilizing a simulation-based model on the down-round protection features within the warrants. We determined that the simulation-based model did not yield materially different results than Black-Scholes. The significant assumptions used in estimating the fair value of our warrant liability include the volatility of the stock underlying the warrant, risk-free interest rate, estimated fair value of the preferred stock underlying the warrant, and the estimated life of the warrant. We derive these estimates by considering comparable public company benchmarks and market trends, as well as third-party valuation reports.

Embedded derivative

As of December 31, 2014, we had convertible promissory notes to stockholders that contain an embedded put option related to the payout that a debt holder receives upon a change of control. The put option is classified as a derivative liability and recorded at estimated fair value at issuance. The derivative liability is subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of other income (expense) in the consolidated statements of operations. We estimated the fair value of the derivative by estimating the probability of various changes of control events occurring and then estimated the present value of the amount the holders would receive upon the change in control. The significant assumption used in estimating the fair value of the derivative is the probability of the change of control scenarios.

Deferred Income Taxes

We record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities using tax rates expected to be in effect in the years in which the differences are expected to reverse that have been enacted or substantively enacted at the reporting date. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced by a valuation allowance to reduce the net deferred tax assets to the amount that will more likely than not be realized. This assessment requires management’s judgment, estimates and assumptions. In evaluating our ability to utilize our deferred tax assets, we consider all available positive and negative evidence, including the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are recoverable.

Our judgments regarding future taxable income are based on expectations of market conditions and other facts and circumstances. Any adverse change to the underlying facts or our estimates and assumptions could require that we reduce the carrying amount of our net deferred tax assets.

Variable Interest Entity

We consolidate Gelesis, LLC, or the LLC, which is a variable interest entity, or VIE, because the total equity investment at risk is not sufficient to permit the LLC to finance its activities without additional subordinated financial support. Additionally, we are the primary beneficiary of the LLC because we are expected to absorb a majority of the LLC’s expected losses, and we have the power to direct the activities of the LLC that most significantly impact the LLC’s economic performance.

 

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In January 2015, Gelesis, LLC, an intellectual property holding company controlled by us and our stockholders, was reorganized into a wholly owned subsidiary of Gelesis in connection with the issuance of an aggregate of 94,109 shares of our common stock to our stockholders. See “Business—Gelesis, LLC Reorganization.”

Emerging Growth Company Status

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 have chosen to “opt out” of this provision and 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.

Recent Accounting Pronouncements

We have reviewed all recently issued standards and have determined that other than as disclosed in Note 2 to the consolidated financial statements included herein, such standards will not have a material impact on our consolidated financial statements or do not otherwise apply to our operations.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2014:

 

     Total      Less than
1 Year
     1 to 3 Years      3 to 5 Years      More than
5 Years
 
     (in thousands)  

Notes payable

   $ 1,192       $ —         $ 147       $ 1,045       $ —     

Convertible promissory notes to stockholders(1)

     3,940         3,940         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,132       $ 3,940       $ 147       $ 1,045       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Convertible promissory notes to stockholders converted to 1,737,989 shares of Series A-5 Preferred Stock in March 2015.

Contractual obligations and commitments as of December 31, 2014 arise from the issuance of convertible notes, and to a lesser extent, a long-term loan from the Italian economic development agency.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations of the Securities and Exchange Commission.

Internal Control Over Financial Reporting

In preparing our consolidated financial statements as of and for the year ended December 31, 2014, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that together constituted a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness identified resulted from the fact that we do not have sufficient financial reporting and accounting staff with appropriate training in GAAP and SEC rules and regulations to perform an adequate level of review of accounting and financial reporting information or maintain adequate controls related to the risk assessment and information components of the control framework, and there was insufficient oversight of the financial reporting process by those charged with governance due to a lack of

 

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internal resources. As such, our controls over financial reporting were not designed or operating effectively, and as a result, there were adjustments required in connection with closing our books and records and preparing our December 31, 2013 and 2014 consolidated financial statements.

The material weakness in our internal control over financial reporting was attributable to our lack of sufficient financial reporting and accounting personnel with the technical expertise to appropriately segregate the preparation and review of the accounting and financial reporting information that is reflected in our consolidated financial statements. Furthermore, those charged with governance did not perform an adequate level of oversight in the financial reporting process. In response to this material weakness, we have hired additional personnel with public company financial reporting expertise to build our financial management and reporting infrastructure and further develop and document our accounting policies and financial reporting procedures. We have also implemented a standardized consolidation and reporting package to ensure those responsible for financial reporting receive consistent, accurate and timely information. We have engaged technical experts with significant tax, U.S. GAAP accounting and disclosure and valuation experience to assist with fair value analysis, complex accounting, and SEC reporting. Additionally, we plan to implement controls that include the review of our financial statements and SEC filings by those charged with corporate governance, as well as the establishment of an audit committee that meets the independence and experience requirements for a public company as well as other measures to address each component of the control framework. However, we cannot assure you that we will be successful in pursuing these measures or that these measures will significantly improve or remediate the material weakness described above. We also cannot assure you that we have identified all of our existing material weaknesses or that we will not in the future have additional material weaknesses. We have not yet remediated our material weakness, and the remediation measures that we intend to implement may be insufficient to address our existing material weakness or to identify or prevent additional material weaknesses.

Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the control deficiencies and the resulting material weakness that was identified as a result of the limited procedures performed, we believe that it is possible that had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses and significant control deficiencies may have been identified. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the requirement that our independent registered public accounting firm provide an attestation on the effectiveness of our internal control over financial reporting. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Quantitative and Qualitative Disclosures About Market Risks

Foreign Currency Risk

We are exposed to foreign exchange rate risk. Historically, our collaborative research and development revenue has been generated in U.S. Dollars, while our grant revenues have been generated in Euros. Our headquarters are located in the United States, where the majority of our general and administrative expenses are incurred in U.S. Dollars. The majority of our research and development costs are incurred by our Italian subsidiary, whose functional currency is the Euro. As we continue to grow our business, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any foreign currency hedging contracts.

 

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BUSINESS

Overview

We are a biotechnology company focused on the development of first-in-class products to induce weight loss and improve glycemic control in overweight and obese patients, including those with prediabetes and type 2 diabetes. Our product candidates are based on our proprietary hydrogel technology that works mechanically, as opposed to via a chemical mode of action, and exclusively in the gastrointestinal, or GI, tract rather than systemically or through surgical intervention. We believe our product candidates, if approved, have the potential to address the obesity and diabetes epidemics by providing safe and effective treatments that can help large patient populations, including those not served by existing treatments.

Our lead product candidate, Gelesis100, is an orally administered capsule that contains small hydrogel particles designed to employ multiple mechanisms of action along the GI tract to induce weight loss and improve glycemic control. For optimal safety and efficacy, these hydrogel particles are engineered to rapidly absorb and release water at specific locations in the GI tract. We have completed our 3 month proof of concept, or POC, FLOW study, a 128-patient, randomized, double-blind, placebo-controlled, parallel-group, clinical trial for Gelesis100 that demonstrated statistically significant weight loss and improvement of glycemic parameters in overweight and obese patients, including prediabetics. Gelesis100 exhibited a safety profile that was similar to that of placebo with no serious adverse events observed. In November 2014, we initiated the GLOW study, a 168-patient, randomized, double-blind, placebo-controlled, parallel-group, 6 month clinical trial to study the ability of Gelesis100 to induce weight loss and improve glycemic control in overweight and obese patients, including those with prediabetes and mild type 2 diabetes. We expect to report data from this trial in the first half of 2016. This study could, subject to the outcome of our discussions with European notified bodies, serve as the pivotal study for obtaining a CE Mark for marketing approval for a weight loss indication in the European Economic Area and certain other jurisdictions. It will also serve as a proof of concept study for weight loss and glycemic control in the United States. Although Gelesis100 is an orally administered capsule, we anticipate it will be regulated as a medical device.

Obesity and obesity-related metabolic diseases represent a global health challenge for which there are few safe and effective interventions. These conditions are associated with comorbidities such as type 2 diabetes, hypertension, and heart disease. In 2012, based on a report from the U.S. Centers for Disease Control and Prevention, or CDC, 35% of the U.S. adult population 20 years of age and older was obese and an additional 34% was overweight. Of the overweight population, many of these individuals are expected to cross the threshold into obesity in the near future. The treatment of obesity, and its associated comorbidities, cost the U.S. healthcare system approximately $190 billion, or 21% of medical spending, in 2005. Globally, there were more than 1.9 billion adults 18 years of age and older that were overweight or obese in 2014, according to the World Health Organization, or WHO. One of the most prevalent comorbidities of overweight and obesity is type 2 diabetes. In 2012, according to the CDC, approximately 26 million Americans had type 2 diabetes and 85% of these individuals were overweight or obese. Furthermore, there were an additional 86 million American adults 20 years of age and older that were considered prediabetic, with approximately 1.7 million new cases of type 2 diabetes diagnosed that year.

There are limited available treatments that address the overweight and obesity epidemic safely and effectively. Available therapies include pharmaceuticals and surgical interventions, including device implantation. These approaches are associated with safety concerns that limit their use. We believe that our product candidates, if approved, can be used to safely induce clinically relevant weight loss and improve glycemic control in overweight and obese populations, including those with prediabetes and type 2 diabetes.

 

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Gelesis100 is a novel hydrogel engineered to rapidly absorb and release water at specific locations in the GI tract. The hydrogel particles are synthesized through our multi-step, proprietary process using a specific form of modified cellulose and citric acid, both of which are considered GRAS by the FDA and commonly used in the food industry. In this process, we crosslink the modified cellulose with citric acid to form a three dimensional matrix, resulting in the desired properties of Gelesis100. Each Gelesis100 capsule contains thousands of hydrogel particles and each particle is approximately the size of a grain of salt. We designed the Gelesis100 capsule to be ingested with water before a meal. In the stomach, the hydrogel particles are released from the capsules and rapidly absorb water, hydrating to approximately 100 times their original size. When fully hydrated, each gel particle is, on average, approximately 2 mm in diameter and its elastic response (a measurement of the ability of matter to recover its original shape after deformation) is similar to that of ingested solid food. The hydrogel particles mix homogeneously with food and travel through the GI tract, inducing satiety and improving glycemic control through multiple mechanisms of action. Once in the large intestine, the particles partially degrade and release most of the water, which is reabsorbed by the body. The microscopic degraded particles are then are safely eliminated by the body in the same manner as food.

In addition to efficacy, safety is valued as a key weight loss product property by physicians and patients. We believe Gelesis100 will provide the following safety advantages over available therapies:

 

   

acts mechanically in the GI tract and is not absorbed into the blood stream, avoiding acute or chronic side effects caused by systemically acting therapies;

 

   

passes with food through the GI tract; no procedure is required for introduction or removal;

 

   

has a natural cycling effect similar to food, preventing habituation, adaptation, and irritation of the GI tract associated with some therapies; and

 

   

is engineered using components that are GRAS by the FDA and widely used in the food industry.

We have completed our 3 month proof of concept, First Loss Of Weight, or FLOW study, which was a 128-patient, randomized, double-blind, placebo-controlled, parallel-group study of Gelesis100 in overweight and obese patients, including prediabetics. This study was designed to demonstrate Gelesis100’s ability to induce weight loss in the target population. The study achieved statistically significant weight loss of 6.1% (2.0% placebo-adjusted) at 3 months with a 2.25 g dose of Gelesis100 administered twice daily. Placebo adjusted weight loss refers to weight lost by patients taking Gelesis100 after taking into account the weight lost by patients taking placebo. Patients in the Gelesis100 3.75 g arm had a total body weight loss of 4.5% (0.4% placebo-adjusted). In the Gelesis100 2.25 g arm, 43% of patients lost ³ 5% of their body weight and 26% lost ³ 10%. In a post-hoc analysis, the subset of prediabetic patients, defined as patients with a fasting blood glucose level ³ 100 mg/dL and <126 mg/dL, showed the most dramatic weight loss of 10.9% (5.3% placebo-adjusted) in the 2.25 g arm. Gelesis100 exhibited a safety profile that was similar to placebo with no serious adverse events observed.

In addition to weight loss, we observed statistically significant and clinically relevant improvement in glycemic control parameters. In a post hoc analysis, we observed conversion from prediabetes status at baseline to normal glucose status at the end of treatment, as measured by fasting blood glucose levels, in 56% of the prediabetic patients in the Gelesis100 2.25 g arm and 78% of the prediabetic patients in the Gelesis100 3.75 g arm compared to 27% in the placebo arm. This improvement, which was observed in both individuals who lost weight, or weight responders, and individuals who did not lose weight, or weight non-responders, suggests that both weight-dependent and weight-independent mechanisms may be involved in glycemic control. Patients in the Gelesis100 arms also showed improvement in insulin levels and insulin resistance as compared to placebo. We believe that these exploratory findings may provide an opportunity for us to pursue additional studies and a potentially separate glycemic control indication for our product candidates in the future.

 

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Gelesis100 capsules are administered orally like a drug but we expect that it will be regulated as a medical device because it does not achieve its primary intended purpose through chemical action within or on the body, and is not dependent upon being metabolized for the achievement of its primary intended purposes. Additionally, we have engaged in discussions with the Center for Devices and Radiological Health, or CDRH, a division of the FDA, which has indicated that Gelesis100 will be regulated as a medical device. However, we expect our product to be marketed, detailed, and prescribed through the same channels as currently available, orally administered weight loss pharmaceuticals.

We held a pre-submission meeting with the FDA to review the results of our FLOW study and to discuss the requirements for potential regulatory approval. In this meeting, the FDA stated that, at a minimum, the following co-primary endpoints would be required for a 6 month weight loss trial to support approval for a weight loss indication: (i) 3% placebo-adjusted weight loss with super superiority and (ii) 5% weight loss in at least 35% of patients on Gelesis100, regardless of placebo results. These endpoints take into account the safety profile demonstrated in the FLOW study and an assumption that a similar safety profile would be observed in the pivotal study.

We initiated our 6 month, Gelesis Loss Of Weight, or GLOW, study in November 2014. The GLOW study is a randomized, double-blind, placebo-controlled, parallel-group study being conducted in four European countries, to assess the effect of repeated administration of Gelesis100 on body weight and glycemic control in 168 overweight and obese patients, including those with prediabetes and mild type 2 diabetes. We define mild type 2 diabetics as patients with a fasting blood glucose level ³ 126 mg/dL and £ 145 mg/dL for those that are untreated and £ 145 mg/dL for those that are treated with metformin, a drug commonly prescribed for type 2 diabetics. The co-primary endpoints for the GLOW study are: (i) 3% weight loss difference between placebo and Gelesis100 and (ii) 5% weight loss in at least 35% of patients on Gelesis100, regardless of placebo results. The secondary endpoints include changes in key glycemic control parameters, including insulin levels, insulin resistance (HOMA-IR), fasting blood glucose and glycosylated hemoglobin, or HbA1c. We expect to report data from this study in the first half of 2016, and it could, subject to the outcome of our discussions with the European notified bodies, be the pivotal study for obtaining a CE Mark for a weight loss indication.

On March 4, 2015 we held a second pre-submission meeting with the FDA to discuss the statistical analysis plan for the GLOW study. In advance of this pre-submission meeting, the FDA provided us with initial feedback in which it designated the GLOW study as a significant risk study. During the meeting, we discussed their feedback and, as a result of these discussions, we believe that with limited protocol amendments per the FDA’s request, we will receive nonsignificant risk, or NSR, status for the GLOW study. If granted, this designation would allow us to expand the GLOW trial to include sites in the United States, in addition to the European sites. If we do not receive NSR status, we intend to complete the GLOW study in the European sites with no change in the scheduled data readout. Whether we receive NSR status or not, once we have completed the GLOW study, we intend to file for an Investigational Device Exemption, or IDE, for the FDA pivotal trial so that we can include a broader patient population, including those treated with medications for comorbidities. We expect to initiate the FDA pivotal trial in the second half of 2016 and submit data to the FDA in the first half of 2018, which would allow us to potentially launch Gelesis100 in the United States in first half of 2019.

With regards to the pediatric indication, we believe the Gelesis100 preclinical studies that have

been conducted and described herein are sufficient to support initiating a pediatric clinical trial. We expect that we will meet with the FDA to discuss the results of the preclinical studies in 2016 and carry out a safety and tolerability study followed by a POC study for weight loss, both beginning in 2017.

Our second product candidate, Gelesis200, is also a novel hydrogel developed from the same proprietary hydrogel technology platform as Gelesis100. Like Gelesis100, it will also be orally administered as a capsule. Gelesis200 was engineered to have different physical properties than Gelesis100 that we believe could provide additional benefits for specific subpopulations and indications. When compared to Gelesis100, Gelesis200 hydrates more rapidly and creates a higher elastic response and viscosity, but

occupies a slightly smaller volume in the stomach. We believe that these properties could make

 

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Gelesis200 more suitable as a glycemic control product for prediabetics and type 2 diabetics, who may or may not require weight loss. Gelesis200 is in pre-clinical development and we anticipate initiating clinical studies, including a 3 month proof of concept study, in the second half of 2015. We expect to report data for these clinical trials in the second half of 2016.

We have developed proprietary in-house manufacturing processes and know-how for the production of our product candidates. Our existing manufacturing facility operates under applicable quality system regulation, or QSR, requirements and has the capacity to supply clinical trial material for all current and planned trials through launch. We are currently in the advanced testing and process engineering stage of a new manufacturing line to produce commercial-scale quantities of Gelesis100. We plan to initiate the construction of this commercial-scale manufacturing line in North America in 2016, following successful completion of the GLOW study.

We currently retain worldwide sales and marketing rights for our product candidates. If approved by regulatory authorities, we intend to launch our product candidates by establishing internal sales and marketing teams or collaborating with strategic partners. We currently expect our lead product candidate, Gelesis100, if approved for the initial indication of weight loss in overweight and obese patients, will be launched in 2019 in the United States. Following successful completion of the GLOW study, we intend to file for a CE Mark for the initial indication of weight loss for overweight and obese patients for Gelesis100 in Europe. Upon receipt of a CE Mark, we intend to launch Gelesis100 in certain European countries as early as 2018 through strategic collaborations with established sales and marketing partners.

Gelesis was founded in 2006 to develop products that safely induce weight loss in overweight and obese patients. In conjunction with our formation, we gathered key obesity opinion leaders to identify the characteristics of an ideal anti-obesity product. The key attributes identified through this process were a non-systemic mechanism of action and a balanced profile of safety and efficacy. In particular, these experts focused on a product profile with a natural cycling effect similar to ingested food that would be non-invasive and require no procedure for introduction or removal. With these parameters in mind, we initiated a worldwide search, identified potential technologies, and evaluated each through extensive research, which resulted in our hydrogel technology. We committed our full resources to further develop our hydrogel technology that enables our products. We believe this technology is a breakthrough in material science as it is the first and only superabsorbent hydrogel that is constructed from building blocks used in foods and specifically engineered to achieve its medical purpose.

Our Product Candidates

The following table summarizes the current and expected development status of our product candidates.

 

LOGO

 

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Our Strategy

Our goal is to be a leader in the discovery, development, and commercialization of hydrogel products that safely induce weight loss in overweight and obese patients. We also seek to expand the application of our product candidates for the improvement of glycemic control in prediabetic and type 2 diabetic patients. We seek to address these patient populations by developing effective products that have a favorable safety profile and will avoid the risk of serious side effects and complications associated with systemically acting and surgical treatment options, enabling widespread use. Our strategy has the following elements:

 

   

Continue clinical development and seek regulatory approval of Gelesis100 for weight loss in overweight and obese patients, including those with prediabetes and type 2 diabetes.    Based on the results of the FLOW trial, we initiated our GLOW trial in November 2014 and, upon completion and achievement of study objectives, we will seek a CE Mark for a weight loss indication. Unlike the FLOW study, which did not include type 2 diabetic patients, the GLOW study will include mild type 2 diabetic patients. In the United States, we expect GLOW to serve as a 6 month proof of concept trial for weight loss, which is the primary indication we expect to submit for approval by the FDA. We intend to initiate additional post-marketing clinical studies to study the effect of chronic administration of Gelesis100 for a period of up to two years.

 

   

Expand the potential applications of our technology to include glycemic control in the prediabetic and type 2 diabetic patient populations.    Based on the statistically significant improvement in some glycemic parameters observed in both weight responders and weight non-responders in the FLOW study, we designed our second product candidate, Gelesis200, to have differentiated physical properties that we believe could provide additional benefits for improved glycemic control in prediabetics and type 2 diabetics who may or may not require weight loss. Gelesis200 is in pre-clinical development and we anticipate initiating the first clinical study in the second half of 2015.

 

   

Continue to develop a strong intellectual property position to maintain our leadership in hydrogel products for weight loss and improvement in glycemic control.    We own patents and have patents pending covering composition of matter and methods of using and producing our hydrogel technology. Patents covering uses of our technology for treating obesity and reducing caloric intake have been granted or allowed in the United States, Europe and several other territories providing protection until at least 2027 and potentially longer based on regulatory extensions, if applicable, or our pending patent applications, should they be granted. In addition, we rely on know-how, trade secrets, and continuing technological innovation to develop and maintain our proprietary position. We plan to file additional patent applications to protect the new developments and findings of our research and development and regularly monitor commercial activity to guard against potential infringement.

 

   

Expand our existing manufacturing efforts to provide commercial scale manufacturing capability.    We have developed proprietary processes and manufacturing technologies for the production of Gelesis100 and we believe our capabilities and know-how will allow us to commercialize Gelesis100 and future product candidates quickly, efficiently, and cost-effectively. Our existing facility has the capacity to supply clinical trial material for all current and planned trials. We are currently in the advanced testing and process engineering stage of a new manufacturing line to produce commercial-scale quantities of Gelesis100. We plan to initiate the construction of this commercial-scale manufacturing line in North America in 2016 to support a full commercial launch of Gelesis100, subject to approval by applicable regulatory authorities.

 

   

Maximize the commercial value of our product candidates.    We retain worldwide sales and marketing rights for our product candidates and intend to launch our products by

 

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establishing internal sales and marketing teams or collaborating with strategic partners. We anticipate that certain strategic relationships may provide access to additional geographies, substantial experience in the commercialization of anti-obesity agents, and/or the development of additional indications for our product candidates.

Market Overview

Obesity and Type 2 Diabetes in the General Population

Obesity is a serious medical condition that is growing rapidly in prevalence worldwide. It was recently designated by the American Medical Association, or AMA, as a “multi-metabolic and hormonal disease state.” Between 1988 and 1994, 22% of adults in the United States 20 years of age and older, or approximately 39 million, were obese according to a recent CDC report. However, by 2012, this number had risen to 35% or approximately 81 million, representing a 107% increase. Furthermore, the CDC reported that an additional 34% of adults in the United States 20 years of age and older, or approximately 79 million, were overweight, with many of these individuals expected to cross the threshold into obesity in the near future. Globally, there were more than 1.9 billion adults 18 years of age and older that were overweight, of which approximately 600 million were obese in 2014, according to the WHO.

In addition to the adult population, the pediatric population is also suffering from an obesity epidemic. According to the CDC, obesity in the United States has more than doubled in children and quadrupled in adolescents in the past 30 years. In 2012, more than one-third of children and adolescents were overweight or obese. According to a study in the American Journal of Clinical Nutrition, 43 million children globally were estimated to be overweight or obese in 2010, with an additional 92 million at risk of becoming overweight.

The designations “overweight” and “obese” are based on the thresholds of body mass index, or BMI, which measures weight on a height-adjusted basis. A person with a BMI of 30 or greater is typically classified as obese, while a person with a BMI of between 25 and 30 is typically classified as overweight. BMI is considered the standard within the medical community for measuring body fat and is recommended by the National Institutes of Health, or NIH, as a guide for the classification of overweight and obese patients.

There are a number of comorbidities caused by being either overweight or obese. The treatment of obese patients, and their associated comorbidities, cost the U.S. healthcare system approximately $190 billion, or 21% of medical spending in 2005. Approximately 300,000 people in the United States die each year as a result of obesity and its associated comorbidities, according to the Department of Health and Human Services, or HHS. According to the WHO, 44% of diabetes diagnoses, 23% of ischemic heart disease diagnoses, and a significant percentage of certain cancer diagnoses can be attributed to being either overweight or obese.

Because people who are obese are much more likely to develop type 2 diabetes, the increase in obesity rates has contributed significantly to the increase in the number of patients diagnosed with type 2 diabetes (defined by a fasting blood glucose level ³ 126 mg/dL). According to the American Diabetes Association, or ADA, diabetes was the seventh leading cause of death by disease in the United States in 2010. In 2012, approximately 26 million Americans suffered from type 2 diabetes, of whom greater than 85% were overweight or obese. An additional 86 million American adults 20 years of age and older were considered prediabetic (defined by a fasting blood glucose level ³ 100 mg/dL and < 126 mg/dL), with approximately 1.7 million new diagnoses of type 2 diabetes per year. Based on current trends, as many as one in three Americans will develop type 2 diabetes in their lifetime. According to the ADA, the economic impact of diagnosed diabetes was estimated to be $245 billion in 2012, approximately $176 billion of which was attributed to direct medical costs, and approximately $69 billion of which was attributed to reduced productivity.

 

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Although obesity and type 2 diabetes have been repeatedly cited as leading public health concerns both in the United States and worldwide, these patient populations continue to grow at an alarming rate. Furthermore, this trend is expected to persist due to the prevalence of high calorie foods with low nutritional value combined with an increasingly sedentary lifestyle. An effective treatment with minimal side effects is needed to slow and ultimately reverse the progression of obesity to address type 2 diabetes and other potentially life-threatening comorbidities.

Limitations of Current Treatments

Current treatments for overweight or obese patients include behavioral modification, pharmaceutical therapies, surgery, and device implantation. Behavioral modification focused on diet and exercise is typically prescribed as an initial treatment for an overweight or obese patient. However, behavioral modification frequently fails to produce adequate weight loss due to poor compliance and other limiting factors. In conjunction with behavioral modification, pharmaceutical therapies are approved for use by patients with a BMI of 27 or greater with at least one comorbidity, and all patients with a BMI of 30 or greater. Bariatric surgery, including gastric bypass and gastric banding procedures, is typically limited to severely obese patients with a BMI of greater than 40 or greater than 35 with at least one comorbidity. Although these procedures can produce dramatic weight loss results in this population, they come with a multitude of risks, including those inherent in surgery, such as death.

There are multiple pharmaceutical products approved for weight loss in overweight and obese patients, including products such as Qsymia (phentermine/topiramate), Belviq (lorcaserin), and Contrave (naltrexone/bupropion). The table below summarizes the safety and efficacy of these treatments, as stated in “Pharmacological Management of Obesity: An Endocrine Society Clinical Practice Guideline” published in the Journal of Clinical Endocrinology & Metabolism in January 2015.

 

Drug (Generic)

 

Weight Loss Above Diet and
Lifestyle Alone, Mean Weight
Loss,% or kg*; Duration of
Clinical Studies

 

Common Side Effects

 

Contraindications

Lorcaserin   3.6 kg (7.9 lb), 3.6%; 1y   Headache, nausea, dry mouth, dizziness, fatigue, constipation  

Pregnancy and breastfeeding

Use with caution: SSRI, SNRI/MAOI, St John’s wort, triptans, buproprion, dextromethorphan

Phentermine (P)/ topiramate (T)  

6.6 kg (14.5 lb) (recommended dose), 6.6%

8.6 kg (18.9 lb) (high dose), 8.6%; 1y

  Insomnia, dry mouth, constipation, paraesthesia, dizziness, dysgeusia   Pregnancy and breastfeeding, hyperthyroidism, glaucoma, MAOI, sympathomimetic amines
Naltrexone/bupropion   4.8%; 1y   Nausea, constipation, headache, vomiting, dizziness   Uncontrolled hypertension, seizure disorders, anorexia nervosa or bulimia, drug or alcohol withdrawal, MAOI

 

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Abbreviations:

   SSRI, selective serotonin reuptake inhibitor;
   SNRI, serotonin-norepinephrine reuptake inhibitor;
   MAOI, monoamine oxidase inhibitor.
* Mean weight loss in excess of placebo as percentage of initial body weight or mean kilogram weight loss over placebo.

All of these products act through mechanisms that require the product to be absorbed into the patient’s blood stream. As a result, these products carry the risk of systemic side effects, such as adverse gastrointestinal, cardiovascular and central nervous system effects, some of which can be serious or even life threatening. Each of these approvals has also been accompanied by requirements for post-marketing safety studies to assess the safety of long-term treatment, with an emphasis on potential adverse cardiovascular side effects. In addition, Qsymia and Belviq are designated as Schedule IV controlled substances due to their potential for abuse. Furthermore, in connection with its approval of Qsymia, the FDA required a Risk Evaluation and Mitigation Strategy, or REMS, program to inform prescribers and women with the potential to become pregnant about the increased risk of congenital malformation in infants exposed to Qsymia in early pregnancy, as well as limiting access to certified pharmacies. The Contrave label includes a black box warning from the FDA to alert health care professionals and patients to the increased risk of suicidal thoughts and behaviors, as well as serious neuropsychiatric events, associated with bupropion. These drugs also compete against generic forms of phentermine, topiramate, naltrexone, and bupropion. None of these products have been approved for use in pediatric patients.

In 2013, fewer than 500,000 U.S. prescriptions were given for these pharmaceutical therapies in the aggregate, accounting for less than 1% of the obese population in the United States. We believe that this treatment rate substantially understates the potential demand for safe and effective weight loss therapies. In the mid-1990s, fenfluramine or dexfenfluramine were used off-label in combination with phentermine, together known as “fen-phen,” and demonstrated significant weight loss. At its peak in 1996, before fenfluramine and dexfenfluramine were withdrawn for safety issues, fen-phen, along with other prescribed pharmaceuticals, represented over 20 million total U.S. prescriptions, according to IMS Health. This represented over $300 million in sales over the 18 months, from its approval in April 1996 to its withdrawal from the market in September 1997. We believe this history, combined with the substantial economic cost associated with obesity and its related comorbidities, underscores the unmet need and potential for novel products to dramatically grow the market for obesity therapies.

The current treatment paradigm for prediabetes and type 2 diabetes focuses on lifestyle changes, including weight loss, if applicable, as well as medications to manage blood glucose levels. Weight loss alone is associated with improvements in glycemic parameters. Therapeutic interventions, both oral and injectable, are used extensively and are effective in addressing glycemic control in these patients. However, weight loss therapies are generally not prescribed to this patient population. In particular, prediabetics are generally limited to diet and exercise to induce weight loss. We believe Gelesis100 may provide an opportunity for physicians to prescribe a weight loss therapy to prediabetic and type 2 diabetic patients that is both safe and effective, while also providing the added benefit of improved glycemic control.

Gelesis100

Our lead product candidate, Gelesis100, is a novel hydrogel comprised of a specific modified cellulose synthesized with citric acid. It is administered orally in a capsule that is designed to be taken with water before meals. We have completed a 128-patient proof of concept clinical study, the FLOW study, for Gelesis100 that achieved statistically significant weight loss in overweight and obese patients, including those with prediabetes, over a 3 month period. Furthermore, we observed clinically relevant improvement of glycemic parameters, such as insulin levels, insulin resistance, and fasting blood glucose. In a post-hoc analysis, we observed conversion from prediabetes status at baseline to normal glucose status at the end of treatment in 56% of the prediabetic patients in the Gelesis100 2.25 g arm and 78% of the prediabetic

 

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patients in the Gelesis100 3.75 g arm, as compared to 27% in the placebo arm. Gelesis100 exhibited a safety profile that was similar to that of placebo with no serious adverse events observed. We believe Gelesis100 will provide the following safety advantages over currently available therapies:

 

   

acts mechanically in the GI tract and is not absorbed into the blood stream, avoiding acute and chronic side effects caused by systemically acting therapies;

 

   

passes with food through the GI tract with no procedure required for introduction or removal;

 

   

has a natural cycling effect similar to food, preventing the habituation, adaptation, and irritation of the GI tract associated with some therapies, such as gastric balloons; and

 

   

is engineered using components that are GRAS by the FDA and widely used in the food industry.

Mechanisms of Action

Gelesis100 is designed to act mechanically throughout the GI tract, with multiple and potentially synergistic mechanisms of action at play that may impact hunger, satiety and appetite. Based on our preclinical in vitro and in vivo studies, we hypothesize that the following mechanisms are present:

 

   

increased volume of stomach contents caused by our non-caloric hydrogel (a single dose of 2.25 g Gelesis100, when hydrated, will occupy approximately 20% of average stomach volume);

 

   

delayed gastric emptying of the stomach due to increased elasticity of the stomach contents; and

 

   

increased viscosity of small intestine contents resulting in slowed absorption of glucose into the bloodstream.

 

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The figure and numbered paragraphs below describe how Gelesis100 flows through the GI tract and the corresponding mechanisms of action.

 

LOGO

(1) Twenty to thirty minutes before a meal, Gelesis100 capsules are taken with two glasses of water, which are consumed over 5 to 10 minutes.

(2) The gelatin capsules are dissolved in the water, releasing thousands of individual Gelesis100 particles.

(3) The particles absorb water, increase in volume by approximately 100 times and mix homogeneously with ingested food, producing an increased feeling of satiety.

(4) As the food is gradually digested and liquefied in the stomach, the hydrogel particles are not digested and maintain a higher elastic response of the stomach contents, which may result in slower gastric emptying that, in turn, prolongs post-meal satiety. The Gelesis100 particles are designed to partially shrink in size as the pH of the stomach contents naturally decreases.

(5) Upon transition to the small intestine, the particles fully hydrate again to approximately 100 times their original size as a result of the higher pH of the small intestine, increasing the viscosity, or thickness, of the small intestine contents. The increased viscosity of the contents of the small intestine delays the absorption of glucose into the blood stream, improving glycemic control.

(6) Upon transition into the large intestine, the three-dimensional matrix structure of the Gelesis100 particles is degraded by digestive enzymes naturally present in the human GI tract, resulting in the release of most of the water, which is then reabsorbed in the body.

During this process, there are several relevant characteristics of Gelesis100 that we believe ensure that the hydrogel travels safely through the body:

 

   

no additional volume is created in the stomach beyond the volume of liquid present, reducing bloating and improving tolerability;

 

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particles do not cluster or stick together and, when hydrated in the stomach, have similar dimensions as ingested solid food, reducing the risk of obstruction in any part of the GI tract;

 

   

rheological properties (e.g., elastic response and viscosity) are similar to ingested solid food without adding caloric value, minimizing irritation and allowing normal flow in the GI tract; and

 

   

particles partially degrade in the large intestine, releasing most of the water that is reabsorbed by the body, reducing the risk of dehydration or diarrhea.

Key Physical Properties

Based on our in vitro and in vivo research, as well as additional supporting references in the fields of rheology (the study of consistency and flow of matter), satiety, and glycemic effects, we believe that there are three key physical properties which influence the safety and efficacy profile of our products:

 

   

hydration capacity:    the amount of water absorbed by the hydrogel;

 

   

viscoelastic properties:    the elastic response (a measurement of the ability of matter to recover its original shape after deformation) and viscosity (thickness) of the hydrogel; and

 

   

water absorption and release rates:    the length of time needed for the hydrogel to absorb and release water.

We engineered these key physical properties of Gelesis100 to function in response to the different physiological conditions in each part of the GI tract, such as pH levels or local enzymes, in order to serve its intended purpose:

Progression of Gelesis100 through the GI Tract

 

Property         Stomach     LOGO     Small Intestine     LOGO   Large Intestine    
Hydration Capacity   Gelesis100 absorbs water in the stomach expanding in volume up to 100 times its size. A single dose creates a non-caloric volumetric effect to enhance satiety.   Maximal hydration of the hydrogel also occurs in the small intestine to reduce the amount of liquids and increase the amount of solids. Since diffusion through solids is slower, glucose absorption is delayed.   Hydration capacity is decreased through enzymatic hydrolysis of the cross-links that degrades the three dimensional structure and releases the absorbed water in the large intestine, which is reabsorbed, reducing the risk for dehydration or diarrhea.
Viscoelastic Properties   Higher hydrogel elastic response in the stomach slows down gastric emptying and, in turn, prolongs post-meal satiety.   Higher hydrogel viscosity in the small intestine delays glucose absorption and contributes to the improvement of glycemic control.   Not applicable due to the degradation of the hydrogel.
Water Absorption and Release Rates   Shorter hydrogel water absorption time in the stomach allows for a relatively immediate volumetric effect.   Shorter hydrogel water absorption time in the small intestine allows for a relatively immediate effect on the absorption of glucose.   Particle degradation and water release occurs at the anatomical site where ingested water is normally absorbed.

 

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We developed an in vitro simulation model to demonstrate the change in the hydration capacity of the hydrogel through the GI tract. This study involved placing the hydrogel in simulated stomach, small intestine, and large intestine media, each with different representative fluids that had similar properties to those found in the body. The graph below presents the results of the simulation over 480 minutes, or eight hours.

Hydration Capacity of Gelesis100

 

LOGO

Gelesis100’s hydration capacity is largely dependent on pH and achieves full hydration in the GI tract when pH is above 4. The actual hydration profile will also vary based on the size and type of the meal consumed. For example, a large meal rich with fat and protein could maintain a higher pH in the stomach for a longer period of time than shown above, whereas a small meal with minimal fat and protein would maintain it for a shorter period of time. The stomach pH immediately increases when eating commences, which allows for maximum hydration capacity of the hydrogel. During the natural digestion process, the pH gradually decreases (time point 60 to 180) and the hydrogel hydration capacity is reduced. When the stomach contents are cleared into the small intestine, the hydrogel begins to rehydrate (time point 180) due to the higher natural pH of the small intestine. As the contents pass into the large intestine (time point 360), the hydrogel hydration capacity is reduced once again, but not due to a change in pH. Rather, the degradation by enzymes in the large intestine results in permanent reduction of most of the hydration capacity of the hydrogel.

Completed Clinical Trials

Two clinical studies were conducted in overweight and obese patients, the FLOW study and the Acute Satiety study. We have initiated an additional larger clinical study, the GLOW study, in overweight and obese patients including those with prediabetes and mild type 2 diabetes to assess the efficacy of Gelesis100 over a longer period of time on a broader patient population.

FLOW (First Loss Of Weight) Study: Effect on Body Weight

FLOW was a 3 month study to determine the effect of repeated administration of Gelesis100 on body weight in overweight and obese patients. The study was conducted at five leading obesity centers in three countries. One hundred and twenty eight patients, with a mean BMI of 31.7, were randomized into three

 

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arms: Gelesis100 at a 2.25 g dose, Gelesis100 at a 3.75 g dose, and placebo. Patients ingested either Gelesis100 or placebo 20 to 30 minutes before lunch and dinner with two glasses of water. The placebo capsules contained microcrystalline cellulose, a non-digestible fiber and bulking agent with low water absorption capacity and potential weight loss properties. All patients received dietary counseling designed to reduce their caloric intake by 600 kcal/day below their daily requirement. The intention-to-treat, or ITT, population included 125 patients who had at least one post-baseline assessment of body weight. Forty-two of the ITT patients were on Gelesis100 2.25 g, 41 on Gelesis100 3.75 g, and 42 on placebo. One hundred ten patients completed the key visit of the study at Day 87 for the assessment of body weight. One hundred twenty-six patients provided post-randomization safety data through Day 95. The primary efficacy endpoint of change in body weight from baseline was assessed by analysis of covariance (ANCOVA) model in the ITT population with baseline weight, gender, and BMI status as covariates (possible predictors of the outcome).

Body weight decreased significantly by Day 87 in patients on Gelesis100 2.25 g with a placebo-adjusted weight loss of 2.0% and a total body weight loss of 6.1%, while patients in the Gelesis100 3.75 g arm had a total body weight loss of 4.5% (0.4% placebo-adjusted). We believe the lower observed efficacy in the Gelesis100 3.75 g arm compared with the Gelesis100 2.25 g arm can be explained by two factors: lower tolerability and insufficient water intake. Patients in the Gelesis100 3.75 g arm reported GI AEs at a higher rate (76%) than patient in the Gelesis100 2.25 g arm (60%). In addition, 10 patients, or 24%, from the Gelesis100 3.75 g arm dropped out of the study, with 8 of the dropouts reporting GI AEs, as compared with two patients, or 5%, who dropped out from Gelesis100 2.25 g arm, with no GI AEs. When looking specifically at the nonresponders in each arm, in the Gelesis100 3.75 g arm, we observed a statistically significant increase in serum albumin (a surrogate marker for hemoconcentration, which is the decrease of the fluid content of the blood) of 1.8 g/L (p=0.01) compared with a decrease of 0.3 g/L in the placebo arm and a decrease of 0.7 g/L in the Gelesis100 2.25 g arm. To maintain a blinded study, the same volume of water was required at capsule administration for all arms in the trial. Our assumption was that the volume of water administered with the capsules, in addition to gastric fluids and liquids consumed during the meal, would be sufficient to hydrate both the Gelesis100 2.25 g dose and the Gelesis100 3.75 g dose. Based on the hemoconcentration observed in the nonresponders in the Gelesis100 3.75 g arm, we believe these patients did not drink enough liquids during the meal, resulting in the overall lower efficacy in this arm.

Weight loss was observed in both treatment arms, with 43% of patients in the Gelesis100 2.25 g arm and 46% of patients in the Gelesis100 3.75 g arm losing ³ 5% of their body weight. In addition, 26% of patients in the Gelesis100 2.25 g arm lost ³ 10% of their body weight. In the Gelesis100 2.25 g arm, 39% of obese patients converted to overweight and 29% of overweight patients converted to normal. Although these data are limited to weight loss at 3 months, based on the absence of a discernible weight loss plateau, we believe Gelesis100 could provide better weight loss results over a longer period when compared to FLOW study results.

The key results of this clinical trial are summarized below:

Mean Percentage Weight Change in ITT Population

 

Trial Arm

   Number of
patients
     Mean % Weight Change     p value (versus placebo)  

Placebo

     42         -4.1     —     

Gelesis100 2.25 g

     42         -6.1     0.026   

Gelesis100 3.75 g

     41         -4.5     0.859   

 

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Mean Percentage Weight Change Progression in ITT Population

 

LOGO

 

Body weight was measured at Day 87 approximately three days after last administration to allow full elimination of Gelesis100 from the GI tract.

In the study, the placebo arm achieved weight loss at 3 months that was comparable to that of some approved orally administered weight loss drugs. We believe that three factors may have resulted in higher than expected weight loss in the placebo arm: (i) the placebo, a microcrystalline cellulose, is a bulking agent that may have some weight loss properties (ii) ingestion of two glasses of water before lunch and dinner may result in weight loss (previous published studies have demonstrated that drinking water before meals could result in 1.3% weight loss over 3 months) and (iii) the prescribed reduction in caloric intake by 600 kcal/day below each patient’s daily requirement, or a 600 kcal/day deficit.

In a post-hoc analysis, the extent of weight loss at Day 87 was more pronounced in a subset of patients with a baseline fasting blood glucose > 93 mg/dL (median of the population). Patients in the Gelesis100 2.25 g arm had 3.8% placebo-adjusted weight loss and 8.2% total body weight loss, while patients in the Gelesis100 3.75 g arm had 0.5% placebo-adjusted weight loss and 4.9% total body weight loss.

 

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Mean Percentage Weight Change in ITT Population with

Baseline Fasting Blood Glucose > 93 mg/dL (Median of ITT)

 

Trial Arm

   Number of
patients
     Mean % Weight Change     p value (versus placebo)  

Placebo

     22         -4.4     —     

Gelesis100 2.25 g

     21         -8.2     0.006   

Gelesis100 3.75 g

     19         -4.9     0.925   

Mean Percentage Weight Change Progression in ITT Population with

Baseline Fasting Blood Glucose > 93 mg/dL (Median of ITT)

 

LOGO

 

 

Body weight was measured at Day 87 approximately three days after last administration to allow full elimination of Gelesis100 from the GI tract.

In another post-hoc analysis, the extent of weight loss at Day 87 was even more dramatic in the small subset of prediabetic patients, those with baseline fasting blood glucose ³ 100 mg/dL and < 126 mg/dL, on Gelesis100 2.25 g. The placebo-adjusted weight loss was 5.3% and the total body weight loss was 10.9%. Patients in the Gelesis100 3.75 g arm had 4.2% total body weight loss, which was less total body weight loss than observed with placebo.

 

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Mean Percentage Weight Change in ITT Population with

Baseline Fasting Blood Glucose ³ 100 mg/dL (Prediabetic)

 

Trial Arm

   Number of
patients
     Mean % Weight Change     p value (versus placebo)  

Placebo

     11         -5.6     —     

Gelesis100 2.25 g

     9         -10.9     0.019   

Gelesis100 3.75 g

     9         -4.2     0.348   

Mean Percentage Weight Change Progression in ITT Population with

Baseline Fasting Blood Glucose ³ 100 mg/dL (Prediabetic)

 

LOGO

 

 

Body weight was measured at Day 87 approximately three days after last administration to allow full elimination of Gelesis100 from the GI tract.

There was a statistically significant negative correlation between fasting blood glucose at baseline and change in body weight at Day 87 in the Gelesis100 2.25 g arm (r = -0.50; p < 0.001) contrasting with a lack of statistically significant correlation in the placebo arm (r = -0.06; p = 0.708). There was no correlation observed in the Gelesis100 3.75 g arm (r = -0.01; p = 0.968).

 

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Comparison of Mean Percentage Weight Change in ITT Population and Certain Subpopulations

 

Trial Arm

  

Mean% Weight Change

ITT Population

    

Mean% Weight Change

Baseline Fasting Blood
Glucose > 93 mg/dL

    

Mean% Weight Change

Baseline Fasting Blood
Glucose ³ 100 mg/dL

 

Placebo

     -4.1%(n=42)         -4.4%(n=22)         -5.6%(n=11)   

Gelesis100 2.25 g

     -6.1%(n=42)         -8.2%(n=21)         -10.9%(n=9)   
  

 

 

    

 

 

    

 

 

 

Difference

     -2.0%         -3.8%         -5.3%   

Patients in the Gelesis100 2.25 g arm with higher fasting blood glucose lost more weight than patients in the same treatment arm with lower fasting blood glucose. Based on these findings, we have expanded our inclusion criteria for the GLOW study to include mild type 2 diabetic patients, defined as patients with a fasting blood glucose level ³ 126 mg/dL and £ 145 mg/dL for those that are untreated and £ 145 mg/dL for those that are treated with metformin. We have also designed the trial to ensure good representation of the prediabetic population, defined as those with a fasting blood glucose level ³ 100 mg/dL and < 126 mg/dL.

We conducted pre-defined, exploratory analyses of a number of biochemical variables, including variables related to glycemic control. Plasma glucose decreased significantly by Day 87 in patients on Gelesis100 2.25 g. Mean changes from baseline to the end of treatment were -5.8% with Gelesis100 2.25 g, -3.3% with Gelesis100 3.75 g, and 1.2% with placebo. In addition to blood glucose, statistically significant improvements in insulin levels and insulin resistance were observed with Gelesis100. Conversion from prediabetes status at baseline (n = 29) to normal glucose status at the end of treatment was observed in 56%, 78%, and 27% of the patients, with Gelesis100 2.25 g, Gelesis100 3.75 g, and placebo, respectively. The improvement of glycemic control with Gelesis100 was observed in both weight responders (³ 5% weight loss) and weight non-responders (< 5% weight loss). When compared with Gelesis100 2.25 g, patients in the Gelesis100 3.75 g arm had an overall superior improvement in glycemic control parameters, despite a smaller decrease in body weight. This further supports the hypothesis that some of the underlying mechanisms for glycemic control may differ from those involved in weight loss. No patients in the study developed hypoglycemia.

Mean Percentage Change in Glycemic Parameters in ITT Population

 

Trial Arm

   Number of
patients
     Mean % Plasma
Glucose Change
    p value
(versus placebo)
 

Placebo

     42         1.2     —     

Gelesis100 2.25 g

     41         -5.8     0.003   

Gelesis100 3.75 g

     39         -3.3     0.057   

 

Trial Arm

  Number of
patients
    Mean % Insulin
Change
    p value
(versus placebo)
    Mean % Insulin
Resistance
(HOMA-IR)  Change
    p value
(versus placebo)
 

Placebo

    42        24.4     —          28.8     —     

Gelesis100 2.25 g

    41        -7.6     0.053        -12.1     0.025   

Gelesis100 3.75 g

    39        -14.1     0.022        -16.6     0.016   

The levels of major electrolytes (sodium, potassium, calcium and magnesium) and hematocrit remained stable after 3 months of exposure to Gelesis100. The changes from baseline to the end of treatment were not clinically relevant, indicating that Gelesis100 did not have an adverse effect on absorption of electrolytes.

 

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Mean Change in Electrolytes and Hematocrit in ITT Population

 

Trial Arm

  Number  of
patients(1)
     Sodium
Change
(mmol/L)
     Potassium
Change
(mmol/L)
     Calcium
Change
(mmol/L)
     Magnesium
Change
(mmol/L)
     Hematocrit
% Change
 

Placebo

    42         -0.4         0.0         -0.01         -0.03         0.2%   

Gelesis100 2.25 g

    42         0.3         -0.1         -0.01         -0.04         0.4%   

Gelesis100 3.75 g

    41         -0.1         0.1         0.01         0.00         0.7%   

 

(1) 

Assessment is missing in up to four subjects for some parameters in each arm due to insufficient blood samples or technical laboratory issues.

GI adverse events, or AEs, were collected using a solicited questionnaire. Thirty one patients, or 74%, on Gelesis100 2.25 g, 35 patients, or 85%, on Gelesis100 3.75 g, and 36 patients, or 84%, on placebo reported at least one AE during the study (mainly GI AEs). There was a lower prevalence of the most common GI AEs, bloating (29%), flatulence (26%), abdominal pain (21%), and diarrhea (19%), in the Gelesis100 2.25 g compared to both the placebo and Gelesis100 3.75 g arms. Frequency of GI AEs observed in the obese population (BMI = 30-35) of Olmsted County, Minnesota (n=1,962), published in the American Journal of Gastroenterology in 2004, were similar to those observed in the FLOW study and included bloating (25.3%), upper abdominal pain (16.7%), and diarrhea (26.6%).

Common cold and headache were the most common non-GI AEs. The AEs were usually of mild intensity, occurred at varying times during the course of the study, and resolved within one week in most cases. Serious AEs, or SAEs, were observed in three patients on placebo (gallstone and abdominal pain). Dropout after randomization occurred in 2 patients (5%) on Gelesis100 2.25 g, 10 patients (24%) on Gelesis100 3.75 g, and 9 patients (21%) on placebo. All dropouts in the Gelesis100 3.75 g arm reported AEs. However, no AE was responsible for dropouts in the Gelesis100 2.25 g arm.

Prevalence of Adverse Events in Safety Population

 

Trial Arm

   Number of
patients
     Any AE     Any GI AE     Any SAE     Dropouts  

Placebo

     43         84     74     7     21

Gelesis100 2.25 g

     42         74     60     0     5

Gelesis100 3.75 g

     41         85     76     0     24

Prevalence of Most Common GI Adverse Events in Safety Population

 

Trial Arm

   Number of
patients
     Bloating     Flatulence     Abdominal Pain     Diarrhea  

Placebo

     43         37     30     35     37

Gelesis100 2.25 g

     42         29     26     21     19

Gelesis100 3.75 g

     41         37     37     29     24

The FLOW study has provided us with preliminary evidence that Gelesis100 induces statistically significant weight loss in overweight and obese patients, including prediabetics. In addition, the improvement in glycemic control, observed in both weight responders and weight non-responders, suggests that our technology could improve glycemic control independent of weight loss. These results were achieved with a safety profile that was similar to placebo with no serious adverse events observed. Based on these results, and the feedback from the FDA, we have initiated further clinical development of Gelesis100 and our other product candidates.

 

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Acute Appetite Study: Acute Effect on Satiety and Hunger

Prior to our acquisition of the Gelesis100 technology, the acute appetite study was designed and conducted by its inventors. This study assessed the effects of a single administration of an earlier formulation of Gelesis100 on satiety and hunger and demonstrated an increase in post-meal satiety and a decrease in pre-meal hunger. Ninety-five patients who were either normal weight, overweight, or obese (mean BMI = 31) were studied at a single European site. Study patients received capsules containing 2 g of Gelesis100 or placebo 30 minutes before breakfast, lunch, and dinner, in a double-blind, cross-over design. Satiety was self-reported 30 and 60 minutes after each meal and hunger was self-reported 30 minutes before each meal. The key results showed a statistically significant (defined by a p-value <0.05) increase in satiety versus placebo 30 minutes after breakfast (p = 0.037) and 60 minutes after lunch (p = 0.007) and dinner (p = 0.006). There was no decrease in hunger before lunch but a there was a significant decrease before dinner (p = 0.011) when Gelesis100 was taken before lunch.

Current Clinical Trial(s)

GLOW (Gelesis Loss Of Weight) Study: Effect on Body Weight and Glycemic Control

The GLOW study, a randomized, double-blind, placebo-controlled, parallel-group study, is intended to assess the effect of repeated administration of Gelesis100 over 6 months on body weight and glycemic control parameters in 168 overweight and obese patients, including those with prediabetes and mild type 2 diabetes. Our co-primary endpoints for the GLOW study are placebo-adjusted weight loss ³ 3% and weight loss of at least 5% in ³ 35% of patients on Gelesis100, regardless of placebo results. The secondary endpoints include changes in key glycemic control parameters, including insulin levels, insulin resistance (HOMA-IR), fasting blood glucose, and HbA1c. In the study, Gelesis100 or placebo is taken twice daily, approximately 30 minutes before lunch and dinner. As a result of our discussion with the FDA we are using sucrose as the placebo in the GLOW Study. This will result in an intake of less than 20 calories per day, which we believe will have a negligible effect on weight loss and glycemic parameters. Patients have been placed on a hypocaloric diet (deficit of 300 kcal/day) and asked to perform moderate intensity exercise. The GLOW study commenced in November 2014, and we expect to report data in the first half of 2016.

The GLOW study includes mild type 2 diabetics, which we define as patients with a fasting blood glucose level ³ 126 mg/dL and £ 145 mg/dL for those that are untreated and £ 145 mg/dL for those that are treated with metformin. This differs from the FLOW study, which included only normal and prediabetic patients. We anticipate that the GLOW study could, subject to the outcome of our discussions with the European notified bodies, be the pivotal study for obtaining a CE Mark for a weight loss indication.

The GLOW study will also serve as a 6 month proof of concept study in the United States for weight loss and improvement of glycemic control in overweight and obese patients, including those with prediabetes and mild type 2 diabetes.

Upcoming Clinical Trial(s)

FDA Pivotal Trial

For purposes of regulatory approval in the United States, we believe Gelesis100 will be classified as a medical device based on our discussions with the FDA. Subsequent to the GLOW study, we will need to complete a pivotal trial in order to request premarket approval, or a PMA, from the FDA for a weight loss indication. In addition, based on the safety profile exhibited in the FLOW study, we have received guidance from the FDA that indicates that a 6 month study, as opposed to the one-year study generally required for weight loss pharmaceuticals, may be sufficient for approval of a weight loss indication.

We intend to use the data from both the FLOW and GLOW studies to design the pivotal study for a weight loss indication for Gelesis100 in the United States. We expect to initiate this study in 2016 and submit data to the FDA in 2017, which would allow us to potentially launch Gelesis100 in the United

 

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States in first half of 2019. Because we expect to include a broader patient population in the pivotal trial that includes patients that are treated for comorbidities common in overweight and obese populations, we believe that the pivotal trial will have a different risk profile from the GLOW study and we intend to file for an IDE for our Gelesis100 U.S. pivotal trial.

Drug-Device Interaction Studies

We plan to conduct studies to assess the interaction between Gelesis100 and drugs commonly prescribed in the target population (e.g., metformin, antihypertensives, antidyslipidemics, oral antidiabetics, and oral anticoagulants). We expect to initiate these studies in the second half of 2015 and complete them before the initiation of the FDA pivotal study in the second half of 2016.

Acute and Short-Term Mechanistic Studies

We plan to conduct additional studies to assess the mechanisms of action related to appetite and glycemic control parameters and to allow for further optimization of treatment regimens. We are currently in the early planning stages of these studies and expect to initiate these studies in 2015 or 2016.

Pre-Clinical Studies

We have carried out pre-clinical animal studies indicating that Gelesis100 is biocompatible (able to perform its intended function without being harmful to living tissue). In addition, there is an extensive body of scientific literature demonstrating the biocompatibility of the two building blocks of Gelesis100, a specific modified cellulose and citric acid. Our studies revealed no signs of mutagenicity or genotoxicity, no toxicological findings (based on observation or fine histopathology), and no significant effects on fecal production or moisture levels.

Gelesis200

Our second product candidate, Gelesis200, is similar in concept to Gelesis100, but has different physical properties that we believe could address different indications and treatment regimens. When compared to Gelesis100, Gelesis200 hydrates more rapidly and creates a higher elastic response and viscosity, but occupies a slightly smaller volume in the stomach. For example, due to its higher elastic response and accelerated hydration, Gelesis200 could be more suitable for glycemic control, where one relevant mechanism is the delay of the absorption of glucose in the small intestine. For this purpose, the volumetric effect at the beginning of the meal could be less important and Gelesis200 could be administered immediately prior to the meal. We believe that these properties could make Gelesis200 more suitable as a glycemic control product for prediabetics and type 2 diabetics, who may or may not require weight loss. Gelesis200 is in pre-clinical development and we anticipate initiating clinical studies, including a 3 month proof of concept study, in the second half of 2015. We expect to report data for these clinical trials in the second half of 2016.

Upcoming Clinical Trial(s)

Safety and Dose-Ranging Study

We are in the advanced planning stage for the safety and dose-ranging study of Gelesis200. This trial will be a randomized, double-blind, placebo-controlled, cross-over study assessing the safety and the effects on appetite and glycemic control parameters and food intake of three amounts of Gelesis200 in 20 overweight and obese patients.

Human Proof of Concept Study

We plan to initiate a 3 month human proof of concept study to determine the effect of repeated administration of Gelesis200 on body weight and glycemic control in overweight and obese patients, including those with prediabetes. The study will be conducted at several sites worldwide. About one

 

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hundred and twenty patients, within a BMI range of 27 to 40, will be randomized into three treatment arms, including placebo. All patients will receive dietary counseling designed to reduce their caloric intake by 300 kcal/day below their daily requirement.

Pre-Clinical Studies

We have carried out in vitro characterization and performance testing to further explore the properties of Gelesis200. These tests are mainly performance related, and include testing properties such as water absorption and release rates, viscoelasticity, hydration capacity, and particle size distribution. With respect to safety, there is an extensive body of scientific literature demonstrating the safety of the two building blocks of Gelesis200, a specific modified cellulose and citric acid. However, we intend to initiate additional pre-clinical testing to demonstrate that Gelesis200 is biocompatible.

Intellectual Property

We strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking and maintaining patents intended to cover our products and compositions including our products, their methods of use and any other inventions that are important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain the proprietary position of our technology and product candidates.

We own five families of patents and patent applications which cover composition of matter, methods of use and methods of production for our product candidates, including Gelesis100 and Gelesis200. Uses of Gelesis100 for treating obesity and reducing caloric intake are currently protected in the United States by an issued patent with a priority date of August 10, 2007. Corresponding patents have also been granted or allowed in Europe, Russia, China, Australia, and Mexico. A divisional patent application covering Gelesis100 composition of matter has also been granted in Europe. This patent family is also pending in additional territories. Two more recent international patent families and two U.S. provisional applications are also pending. These families are directed to methods for enhancing glycemic control, methods for producing a polymer hydrogel, and methods for treating obesity in a subject involving oral administration of a specific form of crosslinked modified cellulose at particular doses, respectively. We expect to have coverage in the United States until at least 2027, with possible extended coverage from pending applications should they be granted.

 

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The following table lists our issued patents and patent applications as of the date hereof:

 

Patent
Family
 

Technology

  Country    Summary of what each
Patent/Patent
Application Covers
(Composition, Method
of Making, Method of
Using, etc.)
   Status    Expiration  Date/
Expected Expiration
Date
21  

Polymer hydrogels and method of preparation thereof

        United States    Method of using    Granted    July 30, 2028
        United States    Composition    Pending    August 8, 2027
        Australia    Method of using    Granted    August 8, 2028
        Australia    Composition    Pending    August 8, 2028
        Canada    Composition for use; composition    Pending    August 8, 2028
        China    Composition for use    Granted    August 8, 2028
        Europe: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Monaco, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom    Composition for use    Granted    August 8, 2028
        Europe: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Monaco, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom    Composition    Granted    August 8, 2028
        Hong Kong    Composition for use    Allowed    August 8, 2028

 

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Patent
Family
 

Technology

  Country    Summary of what each
Patent/Patent
Application Covers
(Composition, Method
of Making, Method of
Using, etc.)
   Status    Expiration  Date/
Expected Expiration
Date
        India    Method of using; composition    Pending    August 8, 2028
        Japan    Composition for use    Pending    August 8, 2028
        Mexico    Composition for use    Allowed    August 8, 2028
        Russia    Composition for use    Granted    August 8, 2028
        Russia    Composition    Pending    August 8, 2028
22  

Methods and compositions for weight management and for improving glycemic control

        United States    Food composition    Pending    November 18, 2029
        Australia    Food composition; method of enhancing glycemic control    Granted    November 18, 2029
        Australia    Food composition    Pending    November 18, 2029
        Brazil    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        Canada    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        China    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        Europe    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        Hong Kong    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        India    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        Japan    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        South Korea    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029

 

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Patent
Family
 

Technology

  Country    Summary of what each
Patent/Patent
Application Covers
(Composition, Method
of Making, Method of
Using, etc.)
   Status    Expiration  Date/
Expected Expiration
Date
        Mexico    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
        Russia    Food composition; composition for use in enhancing glycemic control    Granted    November 18, 2029
        Russia    Food composition; composition for use in enhancing glycemic control    Pending    November 18, 2029
23  

Method for producing hydrogels

        United States    Composition    Pending    June 7, 2032
        Australia    Composition; methods of using; method of making    Pending    June 7, 2032
        Brazil    Composition; methods of using; method of making    Pending    June 7, 2032
        Canada    Composition; methods of using; method of making    Pending    June 7, 2032
        China    Composition; methods of using; method of making    Pending    June 7, 2032
        Europe    Composition; methods of using; method of making    Pending    June 7, 2032
        India    Composition; methods of using; method of making    Pending    June 7, 2032
        Japan    Composition; methods of using; method of making    Pending    June 7, 2032
        South Korea    Composition; methods of using; method of making    Pending    June 7, 2032
        Mexico    Composition; methods of using; method of making    Pending    June 7, 2032
        Russia    Composition; methods of using; method of making    Pending    June 7, 2032

 

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Patent
Family
 

Technology

  Country    Summary of what each
Patent/Patent
Application Covers
(Composition, Method
of Making, Method of
Using, etc.)
   Status    Expiration  Date/
Expected Expiration
Date
25  

Methods for treating excess weight or obesity

        United States    Method of using    Pending (Provisional)    June 20, 2035
26  

Methods for producing hydrogels having high elastic modulus

        United States    Composition; methods of using; method of making    Pending (Provisional)    January 29, 2036

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, including the United States, the patent term is 20 years from the date of filing the first non-provisional application. In the U.S., however, the term of a patent may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or U.S. PTO, in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-filed patent. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. However, the restoration period cannot be longer than five years and the restoration period may be reduced if the total patent term including the restoration period, would exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. Uses of our technology for treating obesity and reducing caloric intake are currently protected in the United States, Europe and several other territories until at least 2027 and potentially longer based on regulatory extensions, if applicable, or pending patent applications, should they be granted. However, the actual protection afforded by a patent varies on a claim by claim and country to country basis for each applicable product and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country, and the validity and enforceability of the patent.

Furthermore, the patent positions of biotechnology and pharmaceutical products and processes like those we intend to develop and commercialize are generally uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in such patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries can diminish our ability to protect our inventions, and enforce our intellectual property rights and more generally, could affect the value of intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.

License Agreements

In October 2008 and December 2008, we entered into a master agreement with the inventors of certain of the core patents that cover Gelesis100 and our other hydrogel-based product candidates, and a patent license and assignment agreement with an Italian limited liability company, One S.r.l., the entity that directly owned such patent rights. One S.r.l. was organized and is owned, collectively, by the inventors. Gelesis made a series of payments to One S.r.l. and the inventors in 2012, resulting in all rights, title and interest relating to the above intellectual property being assigned to Gelesis. In December 2014, we entered into an amended and restated agreement that superseded our master agreement and patent license and assignment agreement from 2008 into a single agreement, which we refer to collectively as our amended and restated master agreement. We previously acquired relevant patent rights from One S.r.l., which are described in more detail above under “Business—Intellectual Property.”

 

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Under the amended and restated master agreement, we granted the inventors a non-exclusive, royalty-free and irrevocable right to practice the patent rights for non-commercial academic and research purposes. One S.r.l. and the inventors are bound by non-competition provisions in the amended and restated master agreement, which prohibit them from developing, manufacturing or commercializing any product or process related to diet, weight loss, food products or obesity during the term of our amended and restated master agreement and for a year after its termination. Additionally, the inventors have agreed to assign to us certain future technology relating to food products that they develop during the term of the amended and restated master agreement, as well as other improvements to our existing intellectual property rights that result from activities they perform under consulting agreements or the amended and restated master agreement.

In the amended and restated master agreement, we have agreed to negotiate in good faith with the inventors for a non-exclusive, royalty-bearing non-blocking license under our patents if an affiliate of the inventors wishes to collaborate with a pharmaceutical or biotechnology company for the development or commercialization of certain drug delivery products, but only if such products do not include compositions of matter that are claimed by one of our patents.

Through January 2015, we have paid €2.0 million (approximately $2.5 million) to One S.r.l. We have also granted One S.r.l. 2,444 shares of common stock and a warrant to purchase 839,857 shares of the Series A-3 Preferred Stock of Gelesis, Inc. Future contingent milestone payments remain, which could equal up to €5.5 million (approximately $6.7 million) if we achieve certain regulatory and commercial milestone events. In addition to the milestone payments, we must pay One S.r.l. low single digit royalties as a percentage of adjusted gross sales by us or our affiliates or sublicensees of hydrogel-based products that are covered by a licensed patent that has issued and has not been revoked or abandoned. Also, with respect to certain products, we must pay One S.r.l. a low double-digit percentage of certain payments we receive from our sublicensees. The royalty rates are subject to customary downward adjustments in the event we are required to pay third parties to obtain a license to intellectual property rights that are necessary for us to develop or commercialize our products.

The term of our amended and restated master agreement expires on a product-by-product and country-by-country basis when no valid patents remain outstanding and we have discharged all outstanding payment obligations. We may otherwise terminate the amended and restated master agreement only upon mutual written agreement.

We entered into a Royalty and Services Agreement with PureTech Ventures, LLC, or PureTech, in December 2009. Under that agreement, as consideration for certain funding, management services and technical know-how in developing the intellectual property we are licensing provided to us by PureTech, we are required to pay PureTech a royalty equal to 2% of all net product sales and 10% of gross sublicense income received on certain food products as a result of developing hydrogel-based products that are covered by a licensed patent that has issued and has not been revoked or abandoned. The royalty rate is subject to customary downward adjustments in the event we are required to pay third parties to obtain a license to intellectual property rights that are necessary for us to develop or commercialize our products. Management services provided by PureTech include advisory services on corporate strategy, general and administrative support including office space, supplies and administrative support, payroll services and website development and support. Historically, funding provided by PureTech has been in the form of short term cash advances, convertible notes and preferred stock financings. Our obligation to pay royalties to PureTech will terminate upon termination of our license agreement with One S.r.l.

Gelesis, LLC Reorganization

As of December 31, 2014, (i) all of the issued and outstanding preferred shares of Gelesis, LLC were owned approximately 99% by us and approximately 1% by Gelesis 2012, (ii) all of the issued and outstanding common shares of Gelesis, LLC were owned approximately (a) 94.7% by our stockholders, (b) 4.3% by us and (c) 1% by Gelesis 2012.

 

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In January 2015, Gelesis, LLC, an intellectual property holding company owned and controlled by us and our stockholders, was reorganized into a wholly owned subsidiary of Gelesis. The reorganization was effected by a merger in which a newly-organized wholly owned subsidiary of Gelesis was merged with and into Gelesis, LLC with Gelesis, LLC continuing as the surviving company. In connection with the reorganization, our stockholders were issued an aggregate of 94,109 shares of our common stock in exchange for the issued and outstanding Gelesis, LLC common shares held by them. As a result of the reorganization, Gelesis, LLC became wholly owned by us.

Manufacturing and Facilities

All product candidates that are under development and are used in clinical studies have been produced by Gelesis S.r.l., our wholly owned subsidiary, in its manufacturing and research and development facility located in Calimera, Italy. This facility operates in compliance with the QSR. Manufacturing has been ongoing continuously at this facility since April 2012 with more than 400 kilograms of product produced.

The facility houses a manufacturing suite, warehouse, quality control laboratories, research and development laboratories, and offices. Our existing facility has the capacity to supply clinical trial material for all current and planned trials, including the recently initiated GLOW study.

In order to meet demand for commercial sale following regulatory approval, we intend to build a commercial-scale manufacturing line in North America. The new line will utilize the existing processes, which are currently being used in our facility, with throughput increases gained primarily through equipment scale and improved drying techniques. We are currently in the advanced testing and process engineering stage of the manufacturing line to produce commercial-scale quantities of Gelesis100. We currently intend to set up the manufacturing line in a facility that we will own, but we are also considering alternatives such as setting up the manufacturing line in a manufacturing facility owned by a strategic collaboration partner or a third-party manufacturer. We anticipate that construction of the manufacturing line will begin in 2016, following successful completion of the GLOW study.

Sales and Marketing

We expect our commercial business model to be similar to, and provide margins that approximate, a typical prescription pharmaceutical drug. We expect our product to be marketed, detailed, and presented through the same channels as orally administered weight loss pharmaceuticals. We expect that our product candidates, if approved, will be prescribed predominantly by primary care physicians, including general practitioners, family practitioners, and internists, as well as endocrinologists and obesity/metabolism specialists. Given our stage of development, we have not yet established a commercial organization or distribution capabilities, nor have we entered into any partnership or co-promotion arrangements. To develop the appropriate commercial infrastructure to launch our product, we may either build internal capabilities or establish alliances with one or more biotechnology or pharmaceutical company collaborators, depending on, among other things, the applicable indications, the related development costs, and our available resources.

Competition

Due to the growing overweight and obesity epidemic and consumer demand, there are many competitors in the field of obesity treatment. Obesity treatments range from behavioral modification, to drugs and medical devices, and surgery, generally as a last resort. Although we believe that Gelesis100 will be regulated as a medical device, we believe it will be used by patients and prescribed by physicians in the same manner as an orally administered drug. Therefore, we anticipate that Gelesis will face competition primarily from drugs.

 

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Drugs

Orally Administered Drugs

Four drugs that are FDA approved and currently marketed for the treatment of obesity are phentermine/topiramate, lorcaserin, naltrexone/bupropion, and orlistat. Each treatment is indicated for obese patients and overweight patients with at least one comorbidity. In September 2012, Vivus, Inc. commercially launched its combination product, Qsymia (phentermine/topiramate) in the United States. In June 2013, Arena Pharmaceuticals, Inc. launched Belviq (lorcaserin), in the United States. In October 2014, Takeda Pharmaceutical Company Limited commercially launched its combination product, Contrave (naltrexone/bupropion), in the United States and in December 2014 Orexigen received a positive recommendation for approval of Mysimba (naltrexone/bupropion), in Europe. Orlistat is marketed in the United States by Roche Group under the brand name Xenical and over-the-counter in the United States at half the dose of Orlistat by GlaxoSmithKline under the brand name alli. In addition to competing with one another, these drugs also compete against generic forms of phentermine, topiramate, naltrexone, and bupropion.

Injectable Drugs

Several pharmaceutical companies, are developing injectable drugs for obesity. Zafgen has completed a 3 month Phase 2 study with beloranib, an injectable drug candidate with a mechanism of action through methionine aminopeptidase 2, or MetAP2, inhibition. Saxenda, a formulation of Novo Nordisk’s liraglutide, was approved by the FDA in December 2014 for the treatment of obesity. Liraglutide is currently also marketed by Novo Nordisk for the treatment of type 2 diabetes under the brand name Victoza in the United States.

Medical Devices and Surgery

Bariatric surgery, including gastric bypass and gastric banding procedures, is typically employed for obese patients with a BMI exceeding 40 or those with a BMI greater than 35 who are experiencing obesity-related complications such as diabetes. However, in February 2011, the FDA approved Apollo Endosurgery’s LAP-BAND system for obese patients with a BMI greater than 30 who are experiencing obesity related comorbidities or patients with a BMI greater than 35 with or without obesity related comorbidities. The gastric bands available in the United States include LAP-BAND, as well as the Realize gastric band from Johnson & Johnson.

ReShape Duo, a dual-intragastric balloon from ReShape Medical, is approved in Europe. ReShape Medical recently submitted a PMA application to the FDA. In addition, there are gastric balloon concepts in early development by Allurion Technologies and Obalon. EndoBarrier, a duodenal-jejunal bypass liner from GI Dynamics, is approved in Europe and is currently in a U.S. study. On March 5, 2015, GI Dynamics announced that the FDA has placed a hold on enrollment in its ongoing clinical trial of EndoBarrier. EnteroMedics received FDA approval for VBLOC (vagal blocking) therapy in January 2015. VBLOC therapy is also approved in Europe. The TransPyloric Shuttle from BAROnova is an endoscopically-delivered device for which an early stage six month clinical study has been conducted.

Reimbursement

If our product candidates are approved for use by the FDA, we believe the successful launch of these candidates will not be substantially dependent on the reimbursement available from third-party payors, such as government health programs and private insurance companies. Although obesity has long been recognized as a significant public health and economic problem for the U.S. healthcare system, insurance coverage for obesity treatments has been limited. The legislative authorization for Medicare’s prescription drug benefit program specifically prohibits coverage of obesity drugs and until recently, there has been little clinical evidence to convince insurers of the efficacy of obesity treatments, let alone coverage for dietary regimens and products. When coverage is provided by insurers, such as for treatments such as bariatric surgery, it is typically limited to morbidly obese patients.

 

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Recent changes in government-sponsored health programs, in addition to growing recognition by private insurers of the economic benefits of treating obesity, however, have led to increasing coverage of obesity treatments. Recently, two obesity drugs, Belviq and Qsymia, launched in the United States. Of the 160 million people in the United States with insurance coverage, approximately 60% currently have plans that provide coverage for Belviq, and 36% have plans that provide coverage for Qsymia. Two primary factors driving this trend toward reimbursement are: (i) the high cost of treating the related covered comorbidities of obesity, including diabetes and cardiovascular diseases and (ii) the transition to Accountable Care Organizations, capitation payments and other quality contracting models from a fee-for-service system. Despite these developments, we are not certain that our product candidates will receive coverage from public or private insurers and anticipate that a significant number of our patients will pay for our product out of pocket.

Medicare

Medicare is the U.S. public health insurance program for Americans aged 65 years and older, as well as younger people with certain disabilities. Medicare is administered by the Centers for Medicare and Medicaid Services. Historically, Medicare took the position that obesity was not a disease and that obesity therapies should not be covered. By 2006, however, Medicare began to cover certain bariatric surgical services for patients with a BMI greater than or equal to 35, who have at least one comorbidity and have been unsuccessful with other forms of therapy. While weight loss drugs are currently excluded from Medicare Part D coverage, efforts are underway to pass the Treat and Reduce Obesity Act, which would extend Medicare coverage to certain FDA approved obesity therapies.

Because we anticipate that our product candidates will be approved by the FDA as devices, coverage in the Medicare Fee-for-Service sector will not be available under Part D even if Part D were to cover weight loss drugs. However, pharmacy-dispensed, non-drug products are covered under the Medicare Fee-for-Service system within the Part B home medical equipment and supplies payment system. If our product candidates are approved, we plan to work with the appropriate Medicare contractor organizations to secure coverage and payment through that system within Part B by demonstrating both clinical efficacy and cost reduction for defined subsets of obese patients. In addition to the Medicare Fee-for-Service system, a rapidly expanding segment of Medicare beneficiaries receive coverage under capitated Medicare Advantage plans administered by private insurers. These plans are free to provide services not covered under the Medicare Fee-for-Service system and we anticipate that demonstrating reduction in total costs of care over a defined time period will be particularly compelling in securing coverage under Medicare Advantage plans.

Medicaid

Medicaid is the U.S. public health insurance program for families and individuals with low income and who meet certain other eligibility criteria. Each state administers its own program within broad federal requirements, and states and the federal government finance the program jointly. While Medicaid benefits vary somewhat from state-to-state, its benefit structure mirrors that of Medicare and state Medicaid agencies often defer to Medicare on coverage policy issues. Consequently, we believe that if our product candidates are approved and we are successful in securing Medicare coverage, we could expect to secure Medicaid coverage as well. However, it will be necessary to address the issue on a state-by-state basis, including the negotiation of reimbursement rates which are typically lower than Medicare reimbursement rates for the same product or service.

Private Insurance

Current coverage policies of private insurers reflect the same basic attitudes towards obesity therapies as government health plans, and coverage for effective treatments has been expanding slowly. We believe that a compelling empirical demonstration of clinical efficacy, together with evidence of the impact on

 

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total cost of care, will provide a strong argument for private insurer coverage both in the fee-for-service sector and in the Accountable Care Organization sector. Because private insurers are not constrained by the legislative rules that have limited Medicare coverage, they are free, for example, to cover any pharmacy-dispensed product through their prescription drug coverage. If our product candidates are approved for use by the FDA, we plan to work with major private insurers to identify the appropriate coverage as well as the evidence they will require for coverage determinations. Like Medicaid, private insurers often follow Medicare’s lead in coverage determinations, and we do not anticipate that the evidentiary demands of private insurers will differ substantially from Medicare’s.

Self-Pay

Although third-party payor attitudes regarding obesity-related products and services appear to be changing, we are unable to predict with certainty the payor landscape when our product candidates are launched. Accordingly, if our product candidates are accepted by physicians and patients as safe and effective, we anticipate that our product sales will be significantly dependent on the self-pay market.

Government Regulation

Regulation of Medical Devices in the United States

General Requirements

Under the Federal Food, Drug, and Cosmetic Act, or the FDC Act, a medical device is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component part, or accessory which is: (i) recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them; (ii) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or (iii) intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.

In the United States, medical devices are subject to extensive regulation by the FDA under the FDC Act, and its implementing regulations, and certain other federal and state statutes and regulations. The laws and regulations govern, among other things, the research and development, design, testing, manufacture, packaging, storage, recordkeeping, approval, labeling, promotion, post-approval monitoring and reporting, distribution and import and export of medical devices. Failure to comply with applicable requirements may subject a device and/or its manufacturer to a variety of administrative sanctions, such as FDA refusal to approve pending premarket approval applications, or PMAs, issuance of warning letters, mandatory product recalls, import detentions, civil monetary penalties, and/or judicial sanctions, such as product seizures, injunctions, and criminal prosecution.

The FDC Act classifies medical devices into one of three classifications based on the risks associated with the device and the level of control necessary to provide reasonable assurance of safety and effectiveness. Class I devices are deemed to be low risk and are subject to the fewest regulatory controls. Class III devices are generally the highest risk devices and are subject to the highest level of regulatory control to provide reasonable assurance of the device’s safety and effectiveness. Class III devices must typically be approved by FDA before they are marketed.

Generally, establishments that manufacture and/or distribute devices, including manufacturers, contract manufacturers, sterilizers, repackagers and relabelers, specification developers, reprocessors of single-use devices, remanufacturers, initial importers, manufacturers of accessories and components sold directly to the end user, and U.S. manufacturers of export-only devices, are required to register their establishments with the FDA and provide the FDA a list of the devices that they handle at their facilities.

 

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Pre-market Approval and Pre-market Notification

While most Class I and some Class II devices can be marketed without prior FDA authorization, most medical devices can be legally sold within the United States only if the FDA has: (i) approved a PMA application prior to marketing, applicable to Class III devices for which the FDA has required a PMA; or (ii) cleared the device in response to a premarket notification, or 510(k) submission, generally applicable to Class II and some Class I devices. Some devices that have been classified as Class III are regulated pursuant to the 510(k) requirements because FDA has not yet called for PMAs for these devices. Other less common regulatory pathways to market for Class III devices include the humanitarian device exception, or HDE, or a product development protocol, or PDP.

510(k) Pre-market Notification.    Most Class II and limited Class I devices require a 510(k) clearance in order to be commercially distributed in the United States. To obtain 510(k) clearance, a manufacturer must submit a premarket notification to the FDA demonstrating that the proposed device is substantially equivalent to a legally marketed device, referred to as the predicate device. A predicate device may be a previously 510(k) cleared device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet required submission of PMA applications. The manufacturer must show that the proposed device has the same intended use as the predicate device, and it either has the same technological characteristics, or it is shown to be equally safe and effective and does not raise different questions of safety and effectiveness as compared to the predicate device.

There are three types of 510(k)s: traditional, special and abbreviated. Special 510(k)s are for devices that are modified and the modification needs a new 510(k) but does not affect the intended use or alter the fundamental scientific technology of the device. Abbreviated 510(k)s are for devices that conform to a recognized standard. The special and abbreviated 510(k)s are intended to streamline review. The FDA intends to process special 510(k)s within 30 days of receipt, and abbreviated 510(k) within 90 days of receipt. Though statutorily required to clear a traditional 510(k) within 90 days of receipt, the clearance pathway for traditional 510(k)s can take from four to 12 months, or even longer.

De Novo Classification.    Devices of a new type that FDA has not previously classified based on risk are automatically classified into Class III by operation of section 513(f)(1) of the FDC Act, regardless of the level of risk they pose. To avoid requiring PMA review of low- to moderate-risk devices classified in Class III by operation of law, Congress enacted section 513(f)(2) of the FDC Act. This provision allows FDA to classify a low- to moderate-risk device not previously classified into Class I or II. The de novo process has been infrequently used. In 2012, Congress amended the process to potentially make it more amenable to FDA and industry. It is not yet clear whether the changes will lead to greater use of de novo classification.

PMA Approval.    For Class III devices for which the FDA has required a PMA, a PMA application must be submitted to the FDA with proof of the safety and effectiveness of the device to the FDA’s satisfaction. The cost of preparing and submitting a PMA is substantial. Under federal law, the submission of most PMAs is additionally subject to a substantial annually-adjusted application user fee, currently exceeding $250,000. Satisfaction of FDA premarket approval requirements typically takes years and the actual time required may vary substantially based upon the type, complexity, and novelty of the device or disease.

Results from adequate and well-controlled clinical trials are required to establish the safety and effectiveness of a Class III PMA device for each indication for which FDA approval is sought. After completion of the required clinical testing, a PMA including the results of all preclinical, clinical, and other testing, and information relating to the product’s marketing history, manufacture, and controls, is prepared and submitted to the FDA.

 

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Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application, which typically takes one to three years, but could take longer. The review time is often significantly extended as a result of the FDA asking for additional information or clarification of information already provided. During the review period, an FDA advisory committee, typically a panel of clinicians, may be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process. The FDA will also typically inspect one or more clinical sites to assure compliance with FDA regulations. Additionally, the FDA will inspect the facility or the facilities at which the device is manufactured. FDA will not approve the device unless compliance is shown with Quality System Regulation, or QSR, requirements, which impose elaborate testing, control, documentation and other quality assurance procedures.

Upon completion of PMA review, the FDA can: (i) approve the PMA; (ii) issue an approvable letter which indicates the FDA’s belief that the PMA is approvable and states what additional information the FDA requires, or the post-approval commitments that must be agreed to prior to approval; (iii) issue a not approvable letter which outlines steps required for approval, but which are typically more onerous than those in an approvable letter, and may require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years; or (iv) deny the application. If the FDA issues an approvable or not approvable letter, the applicant has 180 days to respond, after which the FDA’s review clock is reset.

An approval order authorizes commercial marketing of the device with specific prescribing information for one or more specific indications, which can be more limited than those originally sought by the manufacturer. As a condition of PMA approval, the FDA may restrict the sale, distribution, or use of the device to help ensure that the benefits of the device outweigh the potential risks. Moreover, FDA may impose substantial post-approval testing and post-market surveillance to monitor the device’s safety or effectiveness. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Once granted, FDA has the authority to withdraw device approvals if compliance with regulatory requirements is not maintained or problems are identified following initial marketing.

An “approvable letter” generally requires the applicant’s agreement to specific conditions, e.g., changes in labeling, or specific additional information, e.g., submission of final labeling, in order to secure final approval of the PMA application. Once the approvable letter is satisfied, the FDA will issue a PMA for the approved indications.

Exempt Devices.    If a manufacturer’s device falls into a generic category of Class I or Class II devices that FDA has exempted by regulation, a premarket notification is not required before marketing the device in the United States. Manufacturers of such devices are required to register their establishments and list the generic category or classification name of their devices. Some 510(k)-exempt devices are also exempt from QSR requirements, except for the QSR’s complaint handling and recordkeeping requirements.

Pre-Submission Meetings.    The FDA has mechanisms to provide companies with guidance prior to formal submission of either a 510(k) or PMA. One such mechanism is the pre-submission program in which a company has a “pre-submission” meeting as outlined in the FDA guidance document “Requests for Feedback on Medical Device Submissions: The Pre-Submission Program and Meetings with the Food and Drug Administration Staff” that was issued on February 18, 2014. The main purpose of the pre-submission meeting is to provide companies with guidance from the FDA on matters of significance to an approval decision. Prior to the pre-submission meeting, the company provides a briefing document to the FDA. The FDA is not obligated to follow the recommendations it provides to companies as a result of a pre-submission meeting.

 

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