10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number: 001-36540

PFENEX INC.

(Exact name of registrant as specified in its charter)

Delaware	27-1356759
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

10790 Roselle Street, San Diego, CA	92121
(Address of Principal Executive Offices)	(Zip Code)

(858) 352-4400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging Growth Company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of October 31, 2018, the registrant had 31,460,719 shares of Common Stock ($0.001 par value) outstanding.

PFENEX INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Consolidated Balance Sheets as of September 30, 2018 and December  31, 2017	1
		Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017	2
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	3
		Notes to Consolidated Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
	Item 3.	Defaults Upon Senior Securities	70
	Item 4.	Mine Safety Disclosures	70
	Item 5.	Other Information	71
	Item 6.	Exhibits	71
	EXHIBIT INDEX		72
	SIGNATURES		73

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PFENEX INC.

Consolidated Balance Sheets

	September 30, 2018 (unaudited)			December 31, 2017
	(in thousands)
Assets
Current assets
Cash and cash equivalents	$	67,825		$	57,664
Restricted cash		200			200
Accounts and unbilled receivables, net		1,745			1,306
Income tax receivable		206			638
Other current assets		1,972			1,705
Total current assets		71,948			61,513
Property and equipment, net		7,455			7,397
Other long-term assets		133			133
Intangible assets, net		4,381			4,771
Goodwill		5,577			5,577
Total assets	$	89,494		$	79,391
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,360		$	1,905
Accrued liabilities		10,585			8,913
Current portion of deferred revenue		7,141			7,421
Current portion of capital lease obligations		317			228
Total current liabilities		19,403			18,467
Deferred revenue, less current portion		2,500			2,742
Capital lease obligations, less current portion		272			419
Total liabilities		22,175			21,628
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, par value $0.001, 200,000,000 shares authorized; 31,460,719 and 23,548,280 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		32			24
Additional paid-in capital		261,764			219,446
Accumulated deficit		(194,477	)		(161,707	)
Total stockholders’ equity		67,319			57,763
Total liabilities and stockholders’ equity	$	89,494		$	79,391

The accompanying notes are an integral part of these unaudited consolidated financial statements.

1

PFENEX INC.

Consolidated Statements of Operations

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017
Revenue	$	3,570		$	5,024		$	11,506		$	10,871
Cost of revenue		1,479			1,766			3,923			3,481
Gross profit		2,091			3,258			7,583			7,390
Operating expense
Research and development		9,045			8,112			28,590			24,708
Selling, general and administrative		3,823			3,999			11,920			13,973
Total operating expense		12,868			12,111			40,510			38,681
Loss from operations		(10,777	)		(8,853	)		(32,927	)		(31,291	)
Other income, net		115			35			157			117
Net loss	$	(10,662	)	$	(8,818	)	$	(32,770	)	$	(31,174	)
Net loss per common share, basic and diluted	$	(0.34	)	$	(0.37	)	$	(1.20	)	$	(1.33	)
Weighted-average common shares used in calculating basic and diluted net loss per share		31,437			23,539			27,288			23,488

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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PFENEX INC.

Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,
	2018			2017
	(in thousands)
Cash flows from operating activities
Net loss	$	(32,770	)	$	(31,174	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		849			619
Amortization of intangible assets		400			398
Stock-based compensation expense		2,551			2,495
Loss (gain) on disposal of property and equipment		8			(20	)
Changes in operating assets and liabilities
Accounts and unbilled receivables		(439	)		(517	)
Other current assets		(268	)		205
Accounts payable		(560	)		307
Accrued liabilities		2,031			1,558
Deferred revenue		(522	)		(5,027	)
Income tax receivable		432			—
Net cash used in operating activities		(28,288	)		(31,156	)
Cash flows from investing activities
Acquisitions of property and equipment		(1,010	)		(1,954	)
Purchase of intangible asset		(10	)		—
Proceeds from sale of property and equipment		—			45
Net cash used in investing activities		(1,020	)		(1,909	)
Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs		39,522			—
Repayments of capital lease obligations		(212	)		(43	)
Proceeds from exercise of stock options and other stock issuances		197			180
Payment for taxes related to net share settlement of equity award		(38	)		—
Net cash provided by financing activities		39,469			137
Net increase (decrease) in cash, cash equivalents, and restricted cash		10,161			(32,928	)
Cash, cash equivalents and restricted cash
Beginning of period		57,864			81,501
End of period	$	68,025		$	48,573
Non-cash financing and investing transactions
Asset acquisitions in accounts payable and accrued expenses	$	92		$	304
Acquisitions under capital lease obligations	$	154		$	676
Restricted stock issuance for bonus accrual	$	56		$	—
Supplemental schedule of cash flow information
Interest paid	$	36		$	11
Taxes paid	$	48		$	—

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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PFENEX INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Organization and Summary of Significant Accounting Policies

Business Activities and Organization

Pfenex Inc. (the Company or Pfenex) is a clinical-stage development and licensing biotechnology company focused on leveraging its Pfēnex Expression Technology ^® to develop and improve protein therapies for unmet patient needs. Using the patented Pfēnex Expression Technology platform, the Company has created an advanced pipeline of therapeutic equivalents, vaccines, biologics and biosimilars. The Company also uses its Pfēnex Expression Technology platform to produce CRM197, a diphtheria toxoid carrier protein used in prophylactic and therapeutic vaccines. The Company’s lead product candidates are PF708, a therapeutic equivalent candidate to Forteo^® (teriparatide) for the treatment of osteoporosis, and its novel anthrax vaccine candidates, Px563L and RPA563, funded through an advanced development contract with the U.S. government. In April 2018, the Company granted certain development and commercialization rights for PF708 in certain Asian countries to China NT Pharma Group Company Limited (NT Pharma). In June 2018, the Company granted Alvogen Malta Operations Ltd. (Alvogen) exclusive rights to commercialize and manufacture PF708 in the United States. In addition, the Company is developing hematology/oncology products in collaboration with Jazz Pharmaceuticals Ireland Limited (Jazz). Furthermore, the Company’s pipeline includes biosimilar candidates to Lucentis ^® and Neulasta^®.

Product Candidates and Collaborations

The following table summarizes certain information about the Company’s lead product candidates and collaborations:

Product Candidate	Branded Reference Drug	Program	Indication
Proposed Therapeutic Equivalent
PF708 – Teriparatide	Forteo	•  Licensed in the United States to Alvogen; •  Licensed in Mainland China, Hong Kong, Singapore, Malaysia, Thailand to NT Pharma; •  Wholly-Owned Rest of World	Osteoporosis
Multiple Hematology/Oncology Product Candidates	Various	•  Jazz Pharmaceuticals Ireland Limited	Various
Novel Vaccines
Px563L and RPA563 – rPA based anthrax vaccines	N/A	•  U.S. Government Funded	Anthrax post-exposure prophylaxis

Proposed Therapeutic Equivalent: PF708 – Teriparatide

PF708 is being developed as a therapeutic equivalent candidate to Forteo, which is approved and marketed by Eli Lilly and Company for the treatment of osteoporosis patients at a high risk of fracture. In April 2018, the Company and NT Pharma entered into a Development and License Agreement (NT Pharma Agreement), pursuant to which the Company granted an exclusive license to NT Pharma to commercialize PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand and a non-exclusive license to conduct development activities in such territories with respect to PF708. The Company will be responsible for commercial manufacturing and will provide NT Pharma with the product for commercial sale. NT Pharma will be responsible for all regulatory submissions, development costs and costs associated with regulatory approvals in such territories. The Company will retain exclusive rights to PF708 in all countries outside of such territories, except for the United States, for which rights were subsequently granted to Alvogen. In June 2018, the Company and Alvogen entered into a Development and License Agreement (Alvogen Agreement) pursuant to which Alvogen will have the exclusive right to commercialize and manufacture PF708 in the United States. The Company currently retains exclusive rights to PF708 in all countries outside of the United States, Mainland China, Hong Kong, Singapore, Malaysia and Thailand. The Company will continue to be responsible for development and registration of PF708, while Alvogen will provide additional regulatory and development expertise.

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Collaboration Partner: Jazz Pharmaceuticals Ireland Limited

In July 2016, the Company and Jazz announced an agreement under which the Company granted Jazz worldwide rights to develop and commercialize multiple early stage hematology/oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology. In December 2017, the parties amended the Jazz agreement, bringing the total value of payments and potential payments associated with the collaboration to $224.5 million. In addition, the Company may be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement.

Novel Vaccines: Px563L and RPA563 – rPA based anthrax vaccines

The Company is also developing Px563L and RPA563, novel anthrax vaccine candidates, in response to the United States government’s unmet demand for increased quantity, stability and dose-sparing regimens of anthrax vaccine. The government contract is funded by the Biomedical Advanced Research and Development Authority (BARDA). Subject to continued funding from BARDA, the Company expects to continue to advance the programs with the potential to initiate a Phase 2 trial in 2019. The Company had initially entered into a development contract with BARDA in 2010. The $25.2 million fully-funded contract was completed in 2015, at which time BARDA awarded the Company a cost-plus fixed fee advanced development contract valued at up to approximately $143.5 million. In January 2017, BARDA exercised two options under its existing contract for further development of Px563L and RPA563. One of the exercised options was increased by $1.7 million in May 2018, which increased the total contract value to $145.2 million. In September 2018, BARDA extended the contract period of performance.

Pfēnex Expression Technology Licenses: CRM197

The Company has several development and commercial partnerships in place for CRM197, which is a non-toxic mutant of diphtheria toxin. It is a well-characterized protein and functions as a carrier for polysaccharides and haptens, making them immunogenic. The Company developed a unique CRM197 production strain based on its pseudomonas fluorescens platform and sells non-GMP and cGMP CRM197 to vaccine development-focused pharmaceutical partners. As a result of those efforts, the Company previously entered into commercial licenses for production strains capable of producing CRM197 with both Merck and Serum Institute of India. These commercial license agreements with Merck and Serum contemplate potential maintenance and milestone fees as well as royalties on net sales. Merck and Serum are currently using the Company’s CRM197 in multiple Phase 3 clinical trials for such diseases as pneumococcal and meningitis bacterial infections.

The Company’s revenue in the near term is primarily related to monetizing its protein production platform through CRM197 product sales, commercial license agreements, service agreements, and government contracts, which may provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees.

Other Pipeline Products

In addition to the Company’s lead product candidates, its pipeline includes various other biosimilar candidates, including PF582, the Company’s biosimilar candidate to Lucentis, and PF529, the Company’s biosimilar candidate to Neulasta, as well as vaccines and next generation biologic candidates. Following its strategic review in November 2017, the Company decided to pause its development activities for PF582 and PF529 and focus the Company’s efforts and resources elsewhere in its product portfolio.

At the Market Offering Program

In March 2018, the Company entered into an equity sales agreement (Sales Agreement) with William Blair & Company, L.L.C. (William Blair) to sell shares of the Company’s common stock having aggregate sales proceeds of up to $20.0 million, from time to time, through an “at the market” equity offering program under which William Blair will act as sales agent. Under the Sales Agreement, the Company sets the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. As of September 30, 2018, the Company had not sold any shares under the Sales Agreement.

Follow-on Public Offering

In May 2018, the Company completed a public offering of common stock in which it sold 7,820,000 shares of its common stock at an offering price of $5.50 per share, which included the full exercise by the underwriters of their option to purchase an additional 1,020,000 shares, pursuant to the Company’s existing shelf registration statement. The net proceeds generated from this transaction, after underwriting discounts and commissions and offering costs, were approximately $39.5 million.

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Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the instructions of the Securities and Exchange Commission, or SEC, on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

Use of Estimates

The preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Estimates have been prepared on the basis of the most current and best available information. However, actual results could differ from those estimates.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s product candidates, uncertainty of market acceptance of the Company’s products if approved for sale, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals.

Products developed by the Company require clearances from international and domestic regulatory agencies prior to commercial sales in such jurisdictions. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed or the Company was unable to maintain clearance, it could have a materially adverse impact on the Company.

As of September 30, 2018, the Company had an accumulated deficit of $194.5 million and expects to incur substantial operating losses for the next several years. The Company believes that its existing cash and cash equivalents and cash inflow from operations will be sufficient to meet its anticipated cash needs for at least the next 12 months including all necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors.

Cash and Cash Equivalents

The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash amounts that are restricted as to withdrawal or usage are presented as restricted cash. In January 2017, the Company entered into a Borrower’s Pledge Agreement, which required $0.2 million in restricted cash to be provided as security for its commercial credit card arrangement with one of the Company’s banks.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments and accounts and unbilled receivables. The Company has established guidelines intended to limit its exposure to credit risk by placing investments with high credit quality financial institutions, diversifying its investment portfolio and placing investments with maturities that help maintain safety and liquidity. All cash and cash equivalents were held at three major financial institutions as of September 30, 2018 and December 31, 2017. For the Company’s cash position of $68.0 million as of September 30, 2018, which included restricted cash of $0.2 million, the Company has exposure to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, the Company does not anticipate non-performance.

Additional credit risk is related to the Company’s concentration of receivables. As of September 30, 2018 and December 31, 2017, receivables were concentrated among three customers representing 99% and 89% of total net receivables, respectively. No allowance for doubtful accounts was recorded at September 30, 2018 or December 31, 2017. For the three months ended September 30, 2018 and 2017, revenue was concentrated among two customers and/or collaboration partners representing 89% and two customers and/or collaborative partners representing 94% of total revenues, respectively. Revenue from two customers and/or collaboration partners represented 87% and 91% of total revenue for the nine months ended September 30, 2018 and 2017, respectively.

6

A portion of revenue is earned from sales outside the United States. Non-U.S. revenue is denominated in U.S. dollars. A breakdown of the Company’s net revenue from U.S. and non-U.S. sources for the three and nine months ended September 30, 2018 and 2017 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
US revenue	$	1,371	$	2,190	$	3,877	$	4,453
Non-US revenue		2,199		2,834		7,629		6,418
Total revenue	$	3,570	$	5,024	$	11,506	$	10,871

During the three and nine months ended September 30, 2018 and 2017, Ireland accounted for more than 10% of the Company’s revenue.

Revenue

The Company’s revenue is related to the monetization of its protein production platform through collaboration agreements, service agreements, license agreements, government contracts and sales of CRM197, which may provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees. The Company’s revenue generating agreements also include potential revenues for achieving milestones and for product royalties. The specifics of the Company’s significant agreements are detailed in Note 7—Significant Research and Development Agreements.

The Company considers a variety of factors in determining the appropriate method of accounting for its collaboration agreements, including whether multiple deliverables can be separated and accounted for individually as separate units of accounting. Where there are multiple deliverables within a collaboration agreement that cannot be separated and therefore are combined into a single unit of accounting, revenues are deferred and recognized using the relevant guidance over the estimated period of performance. To the extent an arrangement contains a contingent deliverable, the Company will recognize the allocated consideration once the deliverable has been fulfilled. If the deliverables can be separated, the Company applies the relevant revenue recognition guidance to each individual deliverable. The specific methodology for the recognition of the underlying revenue is determined on a case-by-case basis according to the facts and circumstances applicable to each agreement.

Upfront, nonrefundable licensing payments are assessed to determine whether or not the licensee is able to obtain standalone value from the license. Where the license does not have standalone value, non-refundable license fees are recorded as deferred revenue and recognized as revenue as the Company performs under the applicable agreement. Where the level of effort is relatively consistent over the performance period, the Company recognizes fixed or determined revenue on a straight-line basis over the estimated period of performance. Where the license has standalone value, the Company recognizes total license revenue at the time all revenue recognition criteria have been met.

Nonrefundable payments for research funding are generally recognized as revenue over the period the underlying research activities are performed.

Revenue under service agreements are recorded as services are performed. These agreements do not require development achievement as a performance obligation and provide for payment when services are rendered. All such revenue is nonrefundable. Upfront, nonrefundable payments for license fees, exclusivity and feasibility services received in excess of amounts earned are classified as deferred revenue and recognized as income over the contract term or period of performance based on the nature of the related agreement.

The Company recognizes revenue for its cost-plus fixed fee government contracts in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contractors. Reimbursable costs under the Company’s government contracts primarily include direct labor, materials, subcontracts, accountable property and indirect costs. In addition, the Company receives a fixed fee under its government contracts, which is unconditionally earned as allowable costs are incurred and is not contingent on success factors. Reimbursable costs under the Company’s government contracts, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable.

7

The Company assesses milestone payments on an individual basis and recognizes revenue from nonrefundable milestone payments when the earnings process is complete and the payment is reasonably assured. Nonrefundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the associated milestone, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the milestone event. For the nine months ended September 30, 2018, $1.3 million in revenue was recognized in connection with the Merck and Jazz collaborations, with no revenue recognized for the quarter. For the three and nine months ended September 30, 2017, $1.0 million in revenue was recognized in connection with the achievement of development milestones associated with the Jazz collaboration.

The Company’s reagent protein products are primarily comprised of internally developed reagent protein products. Revenues for reagent product sales are reflected net of attributable sales tax. The Company generally offers a 30-day return policy. The Company recognizes reagent product revenue from product sales when it is realized or realizable and earned. As of September 30, 2018, the Company has had minimal product returns related to reagent protein product sales. Therefore, no reserve for warranty and return rights was recorded as of September 30, 2018 and December 31, 2017, respectively.

Revenue under arrangements where the Company outsources the cost of fulfillment to third parties is evaluated as to whether the related amounts should be recorded gross or net. The Company records amounts collected from the customer as revenue, and the amounts paid to suppliers as cost of revenue when it holds all or substantially all of the risks and benefits related to the product or service. For transactions where the Company does not hold all or substantially all the risk, the Company uses net reporting and therefore records the transaction as if the end-user made a purchase from the supplier with the Company acting as a sales agent.

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Under the ASU, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statements of cash flows. The ASU is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. The ASU requires that the Consolidated Statement of Cash Flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the Consolidated Statement of Cash Flows and the cash and equivalents balance presented on the Consolidated Balance Sheet. The ASU was effective retrospectively on January 1, 2018, with early adoption permitted. This guidance was adopted during the quarter ended March 31, 2018. Upon adoption of this guidance, prior periods were retrospectively adjusted to conform to the current period’s presentation. For the nine months ended September 30, 2017, the Company had previously disclosed $0.2 million of restricted cash as net cash used in financing activities. The effect of the adoption of ASU 2016-18 on the Company’s consolidated statement of cash flows was to reduce net cash used in financing by $0.2 million and include restricted cash balances in the balances of cash and cash equivalents and restricted cash.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The new standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 was effective for the Company in the first quarter of 2018, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018, and the adoption did not have a material effect on its consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Numerous updates were issued in 2016 that provide clarification on a number of specific issues as well as requiring additional disclosures. The effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods: the full retrospective method or the modified retrospective method. The Company plans to adopt the standard in the first quarter of fiscal year 2019 using the modified retrospective method. The Company does not expect the new standard to have a material impact on the recognition of revenue from its reagent protein product sales. The Company is currently evaluating its agreements with BARDA, NT Pharma, Jazz and Alvogen.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which was subsequently amended in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted

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Improvements. This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases. This guidance is effective for the Company in the first quarter of fiscal year 2020. The Company is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This updated guidance eliminates Step 2 from the current two-step quantitative model for goodwill impairment tests. Step 2 required an entity to calculate an implied fair value, which included a hypothetical purchase price allocation requirement, for reporting units that failed Step 1. Per this updated guidance, a goodwill impairment will instead be measured as the amount by which a reporting unit’s carrying value exceeds its fair value as identified in Step 1. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact on its financial statements and related disclosures.

2. Fair Value Measurements

The fair value measurements of the Company’s cash equivalents and investments, which are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, were determined using the inputs described above and are as follows:

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
September 30, 2018
Cash and money market funds	$	68,025	$	68,025	$	—	$	—
Total assets measured at fair value	$	68,025	$	68,025	$	—	$	—
December 31, 2017
Cash and money market funds	$	57,864	$	57,864	$	—	$	—
Total assets measured at fair value	$	57,864	$	57,864	$	—	$	—

Cash and money market funds at September 30, 2018 and December 31, 2017 include restricted cash, which is included in current assets on the balance sheet.

The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no significant transfers into or out of Level 1, 2, or 3 during the periods presented.

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3. Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.

	September 30, 2018			December 31, 2017
	(in thousands)
Cash and cash equivalents	$	67,825		$	57,664
Restricted cash		200			200
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	68,025		$	57,864
4. Property and Equipment
Property and equipment consisted of the following:
	September 30, 2018			December 31, 2017
	(in thousands)
Furniture and equipment	$	365		$	355
Computers and IT equipment		432			368
Purchased software		333			931
Lab and research equipment		8,832			8,131
Leasehold improvements		876			865
Construction in progress		196			162
Other fixed assets		83			64
Total property and equipment, gross		11,117			10,876
Less: accumulated depreciation and amortization		(3,662	)		(3,479	)
Total property and equipment, net	$	7,455		$	7,397

Total property and equipment assets under capital lease were $1.2 million and $1.1 million as of September 30, 2018 and December 31, 2017, respectively. Accumulated depreciation related to assets under capital lease as of these dates were $0.2 million and $0.1 million, respectively. For the three and nine months ended September 30, 2018 and 2017, total depreciation and amortization expense is included in research and development, selling, general and administrative expenses and cost of sales in the accompanying consolidated statements of operations as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	8	$	—	$	23	$	—
Research and development		242		139		709		382
Selling, general and administrative		41		89		117		237
Total depreciation and amortization expense	$	291	$	228	$	849	$	619

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5. Intangible Assets

Intangible assets consisted of the following:

	September 30, 2018			December 31, 2017
	(in thousands)
Customer relationships	$	3,750		$	3,750
Developed technology		4,400			4,400
Trade names		920			910
Gross intangible assets		9,070			9,060
Less: Accumulated amortization		(4,689	)		(4,289	)
Total intangible assets, net	$	4,381		$	4,771

Amortization expense related to intangible assets was $0.1 million for both the three months ended September 30, 2018 and 2017, respectively, and $0.4 million for both the nine months ended September 30, 2018 and 2017, respectively. Amortization expense is included within selling, general and administrative expense in the accompanying consolidated statements of operations. As of September 30, 2018, estimated amortization expense for the next five years amounts to approximately $0.5 million per year.

6. Accrued Liabilities

Accrued liabilities consisted of the following:

	September 30, 2018		December 31, 2017
	(in thousands)
Accrued vacation	$	495	$	477
Deferred rent		598		620
Accrued bonuses		1,439		1,672
Other accrued employee-related liabilities		360		462
Accrued professional fees		1,529		575
Accrued supplier liabilities		461		690
Accrued subcontractor costs		5,321		2,681
Accrued clinical trial costs		—		866
Other accrued liabilities		382		870
Total accrued liabilities	$	10,585	$	8,913

Clinical trial for PF708 ended in the first half of 2018. No further clinical trial costs were required to be accrued. Activity related to preparing for PF708’s NDA submission led to increased subcontractor accruals.

7. Significant Research and Development Agreements

The Company has two types of research and development agreements (i) those for which the Company co-develops or assists customers in developing their products (Collaboration Agreements), and (ii) those for which the Company receives funding to advance its own products (Funding Agreements).

Collaboration and License Agreements

Jazz

In July 2016, the Company entered into a development and license agreement with Jazz Pharmaceuticals for the development and commercialization of multiple early stage hematology/oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology, and in the third quarter of 2017, achieved a process development milestone. The agreement also includes an option for Jazz to negotiate a license for a recombinant pegaspargase product candidate with the Company. Under the agreement, the Company received an upfront and option payment totaling $15.0 million in July 2016 and may be eligible to receive additional payments based on achievement of certain research and development, regulatory and sales-related milestones.

In December 2017, the Company and Jazz entered into an amended and restated agreement. In connection with the amendment and restatement of the Jazz Agreement (as amended, the Amended Jazz Agreement), the Company received a total of $18.5 million, consisting of an upfront payment of $5.0 million and a payment of $13.5 million for development achievement. The Company may be eligible to receive additional payments under the Amended Jazz Agreement of up to $189.3 million based on achievement of certain research and development, regulatory and sales-related milestones. The total milestones are categorized as follows: $30.3 million based on achievement of certain research and development milestones; $34.0 million for certain regulatory milestones; and $125.0 million for sales milestones. For the non-sales-related milestones totaling $64.3 million, the Company conducted an evaluation as to whether they will be recorded using the milestone method and, as a result of this evaluation, estimates approximately

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$30.3 million of these non-sales-related milestones are deemed to be substantive. The Company may also be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement. Both Jazz and the Company will be contributing to the development efforts. Unless terminated earlier, the Amended Jazz Agreement will continue on a product-by-product basis for as long as Jazz is commercializing or having commercialized the products under the Amended Jazz Agreement.

In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the Jazz Agreement and again upon entering into the Amended Jazz Agreement. The deliverables have not changed under the amendment. The significant deliverables were determined to be the research and development services related to the pegaspargase product candidate option and for license and research and development activities of the other hematology/oncology products. The Company has determined that the license, together with the research and development activities, represent one unit of accounting for each product under license, as the license does not have standalone value from the respective development activities. The research and development activities related to the pegaspargase option were determined to have standalone value apart from the license and development activities for the other hematology/oncology products. The estimated selling price for the pegaspargase product candidate and the hematology/oncology products was determined using an income approach. In determining the estimated selling price, the Company considered costs expected to be incurred for internal labor, burden rates, internal margins, and subcontractors. Based on the Company’s considerations of estimated selling price, the Company allocated the original $15.0 million upfront and option payment as follows: $10.0 million to the pegaspargase product candidate and $2.5 million to each of the hematology/oncology products. For the $5.0 million upfront payment received under the terms of the Amended Jazz Agreement, the Company determined that $0.8 million represented development services performed prior to the amendment, which had been reimbursable under the original agreement. The remaining $4.2 million of the upfront payment was allocated to the remaining hematology product; the amount was deferred and will be recognized over the period of performance. The Amended Jazz Agreement provisions allow for Jazz to halt the advancement of one of the products under development and replace with others wherein the Company could potentially earn milestone revenue on those products. However, the Company believes it is unlikely Jazz would halt the advancement of the product under development and replace with other products. Therefore, none of the upfront payments were allocated to this option.

The upfront and option payment for the original Jazz agreement and the amendment are being deferred and will be recognized as revenue ratably over the period in which the Company expects services to be rendered for each respective unit of accounting. As previously disclosed, the estimated period of revenue recognition approximates a range of 15 to 32 months. Based on changes to this estimate that occurred during the quarter ended June 30, 2017, the Company modified the period of revenue recognition to range from 15 to 35 months. During the year ended December 31, 2017, the Company completed the service period related to one of the hematology products. In the second quarter of 2018, the Company achieved two development milestones and recognized $750 thousand in revenue for successful achievement of process development milestones for PF745. During the three months ended September 30, 2018 and 2017, the Company recorded revenue of approximately $1.8 million and $2.7 million related to the Jazz Collaboration, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded revenue of approximately $6.3 million and $6.0 million related to the Jazz collaboration, respectively. As of September 30, 2018 and December 31, 2017, deferred revenue associated with the Jazz collaboration was $4.6 million and $10.1 million, respectively. This deferred revenue will be recognized over the remaining period of performance from 6 to 9 months, subsequent to September 30, 2018.

NT Pharma

In April 2018, the Company entered into an agreement with NT Pharma under which the Company granted NT Pharma non-exclusive development and exclusive commercialization rights to PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand. In accordance with the agreement, the Company received an upfront payment of $2.5 million and may be eligible to receive up to $22.5 million in payments based on the achievement of certain development, regulatory, and sales-related milestones. In addition, the Company is eligible to receive double-digit royalties on net product sales. NT Pharma will be responsible for any further development required to achieve regulatory approval as well as commercialization activities in the applicable territories. The Company deems that none of the non-sales milestones are substantive. Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met.

In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the NT Pharma Agreement. The significant deliverables were determined to be the license and research and development services up through the NDA filing related to the PF708 product. The Company has determined that these deliverables meet the separation criteria and therefore are each treated as separate units of accounting.

The upfront payment of $2.5 million is not fixed and determinable. Due to a contract clause, the $2.5 million may be payable to NT Pharma if the NDA is not filed by a specified date; therefore, the upfront payment has been recorded as deferred revenue in the accompanying consolidated balance sheet.

Alvogen

In June 2018, the Company entered into an agreement with Alvogen in which the Company has granted Alvogen exclusive rights to commercialize PF708 in the United States. The Company will retain exclusive rights to PF708 in all countries outside of the

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United States except Mainland China, Hong Kong, Singapore, Malaysia and Thailand, where the Company has granted rights to NT Pharma. The Company will continue to be responsible for development and registration of PF708, while Alvogen will provide additional regulatory and development expertise. Alvogen will assume responsibility for costs related to litigation, commercial manufacturing and supply chain, and commercialization of PF708. In consideration for the licenses and other rights granted in the development and license agreement, the Company received an upfront payment of $2.5 million and may be eligible to receive an additional $25 million in support and regulatory milestone payments. The Company may also be eligible to receive a 50% gross profit split on sales if the product is rated as Therapeutically Equivalent (AP) to Forteo and up to 40% if rated differently. The Company deems that the support and regulatory milestones are substantive.

In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the Alvogen Agreement. The significant deliverables were determined to be the development and regulatory services up through the NDA filing and ultimate approval related to the PF708 product and the exclusive license granted to Alvogen to commercialize PF708 in the United States. The Company has determined that the license and the development and regulatory activities meet the separation criteria; therefore, they are each treated as separate units of accounting.

To determine the stand-alone value of the license, the Company considered our negotiation discussions with Alvogen that led to the final terms of the agreement and other information. The Company determined a selling price for the services by estimating costs expected to be incurred for internal labor, burden rates, internal margins, and subcontractors.

The upfront payment of $2.5 million is not fixed and determinable due to a contract clause that $2.5 million may be payable to Alvogen if the NDA approval is not transferred to Alvogen by a specified date; therefore, the upfront payment has been recorded as deferred revenue in the accompanying consolidated balance sheet. Alvogen is supporting certain agreed costs incurred by the Company related to the preparation and filing of the NDA for PF708. The Company records reimbursement amounts as net against research and development expenses in the accompanying consolidated statement of operations. The Company estimates the amounts to be received related to the reimbursement and records the amounts when they are fixed and determinable. For the nine months ended September 30, 2018, the Company recorded approximately $0.2 million for the estimated reimbursements. For the three months ended September 30, 2018, the Company did not record reimbursement amounts.

Funding Agreements

The U.S. Department of Health and Human Services

In July 2010, the Company entered into a contract with BARDA within the Office of the Assistant Secretary for Preparedness and Response in the U.S. Department of Health and Human Services to develop a production strain and process for the production of bulk recombinant protective antigen (rPA) from anthrax. The arrangement is a cost-plus fixed fee contract comprised of a base period and follow on options at BARDA’s election. At the inception of the contract, both BARDA and the Company entered into the arrangement with the expectation that BARDA would fund all costs of development and no costs in excess of the arrangement would be incurred by the Company. In December 2014, the Company filed the investigational new drug (IND) application for Px563L. BARDA extended the contract in December 2014 and provided additional funding, increasing the total contract to $25.2 million. The development contract was completed in August 2015.

In August 2015, the Company entered into a contract with BARDA for the advanced development of Px563L and RPA563 as novel vaccine candidates for the prevention of anthrax infection (BARDA Advanced Development Agreement). The BARDA Advanced Development Agreement is a cost-plus fixed fee development contract valued at up to approximately $143.5 million, including a 30-month base period of performance of approximately $15.9 million, and eight option periods valued at a total of approximately $127.6 million. The base period of performance was initially from August 2015 through February 2018 and later extended through September 2018. In addition to the base period, BARDA exercised additional phases of the development contract effective January 2017, totaling $4.9 million and allowing for the continuing development of Px563L and RPA563. The period of performance for the two option periods was extended through September 2018 and December 2019. Over the course of 2017 and 2018, the Company continued to collect favorable stability data for both products. Potential next milestones are the triggering of analytical and non-clinical animal study options, leading to a potential Phase 2 study in 2019, subject in each case to continued funding by BARDA. In May 2018, BARDA increased the funding for one of the option periods by approximately $1.7 million. This modification increased the total contract value if all options are exercised by BARDA to approximately $145.2 million.

Revenue is recognized in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contractors. Reimbursable costs under this government contract primarily include direct labor, materials, subcontracts, accountable property and indirect costs. In addition, the Company receives a fixed fee under the BARDA contract, which is unconditionally earned as allowable costs are incurred and is not contingent on success factors. Reimbursable costs under this BARDA contract, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable. The billing of any overage in indirect cost rates over the approved provisional rates in the contract is not allowed. Any such overage is expensed as incurred. When and if final rates with Defense Contract Audit Agency are approved, the Company will recognize any change in revenue resulting from the rate change in the period such revised rates are approved and as such this would be considered a change in estimate. This agreement is subject to early termination and stop-

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work order in conformance with Federal Acquisition Regulations 52.249-6 and 52.242-15 whereupon BARDA may immediately terminate the agreement early for convenience or request the Company to stop all or any part of the work for a period of at least 90 days. If BARDA is not adequately funded, there is a potential that some or all of the follow-on options could be delayed or never elected.

8. Commitments and Contingencies

Capital Lease Agreements

In February 2018, the Company signed a lease agreement (the Lease) for the purchase of specialized equipment totaling approximately $0.2 million. The Lease, which is classified as a capital lease, has a term of 24 months and commenced during the three months ended March 31, 2018.

Payment commitments for the Company’s capital leases are summarized as follows:

	September 30, 2018
	(in thousands)
2018	$	87
2019		342
2020		197
Total future minimum lease payments	$	626

In addition to the Lease, the Company has entered into operating and capital lease agreements for office and lab equipment that expire at various dates through 2021.

Clinical Study and Development Activity Commitments

The Company has entered into agreements with contract research organizations and subcontractors to further develop its product candidates. These contracts can be cancelled at any time, with some having certain cancellation fees associated with the termination of the contract, and others that only obligate the Company through the termination date.

9. Stock-Based Compensation

Summary Stock-Based Compensation Information

The following table summarizes stock-based compensation expense:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	50	$	67	$	143	$	189
Research and development		339		202		1,149		764
Selling, general and administrative		404		498		1,259		1,542
Total	$	793	$	767	$	2,551	$	2,495
Stock-based compensation from:
Stock options	$	752	$	707	$	2,395	$	2,377
Employee stock purchase plan		41		60		156		118
Total	$	793	$	767	$	2,551	$	2,495

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The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2018:

	Number of Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017		3,237		$	7.50
Granted		1,568			3.63
Exercised		(37	)		2.17
Cancelled (forfeited)		(649	)		6.95
Outstanding at September 30, 2018		4,119		$	6.16		7.51	$	3,552
Vested and expected to vest at September 30, 2018		3,596		$	6.44		7.28	$	2,871
Vested and exercisable at September 30, 2018		1,923		$	7.95		5.80	$	938

The Company received approximately $80 thousand and $26 thousand from stock option exercises during the nine months ended September 30, 2018 and 2017, respectively. Options outstanding at September 30, 2018 have a weighted average remaining contractual term of 7.51 years.

The exercise price of all options granted during the nine months ended September 30, 2018 and 2017 was equal to the closing price of the Company’s common stock on the date of grant. The fair value of each stock option granted is estimated on the grant date under the fair value method using the Black-Scholes model. The estimated fair values of the stock option, including the effect of estimated forfeitures, are then expensed over the requisite service period which is generally the vesting period. The table below sets forth the weighted-average assumptions used to estimate the fair value of stock options:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Risk-free interest rate		2.8	%		1.9	%		2.7	%		2.0	%
Expected volatility		72.8	%		65.8	%		71.1	%		66.8	%
Dividend yield		0	%		0	%		0	%		0	%
Expected term (years)		6.3			6.3			6.3			6.2

The weighted average grant date fair value of options granted during the nine months ended September 30, 2018 and 2017 was $2.37 and $3.50, respectively. As of September 30, 2018, there was approximately $4.4 million of unrecognized compensation cost related to unvested stock option awards and the weighted average period over which this cost is expected to be recognized is 2.55 years.

10. Income Taxes

During the three months and nine months ended September 30, 2018, the Company recorded no income tax expense. The Company expects to be in an overall taxable loss position for 2018. No tax expense is expected in the next several years as the Company expects to generate taxable net operating losses and corresponding valuation allowances due to its investments in its lead product candidates and other pipeline products.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.

Pursuant to the SEC Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), issued on December 22, 2017, a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. As of December 31, 2017, the Company was able to reasonably estimate provisional adjustments, based on current year operations only, related to Meals & Entertainment and Compensation related items that do not have an impact on its financial statements due to a full valuation allowance. As it relates to the Tax Act, the Company feels the calculations are completed and the measurement window is closed.

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11. Net Loss per Share of Common Stock

The following table summarizes the calculation of basic and diluted net loss per share:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands, except per  share data)
Net loss	$	(10,662	)	$	(8,818	)	$	(32,770	)	$	(31,174	)
Weighted-average common shares used in calculating basic and diluted net loss per share		31,437			23,539			27,288			23,488
Net loss per common share, basic and diluted	$	(0.34	)	$	(0.37	)	$	(1.20	)	$	(1.33	)

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period, determined using the treasury-stock method, if inclusion of these is dilutive. Because the Company reported a net loss for the three and nine months ended September 30, 2018 and 2017, diluted net loss per common share is the same as basic net loss per common share for those periods.

The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the calculation of diluted shares outstanding because of their anti-dilutive impact to earnings per share:

	September 30,
	2018		2017
	(in thousands)
Options to purchase common stock		4,119		3,430
Employee stock purchase plan		70		68
Total		4,189		3,498

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion and analysis should be read together with our consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include, but are not limited to:

• the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure needs for the next 12 months, including our belief that we have sufficient cash resources to fund all necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors;

• our and any potential future collaboration partner’s ability to enroll patients in our clinical studies at the pace that we project;

• our expectations regarding the initiation, timing, progress and the success of the design, primary and secondary end points, and duration of the clinical trials and planned clinical trials of PF708, Px563L, RPA563 and our other product candidates, and reporting results from same;

• whether the results of our and our collaboration partners’ trials will be sufficient to support domestic or global regulatory filings and approvals for PF708, including our expectations regarding the timing of our submission of the NDA for PF708;

• our ability to seek, obtain and maintain regulatory approval of PF708 or our other product candidates, and the timing of such submissions and regulatory approvals;

• our ability to obtain an FDA determination that PF708 is therapeutically equivalent to Forteo;

• our expectations regarding the earliest potential commercial launch of PF708 in the United States;

• our reliance on third parties to conduct clinical studies;

• our reliance on third-party contract manufacturers to manufacture and supply our product candidates for us;

• the benefits of the use of PF708, Px563L, RPA563 or any of our other product candidates;

• the rate and degree of market acceptance of PF708, Px563L, RPA563 or any of our other product candidates, if approved for sale;

• regulatory developments in the United States and foreign countries;

• our expectations regarding government and third-party payor coverage and reimbursement;

• our ability to manufacture PF708, Px563L, RPA563 and our other product candidates in conformity with regulatory requirements and to scale up manufacturing of PF708, Px563L, RPA563 and our other product candidates to commercial scale;

• our ability to successfully build a specialty sales force, or collaborate with third-parties (including our existing collaboration partners, Alvogen and NT Pharma), to commercialize PF708 and our other product candidates;

• our ability to compete with companies currently producing the reference products, including Forteo;

• our ability to compete with companies that may also seek and obtain approval for therapeutically equivalent versions of Forteo;

• our reliance on Jazz, Alvogen, NT Pharma, and any future collaboration partner’s performance over which we do not have control;

• our ability to retain and recruit key personnel, including development of a sales and marketing function;

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• our ability to obtain and maintain intellectual property protection for PF708, Px563L, RPA563 or any other product candidates;

• our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for or ability to obtain additional financing;

• our expectations regarding the market size, size of patient populations, and growth potential for our product candidates, if approved for commercial use;

• our estimates of the expected patent expiration timelines for Forteo and other branded reference drugs and biologics;

• our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act;

• our ability to develop new products and product candidates;

• our ability to successfully establish and successfully maintain appropriate collaborations and derive significant revenue from those collaborations;

• our financial performance; and

• developments and projections relating to our competitors and our industry.

Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, “Risk Factors,” elsewhere in this Form 10-Q filed with the Securities and Exchange Commission, or SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

Pfēnex™ and Pfēnex Expression Technology^® are our primary registered trademarks. Other service marks, trademarks, and trade names referred to in this Form 10-Q are the property of their respective owners.

In this Form 10-Q, “we,” “us” and “our” refer to Pfenex Inc. and its subsidiaries.

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Overview

We are a clinical-stage development and licensing biotechnology company focused on leveraging our Pfēnex Expression Technology to develop and improve protein therapies for unmet patient needs. Using the patented Pfēnex Expression Technology platform, we have created an advanced pipeline of therapeutic equivalents, vaccines, biologics and biosimilars. The Company also uses its Pfēnex Expression Technology platform to produce CRM197, a diphtheria toxoid carrier protein used in prophylactic and therapeutic vaccines. Our lead product candidates and collaborations are PF708, developed as a therapeutic equivalent drug candidate to Forteo ^® (teriparatide) for the treatment of osteoporosis, and our novel anthrax vaccine candidates, Px563L and RPA563, funded through an advanced development contract with the U.S. government. In addition, we are developing hematology/oncology products in collaboration with Jazz Pharmaceuticals Ireland Limited (Jazz). Furthermore, our pipeline includes biosimilar candidates to Lucentis ^® and Neulasta ^®.

Product Candidates and Collaborations

The following table summarizes certain information about our lead product candidates and collaborations:

Product Candidate	Branded Reference Drug	Program	Indication
Proposed Therapeutic Equivalent
PF708 – Teriparatide	Forteo	•  Licensed in the United States to Alvogen; •  Licensed in Mainland China, Hong Kong, Singapore, Malaysia, Thailand to NT Pharma; •  Wholly-Owned Rest of World	Osteoporosis
Multiple Hematology/Oncology Product Candidates	Various	•  Jazz Pharmaceuticals Ireland Limited	Various
Novel Vaccines
Px563L and RPA563 – rPA based anthrax vaccines	N/A	•  U.S. Government Funded	Anthrax post-exposure prophylaxis

Our lead product candidates and collaborations include the following:

• PF708 – our teriparatide drug candidate. PF708 is being developed as a therapeutic equivalent candidate to Forteo, which is approved and marketed by Eli Lilly and Company for the treatment of osteoporosis in certain patients with a high risk of fracture. Forteo achieved $1.7 billion in global product sales in 2017. PF708 is being developed pursuant to the 505(b)(2) regulatory pathway in the U.S. and references Forteo as the Reference Listed Drug. In November 2017, we announced the interim pharmacokinetic (PK) results from Study PF708-301, which also compared the effect of PF708 and Forteo in osteoporosis patients. In May 2018, we announced positive top-line results from our PF708-301 study, which showed comparable overall profiles between PF708 and Forteo after 24 weeks of daily injection in osteoporosis patients.

The PF708-301 study enrolled a total of 181 patients, with 90 patients receiving PF708 and 91 receiving Forteo. There were 82 patients who completed the study in the PF708 treatment group, compared with 81 patients in the Forteo treatment group. The primary study endpoint was anti-drug antibody (ADA) incidence after 24 weeks of drug treatment. The secondary study endpoints included mean percentage changes in lumbar-spine bone mineral density (BMD) and median percentage changes in bone turnover markers (BTM) after 24 weeks of drug treatment, as well as pharmacokinetic (PK) parameters for up to four hours after the first dose. Safety study endpoints were incidences of adverse events (AE) and serious adverse events (SAE).

There were two PF708-treated patients and two Forteo-treated patients that developed ADA during the study. These low rates of immunogenicity are consistent with historical Forteo results (~3%) in postmenopausal osteoporosis patients. At Week 24, there were two ADA-positive findings for PF708 compared with none for Forteo, but the difference was not statistically significant. The ADA findings in the two PF708 patients were low in titer and resolved during follow-up. One of the two patients had in vitro neutralizing activity transiently detected at Week 4. However, pharmacological activity, as assessed by increases in BMD and BTM, was observed during the study for this patient. There were no apparent safety issues or abnormal serum calcium levels related to ADA or neutralizing antibody findings. These findings are consistent with observations in follow-on biologics and biosimilars approved in the

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United States, with almost all of the products demonstrating an ADA treatment difference of less than 5% in comparative patient studies. The overall ADA results are shown in Table 1, and individual titer results for all ADA-positive patients are shown in Table 2 (below).

PF708 and Forteo demonstrated comparable effects on lumbar-spine BMD, P1NP (N-terminal propeptide of type 1 procollagen), which is a marker of bone formation and CTX (cross-linked C-terminal telopeptide of type 1 collagen), which is a marker of bone resorption. There were no statistically significant differences in any of these parameters between PF708 and Forteo. The lumbar-spine BMD results are shown in Figure 1 (below), and BTM results are shown in Figure 2 (below).

There were no significant imbalances in AE incidences or severity profiles between PF708 and Forteo. Treatment-emergent AE and SAE profiles are shown in Table 3 (below), and the severity of treatment-emergent AEs is shown in Table 4 (below).

The PF708-301 study assessed PF708 and Forteo across multiple endpoints in both female and male osteoporosis patients and showed comparable overall profiles. We believe the PF708-301 and PF708-101 study results meet the requirements for demonstrating clinical safety, effectiveness and bioequivalence. We expect that these results from the PF708-301 study, along with the previously announced bioequivalence findings from the PF708-101 study in healthy subjects, will support the PF708 NDA submission. In July 2018 we had a constructive Pre-NDA meeting with the agency which confirmed there were no additional clinical, nonclinical or analytical comparability studies requested by the agency, which we believe puts us on-track for submission to the FDA in the fourth quarter of 2018, with a potential commercial launch in the United States as early as the fourth quarter of 2019, subject, of course, to FDA acceptance, approval of the application and other factors.

PF708 is being developed pursuant to the 505(b)(2) regulatory pathway in the U.S. and references Forteo as the Reference Listed Drug. While we believe our application strategy could lead to launch in the U.S. as early as the fourth quarter of 2019, subject, of course, to FDA acceptance, approval of the application and other factors, it is possible that various factors, including patent litigation by Eli Lilly and Company, may delay approval and launch. We believe we have sufficient cash resources to fund all necessary activities leading up to and including potential commercial launch in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the application and other factors. We believe the clinical program in the U.S. may be leveraged for regulatory filings in other geographies, such as the European Union (EU).

Table 1. Study PF708-301 Overall Anti-Drug Antibody Results

Time (wk)	PF708				Forteo				P value
0		0/90	0	%		0/91	0	%		1.00
1		1/87	1.2	%		0/90	0	%		0.49
4		1/86	1.2	%		0/89	0	%		0.49
12		2/82	2.4	%		2/86	2.3	%		1.00
24		2/81	2.5	%		0/81	0	%		0.50
24-week overall		2/87	2.3	%		2/90	2.2	%		1.00

Table 2. Study PF708-301 Anti-Drug Antibody Titer Results for Individual Patients

Time (wk)	PF708 Patient 1	PF708 Patient 2	Forteo Patient 1	Forteo Patient 2
0	Neg	Neg	Neg	Neg
1	1:1	Neg	Neg	Neg
4	1:1*	Neg	Neg	Neg
12	1:1	1:1	1:8	1:2
24	1:1	1:1	Neg	Neg
Follow-up	Neg	Neg	N/A	N/A

* In vitro neutralizing activity detected; pharmacological activity, as assessed by changes in BMD and BTM, was observed during the study for this patient.

Antibody titer measures how much ADA is present in a positive sample. A value of 1:1 is the lowest possible finding, whereas a value of 1:8 represents an 8-fold increase.

Neg: negative; N/A: not applicable

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Table 3. Study PF708-301 Treatment-Emergent Adverse Event Profiles

Number and Percent of Patients with:	PF708				Forteo
Any AE		75	83.3	%		73	80.2	%
Any SAE		6	6.7	%		8	8.8	%
Any treatment-related AE		48	53.3	%		45	49.5	%
Any AE leading to early withdrawal		3	3.3	%		5	5.5	%
Any AE leading to death		0	0	%		0	0	%

AE: adverse event; SAE: serious adverse event

Table 4. Study PF708-301 Severity of Treatment-Emergent Adverse Events

		Grade     1		Grade     2		Grade     3		Grade     4		Total
All Findings	PF708		169		84		6		2		261
	Forteo		203		61		9		3		276
		Grade     1		Grade     2		Grade     3		Grade     4		Total
Injection Site Findings	PF708		36		1		0		0		37
	Forteo		33		1		0		0		34

Severity of AEs was assessed according to the Common Terminology Criteria for Adverse Events. Version 4.03

Figure 1. Study PF708-301 Lumbar-Spine Bone Mineral Density Results in Female and Male Patients

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Figure 2. Study PF708-301 Bone Turnover Markers Results in All Patients

In June 2018, we and Alvogen Malta Operations Ltd. (Alvogen) entered into a Development and License Agreement (Alvogen Agreement) pursuant to which Alvogen received the exclusive right to commercialize and manufacture PF708 in the United States. We have retained exclusive rights to the product in all countries outside of the United States except Mainland China, Hong Kong, Singapore, Malaysia and Thailand, where we have granted rights to China NT Pharma Group Company Limited (NT Pharma). We will continue to be responsible for development and registration of PF708, while Alvogen will provide additional regulatory and development expertise. Alvogen will assume responsibility for costs related to litigation, commercial manufacturing and supply chain, and commercialization of PF708. In consideration for the licenses and other rights granted in the development and license agreement, we received an upfront payment of $2.5 million and may be eligible to receive an additional $25 million in support and regulatory milestone payments. We may also be eligible to receive a 50% gross profit split on sales if the product is rated as Therapeutic Equivalent (AP) and up to 40% if rated differently.

In April 2018, we and NT Pharma entered into a Development and License Agreement (NT Pharma Agreement), pursuant to which we granted an exclusive license to NT Pharma to commercialize PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand and a non-exclusive license to conduct development activities in such territories with respect to PF708. We have retained exclusive rights to PF708 in all countries outside of such territories except for the United States, for which rights were subsequently granted to Alvogen. In accordance with the agreement, we received a payment of $2.5 million upon signing the NT Pharma Agreement and may be eligible to receive additional payments of up to $22.5 million based on the achievement of certain development, regulatory, and sales-related milestones. We may also be eligible to receive double-digit royalties on net sales of PF708. NT Pharma is responsible for any further development required to achieve regulatory approval as well as commercialization activities in the applicable territories.

• Jazz Collaboration – multiple early stage hematology/oncology product candidates with Jazz. In July 2016, we entered into a license and option agreement with Jazz, pursuant to which we and Jazz are collaboratively developing hematology/oncology products, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology, and Jazz will have the exclusive right to manufacture and commercialize such products throughout the world. In addition, pursuant to the agreement, we have granted Jazz certain other rights to negotiate the exclusive right to develop, manufacture and commercialize throughout the world other hematology/oncology products that are currently or in the future may be developed by us. In the third quarter of 2017, we achieved a process development milestone associated with this collaboration. In December 2017, we and Jazz signed an amended and restated agreement under which we will be eligible to receive an additional $43.5 million in amendment fee and development milestone payments as compared to the 2016 agreement, increasing the total value of upfront, option and amendment fee payments and potential payments for the achievement of development, regulatory and sales-related milestones associated with the collaboration to an aggregate of $224.5 million. We will also continue to be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement. In December 2017, as part of the amended and restated agreement, we received a total payment of $18.5 million, consisting of an upfront payment of $5.0 million and a payment of $13.5 million for development achievement. In the second quarter of 2018, we achieved two development milestones and received $750 thousand for successful achievement of process development milestones for PF745.

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• Px563L and RPA563 – our two novel anthrax vaccine candidates funded by the Biomedical Advanced Research and Development Authority (BARDA). Both vaccine candidates are prepared using the identical antigen and are being evaluated in parallel, although Px563L contains an adjuvant and RPA563 does not. In August 2016, we announced positive immunogenicity and safety data from Day 70 analysis of the Px563L and RPA563 anthrax vaccine study. The Px563L results indicated that the vaccine was well-tolerated and afforded immunogenicity protection with fewer doses than the currently licensed product. We announced positive interim results from a Phase 1a study in healthy subjects in the second half of 2016 and the study was completed in the first half of 2017. We have generated stability data on the 2016 manufactured lot for up to 12 months, demonstrating the maintenance of high purity at 5°C, the expected storage temperature, and accelerated stability data at 25°C. We have also generated long-term stability data from our toxicology lot, showing the maintenance of high purity at 5°C at 40 months. Over the course of 2017, we continued to collect favorable stability data for both products. In October 2017, we completed a meeting with the FDA in which the Agency provided guidance for the proposed clinical development and licensure plans for a post-exposure prophylaxis indication. In 2017, BARDA exercised additional options under its existing contract, allowing for the continued development of Px563L and RPA563. One of the exercised options was increased by $1.7 million in May 2018, which increased the total contract value to $145.2 million. In September 2018, BARDA extended the contract period of performance.

Potential next milestones are the triggering of analytical and non-clinical animal study options, leading to a potential Phase 2 study in 2019, subject in each case to continued funding by BARDA. We believe the successful completion of the Phase 2 study and activities under our development contract with BARDA could lead to a procurement contract for supply of Px563L or RPA563 to the Strategic National Stockpile.

• CRM197 – We have both licenses and supply agreements in place for CRM197, which is a non-toxic mutant of diphtheria toxin. It is a well-characterized protein and functions as a carrier for polysaccharides and haptens, making them immunogenic. We developed a unique CRM197 production strain based on our Pseudomonas fluorescens platform and sell non-GMP and cGMP CRM197 to vaccine development-focused pharmaceutical partners. As a result of our development efforts, we previously entered into commercial licenses for production strains capable of producing CRM197 with both Merck and Serum. Our CRM197 is currently being used in Merck’s first Phase 3 clinical study of PCV-15 (V114), an investigational 15-valent polyvalent conjugate vaccine for the prevention of pneumococcal disease. This study was initiated in June 2018, at which time we earned a milestone payment. In addition, we are eligible to receive annual fees, milestone payments and a tiered royalty based on net sales for all products developed by Merck that use the CRM197 produced via the Pfēnex Expression Technology platform. Our CRM197 is also currently be used in late-stage clinical trials for such diseases as pneumococcal and meningitis bacterial infections.

• Additional Biosimilar Pipeline Products – Our pipeline includes biosimilar candidates to certain reference products, including biosimilar candidates to Lucentis and Neulasta. Following our strategic review in November 2017, we decided to pause development activities on PF582, our biosimilar candidate to Lucentis. and PF529, our biosimilar to Neulasta, and focus development efforts elsewhere within the product portfolio while we continue to engage potential strategic partners to advance the programs and maximize value. Following the consummation of the Jazz collaboration in July 2016, we decided to advance the hematology/oncology assets that are part of the Jazz collaboration and pause development activities on PF530, our biosimilar candidate to Betaseron.

To date, none of our product candidates have completed clinical development, been submitted for regulatory review or received marketing authorization from any regulatory agency. Therefore, we have not received revenue from the sale of any of our product candidates. Our product candidates are enabled by our patented protein production platform, Pfēnex Expression Technology, which we believe confers several important competitive advantages compared to traditional techniques for protein production, including the ability to produce complex proteins with higher accuracy and greater degree of protein purity, as well as speed and cost advantages. The development of proteins requires several competencies which represent both challenges and barriers to entry. Due to their inherent complexity, proteins require the use of living organisms to efficiently produce them at a large scale. Traditional techniques for protein production employ a trial and error approach to production organism, or strain, selection and process optimization, which is inherently inefficient and typically produces suboptimal results. This historically inefficient process provides barriers to creating or replicating complex proteins, adds significant time to market and results in the high cost of goods typical of biologic therapeutics. Together, these limitations pose significant hurdles for companies interested in entering the market with novel biologics, biosimilars and therapeutic equivalents. Our platform utilizes a proprietary high throughput robotically-enabled parallel approach, which allows the construction and testing of thousands of unique protein production strains in parallel, thereby allowing us to produce and characterize complex proteins while reducing the time and cost of development and long-term production.

The potential market opportunities for our most advanced product candidate, PF708, are substantial. We have developed PF708 as a therapeutic equivalent candidate to Forteo, which achieved product sales of approximately $1.7 billion in 2017. More than half of these product sales came from the U.S. alone, followed by Japan. In 2019, Forteo is expected to lose patent protection with respect to

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claims of patents listed in the Orange Book related to compounds, methods of treatment, and formulations in the U.S. An additional Orange Book listed patent, which has claims relating to the delivery system, expires in 2025. It is not clear whether this patent will delay approval of PF708.

Our revenue for the three months ended September 30, 2018 and 2017 was $3.6 million and $5.0 million, respectively, and was $11.5 million and $10.9 million for the nine months ended September 30, 2018 and 2017, respectively. Our historical revenue has been primarily derived from monetizing our Pfēnex Expression Technology through collaboration agreements, service agreements, government contracts and reagent protein product sales, which provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees.

As of September 30, 2018, we had an accumulated deficit of $194.5 million, of which $89.8 million was attributable to recognizing the accretion in the redemption value of our convertible preferred stock. We recognized net losses of $10.7 million and $8.8 million for the three months ended September 30, 2018 and 2017, respectively, and $32.8 million and $31.2 million for the nine months ended September 30, 2018 and 2017, respectively. As we continue to develop and invest more resources into the development and commercialization of our product candidates, our net operating losses will increase over the next several years. As a result, our research and development expenses will increase materially as we incur further costs of development. We currently utilize third-party clinical research organizations (CROs) to carry out our clinical development and we do not yet have an extensive sales organization. We will need substantial additional funding to support our operating activities, especially as we approach anticipated regulatory approval in the United States, Europe and other territories, and begin to establish our commercialization capabilities. Adequate funding may not be available to us on commercially reasonable terms, or at all. Since our inception, we have funded our operations primarily through the sale and issuance of common stock in our public offerings, revenue from our collaboration agreements, government contracts, service agreements, and reagent protein product sales, our prior credit facility and the private placement of equity securities. We have devoted substantially all of our capital resources to the research and development of our product candidates and working capital requirements.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. The accompanying unaudited consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2017. Except as otherwise disclosed, there have been no material changes in our critical accounting policies and estimates in the preparation of our financial statements during the three and nine months ended September 30, 2018 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 15, 2018.

Results of Operations

Comparison of the three and nine months ended September 30, 2018 and 2017

The following table summarizes our net loss during the periods indicated:

	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands, except percentages)	2018			2017			Change			2018			2017			Change
Revenue	$	3,570		$	5,024			(29	)%	$	11,506		$	10,871			6	%
Cost of revenue		1,479			1,766			(16	)%		3,923			3,481			13	%
Gross profit		2,091			3,258			(36	)%		7,583			7,390			3	%
Operating expense
Research and development		9,045			8,112			12	%		28,590			24,708			16	%
Selling, general and administrative		3,823			3,999			(4	)%		11,920			13,973			(15	)%
Total operating expense		12,868			12,111			6	%		40,510			38,681			5	%
Loss from operations		(10,777	)		(8,853	)		22	%		(32,927	)		(31,291	)		5	%
Other income, net		115			35			229	%		157			117			34	%
Net loss	$	(10,662	)	$	(8,818	)		21	%	$	(32,770	)	$	(31,174	)		5	%

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Revenue

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except percentages)	2018		2017		Change			2018		2017		Change
Revenue	$	3,570	$	5,024		(29	)%	$	11,506	$	10,871		6	%

Revenue decreased by $1.5 million, or 29%, to $3.6 million in the three months ended September 30, 2018 compared to $5.0 million in the same period in 2017. The decrease in revenue for the quarter was due to achievement of a milestone related to the Jazz agreement in the third quarter of 2017. There were no similar milestones achieved in the three months ended September 30, 2018. In addition, there was less activity related to our Px563L product candidate under our government contract with BARDA in the third quarter of 2018 compared to the prior year.

Revenue increased by $0.6 million, or 6%, to $11.5 million in the nine months ended September 30, 2018, compared to $10.9 million in the same period in 2017. The increase in revenue was primarily due to milestones earned in the second quarter of 2018. Revenue was recognized for the achievement of two development milestones related to the Jazz agreement in June 2018 and a milestone earned associated with Merck’s initiation of the first Phase 3 clinical study of a pneumococcal vaccine using our CRM197, also in June 2018. The Merck vaccine is produced using the Pfēnex Expression Technology platform. Revenue for the nine months ended September 30, 2018 also included increased reagent protein product sales and increased license revenue associated with the Jazz agreement.

Given the nature of the novel vaccine development process with BARDA, revenue will fluctuate depending on stage of development.

Cost of Revenue

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except percentages)	2018		2017		Change			2018		2017		Change
Cost of revenue	$	1,479	$	1,766		(16	)%	$	3,923	$	3,481		13	%

Cost of revenue decreased by $0.3 million, or 16%, in the three months ended September 30, 2018 compared to the same period in 2017. This resulted primarily from a decrease in activity related to our government contract with BARDA.

Cost of revenue increased by $0.4 million, or 13%, to $3.9 million in the nine months ended September 30, 2018, compared to $3.5 million in the same period in 2017. The increases in cost of revenue for the nine months ended September 30, 2018 over the nine months ended September 30, 2017 were due primarily to an increase in costs for our Px563L product candidate under our government contract with BARDA.

Given the nature of the novel vaccine development process with BARDA, these costs will fluctuate depending on stage of development.

Research and Development

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except percentages)	2018		2017		Change			2018		2017		Change
Research and development	$	9,045	$	8,112		12	%	$	28,590	$	24,708		16	%

Research and development expenses increased by $0.9 million, or 12%, to $9.0 million in the three months ended September 30, 2018 compared to $8.1 million in the same period in 2017. The increase was primarily due to increased activity for our product candidate PF708 to satisfy the clinical and manufacturing filing requirements for an NDA, which we expect to submit to the FDA in the fourth quarter of 2018.

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Research and development expenses increased by $3.9 million, or 16%, to $28.6 million in the nine months ended September 30, 2018, compared to $24.7 million in the same period in 2017. The increase was primarily due to increased activity for PF708 to satisfy the clinical and manufacturing filing requirements for an NDA, which we expect to submit to the FDA in the fourth quarter of 2018. These increased costs were partially offset by a decrease in expenses due to our decision to pause our development activities on certain product candidates in the first half of 2017.

We expect research and development expenses to increase for the foreseeable future as we advance our lead product candidates and pipeline product candidates. The timing and amount of expenses incurred for our product candidates will depend largely upon the outcomes of current or future clinical studies for our product candidates, as well as the related regulatory requirements, manufacturing costs and any costs associated with the advancement of our preclinical programs.

Selling, General and Administrative

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except percentages)	2018		2017		Change			2018		2017		Change
Selling, General and Administrative	$	3,823	$	3,999		(4	)%	$	11,920	$	13,973		(15	)%

Selling, general and administrative expenses decreased by $0.2 million, or 4%, to $3.8 million in the three months ended September 30, 2018 compared to $4.0 million in the same period in 2017.

Selling, general and administrative expenses decreased by $2.1 million, or 15%, to $11.9 million in the nine months ended September 30, 2018, compared to $14.0 million in the same period in 2017. The decreases were primarily due to higher expenditures related to marketing, legal, severance, recruiting fees and other outside services in the first half of 2017 relative to the same period in the current year.

Liquidity and Capital Resources

To date, we have funded our operations primarily through the sale and issuance of common stock in our public offerings, revenue from our collaboration agreements, government contracts, service agreements, and reagent protein product sales, our prior credit facility and the private placement of equity securities. At September 30, 2018, we had $67.8 million in cash and cash equivalents and $0.2 million in restricted cash as bank collateral for our commercial card program compared to $57.7 million in cash and cash equivalents and $0.2 million in restricted cash as of December 31, 2017. We believe that our existing cash and cash equivalents and cash inflow from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. We believe we have sufficient cash resources to fund all necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors.

In July 2016, we entered into a development and license agreement with Jazz Pharmaceuticals for the development and commercialization of multiple early stage hematology/oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology, and in the third quarter of 2017, achieved a process development milestone. The agreement also includes an option for Jazz to negotiate a license for a recombinant pegaspargase product candidate with us. Under the terms of the agreement, we received an upfront and option payment totaling $15.0 million in July 2016 and may be eligible to receive additional payments based on the achievement of certain research and development, regulatory, and sales-related milestones.

In December 2017, we and Jazz entered into an amended and restated agreement, bringing the total value of payments and potential payments associated with the collaboration to $224.5 million. In addition, we may be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement. Under the amended and restated agreement, in the second quarter of 2018, we achieved two process development milestones for PF745.

According to an agreement signed in 2007, we are eligible to receive annual fees, milestone payments and a tiered royalty based on net sales for all products developed by Merck that use CRM197 produced via the Pfēnex Expression Technology platform. In June 2018, Merck initiated the first Phase 3 clinical study of investigational 15-valent pneumococcal vaccine PCV-15 (V114), using our CRM197, for which we earned milestone revenue.

In March 2018, we entered into an equity sales agreement (the “Sales Agreement”) with William Blair & Company, L.L.C. (“William Blair”) to sell shares of our common stock having aggregate sales proceeds of up to $20.0 million, from time to time, through an “at the market” equity offering program under which William Blair will act as sales agent. Under the Sales Agreement, we set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested

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to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Sales Agreement provides that William Blair will be entitled to compensation for its services that will equal 3.0% of the gross sales price per share of all shares sold through William Blair under the Sales Agreement. The Sales Agreement shall automatically terminate upon the issuance and sale of placement shares equaling sales proceeds of $20.0 million and may be terminated earlier by either us or William Blair upon five days’ notice. We have no obligation to sell any shares under the Sales Agreement and may at any time suspend solicitation and offers under the Sales Agreement. We have not sold any shares under the Sales Agreement.

On May 25, 2018, we closed an underwritten public offering of 7,820,000 shares of our common stock at a price of $5.50 per share, which included the full exercise by the underwriters of their option to purchase an additional 1,020,000 shares of our common stock, pursuant to our existing shelf registration statement. Net proceeds from the offering were approximately $39.5 million. We believe that our existing cash and cash equivalents and our cash inflow from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. We also believe we have sufficient cash resources to fund all our necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors. 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. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We currently have no credit facility or committed sources of capital although we may receive milestone and other contingent payments under our current license and collaboration agreements. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future capital requirements will depend on many factors, including:

• the timing and extent of spending on our research and development efforts, including with respect to PF708 and our other product candidates;

• our ability to enter into and maintain collaboration, licensing, commercialization and other arrangements and the terms and timing of such arrangements;

• the timing of the NDA submission and FDA’s filing of the application, and marketing approval for PF708, if any;

• the cost of manufacturing and commercialization activities for PF708 and our other product candidates, if any;

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

• the receipt of any collaboration or milestone payments;

• the scope, rate of progress, results and cost of our clinical trials, preclinical testing and other related activities;

• the emergence of competing technologies or other adverse market developments;

• the time and costs involved in seeking and obtaining regulatory and marketing approvals in multiple jurisdictions for our product candidates that successfully complete clinical trials;

• the introduction of new product candidates and the number and characteristics of product candidates that we pursue;

• the timing, receipt and amount of sales, profit sharing or royalties, if any, from our potential products;

• the degree and rate of market acceptance of any products launched by us or our collaboration partners;

• the expansion of our sales and marketing activities; and

• the potential acquisition and in-licensing of other technologies, products or assets.

We may need to raise additional capital to fund our operations in the near future. Funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

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Cash Flows

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

	Nine Months Ended September 30,
	2018			2017
	(in thousands)
Net cash (used in) provided by:
Operating activities	$	(28,288	)	$	(31,156	)
Investing activities		(1,020	)		(1,909	)
Financing activities		39,469			137
Net increase (decrease) in cash, cash equivalents and restricted cash	$	10,161		$	(32,928	)

Net cash used in operating activities

Net cash used in operating activities was $28.3 million for the nine months ended September 30, 2018 compared to net cash used in operating activities of $31.2 million for the nine months ended September 30, 2017. Net cash used in operating activities for the nine months ended September 30, 2018 was primarily attributable to activity to satisfy the clinical and manufacturing filing requirements for an NDA for PF708 and our research and development activities associated with our other product candidates. Net cash used in operating activities for the nine months ended September 30, 2017 was primarily attributable to our research and development activities associated with PF708 and our other product candidates. The decrease in cash used in operating activities was primarily due to amounts received in the second quarter of 2018 upon entering into agreements with Alvogen and NT Pharma. A total of $5.0 million of deferred revenue was received.

Net cash used in investing activities

Net cash used in investing activities was $1.0 million for the nine months ended September 30, 2018, compared to net cash used of $1.9 million for the nine months ended September 30, 2017. We purchased less property and equipment in the nine months ended September 30, 2018 as compared to the same period in 2017.

Net cash provided by financing activities

Net cash provided by financing activities was $39.5 million for the nine months ended September 30, 2018 compared to net cash provided of $0.1 million for the nine months ended September 30, 2017. Net cash provided for the nine months ended September 30, 2018 consisted of $39.5 million in net proceeds from our public offering in May 2018, pursuant to which we sold 7,820,000 shares of our common stock, and $0.2 million in proceeds from the issuance of common stock in connection with exercises of stock options and our Employee Stock Purchase Plan, or ESPP. This was partially offset by $0.2 million in repayment of capital lease obligations and payment of taxes related to net share settlement of equity awards. Net cash provided of $0.1 million for the nine months ended September 30, 2017 resulted primarily from the issuance of common stock in connection with our ESPP, as well as exercises of stock options.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future but have not yet been made. As of September 30, 2018, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

Contractual Obligations and Commitments

In February 2018, we signed a lease agreement for the purchase of specialized equipment totaling approximately $0.2 million. The lease has a term of 24 months and commenced during the quarter ended March 31, 2018. Other than disclosed above, there have been no other material changes during the nine months ended September 30, 2018 to our contractual obligations disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

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Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Numerous updates were issued in 2016 that provide clarification on a number of specific issues as well as requiring additional disclosures. The effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods: the full retrospective method or the modified retrospective method. We plan to adopt the standard in the first quarter of fiscal year 2019 using the modified retrospective method. We do not expect the new standard to have a material impact on the recognition of revenue from our reagent protein product sales. We are currently evaluating our agreements with BARDA, NT Pharma, Jazz and Alvogen.

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842), which was subsequently amended in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases. This guidance is effective for us in the first quarter of fiscal year 2020. We are currently evaluating the impact of the adoption of this accounting standard update on our financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This updated guidance eliminates Step 2 from the current two-step quantitative model for goodwill impairment tests. Step 2 required an entity to calculate an implied fair value, which included a hypothetical purchase price allocation requirement, for reporting units that failed Step 1. Per this updated guidance, a goodwill impairment will instead be measured as the amount by which a reporting unit’s carrying value exceeds its fair value as identified in Step 1. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for us in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for us beginning in the first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating this guidance to determine the impact on our financial statements and related disclosures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. As of September 30, 2018, we did not hold or issue financial instruments for trading purposes.

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Interest rate fluctuation risk

The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our cash and cash equivalents without assuming significant risk. To achieve our objectives, we invest our cash and cash equivalents in money market funds, treasury obligations, short term certificates of deposit and high-grade corporate securities, directly or through managed funds, with maturities of 90 days or less. As of September 30, 2018, we had cash and cash equivalents of $67.8 million consisting of cash of $10.7 million and investments of $57.1 million in highly liquid U.S. money market funds. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant and a 100-basis point movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.

Foreign currency exchange risk

We contract with clinical research organizations, investigational sites and suppliers in foreign countries. We are therefore subject to fluctuations in foreign currency rates in connection with these agreements. We have not entered into any material foreign currency hedging contracts although we may do so in the future. To date we have not incurred any material effects from foreign currency changes on these contracts. The effect of a 10% adverse change in exchange rates on foreign currency denominated cash and payables as of September 30, 2018 would not have been material. However, fluctuations in currency exchange rates could harm our business in the future.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the quarter covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, before making an investment decision. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results, cash flows and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating to our Financial Condition and Need for Additional Capital

We have a limited operating history and expect to generate significant losses for the foreseeable future. If we do not generate significant revenue, we will not be profitable.

With the exception of two years, we have incurred annual net operating losses since inception, and to date have generated only limited revenue from government contracts, service agreements, collaboration agreements, and reagent protein product sales. We have recognized net losses of $32.8 million, $31.2 million and $25.7 million for the nine months ended September 30, 2018 and 2017 and the year ended December 31, 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $194.5 million and net working capital of $52.5 million. To date, we have funded our operations primarily through the sale and issuance of common stock in our public offerings, revenue from our collaboration agreements, government contracts, service agreements, and reagent protein product sales, our prior credit facility and the private placement of equity securities. As of September 30, 2018, we had capital resources consisting of cash and cash equivalents of $67.8 million. As we continue to develop and invest more resources into the development and commercialization of our product candidates, our net operating losses will increase over the next several years. To become profitable, we must successfully develop and obtain regulatory approval for our product candidates, and effectively manufacture and commercialize the product candidates we develop. If we obtain regulatory approval to market a product candidate, our future revenue will depend upon the size of any markets in which our product candidates may receive approval, and our and our collaboration partners’ ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for our product candidates in those markets. We may never succeed in these activities and therefore may never generate revenue that is significant or large enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.

We will require substantial additional funds to seek and obtain regulatory approval for and commercialize our most advanced product and vaccine candidates and our other product candidates and, if additional capital is not available, we may need to limit, scale back or cease our operations.

Since our inception, a significant portion of our resources have been dedicated to the preclinical and clinical development of our product candidates, including PF708, Px563L, RPA563, PF582, and PF529. We believe that we will continue to expend substantial resources for the foreseeable future for the preclinical and clinical development of our current product pipeline, and the development of any other indications and product candidates we may choose to pursue, either alone or with a strategic collaboration partner. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical studies, and manufacturing and supply as well as marketing and selling any products that receive marketing authorization. Because the outcome of any clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of PF708, Px563L, RPA563, and our pipeline of other product candidates and preclinical products under development. Following our strategic review in November 2017, we decided to pause our development activities for PF582 and PF529 and focus our efforts and resources elsewhere in the product portfolio until strategic partnerships for these candidates are forged. In the future, we may be required to devote additional resources to the development of PF582 or PF529, or obtain a new collaboration partner on short notice, and the terms of any additional collaboration or other arrangements that we establish may not be favorable to us. We may also need to obtain substantial additional sources of funding to develop our product candidates as currently contemplated. If such additional funding is not available on favorable terms or at all, we may need to delay or reduce the scope of our product candidate development programs, or grant rights in the United States, as well as outside the United States, to our product candidates to one or more partners.

We believe that our available cash and cash equivalents, including the proceeds from any revenue from our government contracts, service agreements, collaboration agreement, and reagent protein product sales, will be sufficient to meet our anticipated cash needs for at least the next twelve months. We believe we have sufficient cash resources to fund all necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors. However, changing circumstances and risks and uncertainties associated with our product

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development efforts may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected. Our future capital requirements may vary depending on the following:

• the timing and extent of spending on our research and development efforts, including with respect to PF708 and our other product candidates;

• our ability to enter into and maintain collaboration, licensing, commercialization and other arrangements and the terms and timing of such arrangements;

• the cost of manufacturing and commercialization activities, if any;

• the receipt of any collaboration or milestone payments;

• the scope, rate of progress, results and FDA acceptance of the results, and cost of our clinical trials, preclinical testing and other related activities for our product candidates, including our anticipated submission of the NDA for PF708;

• the emergence of competing technologies or other adverse market developments;

• the time and costs involved in seeking and obtaining regulatory and marketing approvals in multiple jurisdictions for our product candidates that successfully complete clinical trials;

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

• the introduction of new product candidates and the number and characteristics of product candidates that we pursue;

• the timing, receipt and amount of sales, profit sharing or royalties, if any, from our potential products;

• if approved, the degree and rate of market acceptance of any products launched by us or our collaboration partners;

• the expansion of our sales and marketing activities; and

• the potential acquisition and in-licensing of other technologies, products or assets.

If we were to experience any delays or encounter issues with any of the above, including clinical holds, failed studies, inconclusive or hard-to-interpret results, safety or efficacy issues, or other regulatory challenges that require longer follow-up of existing studies, additional major studies, or additional supportive studies in order to pursue marketing approval, it could further increase the costs associated with the above and delay revenues.

We will need to raise additional capital to fund our operations in the near future. If we seek additional funding in the future, additional funds may not be available to us on acceptable terms or at all. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. We have a sales agreement in place with William Blair to sell up to $20.0 million worth of shares of our common stock, from time to time, through an “at the market” equity offering program under which William Blair will act as sales agent. As of September 30, 2018, $20.0 million worth of shares of our common stock remained available for sale under the “at the market” equity offering program. Any additional equity financing may be dilutive to our stockholders. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail the advancement of one or more of our product candidates. We also could be required to seek funds through arrangements with collaboration partners or others that may require us to relinquish rights to some of our technologies or product candidates which we would otherwise pursue on our own.

Any further development of PF582 and PF529 will require significant resources from us or another collaboration partner, and in the event that we do not find a collaboration partner, the development of PF582 and PF529 could be significantly delayed or result in the discontinuation of the development of PF582 and PF529.

In November 2017, we completed our strategic review of PF582 and PF529, our biosimilar product candidates to Lucentis ^® and Neulasta^®, respectively. The strategic review considered the timeline for development and cost of both programs. As a result of our strategic review, we decided to pause development activities on PF582 and PF529 and focus development efforts elsewhere within the product portfolio while we continue to engage potential strategic partners to monetize PF582 and PF529. Further development of PF582 and PF529 will require significant resources from us or another collaboration partner. We or a new collaboration partner will be responsible for funding any new PF582 and PF529 development and clinical trial activities going forward. Any such further development will require significant resources to develop and commercialize PF582 and PF529, and such further development may not be possible in the near term without a new collaboration partner. There are no assurances that we will have access to additional capital or find a new collaboration partner or that the terms and timing of any such arrangements would be acceptable to us. As a result, we could experience a significant delay in the PF582 and PF529 development processes. If we determine instead to discontinue the development of PF582 or PF529, we will not receive any future return on our investment from that product candidate.

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Our quarterly operating results may fluctuate significantly.

Our operating results are subject to quarterly fluctuations. Our operating results are affected by numerous factors, including:

• variations in the level of expenses related to our PF708, Px563L, RPA563 and other development and future commercialization programs;

• addition or termination of clinical trials;

• any intellectual property infringement lawsuit in which we may become involved;

• regulatory developments affecting any of our products; and

• our execution of any service, collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements.

If our quarterly operating results fall below the expectations of investors or securities analysts, the market price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the market price of our stock to fluctuate substantially.

Risks Relating to our Business and our Industry

Our business operations are dependent upon our senior management team and the ability of our other employees to execute on our business strategy. If we fail to attract, integrate, and keep senior management and key scientific personnel, we may be unable to successfully develop PF708, Px563L, RPA563 or any other product candidates, conduct our clinical trials and commercialize PF708, Px563L, RPA563 or any other product candidates we develop.

Our success depends in part on our continued ability to attract, integrate, retain, and motivate highly qualified management, clinical and scientific personnel, including our ability to develop an effective working relationship among senior management. Our senior management has substantially changed since the beginning of the last fiscal year, including, for example, the departures of our former chief executive officer, Bertrand Liang, former chief financial officer, Paul Wagner, former chief manufacturing officer, Steven Sandoval in 2017 and Hubert Chen, former chief medical and scientific officer, in 2018. Dr. Chen continues to support the Company as an advisor. We have a new president and chief executive officer, Eef Schimmelpennink, who started in August 2017, a new chief financial officer, Susan Knudson, who started in February 2018, and a new chief operating officer, Shawn Scranton. Dr. Scranton joined us in October 2018.

As new employees gain experience in their roles, we could experience inefficiencies or a lack of business continuity due to loss of historical knowledge and a lack of familiarity of new employees with business processes, operating requirements, policies and procedures, and we may experience additional costs as new employees gain necessary experience. It is important to our success that these key employees quickly adapt to and excel in their new roles. If they are unable to do so, our business and financial results could be materially adversely affected. In addition, the loss of the services of any member of our senior management or our scientific or technical support staff might significantly delay or prevent the development of our products or achievement of other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, if any, and could have a material adverse effect on our business.

We believe that our future success is highly dependent upon the contributions of our senior management, particularly our Chief Executive Officer, Chief Financial Officer, Chief Business Officer, and Chief Operating Officer, as well as our senior scientists and other members of our senior management team. Employment agreements with our Chief Executive Officer, Chief Financial Officer, Chief Business Officer, and Chief Operating Officer, as well as our offer letters with our senior scientists, all provide for “at-will” employment. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline, completion of our planned clinical trials or the commercialization of PF708, Px563L, RPA563, or any other products we develop.

Competition for qualified personnel in the biotechnology and pharmaceuticals industry is intense due to the limited number of individuals who possess the skills and experience required. To help attract, retain, and motivate qualified employees, we use share-based incentive awards such as employee stock options. Other companies may provide more generous compensation and benefits, more diverse opportunities and better chances for career advancement than we do. Some of these advantages may be more appealing to high-quality candidates and employees than those we have to offer. In addition, the decline in our stock price has created additional challenges related to our ability to compete effectively with respect to equity compensation. We may 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, or at all, which may cause our business and operating results to suffer.

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If an improved version of a reference product or reference listed drug, such as Forteo, is developed, or if the market for a reference product or reference listed drug significantly declines, sales or potential sales of our biosimilar and therapeutic equivalent product candidates may suffer.

Reference product or reference listed drug (“originator”) sponsor companies may develop improved versions as part of a life cycle extension strategy and may obtain regulatory approval of the improved version under a supplemental biologics license application (BLA) or NDA. If an originator sponsor company succeeds in obtaining an approval of an improved product, it may capture a significant share of the collective market and significantly reduce the market for the reference product/reference listed drug, and thereby the potential size of the market for our biosimilar and therapeutic equivalent product candidates. In addition, the improved product may be protected by additional patent rights.

Additionally, competition in the pharmaceutical market is intense. Reference products/reference listed drugs face competition on numerous fronts as technological advances are made that may offer patients a more convenient form of administration or increased efficacy, or as new products are introduced. As new products are approved that compete with the reference product/reference listed drug for our biosimilar or therapeutic equivalent product candidates, such as Forteo, sales may be significantly and adversely impacted and may render the originator obsolete. If the market for the originator is impacted, we in turn may lose significant market share or market potential for our products and product candidates. As a result, the value of our product pipeline could be negatively impacted and our business, prospects and financial condition could suffer.

Our product candidates, if approved, will face significant competition from the reference products and from other biosimilars and therapeutic equivalent products of the reference products, and from other products. Our failure to effectively compete may prevent us from achieving significant market penetration and expansion.

We expect to enter highly competitive pharmaceutical markets. Successful competitors in the pharmaceutical market have the ability to effectively discover, obtain patents, develop, test and obtain regulatory approvals for products, as well as the ability to effectively commercialize, market and promote approved products, including communicating the effectiveness, safety and value of products to consumers and medical professionals. Numerous companies, universities, and other research institutions are engaged in developing, patenting, manufacturing and marketing of products competitive with those that we are developing. Many of these potential competitors, such as Amgen Inc., Eli Lilly and Company, Teva Pharmaceutical Industries Limited and Emergent BioSolutions Inc., are large, experienced companies that enjoy significant competitive advantages, such as substantially greater financial, research and development, manufacturing, personnel and marketing resources. Recent and potential future merger and acquisition activity in the biotechnology and pharmaceutical industries is likely to result in even more resources being concentrated among a smaller number of our competitors. These companies also maintain greater brand recognition and more experience and expertise in undertaking preclinical testing and clinical trials of product candidates and obtaining the FDA and other regulatory approvals of products. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds that could make our product candidates obsolete.

In addition, our biosimilar, therapeutic equivalent and vaccine products may face competition from companies that develop and commercialize biosimilars, therapeutic equivalent products and vaccines that compete directly with our products. See “Risks Related to Government Regulation—If other therapeutic equivalent or generic products to Forteo are approved and successfully commercialized before PF708, our business would suffer.”

Use of our product candidates could be associated with side effects or adverse events.

Use of our product candidates could be associated with side effects or adverse events which can vary in severity (from minor reactions to death) and frequency (infrequent or prevalent). Side effects or adverse events associated with the use of our product candidates may be observed at any time, including in clinical trials or when a product is commercialized, and any such side effects or adverse events may negatively affect our and our collaboration partners’ ability to obtain and maintain regulatory approval or market our product candidates. Side effects such as toxicity or other safety issues associated with the use of our product candidates could require us or our collaboration partners to perform additional studies or halt development or sale of these product candidates or expose us to product liability lawsuits which would harm our business. We may be required by regulatory agencies to conduct additional animal or human studies regarding the safety and efficacy of our product candidates which we have not planned or anticipated. We may also be required to change our product labeling, including increasing the prominence and content of warnings and contraindications for our products. The FDA could require us to develop a Risk Evaluation and Mitigation Strategy (REMS) for such product or, if a REMS is already in place, to incorporate additional requirements under the REMS, and foreign regulatory authorities may require similar risk management strategies. There can be no assurance that we will resolve any issues related to any product-related adverse events to the satisfaction of the FDA or any regulatory agency in a timely manner or ever, which could harm our business, prospects and financial condition.

In addition, if we and our collaboration partners are successful in commercializing PF708, Px563L, RPA563 or any other product candidates, the FDA, European Medicines Agency (EMA), competent authorities of the Member States of the European Economic Area (EEA), and other foreign regulatory agency regulations require that we timely report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We or our collaboration partners may fail to report adverse events we become aware of within the prescribed timeframe. We or our collaboration partners may also fail to appreciate that we or our collaboration partners have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we or our collaboration partners fail to comply with our reporting obligations, the FDA, the EMA, competent authorities of the Member States of the EEA, or other foreign regulatory agencies could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of our products.

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We currently rely on a limited number of third parties for a substantial portion of our revenue. The loss of or a change in any of these third parties, including its creditworthiness, could materially reduce our revenue and adversely impact our financial position.

Two third parties accounted for more than 10% of our 2017 and 2015 revenue and one third party accounted for more than 10% of our 2016 revenue. Jazz Pharmaceuticals Ireland Limited (Jazz) and the Biomedical Advanced Research and Development Authority (BARDA) each accounted for more than 10% of our revenue in 2017, Pfizer accounted for more than 10% of our 2016 revenue, and Pfizer and BARDA each accounted for more than 10% of our revenue in 2015. We have also entered into agreements with Alvogen Malta Operations Ltd. (Alvogen) and China NT Pharma Group Company Limited (NT Pharma) to develop and commercialize PF708. The prospects for PF708 depend in part on the expertise, development and commercial skills, and financial strength of Alvogen and NT Pharma.

In addition, in August 2016, we entered into a termination agreement with Pfizer pursuant to which our development and license agreement was terminated and all rights to PF582 returned to us. The termination accelerated recognition of $45.8 million of revenue that had been previously deferred, and we will not recognize any additional future revenue under this agreement. Pfizer will no longer be responsible for manufacturing, clinical studies and commercialization of PF582. We will not receive additional revenue from Pfizer.

In addition, in August of 2017, we and Strides Arcolab entered into a termination agreement pursuant to which our joint venture was terminated. While there was no activity under the joint venture with Strides Arcolab, following the termination we solely own the product candidates that were previously subject to the joint venture with Strides Arcolab.

The loss of any key collaboration partner or any significant adverse change in the size or terms of a contract with a key third party could significantly reduce our revenue over the short term. Moreover, having our revenue concentrated among a limited number of entities creates a concentration of financial risk for us, and in the event that any significant third party is unable to fulfill its payment obligations to us, our operating results and cash position would suffer. See “Risks Relating to our Reliance on Third Parties—We are substantially dependent on the expertise of Alvogen, Jazz, and NT Pharma to develop and commercialize certain product candidates. If we fail to maintain our current strategic relationship with Alvogen, Jazz, our business, commercialization prospects and financial condition may be materially adversely affected.”

We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.

We continue to evaluate our business strategy and, as a result, may modify our strategy in the future. In this regard, we may, from time to time, focus our product development efforts on different product candidates or may delay, suspend or terminate the future development of a product candidate at any time for strategic, business, financial or other reasons. For example, in 2017 we decided to pause development activities on PF582 and PF529 and focus development efforts elsewhere within the product portfolio while we continue to engage potential strategic partners for PF582 and PF529 to advance the programs and maximize value. As a result of changes in our strategy, we have and may in the future change or refocus our existing product development, commercialization and manufacturing strategies. This could require changes in our facilities and our personnel. Any product development changes that we implement may not be successful. In particular, we may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates. Our decisions to allocate our research and development, management and financial resources toward particular product candidates may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate product development programs may also prove to be incorrect and could cause us to miss valuable opportunities.

We currently have limited marketing capabilities and no sales organization.

We currently have limited sales and marketing capabilities. We have no prior experience in the marketing, sale and distribution of pharmaceutical products and there are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team.

To commercialize PF708, we have entered into collaboration agreements with Alvogen and NT Pharma and the prospects for PF708 depend in part on the expertise, development and commercial skills, and financial strength of Alvogen and NT Pharma. Under the Alvogen agreement, Alvogen has the exclusive right to commercialize and manufacture PF708 in the United States. Under the NT Pharma agreement, we granted an exclusive license to NT Pharma to commercialize PF708 in certain Asian countries and a non-exclusive license to conduct development activities in such territories with respect to PF708. For Px563L, RPA563, and our other product candidates, if approved, we will need to identify potential sales, marketing and distribution partners or establish our own internal sales force. In the future, we may choose to collaborate with other third parties that have direct sales forces and established distribution systems, either to augment our own sales force or in lieu of our own sales force. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize our product candidates. If we are not successful in commercializing our product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we would incur significant additional losses.

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We enter into various contracts in the normal course of our business that periodically incorporate provisions whereby we indemnify the other party to the contract. In the event we would have to perform under these indemnification provisions, it could have a material adverse effect on our business, financial position and results of operations.

In the normal course of business, we periodically enter into academic, commercial and consulting agreements that contain indemnification provisions. With respect to our academic agreements, we may be required to indemnify the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which we have secured licenses, and from claims arising from our or our sublicensees’ exercise of rights under the agreement. With respect to commercial agreements entered into with our protein production customers, we typically provide indemnification for claims from third parties arising out of any potential intellectual property infringement associated with our Pfēnex Expression Technology^® in the course of performing our services. With respect to our commercial agreements, the bulk of which are with contract manufacturers, we indemnify our vendors from third-party product liability claims which result from the production, use or consumption of the product, as well as for certain alleged infringements of any patent or other intellectual property right by a third party. With respect to consultants, we indemnify them from claims arising from the good faith performance of their services. In all of the above cases, we do not indemnify the parties for claims resulting from the negligence or willful misconduct of the indemnified party.

In certain circumstances, we maintain insurance coverage which we believe may limit our obligations under certain of these indemnification provisions. However, we do not carry insurance for all risks that our business may encounter, including our obligations under certain indemnification provisions. To the extent we do not have insurance to cover certain indemnification obligations, we are denied insurance coverage, or our obligation under an indemnification provision exceeds applicable insurance coverage, any significant, uninsured liability may require us to pay substantial amounts, which would adversely affect our working capital and results of operations.

We may have difficulty expanding our operations successfully.

As we advance our product candidates through the development process, we will need to expand our development, regulatory, manufacturing, quality, sales and marketing capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various collaboration partners, suppliers and other organizations, including with respect to the commercialization of PF708, if PF708 receives regulatory approval.

As of September 30, 2018, we had 65 full-time employees, including a total of 14 employees who hold Ph.D. degrees. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Therefore, we will need to continue to expand our managerial, operational, finance and other resources to manage our operations and clinical trials, continue our development activities and commercialize our product candidates, if approved. In order to effectively execute our growth strategy, we will be required to:

• manage our clinical trials effectively;

• identify, recruit, retain, incentivize and integrate additional employees;

• establish and maintain collaborations with third parties for the development and commercialization of our product candidates, or otherwise build and maintain a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

• manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and

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

Due to our limited financial resources and our limited experience 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. In addition, this expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our development and strategic objectives, or disrupt our operations, which could materially impact our business, revenue, and operating results.

The U.S. government holds certain intellectual property rights related to our Anthrax vaccines, Px563L and RPA563 and Malaria vaccine, Px533.

Although we have intellectual property related to expression of recombinant protective antigen in P. fluorescens, the U.S. government holds certain patents related to the recombinant protective antigen in Px563L and RPA563, as well as certain license rights to intellectual property related to other Px563L components used to produce the final vaccine, which, if exercised, could materially impact our business, revenue and operating results. We have rights to utilize this intellectual property held by the U.S. government by virtue of the Authorization and Consent clauses of our contracts with the U.S. government.

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Our contracts with the U.S. government, and our subcontracts with U.S. government contractors, require ongoing funding decisions by the U.S. government; reduced or discontinued funding of these contracts could cause our financial condition and operating results to suffer materially.

Development of our anthrax vaccines, Px563L and RPA563, is funded by BARDA and development of our Px563L-SDI anthrax vaccine and our malaria vaccine, Px533, is funded by The National Institute of Allergy and Infectious Diseases (NIAID). The funding for government programs is subject to Congressional appropriations, often made on a fiscal year basis, even for programs designed to continue for several years. These appropriations can be subject to political considerations and stringent budgetary constraints. Additionally, our government-funded development contracts give the U.S. government the right, exercisable in its sole discretion, to extend this contract for successive options following a base period of performance. The value of the services to be performed during these options may constitute the majority of the total value of the underlying contract. If levels of government expenditures and authorizations for biodefense decrease or shift to programs in areas where we do not offer products or are not developing product candidates, or if the U.S. government otherwise declines to exercise its options under its contracts with us, our business, revenue and operating results would suffer.

Our current contract with BARDA is a cost-plus fixed fee contract and potential future contracts with the U.S. government may also be structured this way. Under our cost-plus fixed fee contracts, we are allowed to recover our approved costs plus a fixed fee. The total price on a cost-plus fixed fee contract is based primarily on allowable costs incurred, but generally is subject to contract funding limitations. U.S. government regulations require us to notify our customer of any cost overruns or underruns on a cost-plus fixed fee contract. If we incur costs in excess of the funding limitation specified in the contract, we may not be able to recover those cost overruns.

Moreover, changes in U.S. government contracting policies could directly affect our financial performance. Factors that could materially adversely affect our U.S. government contracting business include:

• budgetary constraints affecting U.S. government spending generally, or specific departments or agencies in particular;

• changes in U.S. government fiscal policies or available funding;

• changes in U.S. government defense and homeland security priorities;

• changes in U.S. government programs or requirements;

• adoption of new laws or regulations;

• technological developments;

• U.S. government shutdowns, threatened shutdowns or budget delays;

• competition and consolidation in our industry; and

• general economic conditions.

These or other factors could cause U.S. government departments or agencies to reduce their development funding or future purchases under contracts, to exercise their right to terminate contracts or fail to exercise their options to extend our contracts, any of which could have a material adverse effect on our business, financial condition, operating results and ability to meet our financial obligations.

Unfavorable provisions in government contracts, some of which are customary, may subject our business to material limitations, restrictions and uncertainties and may have a material adverse impact on our financial condition and operating results.

Government contracts contain provisions that give the U.S. government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the U.S. government to:

• terminate existing contracts, in whole or in part, for any reason or no reason;

• unilaterally reduce or modify the government’s obligations under such contracts or subcontracts, without the contractor’s consent, including by imposing equitable price adjustments;

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

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

• under certain circumstances involving public health and safety, license inventions made under such agreements to third parties;

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

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

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

• decline to exercise an option to continue a contract;

• exercise an option to purchase only the minimum amount, if any, specified in a contract;

• decline to exercise an option to purchase the maximum amount, if any, specified in a contract;

• claim rights to facilities or to products, including intellectual property, developed under the contract;

• require repayment of contract funds spent on construction of facilities in the event of contract default;

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

• change the course of a development program in a manner that differs from the contract’s original terms or from our desired development plan, including decisions regarding our partners in the program;

• pursue civil or criminal remedies under the False Claims Act (FCA) and False Statements Act; and

• control or prohibit the export of products.

Generally, government contracts, including our contract with BARDA, contain provisions permitting unilateral termination or modification, in whole or in part, at the U.S. government’s convenience. Under general principles of government contracting law, if the U.S. government terminates a contract for convenience, the government contractor may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the U.S. government terminates a contract for default, the government contractor is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. In addition, government contracts normally contain additional requirements that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These requirements include, for example:

• specialized accounting systems unique to government contracts;

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

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

• mandatory internal control systems and policies; and

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

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

Furthermore, we are required to enter into agreements and subcontracts with third parties, including suppliers, consultants and other third-party contractors in order to satisfy our contractual obligations pursuant to our agreements with the United States government. Negotiating and entering into such arrangements can be time-consuming and we may not be able to reach agreement with such third parties. Any such agreement must also be compliant with the terms of our government contract. Any delay or inability to enter into such arrangements or entering into such arrangements in a manner that is non-compliant with the terms of our contract, may result in violations of our contract.

We may not have the right to prohibit the U.S. government from using certain technologies developed by us, and we may not be able to prohibit third-party companies, including our competitors, from using those technologies in providing products and services to the U.S. government. The U.S. government generally takes the position that it has the right to royalty-free use of technologies that are developed under U.S. government contracts.

Most U.S. government contracts grant the U.S. government the right to use on a royalty free basis, for or on behalf of the U.S. government, any technologies developed and data first produced by the contractor under the government contract. If we were to develop technology under a contract with such a provision, we might not be able to prohibit third parties, including our competitors, from using that technology in providing products and services to the U.S. government.

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Our business is subject to audit by the U.S. government and a negative audit could adversely affect our business.

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

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

• termination of contracts;

• forfeiture of profits;

• suspension of payments;

• fines; and

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

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

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

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

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

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

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

• the Truth in Negotiations Act, which requires certification and disclosure of cost or pricing data in connection with contract negotiations;

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

• export and import control laws and regulations; and

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

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

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If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of products we develop.

We face a risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may incur liability 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 cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Regardless of the merits or eventual outcome, liability claims may result in:

• decreased demand for PF708, Px563L, RPA563 or any other product candidates or products we develop;

• injury to our reputation and significant negative media attention;

• withdrawal of clinical trial participants or cancellation of clinical trials;

• costs to defend the related litigation;

• a diversion of management’s time and our resources;

• substantial monetary awards to trial participants or patients;

• regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;

• loss of revenue; and

• the inability to commercialize any products we develop.

Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could impact the commercialization of PF708, Px563L, RPA563 and any other products we develop. We currently carry product liability insurance covering our clinical trials in the amount of $10.0 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. 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. If and when we obtain approval for marketing PF708, Px563L, RPA563 or any other product candidates, we intend to expand our insurance coverage to include the sale of such products; however, we may be unable to obtain this liability insurance on commercially reasonable terms.

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

We are exposed to the risk that our employees, independent contractors, principal investigators, third-party clinical research organizations (CROs) and contract manufacturing organizations (CMOs), consultants and collaboration partners may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or unauthorized activities that violate: (1) regulations of the FDA and comparable foreign authorities, including those laws requiring the reporting of true, complete and accurate information to such authorities; (2) manufacturing standards; (3) federal and state healthcare fraud and abuse laws and regulations; or (4) laws that require the reporting of true and accurate financial information and data. 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 may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. These activities also include the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Ethics and Conduct, but it is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Our cash and cash equivalents and short-term investments could be adversely affected if the financial institutions in which we hold our cash and cash equivalents and short-term investments fail.

We regularly maintain cash balances at third-party financial institutions in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. While we monitor the cash balances in our accounts and adjust the balances as appropriate, these balances

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could be impacted, and there could be a material adverse effect on our business, if one or more of the financial institutions with which we deposit fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial and credit markets.

We may be subject to information technology failures, including data protection breaches and cyber-attacks, that could disrupt our operations, damage our reputation and adversely affect our business, operations, and financial results.

We rely on our information technology systems for the effective operation of our business and for the secure maintenance and storage of confidential data relating to our business and third-party businesses. Although we have implemented security controls to protect our information technology systems, experienced programmers or hackers may be able to penetrate our security controls, and develop and deploy viruses, worms and other malicious software programs that compromise our confidential information or that of third parties and cause a disruption or failure of our information technology systems. Any such compromise of our information technology systems could result in the unauthorized publication of our confidential business or proprietary information, result in the unauthorized release of customer, supplier or employee data, result in a violation of privacy or other laws, expose us to a risk of litigation, or damage our reputation. The cost and operational consequences of implementing further data protection measures either as a response to specific breaches or as a result of evolving risks, could be significant. In addition, our inability to use or access our information systems at critical points in time could adversely affect the timely and efficient operation of our business. Any delayed sales, significant costs or lost customers resulting from these technology failures could adversely affect our business, operations and financial results.

Third parties with which we conduct business have access to certain portions of our sensitive data. In the event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our business, operations and financial results.

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

Our research and development and manufacturing activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us, including small quantities of acetonitrile, methanol, ethanol, ethidium bromide and compressed gases, and other hazardous compounds. We and our collaboration partners, manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products.

Although we believe that the safety procedures utilized by us and our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and interrupt our business operations.

We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, and the handling of biohazardous materials. 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 these materials, this insurance may not provide adequate coverage against potential liabilities. For claims not covered by workers’ compensation insurance, we also maintain an employer’s liability insurance policy in the amount of $1.0 million per occurrence and in the aggregate. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.

Environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. Any inability to comply with environmental laws and regulations may adversely affect our business and operating results.

Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP. These principles are subject to interpretation by the Securities and Exchange Commission (SEC) and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.

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It is not clear if or when these potential changes in accounting principles may become effective, whether we have the proper systems and controls in place to accommodate such changes and the impact that any such changes may have on our financial position and results of operations.

Even if PF708, Px563L, RPA563 or any of our other product candidates obtain regulatory approval, they may never achieve market acceptance or commercial success.

Even if we obtain FDA or other regulatory approvals, PF708, Px563L, RPA563 or any of our other product candidates may not achieve market acceptance among physicians and patients and may not be commercially successful. The degree and rate of market acceptance of PF708, Px563L, RPA563 or any of our other product candidates for which we receive approval depends on a number of factors, including:

• the performance of our collaboration partners, including Alvogen, Jazz, and NT Pharma;

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

• the clinical indications for which the product is approved;

• acceptance by physicians, major operators of clinics and patients of the product as a safe and effective treatment;

• proper training and administration of our products by physicians and medical staff;

• the potential and perceived advantages of our products over alternative treatments;

• the cost of treatment in relation to alternative treatments and willingness to pay for our products, if approved, on the part of physicians and patients;

• relative convenience and ease of administration;

• the prevalence and severity of adverse events; and

• the effectiveness of our sales and marketing efforts.

Any failure by our product candidates that obtain regulatory approval to achieve market acceptance or commercial success would materially adversely affect our results of operations and delay, prevent or limit our ability to generate revenue and continue our business.

Risks Relating to our Reliance on Third Parties

We rely on third parties, and in some cases a single third party, to manufacture nonclinical and clinical supplies of our product candidates, supply key materials to manufacture our product candidates, and to store critical components of our product candidates for us. Our business could be harmed if those third parties fail to provide us with sufficient quantities of product candidates, or fail to do so at acceptable quality levels or prices.

We do not currently have the infrastructure or capability internally to manufacture supplies of our product candidates for use in clinical studies, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We rely on third-party manufacturers, including with respect to PF708, to manufacture our product candidates for preclinical and clinical studies. Successfully transferring complicated manufacturing techniques to manufacturing organizations and scaling up these techniques for commercial quantities will be time consuming and we may not be able to achieve such transfer. Moreover, the market for contract manufacturing services for protein therapeutics is highly cyclical, with periods of relatively abundant capacity alternating with periods in which there is little available capacity. If our need for contract manufacturing services increases during a period of industry-wide production capacity shortage, we may not be able to produce our product candidates on a timely basis or on commercially viable terms. Although we generally do not begin a clinical study unless we believe we have a sufficient supply of a product candidate to complete such study, any significant delay or discontinuation in the supply of a product candidate for an ongoing clinical study due to the need to replace a third-party manufacturer could considerably delay completion of our clinical studies, product testing, and potential regulatory approval of our product candidates, which could harm our business and results of operations.

Reliance on third-party manufacturers entails additional risks, including reliance on the third party for regulatory compliance and quality assurance, the possible breach of the manufacturing agreement by the third party, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. In addition, third-party manufacturers may not be able to comply with cGMP, or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions, untitled or warning letters, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications,

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and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates or any other product candidates or products that we may develop. Any failure or refusal to supply the components for our product candidates that are being developed could delay, prevent or impair clinical development or commercialization efforts. If our manufacturers were to breach or terminate their manufacturing arrangements with us, the development or commercialization of the affected products or product candidates could be delayed, which could have an adverse effect on our business. Any change in our manufacturers could be costly because the commercial terms of any new arrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant.

If PF708 or any of our other product candidates are approved, in order to produce the quantities necessary to meet anticipated market demand, any manufacturer that we and our collaboration partners engage may need to increase manufacturing capacity. If we, our collaboration partners, or our manufacturers are unable to produce PF708 or any of our product candidates in sufficient quantities to meet the requirements for the launch of these products or to meet future demand, our revenue and gross margins could be adversely affected. Although we currently believe that we, our collaboration partners, and our manufacturers will not have any material supply issues, we cannot be certain that we will be able to obtain long-term supply arrangements for PF708 or any of our other product candidates or materials used to produce such product candidate on acceptable terms, if at all. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of or market PF708 or any of our other product candidates.

Any significant disruption in our supplier relationships could harm our business. We source key materials from third parties, either directly through agreements with suppliers or indirectly through our manufacturers who have agreements with suppliers. There are a small number of suppliers for certain capital equipment and key materials that are used to manufacture our product candidates. Such suppliers may not sell these key materials to our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these key materials by our manufacturers. Any significant delay in the supply of a product candidate or its key materials for an ongoing clinical study could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidate. If our manufacturers, collaboration partners, or we are unable to purchase these key materials for our product candidates after regulatory approval, the commercial launch of our product candidates could be delayed or there could be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.

We also rely on third parties to store master and working cell banks for our product candidates. We have master and working cell banks and believe we would have adequate backup should any cell bank be lost in a catastrophic event. However, it is possible that we could lose multiple cell banks and have our manufacturing severely impacted by the need to replace the cell banks, which could materially and adversely affect our business, financial condition and results of operations.

We have no experience manufacturing our product candidates on a large clinical or commercial scale and have no manufacturing facility. We are dependent on single source third-party contract manufacturing organizations for the manufacture and supply of PF708.

We do not own or operate facilities for the manufacture of any of our product candidates, including PF708. We currently have no plans to build our own clinical or commercial scale manufacturing capabilities. For PF708, we currently rely on several single source contract manufacturing organizations, or CMOs. To meet our projected increased needs for supplies of our product candidates to support our activities through regulatory approval and commercial manufacturing, the CMOs with whom we currently work will need to increase the scale of production. In addition, the CMO on which we principally rely has limited experience manufacturing products on a commercial scale.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance on the third-party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third-party because of factors beyond our control, including a failure to manufacture any products we may eventually commercialize in accordance with our specifications, and the possibility of termination or nonrenewal of the agreement by the third-party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that any products that we may eventually commercialize be manufactured according to cGMPs and similar foreign standards. Any failure by our third-party manufacturers to comply with cGMPs or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to delay in, or failure to obtain, regulatory approval of our product candidates. In addition, failure to comply with cGMPs could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of outside supplies of the product candidate, total or partial suspension of production, suspension of on-going clinical trials, refusal to approve pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction, or imposing civil and criminal penalties.

If we receive FDA approval for PF708, Alvogen will be obligated to use diligent efforts to continue to develop, manufacture and commercialize PF708 in the United States at Alvogen’s cost and expense. Before PF708 can be approved, the manufacturing facilities for both the active pharmaceutical ingredient, or API, and finished pharmaceutical product, will be inspected by the FDA for compliance with cGMPs. If third-party manufacturers fail to pass these preapproval inspections, our NDA will not be approved or will

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be significantly delayed until compliance can be demonstrated. We and Alvogen have not yet identified alternate suppliers for PF708, nor have we identified alternate suppliers for any other product candidate, in the event the current CMOs we utilize are unable to scale to commercial production, pass required preapproval inspections, or if we otherwise experience any problems with them. Although we believe alternative third-party suppliers with the necessary manufacturing and regulatory expertise and facilities exist, it would be expensive and take a significant amount of time to arrange for, and qualify, alternative suppliers. Furthermore, if we or Alvogen are required to identify, qualify and contract with new manufacturing suppliers of PF708, we and Alvogen would need to demonstrate to the satisfaction of the FDA in a bridging study that any new supply of PF708 is substantially the same as the PF708 used in our clinical trials. Any bridging study may require further clinical testing, including testing in patients. We cannot assure you that we can arrange for alternative third-party manufacturing sources for PF708, or any other product candidate, on commercially reasonable terms or in a timely manner, or that such manufacturers will be capable of manufacturing PF708, or any other product candidate, in compliance with cGMPs and to FDA’s satisfaction.

Any significant disruption in our supplier relationships could harm our business. Any significant delay in the supply of a product candidate or its key materials for an ongoing clinical study could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these key materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.

We are substantially dependent on the expertise of Alvogen, Jazz, and NT Pharma to develop and commercialize certain product candidates. If we fail to maintain our current strategic relationship with Alvogen, Jazz, NT Pharma, or with any future collaboration partner, our business, commercialization prospects and financial condition may be materially adversely affected.

Because we have limited capabilities for late-stage product development, manufacturing, sales, marketing and distribution, we may need to enter into alliances with other companies to develop our product candidates. For example, to commercialize PF708, we have entered into collaboration agreements with Alvogen and NT Pharma and the prospects for PF708 depend in part on the expertise, development and commercial skills, and financial strength of Alvogen and NT Pharma. Under the Alvogen agreement, Alvogen has the exclusive right to commercialize and manufacture PF708 in the United States. Under the NT Pharma agreement, we granted an exclusive license to NT Pharma to commercialize PF708 in certain Asian countries and a non-exclusive license to conduct development activities in such territories with respect to PF708. In addition, we entered into an agreement with Jazz, pursuant to which we have transferred the development, manufacturing and commercialization of certain product candidates.

In February 2015, we entered into a development and license agreement with Pfizer to develop and commercialize PF582. In August 2016, we entered into a termination agreement with Pfizer pursuant to which the development and license agreement was terminated and all rights to PF582 have been returned to us. The termination accelerated recognition of $45.8 million of revenue that had been previously deferred and we will not recognize any additional future revenue under the Pfizer development and license agreement. Following our strategic review in November 2017, we decided to pause our development activities for PF582 and focus our efforts and resources elsewhere in our product portfolio. While we are seeking a new collaboration partner for the development and commercialization of PF582, there are no assurances that we will find a new collaboration partner or that the terms and timing of any such arrangements would be acceptable to us.

In addition, in August of 2017, we and Strides Arcolab entered into a termination agreement pursuant to which our joint venture was terminated. While there was no activity under the joint venture with Strides Arcolab, following the termination we solely own the product candidates that were previously subject to the joint venture with Strides Arcolab.

In July 2016, we entered into a license and option agreement with Jazz, pursuant to which we and Jazz are collaboratively developing hematology/oncology products, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology, and Jazz has the exclusive right to manufacture and commercialize such products throughout the world. In December 2017, we amended the agreement. We may be eligible to receive additional payments under the amended agreement of up to $188.5 million based on achievement of certain research and development, regulatory and sales-related milestones, bringing the total value of payments and potential payments associated with the collaboration to $224.5 million. In addition, we may be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement.

The prospects for the product candidates developed under this collaboration depend on the expertise, development and commercial skills, and financial strength of Alvogen, Jazz, and NT Pharma. Our collaborations with Alvogen, Jazz, NT Pharma. or any future collaboration partner may not be successful, and we may not realize the expected benefits from such collaborations, due to a number of important factors, including but not limited to the following:

• Alvogen, Jazz, NT Pharma, or any future collaboration partner may terminate their agreements with us prior to completing development or commercialization of the product candidates under the collaboration, in whole or in part, adversely impacting the potential approval and our revenue from licensed products;

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• the timing and amount of any payments we may receive under these agreements will depend on, among other things, the efforts, allocation of resources, and successful commercialization of the relevant product candidates by Alvogen, Jazz, NT Pharma, or any future collaboration partner, as applicable, under our agreements;

• the timing and amounts of expense reimbursement that we may receive are uncertain; or

• Alvogen, Jazz, NT Pharma, or any future collaboration partner may change the focus of their development or commercialization efforts or pursue or emphasize higher priority programs.

A failure of Alvogen, Jazz, NT Pharma or any future collaboration partner to successfully develop our product candidates which are covered by the collaboration, or commercialize such product candidates, or the termination of our agreements with Alvogen, Jazz, NT Pharma, or any future collaboration partner, as applicable, may have a material adverse effect on our business, results of operations and financial condition.

Our existing product development and/or commercialization arrangements, and any that we may enter into in the future, may not be successful, which could adversely affect our ability to develop and commercialize our product candidates.

We are a party to, and continue to seek additional, collaboration arrangements with other pharmaceutical companies for the development and/or commercialization of our current and future product candidates. In such alliances, we would expect our collaboration partners to provide substantial capabilities in clinical development, manufacturing, regulatory affairs, sales and marketing, both in the United States and internationally. For example, to commercialize PF708, we have entered into collaboration agreements with Alvogen and NT Pharma and the prospects for PF708 depend in part on the expertise, development and commercial skills, and financial strength of Alvogen and NT Pharma. Under the Alvogen agreement, Alvogen has the exclusive right to commercialize and manufacture PF708 in the United States. Under the NT Pharma agreement, we granted an exclusive license to NT Pharma to commercialize PF708 in certain Asian countries and a non-exclusive license to conduct development activities in such territories with respect to PF708.

For example, following our strategic review in November 2017, we decided to pause development activities for PF582 and PF529 and focus our efforts and resources elsewhere in our product portfolio. While we are seeking a new collaboration partner for the development and commercialization of PF582 and PF529, there are no assurances that we will find a new collaboration partner or that the terms and timing of any such arrangements would be acceptable to us. To the extent that we decide to enter into additional collaboration agreements, we will face significant competition in seeking appropriate collaboration partners. Any failure to meet our clinical milestones with respect to an unpartnered product candidate would make finding a collaboration partner more difficult. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement, and we cannot guarantee that we can successfully maintain such relationships or that the terms of such arrangements will be favorable to us. If we fail to maintain, establish and implement collaboration or other alternative arrangements, the value of our business and operating results will be adversely affected.

We may not be successful in our efforts to establish, implement and maintain collaborations or other alternative arrangements if we choose to enter into such arrangements. The terms of any collaboration or other arrangements that we may establish may not be favorable to us. The management of collaborations may take significant time and resources that distract our management from other matters. Our ability to successfully collaborate with any current or future collaboration partners may be impaired by multiple factors including:

• a collaboration partner may shift its priorities and resources away from our programs due to a change in business strategies, or a merger, acquisition, sale or downsizing of its company or business unit;

• a collaboration partner may cease development in therapeutic areas which are the subject of alliances with us;

• a collaboration partner may change the success criteria for a particular program or product candidate thereby delaying or ceasing development of such program or candidate;

• a significant delay in initiation of certain development activities by a collaboration partner will also delay payments tied to such activities, thereby impacting our ability to fund our own activities;

• a collaboration partner could develop a product that competes, either directly or indirectly, with our current or future products, if any;

• a collaboration partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of a product;

• a collaboration partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demand requirements;

• a collaboration partner may exercise its rights under the agreement to terminate our collaboration;

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• a dispute may arise between us and a collaboration partner concerning the research or development of a product candidate or commercialization of a product resulting in a delay in milestones, royalty payments or termination of a program and possibly resulting in costly litigation or arbitration which may divert management attention and resources;

• the results of our clinical trials may not match our collaboration partners’ expectations, even if statistically significant;

• a collaboration partner may not adequately protect or enforce the intellectual property rights associated with a product or product candidate; and

• a collaboration partner may use our proprietary information or intellectual property in such a way as to invite litigation from a third party.

Any such activities by our current or future collaboration partners could adversely affect us financially and could harm our business reputation.

In addition to product development and commercialization capabilities, we may depend on our alliances with other companies to provide substantial additional funding for development and potential commercialization of our product candidates. We may not be able to obtain funding on favorable terms from these alliances, and if we are not successful in doing so, we may not have sufficient funds to develop a particular product candidate internally, or to bring product candidates to market. Failure to bring our product candidates to market will prevent us from generating sales revenue, and this may substantially harm our business. Furthermore, any delay in entering into these alliances could delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market. As a result, our business and operating results may be adversely affected.

We rely on CROs to conduct and oversee our planned clinical trials for our product candidates and other clinical trials for product candidates we are developing or may develop in the future. If our CROs do not successfully carry out their contractual duties, meet expected deadlines, or otherwise conduct the trials as required or comply with regulatory requirements, or if our relationship with our CRO terminates, we and our collaboration partners may not be able to seek or obtain regulatory approval for or commercialize our product candidates when expected or at all, and our business could be substantially harmed.

We will continue to rely upon medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and in accordance with applicable legal and regulatory requirements. These third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. These third parties are not our employees, and except for remedies available to us under our agreements with such third parties, there is no guarantee that any such third party will devote adequate time and resources to our clinical trial. If our CRO or any other third parties upon which we rely for administration and conduct of our clinical trials do not successfully carry out their contractual duties or obligations or meet expected deadlines, 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, or if they otherwise perform in a substandard manner, our clinical trials may be extended, delayed, suspended or terminated, and we may not be able to complete development of, seek or obtain regulatory approval for, or successfully commercialize our product candidates. We plan to rely heavily on these third parties for the execution of clinical trials for products we are developing or may develop in the future, and will control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on our CRO does not relieve us of our regulatory responsibilities.

We, our CRO and our collaboration partners are required to comply with Good Clinical Practice (GCP), which are regulations and guidelines enforced by regulatory authorities around the world for products in clinical development. Regulatory authorities enforce these GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and clinical trial sites. If we, our CRO or our collaboration partners fail to comply with applicable GCP regulations, the clinical data generated in clinical trials may be deemed unreliable and submission of marketing applications may be delayed or the regulatory authorities may require us to perform additional clinical trials before accepting our applications for review or approving marketing applications. We cannot assure that, upon inspection, a regulatory authority will determine that any of our clinical trials comply or complied with applicable GCP regulations. In addition, clinical trials must be conducted with product produced under current Good Manufacturing Practices (cGMP) regulations, which are enforced by regulatory authorities. Any failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if our CRO violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

Comparative clinical trials require a substantial number of patients that can form the basis for generating statistically significant results. Delays in site initiation or unexpectedly low patient enrollment rates may delay the results of the clinical trial. CROs may also generate higher costs than anticipated. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenue could be delayed. Further, if our relationship with our CRO is terminated, we may be unable to enter into arrangements with an alternative CRO on commercially reasonable terms, or at all.

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Switching or adding CROs can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Although we carefully manage our relationship with our CROs, there can be no assurance that we will not encounter such challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition or results of operations.

We rely on third-party suppliers, and in some instances a single third-party supplier, for the manufacture and supply of certain materials in our protein production services, and these suppliers could cease to manufacture the materials, go out of business or otherwise not perform as anticipated.

We rely on third-party suppliers for our protein production services and in some instances a single third-party supplier, for the manufacture and supply of certain materials. We currently rely, and expect to continue to rely, on a single-source supplier for the manufacture and supply of CRM197. To meet these demands, our supplier is in the process of increasing production capacity, and we also have established a repository in the United States that is capable of storing a safety supply of CRM197 and the CRM197 cell bank. Furthermore, we have taken steps to identify alternate sources of supply sufficient to support future needs; however, there may be delays in switching to these alternative suppliers if our contract with primary sources are terminated without notice. Regardless of the foregoing alternative measures, we cannot guarantee that we will have an adequate supply of CRM197. If we are unable to secure adequate quantities of CRM197 from our primary supplier, from potential secondary suppliers or from our safety supply, we may be required to identify additional suppliers. If we are required to engage additional suppliers, we may not be able to enter into an alternative supply arrangement on commercially reasonable terms, or at all. Even if we are able to identify additional suppliers and enter into agreements on commercially reasonable terms, we may incur delays associated with identifying and qualifying additional suppliers and negotiating the terms of any supply contracts. These delays could adversely impact our business and negatively affect profitability of our protein production services.

We have entered into collaborations with third parties in connection with the development of certain of our product candidates. Even if we believe that the development of our technology and product candidates is promising, our partners may choose not to proceed with such development.

Our existing agreements with our collaboration partners, Alvogen, Jazz, and NT Pharma, and any future collaboration agreements we may enter into, are generally subject to termination by the counterparty on short notice upon the occurrence of certain circumstances. Accordingly, even if we believe that the development of product candidates is worth pursuing, our partners may choose not to continue with such development. If any of our collaborations are terminated, such as the termination of our collaboration with Pfizer in August 2016 and the termination of the joint venture agreement with Strides Arcolab in August 2017, we may be required to devote additional resources to the development of our product candidates or seek a new collaboration partner on short notice, and the terms of any additional collaboration or other arrangements that we establish may not be favorable to us.

We are also at risk that our current and any potential collaborations or other arrangements may not be successful. Factors that may affect the success of our collaborations include the following:

• our collaboration partners may incur financial and cash flow difficulties that force them to limit or reduce their participation in our joint projects;

• our collaboration partners may be pursuing alternative technologies or developing alternative products that are competitive to our technology and products, either on their own or in partnership with others;

• our collaboration partners may terminate their collaboration with us, which could make it difficult for us to attract new partners or adversely affect perception of us in the business and financial communities; and

• our collaboration partners may pursue higher priority programs or change the focus of their development programs, which could affect their commitment to us.

If we cannot maintain successful collaborations, our business, financial condition and operating results may be adversely affected.

If we are unable to maintain our commercial supply agreements with key customers purchasing CRM197, sales revenue could decline.

We primarily sell CRM197 directly to biopharmaceutical companies and currently have several supply agreements in place for supply of CRM197. To establish and maintain relationships with customers, we believe we need to maintain adequate supplies of CRM197, remain price competitive, comply with regulatory regulations and provide high quality products. If we are unable to establish and maintain arrangements for the sale of CRM197, our revenue and profits would decline.

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Risks Relating to Our Intellectual Property

Our collaboration partners and other third parties may assert ownership or commercial rights to inventions we develop from our use of the materials which they provide to us, or otherwise arising from our collaboration.

We collaborate with other companies and institutions with respect to research and development matters. Also, we rely on numerous third parties to provide us with materials that we use to develop our technology. If we cannot successfully negotiate sufficient ownership, licensing and/or commercial rights to any inventions that result from our use of any third-party collaborator’s materials, or if disputes arise with respect to the intellectual property developed with the use of a collaborator’s materials, or data developed in a collaborator’s study, our ability to capitalize on the market potential of these inventions or developments may be limited or precluded altogether.

If our efforts to protect our intellectual property related to our platform technology and our current or future product candidates are not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our current product candidates and our development programs. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. In particular, our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our platform and product candidates. However, we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in our market.

The patentability of inventions, and the validity, enforceability and scope of patents in the biotechnology and pharmaceutical industry involve complex legal and scientific questions and can be uncertain. This uncertainty includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law in ways affecting the scope or validity of issued patents. The patent applications that we own or license may fail to result in issued patents in the United States or foreign countries. There is a substantial amount of prior art in the biotechnology and pharmaceutical fields, including scientific publications, patents and patent applications. Our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. We may be unaware of certain prior art relating to our patent applications and patents, which could prevent a patent from issuing from a pending patent application or result in an issued patent being invalidated. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable.

Patents granted by the European Patent Office may be opposed by any person within nine months from the publication of their grant and, in addition, may be challenged before national courts at any time. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents and patent applications we hold, license or pursue with respect to our product candidates is threatened, it could threaten our ability to commercialize our product candidates. In addition, recent changes to the patent laws of the United States provide additional procedures for third parties to challenge the validity of issued patents based on patent applications filed after March 15, 2013. If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with respect to our current or future product candidates is challenged, then it could threaten our ability to commercialize our current or future product candidates and could threaten our ability to prevent competitive products from being marketed. Further, if we encounter delays in our clinical trials, the period of time during which we could market our current or future product candidates under patent protection would be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to either (i) file any patent application related to our product candidates, or (ii) invent any of the inventions claimed in our patents or patent applications. Furthermore, for applications filed before March 16, 2013, or patents issuing from such applications, an interference proceeding can be provoked by a third party or instituted by the United States Patent and Trademark Office (USPTO), to determine who was the first to invent any of the subject matter covered by the patent claims of our applications and patents. As of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. The change to “first-to-file” from “first-to-invent” is one of the changes to the patent laws of the United States resulting from the Leahy-Smith America Invents Act (Leahy-Smith Act) signed into law on September 16, 2011. Among some of the other significant changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and provide opportunities for third parties to challenge any issued patent in the USPTO. It is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring counterclaims against us, and some of our competitors have substantially greater intellectual property portfolios than we have.

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Even if PF708 is approved by the FDA or the EMA we may be delayed in selling PF708 due to direct or indirect legal challenges.

Even if PF708 receives marketing approval in the U.S. or the EU, we may also be subject to direct legal challenges from Eli Lilly and Company, the manufacturer of Forteo, and we could be delayed or prevented from launching PF708 as a result of court orders, regulatory stays, or the time necessary to resolve such challenges. For instance, we are aware of at least one recent instance of a third party being subject to litigation initiated by Eli Lilly and Company on a product purporting to be a generic version of Eli Lilly’s Forteo (teriparatide [rDNA origin] injection) product. Similarly, we may be subject to indirect legal challenges in the U.S. as a result of new executive orders from the President of the United States or the amendment or reversal of various laws by the U.S. Congress that govern or impact the approval of products being developed pursuant to the 505(b)(2) pathway, including the Hatch-Waxman Act, which in aggregate may cause a delay in or prevent the approval or commercial launch of PF708.

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

In addition to the protection afforded by patents, we also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents may be difficult to obtain or enforce and any other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents.

As part of our efforts to protect our trade secrets and other confidential information, we require our employees, consultants, collaborators and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. We also note in this respect that trade secret protection in foreign countries may not provide protection to the same extent as federal and state laws in the United States. A breach of confidentiality could significantly affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. To the extent that our employees, consultants or contractors use any intellectual property owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Also, third parties, including our competitors, may independently develop substantially equivalent proprietary information and technologies or otherwise lawfully gain access to our trade secrets and other confidential information. In such a case, we would have no right to prevent such third parties from using such proprietary information or technologies to compete with us, which could harm our competitive position.

If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be harmed.

Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other parties. Our competitors have developed large portfolios of patents and patent applications in fields relating to our business and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. There may also be patent applications that have been filed but not published that, when issued as patents, could be asserted against us. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving that a patent is invalid is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Also in proceedings before courts in Europe, the burden of proving invalidity of the patent usually rests on the party alleging invalidity. Third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In addition to infringement claims against us, we may become a party to other patent litigation and other

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proceedings, including interference, derivation or post-grant proceedings declared or granted by the USPTO and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or future products. Third parties may submit applications for patent term extensions in the United States and/or supplementary protection certificates in the EU member States seeking to extend certain patent protection which, if approved, may interfere with or delay the launch of one or more of our biosimilar or vaccine products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations. We may become involved in lawsuits to protect or enforce our inventions, patents or other intellectual property or the patents of our licensors, which could be expensive and time consuming.

Competitors may infringe our intellectual property, including our patents or the patents of our licensors. In addition, one or more of our third-party collaborators may have submitted, or may in the future submit, a patent application to the USPTO without naming a lawful inventor that developed the subject matter in whole or in part while under an obligation to execute an assignment of rights to us. As a result, we may be required to file infringement or inventorship claims to stop third-party infringement, unauthorized use, or to correct inventorship. This can be expensive, particularly for a company of our size, and time-consuming. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology or that the factors necessary to grant an injunction against an infringer are not satisfied.

An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference, derivation or other proceedings brought at the USPTO or any foreign patent authority may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or collaborators. Litigation or USPTO proceedings brought by us may fail. An unfavorable outcome in any such proceedings could require us to cease using the related technology or to attempt to license rights to it from the prevailing party, or could cause us to lose valuable intellectual property rights. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Even if we are successful, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or collaborators, to prevent misappropriation of our trade secrets, confidential information or proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

We may not be able to globally protect our intellectual property rights.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States and in some cases, may even force us to grant a compulsory license to competitors or other third parties. 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, 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 and 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.

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In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign intellectual property laws.

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

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

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

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

Risks Related to Government Regulation

The approval processes of the FDA, EMA, and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we and our collaborators are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

The research, development, testing, manufacturing, labeling, packaging, approval, promotion, advertising, storage, marketing, distribution, post-approval monitoring and reporting, and export and import of drug and biologic products are subject to extensive regulation by the FDA and other regulatory authorities in the United States, by the EMA and Competent Authorities of the Member States of the EEA, and by other regulatory authorities in other countries, which regulations differ from country to country. Neither we nor any collaboration partner is permitted to market PF708, Px563L, RPA563 or any other product candidates in the United States until approval from the FDA is received, or in the EEA until we receive European Commission authorization or approval from one or more Competent Authorities of the Member States of the EEA, as applicable. The time required to obtain approval from regulatory authorities is unpredictable, typically takes many years following the commencement of clinical trials, and depends upon numerous factors, including the substantial discretion of such regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the filing of an application and/or the approval or the decision not to approve an application. We and our collaboration partners have not submitted any market application to regulatory authorities or obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Applications for our product candidates could fail to receive regulatory approval or their regulatory approval could be delayed for many reasons, including but not limited to the following:

• the data collected from clinical studies of our product candidates may not be sufficient to support the submission of a Biologics License Application (BLA) under the section 351(a) pathway of the PHSA; an NDA under the section 505(b)(2) of the Food, Drug, and Cosmetic Act; a BLA for a biosimilar product application under the section 351(k) pathway of the PHSA, a biosimilar marketing authorization under Article 6 of Regulation (EC) No. 726/2004 and/or Article 10(4) of Directive 2001/83/EC in the EEA, or other submission or to obtain regulatory approval in the United States, the EEA, or elsewhere;

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• regulatory authorities may disagree with the design (including the duration) or implementation of our clinical trials and may, at any time, determine that the regulatory pathway that we have committed to for PF708, Px563L, RPA563 or any other product candidate is inappropriate;

• the population studied in the clinical program may not be sufficiently broad or representative to assure efficacy and safety in the full population for which we seek approval;

• regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

• we may be unable to demonstrate to the satisfaction of regulatory authorities that a product candidate’s risk-benefit ratio for its proposed indication is acceptable;

• regulatory authorities may fail to approve the manufacturing processes, test procedures and specifications, or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; and

• the approval policies or regulations of regulatory authorities may significantly change in a manner that renders our clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to seek or obtain regulatory approval to market PF708, Px563L, RPA563 or any other product candidates, which would significantly harm our business, results of operations and prospects. Moreover, any delays in the commencement or completion of clinical testing could significantly impact our product development costs and could result in the need for additional financing.

Our most advanced product development program is PF708. The top-line results announced in May 2018 of our Study PF708-301, which will be used to support regulatory approval, showed comparable overall profiles between PF708 and Forteo after 24 weeks of daily injection in osteoporosis patients. The primary end point for Study PF708-301 is anti-drug anti-body formation after 24 weeks of drug treatment. The secondary end points are changes in bone mineral density and bone turnover markers after 24 weeks of drug treatment, as well as PK parameters for up to 4 hours after the first dose. FDA has indicated that if the outcome of the immunogenicity primary end point is not sufficiently positive, 12-month data bone mineral density data may be necessary to support regulatory approval of PF708, which would add time, expense, and uncertainty to the development of PF708. We cannot provide assurances that immunogenicity data generated in Study 708-301, even if successful, will not require us to generate additional bone mineral density data to support the submission or approval of an NDA, or that submission of such additional data will ultimately result in approval.

In addition, even if we or our collaboration partners were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than requested, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

If we fail to obtain approval for our most advanced product candidates or if our most advanced product candidates are not commercially successful, we may have to curtail our product development programs and our business would be materially harmed.

We have invested a significant portion of our time, financial resources and efforts in the development of our most advanced product candidates, including PF708, Px563L and RPA563. The clinical and commercial success of our product candidates will depend on a number of factors, including the following:

• timely and successful completion of all necessary clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the accurate and satisfactory performance of third-party contractors;

• our ability to find suitable collaboration partners to develop our product candidates or our ability to obtain substantial additional sources of funding to develop our product candidates;

• timely receipt of necessary marketing approvals from the FDA, the European Commission, and similar foreign regulatory authorities;

• maintaining an acceptable safety and adverse event profile of our products following approval;

• achieving and maintaining compliance with all regulatory requirements applicable to our product candidates or any approved products;

• making arrangements with third-party manufacturers for, or establishing, commercial manufacturing capabilities;

• launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;

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• obtaining and maintaining patent and trade secret protection and regulatory exclusivity, where available, for our product candidates;

• the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

• acceptance of our products, if and when approved, by patients, the medical community and third-party payors; and

• the ability to raise additional capital on acceptable terms to achieve our goals.

If we and our collaboration partners are unable to seek and obtain regulatory approval for any of our product candidates in a timely manner or at all, we may never realize revenue from these products and we may have to curtail our other product development programs. As a result, our business, financial condition and results of operations would be materially harmed.

Our ability to market our therapeutic equivalent products in the United States may be significantly delayed or prevented by the Hatch-Waxman patent dispute resolution mechanism, including a potential automatic 30-month stay of regulatory approval of our marketing applications.

The Hatch-Waxman Act. The provisions of Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (FFDCA) were created, in part, to help avoid unnecessary duplication of studies already performed on a previously approved (“reference” or “listed”) drug; the section gives NDA applicants express permission to rely on data not developed or owned by the applicant. Indeed, an NDA filed under Section 505(b)(2) is one for which one or more of the investigations relied upon by the applicant for approval were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. We are pursuing a Section 505(b)(2) regulatory strategy for our PF708 product candidate and we plan to reference Forteo (teriparatide), marketed by Eli Lilly for the treatment of osteoporosis, as our listed drug. It is possible that for one reason or another, we will not be able to establish that our PF708 product candidate is suitable for approval under the Section 505(b)(2) framework. In addition, to the extent we rely on certain data and information that was submitted to the FDA related to the safety of Forteo, the FDA will likely require any approved labeling for PF708 to include certain safety information that is included in the Forteo label, including contraindications, warnings, precautions and other safety information.

The owner of an NDA for a branded drug product must list with the FDA certain patents with claims that cover the applicant’s branded product. Each of the patents listed in the application for the drug is then published in the Orange Book. Any applicant who files a 505(b)(2) NDA referencing a drug listed in the Orange Book must certify to the FDA that: (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA, referred to as a Paragraph I Certification; (2) such patent has expired, referred to as a Paragraph II Certification; (3) the date on which such patent expires, referred to as a Paragraph III Certification; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted, referred to as a Paragraph IV Certification.

The applicant may also elect to submit a “section viii” statement certifying that its proposed label does not contain, or carves out, any language regarding a patented method-of-use rather than certify to a listed method-of-use patent. An applicant submitting a Paragraph IV Certification must provide notice to each owner of the patent that is the subject of the certification and to the holder of the approved branded drug to which the 505(b)(2) application references. If the reference drug application holder and patent owners file a lawsuit directed to one of the Orange Book listed patents within 45 days of the receipt of the Paragraph IV Certification notice, the FDA is prohibited from approving the 505(b)(2) application until the earlier of 30 months from the receipt of the Paragraph IV Certification, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the applicant. Given the anticipated timing for submitting our 505(b)(2) NDA for PF708 and the expiration dates for patents currently listed in the Orange Book with Forteo, we likely will be making a Paragraph IV certification with regard to one of the patents, which means we may face litigation and a 30 month stay. It is possible that litigation will not be brought, or if brought will be resolved in less than 30 months, but if we are sued and the case is not resolved, we could face a delay in the launch of PF708, if it is approved. Non-Patent Exclusivity and Approval of Competing Products. Additionally, non-patent exclusivity provisions under the FFDCA can delay the submission or the approval of a 505(b)(2) application or an ANDA. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity (NCE), which is a drug that contains an active moiety that has not been approved by the FDA in any other NDA. An “active moiety” is defined as the molecule or ion responsible for the drug substance’s physiological or pharmacologic action, excluding any part of the molecule that is a salt, ester, or non-covalent derivative. During the five-year exclusivity period, the FDA cannot accept for filing any 505(b)(2) application or any ANDA for the same active moiety; the FDA may accept an application for filing after four years if the 505(b)(2) or ANDA applicant makes a Paragraph IV Certification. An application or supplemental application for a drug that is not a new active moiety may obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical trials, other than bioavailability or bioequivalence studies, was essential to the approval of the application and was conducted or sponsored by the applicant. Should this occur, the FDA would be precluded from approving any 505(b)(2) NDA or ANDA for the same condition of approval until after the three-year exclusivity period has run. However, unlike NCE exclusivity, the FDA can accept an application and begin the review process during the entire exclusivity period. We do not expect that PF708 will be subject to such exclusivity as all relevant exclusivity periods for the listed drug, Forteo, have expired.

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

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Furthermore, we rely on our collaboration partners, CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials for our product candidates. While we have agreements governing the committed activities of our collaboration partners and CROs, we have limited influence over their actual performance. A failure of one or more clinical trials can occur at any time during the trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates that have shown promising results in early studies may still suffer significant setbacks in subsequent clinical studies. For example, the results generated to date in the clinical trial for PF708 do not ensure that later clinical trials will demonstrate similar results. There is a high failure rate for drugs and biologics proceeding through clinical studies, and product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if the clinical trials for our product candidates are completed, nonclinical and clinical data are often susceptible to varying interpretations and analyses, and the results may not be sufficient to obtain regulatory approval for our product candidates.

We have in the past and may in the future experience delays in ongoing clinical trials for our product candidates, and we do not know whether future clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. The commencement or completion of clinical trials can be delayed or aborted for a variety of reasons, including delay or failure to:

• generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation of human clinical studies;

• raise sufficient capital to fund a trial;

• obtain regulatory approval, or feedback on trial design, necessary to commence a trial;

• identify, recruit and train suitable clinical investigators;

• 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;

• obtain institutional review board (IRB) approval or Ethics Committee (EC) positive opinion, as applicable at each site;

• identify, recruit, and enroll suitable patients to participate in a trial;

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

• ensure clinical sites observe trial protocol or continue to participate in a trial;

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

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

• add a sufficient number of clinical trial sites;

• manufacture sufficient quantities of product candidate for use in clinical trials; and

• avoid delays in manufacturing, testing, releasing, validating, or importing/exporting sufficient stable quantities of our product candidates for use in clinical studies, or the inability to do any of the foregoing.

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

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or the ECs of the institutions in which such trials are being conducted, by the data safety monitoring board, for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or

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other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

If we or our collaboration partners experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate product revenue from any of these product candidates will be delayed. In addition, any delays in completing clinical trials for our product candidates will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

The development, manufacture and commercialization of biosimilar, therapeutic equivalent, and vaccine products pose unique risks, and our failure to successfully introduce biosimilar, therapeutic equivalent products, and vaccine products could have a negative impact on our business and future operating results.

We are actively working to develop multiple biosimilar, therapeutic equivalent products and vaccines, including our most advanced product candidates, PF708, Px563L, and RPA563. The cost to develop each biosimilar, proposed therapeutic equivalent drug, and vaccine product candidate could vary significantly and is highly dependent on the specific compound and the amount and type of clinical work that will be necessary for regulatory approval. There can be no assurance that our clinical work will be successful, or that regulatory authorities will not require additional clinical development beyond that which we have planned. Additionally, we may enter into alliances and collaborations to fund biosimilar and therapeutic equivalent product research and development activities, and the success of any such biosimilar or therapeutic equivalent product program may depend on our ability to realize the benefits under such arrangements. Due to events beyond our control or the risks identified herein, we may be unable to fund all or some of our internal biosimilar, therapeutic equivalent, and vaccine product research and development initiatives, which would have an adverse impact on our strategy and growth initiatives.

We intend to pursue market authorization globally when commercially appropriate. Since October 2005, the EU has had a regulatory framework for the authorization of biosimilar products and as of September 30, 2018, forty-seven biosimilar medicinal products have been approved and three biosimilar medicinal products have been withdrawn. In the United States, an abbreviated pathway for approval of biosimilar products was established by the BPCIA, enacted on March 23, 2010, as part of the ACA. The BPCIA established this abbreviated pathway under section 351(k) of the PHSA. Subsequent to the enactment of the BPCIA, the FDA issued draft guidance regarding the demonstration of biosimilarity as well as the submission and review of biosimilar applications. However, to date, only twelve biosimilars have been approved by the FDA, and no biosimilar product has been designated as interchangeable to the reference drug. Moreover, market acceptance of biosimilar products in the U.S. is unclear. Numerous states are considering or have already enacted laws that regulate or restrict the substitution by state pharmacies of biosimilars for biological products already licensed by the FDA pursuant to BLAs, or “reference products.” Market success of biosimilar products will depend on demonstrating to patients, physicians, payors, and relevant authorities that such products are safe and efficacious compared to other existing products.

We will continue to analyze and incorporate into our biosimilar development plans any final regulations issued by the FDA, pharmacy substitution policies enacted by state governments, and other applicable requirements established by relevant authorities. The costs of development and approval, along with the probability of success for our biosimilar product candidates, will be dependent upon application of any laws and regulations issued by the relevant regulatory authorities.

Biosimilar products may also be subject to extensive patent clearances and patent infringement litigation, which will likely delay and could prevent the commercial launch of a product. Moreover, the BPCIA prohibits the FDA from accepting an application for a biosimilar candidate to a reference product within four years of the reference product’s licensure by the FDA. In addition, the BPCIA provides innovative biologics with 12 years of exclusivity from the date of their licensure, during which time the FDA cannot approve any application for a biosimilar candidate to the reference product. Although unsuccessful, there have been efforts in the past to reduce the exclusivity period to 7 years. We cannot predict whether similar efforts will be made in the future, or if any such efforts may succeed.

The BPCIA is complex and continues to be interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning is subject to significant uncertainty. Future implementation decisions by the FDA could result in delays in the development or commercialization of our product candidates or increased costs to assure regulatory compliance, and could adversely affect our operating results by restricting or significantly delaying our ability to market new biosimilar products. In the EEA, holders of marketing authorizations of reference products (for which a marketing authorization was applied for under the centralized procedure after November 20, 2005, or under the Decentralized, Mutual Recognition and national procedures, after October 30, 2005) enjoy eight years of data exclusivity during which a generic or hybrid medicinal product or biosimilar marketing authorization applicant cannot rely on the preclinical and clinical data included in the reference product’s dossier, and 10 years of marketing exclusivity during which a generic or hybrid medicinal product or biosimilar of the reference product cannot be placed in the EEA market. The 10-year marketing exclusivity period can be extended to a maximum of 11 years if, during the first eight years of

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those 10 years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. The data and marketing exclusivity periods start from the date of the initial authorization, which for reference medicinal products authorized through the Centralized Procedure is the date of notification of the marketing authorization decision to the marketing authorization holder of the reference product.

We may rely on the Animal Rule in conducting trials, which could be time consuming and expensive.

To obtain FDA approval for our vaccine candidates Px563L and/or RPA563, we may obtain clinical data from trials in healthy human subjects that demonstrate adequate safety, and efficacy data from adequate and well-controlled animal studies under regulations issued by the FDA in 2002, often referred to as the “Animal Rule.” Among other requirements, the animal studies must establish that the drug or biological product is reasonably likely to produce clinical benefits in humans. If we use this approach we may not be able to sufficiently demonstrate this correlation to the satisfaction of the FDA, as these corollaries are difficult to establish and are often unclear. Because the

Because the FDA must agree that data derived from animal studies may be extrapolated to establish safety and effectiveness in humans, seeking approval under the Animal Rule may add significant time, complexity and uncertainty to the testing and approval process. The FDA may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies, refuse to approve Px563L and/or RPA563, or place restrictions on our ability to commercialize the products. In addition, products approved under the Animal Rule are subject to additional requirements including post-marketing study requirements, restrictions imposed on marketing or distribution or requirements to provide information to patients. Further, regulatory authorities in other countries have not, at this time, established an Animal Rule equivalent, and consequently there can be no assurance that we will be able to make a submission for marketing approval in foreign countries based on such animal data.

Additionally, few facilities in the U.S. and internationally may have the capability to test animals involving exposure to anthrax or otherwise assist us in qualifying the requisite animal models, and we must compete with other companies for access to this limited pool of highly specialized resources. We therefore may not be able to secure contracts to conduct the testing in a predictable timeframe or at all.

If the FDA allows generic versions of Forteo to be approved under the ANDA regulatory pathway, PF708 may face additional competition.

PF708, similar to Forteo, is made recombinantly using living cells. In October 2017, however, the FDA issued a draft guidance document that identified standards by which chemically manufactured, or synthetic, versions of Forteo may be approved under the 505(j), or Abbreviated New Drug Application (ANDA), regulatory pathway, which would not require the conduct of a comparative clinical trial in patients for approval of the product. In addition, the FDA has rejected two citizen petitions that sought to prohibit approval of an ANDA for a synthetic version of Forteo. The availability of the ANDA regulatory pathway for synthetic versions of Forteo may result in additional competition for PF708. Additionally, products approved under the ANDA pathway are considered generic drugs, and generally are approved as therapeutic equivalents to the reference product, and therefore may be automatically substituted for the reference listed drug, depending on health care statutes and policies within each of the 50 states. The potential automatic substitution status of these generic products may adversely affect our ability to generate revenue with PF708 after regulatory approval.

If we do not obtain a therapeutic equivalence designation for PF708 from the FDA, our business may suffer.

We are developing PF708 under the 505(b)(2) regulatory pathway in the United States. Additionally, we have received guidance from the FDA on requirements for a therapeutic equivalence designation, which may allow automatic substitution for the reference listed drug, depending on health care statutes and policies within each of the 50 states. Even with FDA guidance on the requirements, however, demonstrating therapeutic equivalence may prove difficult, and we may receive regulatory approval without obtaining therapeutic equivalence designation from the FDA, an outcome that could adversely affect our ability to generate revenue from PF708, if approved.

If other therapeutic equivalent or generic products to Forteo are approved and successfully commercialized before PF708, our business would suffer.

Other companies may seek approval to manufacture and market therapeutic equivalent or generic product versions of Forteo. If other therapeutic equivalent or generic product versions of Forteo are approved and successfully commercialized before PF708, we may never achieve significant market share for PF708, our revenue would be reduced and, as a result, our business, prospects and financial condition could suffer.

Teva Pharmaceuticals USA, Inc. has submitted an ANDA for a generic version of Forteo, and has settled the subsequent patent lawsuit brought by Eli Lilly alleging infringement of the Orange Book-listed patents for Forteo. The terms of the settlement are not public, but Lilly has said it does not anticipate a generic version of Forteo to be marketed before the second half of 2019, at the

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earliest. Although to date there is no public information indicating that the Teva ANDA has been approved, it is possible that the Teva generic may be approved and marketed before PF708 is approved and marketed, which could adversely affect our ability to generate revenue from PF708, if approved.

Failure to obtain regulatory approval in each regulatory jurisdiction would prevent us and our collaboration partners from marketing our products to a larger patient population and reduce our commercial opportunities.

In order to market our products in the EU, the United States and other jurisdictions, we or our collaboration partners must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The EMA is responsible for the assessment of centralized marketing authorization applications for human medicines. This procedure results in a single marketing authorization granted by the European Commission that is valid in all EU Member States, as well as in EEA States Iceland, Liechtenstein and Norway. The time required to obtain approval abroad may differ from that required to obtain FDA approval. When a marketing authorization application is submitted to the EMA, a related scientific evaluation is conducted by the EMA’s Committee for Medicinal Products for Human Use (CHMP), and a scientific opinion is prepared concerning the suitability of the product for authorization. This scientific opinion is sent to the European Commission which, before arriving at a final decision on a marketing authorization application, must consult the Standing Committee on Medicinal Products for Human Use. The Standing Committee is composed of representatives of the EU member states and chaired by a non-voting European Commission representative. The European Parliament also has a related “droit de regard.” The European Parliament’s role is to ensure that the European Commission has not exceeded its powers in deciding to grant or refuse to grant a marketing authorization. In accordance with the centralized procedure, the maximum timeframe for the evaluation of an MAA is 210 days. This excludes clock stops during which additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP.

The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products within the United States or in any market outside the United States. Failure to obtain these approvals would materially and adversely affect our business, financial condition and results of operations.

Even if we and our collaboration partners obtain regulatory approvals for PF708, or any of our other product candidates, we will be subject to ongoing regulatory review.

Even if we and our collaboration partners obtain regulatory approval for PF708, or any of our other product candidates, any products we develop will be subject to ongoing regulatory review with respect to manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities. Manufacturers and manufacturers’ facilities are required to comply with extensive FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP. As such, we and our contract manufacturers will be subject to continual and unannounced review and inspections by the regulatory authorities governing the markets in which we wish to sell our products. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

Any regulatory approvals that we and our collaboration partners receive for PF708 or any of our other product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or on other conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 trials, and surveillance to monitor the safety and efficacy or the safety, purity, and potency of the product candidate. We and our collaboration partners will be required to promptly report any serious and unexpected adverse events and certain quality or production problems with our products to regulatory authorities, as well as submit other periodic reports. Any new legislation addressing drug or biologic product safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. We and our collaboration partners will have to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drug and biologic products are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. As such, we will not be allowed to promote our products for indications or uses for which they do not have approval. The holder of an approved NDA, BLA, 351(k) application or marketing authorization application must submit new or supplemental applications and obtain prior approval for certain changes to the approved product, product labeling, or manufacturing process. We could also be asked to conduct post-marketing clinical studies to verify the safety and efficacy of our products in general or in specific patient subsets. An unsuccessful post-marketing study or failure to complete such a study could result in penalties or other adverse consequences, up to and including potential withdrawal of marketing approval.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of a product, or if we or our collaboration partners fail to comply with applicable regulatory requirements, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we or our

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collaboration partners fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may subject us to administrative or judicially imposed sanctions or other actions, including, among other things:

• adverse publicity, fines or untitled or warning letters;

• mandated modifications to promotional materials or requirements to provide corrective information to healthcare practitioners;

• a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

• civil or criminal penalties;

• injunctions;

• suspending or withdrawing regulatory approval;

• suspending any of our ongoing clinical studies;

• refusing to approve pending applications or supplements to approved applications submitted by us;

• imposing restrictions on our operations, including suspending or closing our contract manufacturers’ facilities; or

• seizing or detaining products, or requiring a product recall.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected.

We will also be subject to various health care fraud and abuse laws, including anti-kickback, false claims and fraud laws, and physician payment transparency laws, and any violations by us of such laws could result in fines or other penalties.

Although we currently do not have any products on the market, if PF708 or any of our other product candidates are approved and we begin commercialization, we will be subject to healthcare regulation and enforcement by the federal government and the states and EEA and other foreign governments in which we conduct our business. These laws include, without limitation, state and federal, as well as EEA and other foreign, anti-kickback, fraud and abuse, false claims, privacy and security and physician sunshine laws and regulations, such as the following:

• The U.S. federal Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arranging for or recommending the purchase, lease or order of, any good or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced-price items and services. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and Medicare patients, prescribers, purchasers and formulary managers on the other. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution and administrative sanction, the exemptions and safe harbors are drawn narrowly, and practices or arrangements that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection, and therefore would be subject to a facts and circumstances analysis to determine potential Anti-Kickback Statute liability.

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• The U.S. civil False Claims Act (which can be enforced through “qui tam,” or whistleblower actions, by private citizens on behalf of the federal government) prohibits any person from, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the U.S. federal government. Many pharmaceutical and other healthcare companies have been investigated or subject to lawsuits by whistleblowers and have reached substantial financial settlements with the federal government under the False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug reimbursement rates under government healthcare programs. In addition, the government and private whistleblowers have pursued False Claims Act cases against pharmaceutical companies for causing false claims to be submitted as a result of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies also are subject to other federal false claim laws, including federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs.

• The U.S. federal Health Insurance Portability and Accountability Act of 1996, as amended, or HIPAA, imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program (which includes both government and privately funded benefits programs), or 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 by a healthcare benefit program.

• The majority of states have adopted analogous laws and regulations, including state anti-kickback and false claims laws, that may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by any third-party payer, including private insurers. Other states have adopted laws that, among other things, require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws and regulations that require drug manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities.

• The Physician Payments Sunshine Act, implemented as the Open Payments program, and its implementing regulations, require certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to Centers for Medicare & Medicaid Services information related to certain payments made in the preceding calendar year and other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.

Additionally, HIPAA and its implementing regulations also impose certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information and impose notification obligations in the event of a breach of the privacy or security of individually identifiable health information. Further, numerous federal and state laws and regulations that address privacy and data security, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act, or FTC Act), govern the collection, use, disclosure and protection of health-related and other personal information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure investors that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.

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We also may be subject to healthcare privacy and data privacy laws and regulations, and violations of these laws could result in government enforcement actions and create liability for us, private litigation and/or adverse publicity that could negatively affect our business.

We may be subject to laws and regulations covering data privacy and the protection of health-related and other personal information. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing focus on privacy and data protection issues which may affect our business. Numerous federal and state laws and regulations, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use, disclosure, and protection of personal information. Failure to comply with such laws and regulations could result in government enforcement actions and create liability for us (including the imposition of significant penalties), private litigation and/or adverse publicity that could negatively affect our business. In addition, healthcare providers who prescribe our products and research institutions we collaborate with are subject to privacy and security requirements under HIPAA. Although we are not directly subject to HIPAA other than with respect to providing certain employee benefits, we potentially could be subject to criminal penalties if we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.

EU member states, Switzerland and other countries have also adopted data protection laws and regulations that impose significant compliance obligations. In the EU, the collection and use of personal health data is governed by the provisions of the General Data Protection Regulation (GDPR). The GDPR entered into application on 25 May 2018, repealing the Data Protection Directive and increasing our responsibility and liability in relation to the processing of personal data of EU subjects. The GDPR, together with the national legislation of the individual EU member states governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting.

These obligations and restrictions concern, in particular, the consent of the individuals to whom the personal data relates, the information provided to the individuals, the transfer of personal data outside the EU, security breach notifications, security and confidentiality of the personal data, as well as substantial potential fines for breaches of the data protection obligations. Data protection authorities from the different EU member states may interpret the GDPR and national laws differently and impose additional requirements, which add to the complexity of processing personal data of EU subjects.

With respect to the transfer of personal data out of the EU, the GDPR provides that the transfer of personal data to countries that the European Commission does not consider to provide an adequate level of data protection, including the United States, is permitted only on specific legal bases.

In Case C-362/14 Maximillian Schrems v. Data Protection Commissioner, or the Schrems case, the judgment by the Court of Justice of the European Union (CJEU) held invalid the Safe Harbor Framework, which many United States entities had relied upon as a basis for transferring personal data from the EU to the United States. As a result, United States entities could rely only on the alternate procedures for such data transfer provided in the EU Data Protection Directive. On February 29, 2016, however, the European Commission announced an agreement with the United States Department of Commerce, or the DOC, to replace the invalidated Safe Harbor framework with a new “Privacy Shield.” On July 12, 2016, the European Commission adopted a decision on the adequacy of the protection provided by the Privacy Shield, which is intended to address the requirements set out by the CJEU in the Schrems case. The Privacy Shield imposes more stringent obligations on companies, provides stronger monitoring and enforcement by the DOC and the Federal Trade Commission, and makes commitments on the part of public authorities regarding access to information. United States entities have been able to certify to the DOC their compliance with the privacy principles of the Privacy Shield since August 1, 2016 and rely on the Privacy Shield certification to transfer personal data from the EU to the United States.

In October 2016, however, three French digital rights advocacy groups, La Quadrature du Net, French Data Network and the Fédération FDN, brought an action for annulment of the European Commission decision on the adequacy of the Privacy Shield before the CJEU (Case T-738/16). The case is currently pending before the CJEU. If the CJEU invalidates the Privacy Shield, it will no longer be possible to rely on the Privacy Shield certification to transfer personal data from the EU to entities in the United States. Adherence to the Privacy Shield is not, however, mandatory. Entities based in the United States are permitted to rely either on their adherence to the Privacy Shield or on the other authorized means and procedures to transfer personal data provided by the GDPR.

Our failure to comply with these laws, or changes in the way in which these laws are implemented, could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.

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Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory approval of PF708, Px563L, RPA563 or any other product candidates and to produce, market, and distribute our products after approval is obtained, if any.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacturing, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance may be revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or guidance, or revisions or reinterpretations of existing regulations or guidance, may impose additional costs or lengthen FDA review times for PF708, Px563L, RPA563 or any other product candidates. We cannot determine how changes in regulations, statutes, policies, or interpretations when and if issued, enacted or adopted, may affect our business in the future. Such changes could require substantial time and impose significant costs, and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any other products would harm our business, financial condition, and results of operations.

If efforts by manufacturers of reference products to delay or limit the use of biosimilars and therapeutic equivalent products are successful, our sales of biosimilar and other therapeutic equivalent products may suffer.

Many manufacturers of reference products have increasingly used legislative, regulatory and other means in attempts to delay regulatory approval of and competition from biosimilars and therapeutic equivalent products. These efforts have included sponsoring legislation to prevent pharmacists from substituting biosimilars for prescribed reference products or to make such substitutions more difficult by establishing notification, recordkeeping, and/or other requirements, as well as seeking to prevent manufacturers of biosimilars from referencing the branded products in biosimilar product labels and marketing materials. If these or other efforts to delay or block competition are successful, we may be unable to sell our biosimilar and therapeutic equivalent product candidates, which could have a material adverse effect on our sales and profitability.

Our and our collaboration partners’ future sales will be dependent on the availability and level of coverage and reimbursement from third-party payors who continue to implement cost-cutting measures and more stringent reimbursement standards.

In the United States and internationally, our and our collaboration partners’ ability to generate revenue on future sales of our products will be dependent, in significant part, on the availability and level of coverage and reimbursement from third-party payors, such as state and federal governments and private insurance plans. Insurers have implemented cost-cutting measures and other initiatives to enforce more stringent reimbursement standards and likely will continue to do so in the future. These measures include the establishment of more restrictive formularies and increases in the out-of-pocket obligations of patients for such products. In addition, particularly in the U.S. and increasingly in other countries, we will be required to provide discounts and pay rebates to state and federal governments and agencies in connection with purchases of our products that are reimbursed by such entities.

In March 2010, the ACA, as amended by the Health Care and Education Reconciliation Act, was enacted with a goal of reducing the cost of healthcare and substantially changing the way healthcare is financed by both government and private insurers. The ACA, among other things, subjected biologic products to potential competition by lower-cost biosimilars and follow-on products, implemented new price reporting requirements for drugs that are inhaled, infused, instilled, implanted or injected, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, added new entity types eligible for participation in the Public Health Service’s 340B drug pricing program, established annual fees and taxes on manufacturers of certain prescription drugs, and created a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable reference product drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. The Bipartisan Budget Act of 2018 increased such manufacturer point-of-sale discounts in the Medicare Part D coverage gap discount program to 70% beginning in 2019.

Other legislative changes have been proposed and adopted in the U.S. since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011. This included aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will stay in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Tax Payer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals. We expect that additional healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal, state and foreign governments will pay for healthcare products and services, which could result in reduced demand for our products, if approved, or additional pricing pressures. Furthermore, certain legislative changes to and regulatory changes under the ACA have occurred in the 115th U.S. Congress and under the Trump Administration. For example, the Bipartisan Budget Act of 2018 will sunset the exclusion of biosimilars from the Medicare Part D coverage gap discount program beginning in 2019. The impact of these changes on us and potential effect on biosimilar manufacturing industry as a whole is currently unknown. Additional legislative changes to and regulatory changes under the ACA remain possible. Any additional changes to the ACA may have an impact on our results of operations and may have a material adverse effect on our results of operations. We cannot predict what other healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the United States may have on our business.

If we successfully commercialize any of our products, we may participate in the Medicaid Drug Rebate program. Participation is required for federal funds to be available for our covered outpatient drugs under Medicaid and, if applicable, Medicare Part B. Under the Medicaid Drug Rebate Program, we would be required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and, if applicable, Part B of the Medicare program.

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Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service’s 340B drug pricing program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients.

In addition, in order to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, a manufacturer also must participate in the U.S. Department of Veterans Affairs, or VA, Federal Supply Schedule, or FSS, pricing program. Under this program, the manufacturer is obligated to make its innovator and single source products available for procurement on an FSS contract and charge a price to four federal agencies, VA, U.S. Department of Defense, or DoD, Public Health Service and U.S. Coast Guard, that is no higher than the statutory Federal Ceiling Price. Moreover, pursuant to regulations issued by the DoD Defense Health Agency to implement Section 703 of the National Defense Authorization Act for Fiscal Year 2008, manufacturers are required to provide rebates on utilization of their innovator and single source products that are dispensed to TRICARE beneficiaries by TRICARE network retail pharmacies. The requirements under the Medicaid Drug Rebate, 340B, FSS, and TRICARE programs could reduce the revenue we may generate from any products that are commercialized in the future and could adversely affect our business and operating results.

If we successfully commercialize any of our product candidates and if we participate in the Medicaid drug rebate program or other governmental pricing programs, failure to comply with reporting and payment obligations under these programs could result in additional reimbursement requirements, penalties, sanctions, and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The Medicaid Drug Rebate Program and other governmental pricing programs require participating manufacturers to report pricing data to various government agencies. Pricing calculations vary among products and programs and include average manufacturer price and best price for the Medicaid Drug Rebate Program, average sales price for certain categories of drugs that are paid under Part B of the Medicare program, and non-federal average manufacturer price for the VA FSS pricing program. If we successfully commercialize any of our products and participate in such governmental pricing programs, we will be liable for errors associated with our submission of pricing data. That liability could be significant. For example, if we are found to have knowingly submitted false average manufacturer price, average sales price, best price, or non-federal average manufacturer price information to the government, or fail to timely submit such information, we may be liable for significant civil monetary penalties. The foregoing also could be grounds for other sanctions, such as termination from the Medicaid Drug Rebate Program.

Foreign governments tend to impose strict price controls, which may adversely affect our revenue, if any.

In some foreign countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. Our existing or future collaboration partners, if any, may elect to reduce the price of our products in order to increase the likelihood of obtaining reimbursement approvals which could adversely affect our revenues and profits. To obtain reimbursement or pricing approval in some countries, we or our collaboration partners may also be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

Our ability to market our biosimilar product candidates in the United States may be significantly delayed or prevented by the BPCIA patent dispute resolution mechanism.

The Biologics Price Competition and Innovation Act of 2009, Title VII, Subtitle A of the Patient Protection and Affordable Care Act, collectively referred to as the Affordable Care Act (ACA), Pub.L.No.111-148, 124 Stat.119, Sections 7001-02 signed into law March 23, 2010, and codified in 42 U.S.C. §262 (BPCIA) created an elaborate and complex patent dispute resolution mechanism for biosimilars that could prevent us from launching our product candidates in the United States or could substantially delay such launches. The BPCIA mechanism required for 351(k) biosimilar applicants may pose greater risk as compared to the litigation risk to which we might be exposed under a traditional 351(a) BLA regulatory pathway.

The BPCIA sets forth patent disclosure and briefing that are demanding and time-sensitive. The following is an overview of the patent exchange and patent briefing procedures set forth in the BPCIA:

• Disclosure of the Biosimilar Application. Within 20 days after the FDA publishes a notice that its application has been accepted for review, a 351(k) biosimilar applicant can decide whether or not it chooses to provide a copy of its application to the originator. If the applicant does not provide its application, the originator may file for a “declaration of infringement, validity, or enforceability of any patent that claims the biological product or a use of the biological product.”

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• Identification of Pertinent Patents. Within 60 days of the date of receipt of the application the originator must identify patents owned or controlled by the originator which it believes could reasonably be asserted against the biosimilar applicant.

• Statement by the Biosimilar Applicant. Within 60 days of the date of receipt of the originator’s patent list, the biosimilar applicant must state either that it will not market its product until the relevant patents have expired or alternatively provide its arguments that the patents are invalid, unenforceable or would not be infringed by the proposed biosimilar product candidate. The biosimilar applicant may also provide the originator with a list of patents the biosimilar applicant believes the originator could reasonably assert against a person not licensed by the originator engaged in the making, using, offering to sell, selling, or importing into the United States of the reference product.

• Statement by the Originator. In the event the biosimilar applicant has asserted that the patents are invalid, unenforceable or would not be infringed by the proposed follow-on product, the originator must provide the biosimilar applicant with a response within 60 days. The response must provide the legal and factual basis of the opinion that such patent will be infringed by the commercial marketing of the proposed biosimilar and a response to any arguments offered from the biosimilar applicant concerning validity and enforceability.

• Patent Resolution Negotiations. If the originator provides its detailed views that the proposed biosimilar would infringe valid and enforceable patents, then the parties are required to engage in good faith negotiations to identify which of the discussed patents will be the subject of a patent infringement action. If the parties agree on the patents to be litigated, the originator firm must bring an action for patent infringement within 30 days.

• Simultaneous Exchange of Patents. If those negotiations do not result in an agreement within 15 days, then the biosimilar applicant must notify the originator of how many patents (but not the identity of those patents) that it wishes to litigate. Within five days, the parties are then required to exchange lists identifying the patents to be litigated. The number of patents identified by the originator may not exceed the number provided by the biosimilar applicant. However, if the biosimilar applicant previously indicated that no patents should be litigated, then the originator may identify one patent.

• Commencement of Patent Litigation. The originator must then commence patent infringement litigation within 30 days. That litigation will involve all of the patents on the originator’s list and all of the patents on the follow-on applicant’s list. The follow-on applicant must then notify the FDA of the litigation. The FDA must then publish a notice of the litigation in the Federal Register.

• Notice of Commercial Marketing. The BPCIA requires the biosimilar applicant to provide notice to the originator at least 180 days in advance of its first commercial marketing of its proposed follow-on biologic. The originator is allowed to seek a preliminary injunction blocking such marketing based upon any patents that either party had preliminarily identified, but were not subject to the initial phase of patent litigation. The litigants are required to “reasonably cooperate to expedite such further discovery as is needed” with respect to the preliminary injunction motion.

Biosimilar companies such as ours have the option of applying for U.S. regulatory approval for our products under either a traditional 351(a) BLA approval route, or under the 351(k) approval route established by the BPCIA. The factors underpinning such a decision are extremely complex and involve, among other things, balancing legal risk (in terms of, e.g., the degree and timing of exposure to potential patent litigation by the originator) versus regulatory risks (in terms of, e.g., the development costs and the differing scope of regulatory approval that may be afforded under 351(a) versus 351(k)).

A significant legal risk in pursuing regulatory approval under the 351(k) regulatory approval route is that the above-summarized patent exchange process established by the BPCIA could result in the initiation of patent infringement litigation prior to FDA approval of a 351(k) application, and such litigation could result in blocking the market entry of our products. In particular, while the 351(k) route is more attractive to us (versus 351(a)) for reasons related to development time and costs and the potential broader scope of eventual regulatory approval for our proposed biosimilar candidates, the countervailing risk in such a regulatory choice is that the complex patent exchange process mandated by the BPCIA could ultimately prevent or substantially delay us from launching our products in the United States.

Moreover, the disclosure process set forth in the process outlined above, which is directed to disclosure by the biosimilar applicant of not only its regulatory application but also the applicant’s manufacturing process, has the potential to afford originators an easier path than traditional infringement litigation for developing any factual grounds they may require to support allegations of infringement. The rules established in the BPCIA’s patent dispute procedures (versus the rules governing traditional patent infringement litigation) place biosimilar firms at a significant disadvantage by affording originators a much easier mechanism for factual discovery, thereby increasing the risk that a biosimilar product could be blocked from the market more quickly than under traditional patent infringement litigation processes. However, a June 12, 2017 decision by the United States Supreme Court held that no injunction is available under federal law to force compliance with the patent exchange and patent briefing process. The Supreme

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Court remanded the case to the Federal Circuit to answer: (1) whether an injunction is available under state law; and (2) whether such a state-law injunction is preempted by federal law. The Federal Circuit recently held that the “BPCIA preempts state law remedies for an applicant’s failure to comply with § 262(l)(2)(A).”

Preparing for and conducting the patent exchange, briefing and negotiation process outlined above will require extraordinarily sophisticated legal counseling and extensive planning, all under extremely tight deadlines. Moreover, it may be difficult for us to secure such legal support if large, well-funded originators have already entered into engagements with highly qualified law firms or if the most highly qualified law firms choose not to represent biosimilar applicants due to their long-standing relationships with originators. Furthermore, we could be at a serious disadvantage in this process as an originator company may be able to apply substantially greater legal and financial resources to this process than we could.

We are aware that some biosimilar companies, namely Sandoz International GmbH (Sandoz), a subsidiary of Novartis AG, and Celltrion, Inc. have engaged in legal challenges against originators to establish their right to bring declaratory judgment actions against such originators outside the complex framework of the BPCIA patent exchange rules in order to challenge the validity of the originators’ patents prior to the filing of any biosimilar regulatory application. For example, in the Sandoz case against the originator Amgen (relating to Sandoz’ proposed etanercept (Enbrel^®) biosimilar) the federal district court ruled that Sandoz did not have the right to bring a declaratory judgment action against Amgen to challenge the validity of certain Amgen-controlled patents directed to Enbrel, but instead determined that Sandoz must use the patent exchange mechanism established in the BPCIA. Sandoz appealed this decision to the United States Court of Appeals for the Federal Circuit, and on December 5, 2014 the Federal Circuit Court ruled that Sandoz had not met the legal requirements to pursue a declaratory judgment action against Amgen. The Federal Circuit court did not address whether the patent resolution mechanism established in the BPCIA would preclude Sandoz from filing its declaratory judgment action against Amgen if and when it files an FDA application under the BPCIA for its etanercept biosimilar.

In October 2014, Amgen filed suit in federal district court against Sandoz alleging that Sandoz unlawfully refused to follow the patent resolution provisions of the BPCIA in connection with Sandoz’ July 2014 regulatory approval application under 351(k) for its Neupogen^® (filgrastim) biosimilar, Zarxio^®. Amgen sought declaratory and injunctive relief. Following litigation at the federal district court and appeals to the Federal Circuit, on February 16, 2016, Sandoz petitioned the United States Supreme Court for certiorari review of the Federal Circuit decision that biosimilar applicants must wait until FDA approval before providing 180-day notice and Amgen filed a cross petition to review the decision that the patent exchange and briefing process is optional. On June 12, 2017, the Supreme Court issued a unanimous opinion in Amgen v. Sandoz holding that notice of commercial marketing may be given prior to FDA approval of the biosimilar product. The Court also held that no injunction is available under federal law to force compliance with the patent exchange and patent briefing process. The Court remanded the case to the Federal Circuit to answer: (1) whether an injunction is available under state law; and (2) whether such a state-law injunction is preempted by federal law. On December 14, 2017, the Federal Circuit affirmed the dismissal of Amgen’s unfair competition and conversion claims and that Amgen’s state law claims are preempted on both field and conflict grounds. In particular, the Federal Circuit noted that the “BPCIA preempts state law remedies for an applicant’s failure to comply with § 262(l)(2)(A).”

If we file a 351(k) regulatory approval application for one or more of our products, we may consider it necessary or advisable to adopt the strategy of selecting one or more patents of the originator to litigate in the above described BPCIA process (for example in steps 3 and 7, of the process, as outlined above), either to assert our non-infringement of such patents or to challenge their validity; but we may ultimately not be successful in that strategy and could be prevented from marketing the product in the United States.

Under the complex and uncertain rules of the BPCIA patent provisions, coupled with the inherent uncertainty surrounding the legal interpretation of any originator patents that might be asserted against us in this new process, we see substantial risk that the BPCIA process may significantly delay or defeat our ability to market our products in the United States.

If we and our collaboration partners are not able to demonstrate biosimilarity of our biosimilar product candidates to the satisfaction of regulatory authorities, we will not obtain regulatory approval for commercial sale of our biosimilar product candidates and our future results of operations would be adversely affected.

Our future results of operations depend, to a significant degree, on our and our collaboration partners’ ability to obtain regulatory approval for and commercialize our proposed biosimilar products. To obtain regulatory approval for the commercial sale of these product candidates, we will be required to demonstrate to the satisfaction of regulatory authorities, among other things, that our proposed biosimilar products are highly similar to biological products already licensed by the FDA pursuant to Biologic License Applications (BLAs), notwithstanding minor differences in clinically inactive components, and that they have no clinically meaningful differences as compared to the marketed biological products in terms of the safety, purity and potency of the products. In the EEA, the similar nature of a biosimilar and a reference product is demonstrated by comprehensive comparability studies covering quality, biological activity, safety and efficacy.

In addition, the FDA may determine that a proposed biosimilar product is “interchangeable” with a reference product, meaning that the biosimilar product may be substituted by a pharmacist for the reference product without the intervention of the health care provider who prescribed the reference product, if the application includes sufficient information to show that the product is biosimilar to the reference product and that it can be expected to produce the same clinical result as the reference product in any given patient. If

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the biosimilar product may be administered more than once to a patient, the applicant must demonstrate that the risk in terms of safety or diminished efficacy of alternating or switching between the biosimilar and reference product is not greater than the risk of using the reference product without such alternation or switch. To make a final determination of biosimilarity or interchangeability, regulatory authorities may require additional confirmatory information beyond what we and our collaboration partners plan to initially submit in our applications for approval, such as more in-depth analytical characterization, animal testing, or further clinical studies. Provision of sufficient information for approval may prove difficult and expensive. We cannot predict whether any of our biosimilar product candidates will meet regulatory authority requirements for approval as a biosimilar or interchangeable product. To date, the FDA has not approved a biosimilar product as being interchangeable to the reference drug.

Analytical assessments can identify potential differences between biosimilar candidates and reference products. Differences in the analytical assessments may require clinical studies to reduce the residual uncertainties. In the event that regulatory authorities require us to conduct additional clinical trials or other lengthy processes, the commercialization of our proposed biosimilar products could be delayed or prevented. Delays in the commercialization of, or the inability to obtain regulatory approval for, these products could adversely affect our operating results by restricting or significantly delaying our introduction of new biosimilars.

We intend to market our products outside of the United States, and we will be subject to the risks of doing business outside of the United States.

Because we intend to market our product candidates, if approved, outside of the United States, our business is subject to risks associated with doing business outside of the United States. Accordingly, our business and financial results in the future could be adversely affected due to a variety of factors, including:

• efforts to develop an international sales, marketing and distribution organization may increase our expenses, divert our management’s attention from the acquisition or development of product candidates or cause us to forgo profitable licensing opportunities in these geographies;

• changes in a specific country’s or region’s political and cultural climate or economic condition;

• unexpected changes in foreign laws and regulatory requirements;

• difficulty of effective enforcement of contractual provisions in local jurisdictions;

• inadequate intellectual property protection in foreign countries;

• trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges;

• the effects of applicable foreign tax structures and potentially adverse tax consequences; and

• significant adverse changes in foreign currency exchange rates.

Moreover, our partners and third-party contractors located outside the U.S. may have inadequate compliance programs or may fail to respect the laws and guidance of the territories in which they operate. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could also have an adverse effect on our business, financial condition and results of operations.

Risks Relating to Owning Our Common Stock

The market price of our stock may fluctuate significantly, and investors may have difficulty selling their shares.

Our stock is currently traded on NYSE American, but we can provide no assurance that we will be able to maintain an active trading market on NYSE American or any other exchange in the future. The trading volume of our stock tends to be low relative to our total outstanding shares, and we have several stockholders who hold substantial blocks of our stock. As of September 30, 2018, we had 31,460,719 shares of common stock outstanding, and stockholders holding at least 5% of our stock, individually or with affiliated persons or entities, collectively beneficially owned or controlled approximately 38% of such shares. Sales of large numbers of shares by any of our large stockholders could adversely affect our trading price, particularly given our relatively small historic trading volumes. If stockholders holding shares of our common stock sell, indicate an intention to sell, or if it is perceived that they will sell, substantial amounts of their common stock in the public market, the trading price of our common stock could decline.

Since shares of our common stock were sold in our initial public offering in July 2014 at a price of $6.00 per share, our stock price has ranged from $2.07 to $24.41 through September 30, 2018. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this quarterly report on Form 10-Q, factors that may cause volatility in our share price include:

• actual or anticipated quarterly variation in our results of operations or the results of our competitors;

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• announcements by us or our competitors of new commercial products, significant contracts, commercial relationships or capital commitments;

• issuance of new or changed securities analysts’ reports or recommendations for our stock;

• developments or disputes concerning our intellectual property or other proprietary rights;

• changes to our organization and management;

• commencement of, or our involvement in, litigation;

• market conditions in the relevant market;

• reimbursement or legislative changes in the relevant market;

• failure to complete significant sales;

• regulatory developments that may impact our product candidates;

• any future sales of our common stock or other securities;

• any major change to the composition of our board of directors or management; and

• general economic conditions and slow or negative growth of our markets.

The stock market in general and market prices for the securities of biopharmaceutical companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

We may be subject to securities litigation, which is expensive and could divert management attention.

The market price of our common stock has been and will likely continue to be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If securities or industry analysts publish unfavorable research about our business or cease to cover our business, our stock price and/or trading volume could decline.

The trading market for our common stock may rely, in part, on the research and reports that equity research analysts publish about us and our business. We do not have any control of the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, the market price of our common stock may decline.

We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. Any such future issuance, including any issuances pursuant to our “at the market” equity offering program under our sales agreement with William Blair, could result in substantial dilution to our existing stockholders and could cause our stock price to decline. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, the market price of our common stock may decline.

Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. We also register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.

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Furthermore, certain of our executive officers have adopted, and other directors and executive officers may in the future adopt, written plans, known as “Rule 10b5-1 Plans,” under which they have contracted, or may in the future contract, with a broker to sell shares of our common stock on a periodic basis to diversify their assets and investments. Sales of substantial amounts of our common stock in the public markets, including, but not limited to, sales made by our executive officers and directors pursuant to Rule 10b5-1 Plans, or the perception that these sales could occur, could cause the market price of our common stock to decline.

We are an “emerging growth company” and a “smaller reporting company” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (JOBS Act) enacted in April 2012, and may remain an “emerging growth company” for up to five years following the completion of our initial public offering, although, if we have more than $1.07 billion in annual revenue, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of December 31 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. For as long as we remain an “emerging growth company,” we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include:

• not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

• not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

• reduced disclosure obligations regarding executive compensation; and

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

We have taken advantage of reduced reporting burdens in our reports filed with the Securities and Exchange Commission (SEC). 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, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of reporting companies who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Notwithstanding the above, we are also currently a “smaller reporting company.” Specifically, similar to “emerging growth companies,” “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings and have certain other decreased disclosure obligations in their SEC filings. We cannot predict whether investors will find our common stock less attractive as a result of our reliance 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 the market price of our common stock may be reduced or more volatile.

If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.

In connection with our audit committee investigation, which concluded in the first quarter of 2017, we concluded that we had a material weakness relating to our former chief executive officer’s failure to set an appropriate “tone-at-the-top.” While we have designed and implemented measures that we believe address this material weakness, we continue to develop our internal controls, processes and reporting systems. However, completion of remediation does not provide assurance that our controls will operate properly or that our financial statements will be free from error. There may be undetected material weaknesses in our internal control over financial reporting, as a result of which we may not detect financial statement errors on a timely basis.

If we identify new material weaknesses in our internal control over financial reporting or we are unable to successfully remediate any future material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities laws and NYSE American listing requirements regarding the timely filing of periodic reports, investors may lose confidence in our financial reporting, and our stock price may decline.

Additionally, our independent registered public accounting firm is not required to and did not perform an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act due to a transition period established by the rules of the Securities and Exchange Commission (SEC) for newly public companies that have not lost their “emerging growth company” status as defined in the JOBS Act. Had our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act,

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additional control deficiencies amounting to significant deficiencies or material weaknesses may have been identified. We cannot be certain as to when we will be able to implement the requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a significant deficiency or material weakness may cause investors to lose confidence in our financial statements, and the trading price of our common stock may decline. If we fail to remedy any significant deficiency or material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

We expect to generate a tax net operating loss for 2018. The 2017 net operating loss carryforwards are available to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes may be limited. We have not analyzed whether we have experienced an ownership change for purposes of Sections 382 and 383 of the Code since 2014. We may have experienced an ownership change in connection with the sale of securities pursuant to a predecessor registration statement or otherwise and we may experience ownership changes in the future as a result of shifts in our stock ownership. We plan to complete a Section 382/383 analysis at year end to determine if we have had a ownership change. As a result, if or when we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income may be subject to limitations. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. As a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could adversely affect our future cash flows.

We are incurring increased costs as a result of operating as a public company and our management is required to devote substantial time to new compliance initiatives and corporate governance practices including maintaining an effective system of internal control over financial reporting.

As a public company, and increasingly after we are no longer an “emerging growth company” and/or “smaller reporting company,” we are incurring significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC, and the NYSE American impose numerous requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Also, the Securities Exchange Act of 1934 (Exchange Act), as amended, requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. Our management and other personnel devote a substantial amount of time to comply with these laws and regulations. These requirements have increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers. These rules and regulations 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 changing governance practices.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404(a) of the Sarbanes-Oxley Act requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. Section 404(b) of Sarbanes-Oxley Act (Section 404(b)) also requires our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting. As an “emerging growth company,” we are availing ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404(b). However, we may no longer avail ourselves of this exemption when we are no longer an “emerging growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404(b) will correspondingly increase. Our compliance with applicable provisions of Section 404 requires us and will continue to require us to incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements.

Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of any required compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered public accounting firm.

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Our directors, executive officers and principal stockholders will continue to have substantial control over us and could limit investors’ ability to influence the outcome of key transactions, including transactions that would cause a change of control.

As of September 30, 2018, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock and their respective affiliates beneficially owned or controlled approximately 40% of the outstanding shares of our common stock. Accordingly, these executive officers, directors and stockholders and their respective affiliates, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may therefore delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

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

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

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

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

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

• We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.

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

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

To the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds available for use in our business.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

• authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;

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

• specify that special meetings of our stockholders can be called only by our board of directors, the chairman of the board of directors, or the chief executive officer;

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

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

• provide that our directors may be removed only for cause;

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

• specify that no stockholder is permitted to cumulate votes at any election of directors; and

• require a super-majority of votes to amend certain of the above-mentioned provisions.

These provisions may frustrate or 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. 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.

We have broad discretion in the use of the net proceeds from our public offerings, including our “at the market” offering, and may not use them effectively.

We have broad discretion as to how to spend and invest the proceeds from our public offerings, including our “at-the-market” offering with William Blair, and we may spend or invest these proceeds in a way with which our stockholders disagree. Accordingly, investors will need to rely on our judgment with respect to the use of these proceeds and these uses may not yield a favorable return to our stockholders. In addition, until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

With the exception of the issuance of shares of common stock to our preferred stockholders in connection with the payment of all accrued and unpaid dividends in connection with our initial public offering, we do not anticipate paying any cash dividends in the foreseeable future.

At the closing of our initial public offering, our board of directors issued shares of common stock to pay all accrued but unpaid dividends on our convertible preferred stock. With the exception of this dividend, we do not anticipate paying cash dividends on any classes of our capital stock in the foreseeable future. We currently intend to retain our future earnings for the foreseeable future to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain on an investment in our common stock for the foreseeable future.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Recent Sale of Unregistered Securities

None.

(c) Issuer Purchases of Equity Securities

We did not repurchase any shares of our common stock during the three months ended September 30, 2018.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

70

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

71

EXHIBIT INDEX

Exhibit Number	Description	Incorporated by Reference Herein
		Form		File No.		Exhibit		Filing Date
10.1#+	Transition Agreement and Release by and between the Company and Hubert C. Chen dated August 16, 2018
10.2#†	Modification No. 7, effective September 14, 2018, to Cost Plus Fixed Fee Agreement, dated August  14, 2015, between the Registrant and the United States Department of Health and Human Services.
10.3+	Executive Employment Agreement, effective October 1, 2018, between the Company and Shawn A. Scranton, PharmD.		8-K		001-36540		10.1		September 11, 2018
31.1#	Certification of Chief Executive Officer pursuant to Exchange Act Rules  13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2#	Certification of Principal Financial Officer pursuant to Exchange Act Rules  13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certifications of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

# Filed herewith.

+ Indicates a management contract or compensatory plan.

† Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the SEC.

** The information in this exhibit is furnished and deemed not filed with the Securities and Exchange Commission for purposes of section 18 of the Exchange Act of 1934, as amended (the “Exchange Act”), and is not to be incorporated by reference into any filing of Pfenex Inc. under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

72

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PFENEX INC.
Dated: November 7, 2018	By:	/s/ Evert B. Schimmelpennink
		Evert B. Schimmelpennink
		Chief Executive Officer, President and Secretary (Principal Executive Officer)
Dated: November 7, 2018	By:	/s/ Susan A. Knudson
		Susan A. Knudson
		Chief Financial Officer (Principal Financial and Principal Accounting Officer)

73

EX-10.1

Exhibit 10.1

TRANSITION AGREEMENT AND RELEASE

This Transition Agreement and Release (“Agreement”) is made by and between Hubert C. Chen, M.D. (“Executive”) and Pfenex Inc. (the “Company”) (jointly referred to as the “Parties” or individually referred to as a “Party”) entered into on August 16, 2018 (the “Execution Date”) and effective as of the Effective Date (as defined in Section 23 below).

RECITALS

WHEREAS, Executive is currently employed as the Company’s Chief Medical and Scientific Officer;

WHEREAS, Executive signed an Executive Employment Agreement with the Company on November 3, 2014 (the “Employment Agreement”);

WHEREAS, Executive signed the Confidential Information and Invention Assignment Agreement with the Company on November 3, 2014 (the “CIIA”);

WHEREAS, Executive signed an Indemnification Agreement with the Company, dated November 14, 2014 (the “Indemnification Agreement”);

WHEREAS, Executive previously was granted options to purchase shares of the Company’s common stock (each, an “Option”) pursuant to the terms the Company’s 2014 Equity Incentive Plan (the “Plan”) and individual award agreements thereunder (each, a “Stock Option Agreement” and together with the Plan, the “Equity Agreements”);

WHEREAS, Executive is resigning his employment with the Company without “Good Reason” (as defined in the Employment Agreement), which resignation shall be effective September 2, 2018 (the “Separation Date”); and

WHEREAS, Executive’s last day of full-time employment in the office is August 17, 2018;

WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that the Executive may have against the Company and any of the Releasees as defined below, including, but not limited to, any and all claims arising out of or in any way related to Executive’s employment with or separation from the Company.

NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Executive hereby agree as follows:

COVENANTS

1.    Consideration. In exchange for Executive entering into this Agreement and executing the resignation letter appended as Exhibit A prior to or contemporaneously with this Agreement:

a.    Bonus Severance. If Executive remains employed by the Company through the Separation Date and during such time provides competent transition services (as determined by the Company in its sole discretion) as reasonably requested by the Company as a medical and

scientific advisor into 2019 through the end of the Transition Period (as defined below), the Company agrees to pay to Executive an award under the Pfenex Inc. Incentive Compensation Plan and the 2018 Participation and Performance Goals under the Incentive Compensation Plan (together, the “Bonus Plan”). Such amount shall a target amount of fifty percent (50%) of the aggregate amount of Executive’s salary payments and transition period payments paid by the Company to Executive during 2018 and further subject to the provisions of this paragraph and adjustment by the Compensation Committee. The Bonus Severance amount will be determined by (i) the actual achievement of the corporate performance goals during the 2018 Performance Period as determined by Compensation Committee of the Board of Directors, (ii) the Executive’s individual performance goals during the 2018 Performance Period, which are hereby determined to have been achieved at one hundred percent (100%), and (iii) the actual achievement of the Special Individual Performance Incentives during the 2018 Performance Period (as defined in the Bonus Plan) (collectively, the “Bonus Severance”). The Bonus Severance will be paid in accordance with the terms and conditions of the Bonus Plan following the 2018 Performance Period and no later than March 15, 2019; provided that Executive continues to provide competent transition services as reasonably requested by the Company as a medical and scientific advisor through such earlier event or date. Executive acknowledges and agrees that unless he signs this Agreement, he would not otherwise be entitled to the cash award described in this paragraph once his employment terminates on the Separation Date.

b.    Transition Services. Commencing on the Separation Date, Executive agrees to provide transition services to the Company through the earlier of (i) the approval of the NDA for PF708 or (ii) September 30, 2019 (the “Transition Period”). During the Transition Period, Executive will be paid Seven Thousand Five Hundred Dollars ($7,500.00) per month, less applicable withholdings for ten (10) hours of work per month then an additional Seven Hundred and Fifty Dollars ($750.00) per hour, less applicable withholdings, for any work beyond 10 hours in a month. Executive understands that Executive’s pay for the transition services will be reported on an IRS Form W-2. During the Transition Period, Executive may not work more than eight hours in a day, 40 hours in a week, or six days in a row without mutual prior express, written agreement. Executive agrees to participate in one weekly meeting with the Company, mutually chosen by the Executive and Company, such meeting to last approximately one hour each week.

c.    Supplemental Release Payment. Subject to Executive executing and not revoking the Supplemental Release attached hereto as Exhibit B (the “Supplemental Release”), within ten (10) days following the Supplemental Release Effective Date (as defined therein), the Company will make a lump sum payment to Executive in the amount of One Thousand Dollars ($1,000), less applicable withholdings. The Supplemental Release Payment will be paid within ten (10) days following the Supplemental Release Effective Date, as defined in the Supplemental Release.

d.    Supplemental Release Agreement. In exchange for the Supplemental Release Payment, Executive agrees to execute, within twenty-one (21) days after the end of the Transition Period, the Supplemental Release Agreement attached hereto as Exhibit B, which agreement will serve to cover the time period from the Effective Date of this Agreement through the Supplemental Release Effective Date; provided, however, the Parties agree to modify the Supplemental Release to comply with any new laws that become applicable prior to the end of the Transition Period. If Executive refuses to sign the Supplemental Release, he shall be deemed to have failed to abide by the material terms of this Agreement. Further, Executive understands and agrees that he will only be

entitled to such Supplemental Release Payment in Section 1.c. above if he executes the Supplemental Release Agreement within the time allotted in this Section 1.d. and does not revoke that agreement.

e.    No Further Severance. Except as explicitly set forth in this Agreement, Executive acknowledges and agrees that he is not entitled to receive any severance compensation or post-termination benefits from the Company, including, but not limited to, the payments described in Section 6 of the Employment Agreement. Executive hereby acknowledges that without this Agreement, he is not otherwise entitled to the consideration listed in this section 1 or any other severance or separation benefits from the Company.

2.    Stock. Except as amended by Section 1 of this Agreement, each Option that is outstanding and unexercised as of the Separation Date shall continue to be subject to the terms of the Equity Agreements, including that each Option shall continue to vest and remain exercisable during the Transition Period in accordance with the vesting schedule under the applicable Equity Agreement.

3.    Benefits. Executive’s health insurance benefits shall cease on the last day of the month in which Executive’s full-time employment terminates, subject to Executive’s right to continue Executive’s health insurance under the Consolidated Omnibus Budget Reconciliation Act of 1985. Executive’s participation in all benefits and incidents of employment, including, but not limited to, the accrual of bonuses, vacation, and paid time off, cease as of the Separation Date, excepts for benefits which the Company is obligated by law to provide to part-time employees, such as paid sick leave pursuant to California law. In addition, during the Transition Period, Executive will continue to vest in the Option in accordance with the Equity Agreements.

4.    Payment of Salary and Receipt of All Benefits. Executive acknowledges and represents that, other than the consideration set forth in this Agreement, the Company has paid or provided all salary, wages, bonuses, accrued vacation/paid time off, premiums, leaves, housing allowances, relocation costs, interest, severance, outplacement costs, fees, reimbursable expenses, commissions, stock, stock options, vesting, and any and all other benefits and compensation due to Executive as of the Effective Date. On or before the Separation Date, the Company shall pay or provide Executive all additional salary, wages, bonuses, accrued vacation/paid time off, premiums, leaves, housing allowances, relocation costs, interest, severance, outplacement costs, fees, reimbursable expenses, commissions, stock, stock options, vesting, and any and all other benefits and compensation due to Executive as of the Separation Date.

5.    Release of Claims. Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations, as of the Effective Date, owed to Executive by the Company and its current and former officers, directors, employees, agents, investors, attorneys, shareholders, administrators, affiliates, benefit plans, plan administrators, professional employer organization or co-employer, insurers, trustees, divisions, and subsidiaries, and predecessor and successor corporations and assigns (collectively, the “Releasees”). Executive, on Executive’s own behalf and on behalf of Executive’s respective heirs, family members, executors, agents, and assigns, hereby and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute, or pursue, any claim, complaint, charge, duty, obligation, demand, or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess against any of the Releasees arising from any

omissions, acts, facts, or damages that have occurred up until and including the Effective Date of this Agreement in connection with Executive’s employment by the Company, including, without limitation:

a.    any and all claims relating to or arising from Executive’s employment relationship with the Company and the termination of that relationship;

b.    any and all claims relating to, or arising from, Executive’s right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law;

c.    any and all claims for wrongful discharge of employment, termination in violation of public policy, discrimination, harassment, retaliation, breach of contract (both express and implied), breach of covenant of good faith and fair dealing (both express and implied), promissory estoppel, negligent or intentional infliction of emotional distress, fraud, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, unfair business practices, defamation, libel, slander, negligence, personal injury, assault, battery, invasion of privacy, false imprisonment, conversion, and disability benefits;

d.    any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Equal Pay Act, the Fair Labor Standards Act, the Fair Credit Reporting Act, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, the Family and Medical Leave Act, the Immigration Reform and Control Act, the California Family Rights Act, the California Labor Code, the California Workers’ Compensation Act, and the California Fair Employment and Housing Act;

e.    any and all claims for violation of the federal or any state constitution;

f.    any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;

g.    any claim for any loss, cost, damage, or expense arising out of any dispute over the nonwithholding or other tax treatment of any of the proceeds received by Executive as a result of this Agreement; and

h.    any and all claims for attorneys’ fees and costs .

Executive agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. This release does not release (i) claims that cannot be released as a matter of law, including, but not necessarily limited to, any Protected Activity (as defined below), nor (ii) any defense or indemnification rights available under Executive’s Indemnification Agreement, Company Bylaws, insurance policy, or under applicable law.

6.    California Civil Code Section 1542. Executive acknowledge that he has been advised to consult with legal counsel and is familiar with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

Executive, being aware of said code section, agrees to expressly waive any rights he may have thereunder, as well as under any other statute or common law principles of similar effect.

7.    No Pending or Future Lawsuits. Executive represents that there are no lawsuits, claims, or actions pending in Executive’s name or on behalf of any other person or entity, against the Company or any of the other Releasees, or against the Executive, as applicable. Employee also represents that Employee does not intend to bring any claims on Employee’s own behalf or on behalf of any other person or entity against the Company or any of the other Releasees.

8.    Trade Secrets and Confidential Information/Company Property; Insider Trading Policy. Executive reaffirms and agrees to observe and abide by the terms of the restrictions set forth in the CIIA, specifically including the provisions therein regarding nondisclosure of the Company’s trade secrets and confidential and proprietary information and assignment of inventions to the Company. Notwithstanding anything in the CIIA, Executive and Company acknowledge that “Confidential Information” (as defined in the CIIA) does not include any of the foregoing items that have become publicly known and made generally available through no wrongful act of Executive’s or of others who were under confidentiality obligations as to the item or items involved or improvements or new versions thereof. Executive hereby grants consent to notification by the Company to any new employer about Executive’s obligations under this section. Executive represents that Executive has not to date misused or disclosed Confidential Information to any unauthorized party in breach of the CIIA. Executive acknowledges and agrees to continue to abide by the terms and conditions of the Company’s Insider Trading Policy in accordance with its terms. During the Transition Period, Executive agrees not to do work for the Company using any other employer’s equipment or on any other employer’s property or during a time in which he is supposed to work for a different employer.

9.    No Cooperation. Subject to Section 10 governing Protected Activity, Executive agrees that Executive will not knowingly encourage, counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against any of the Releasees, unless under a subpoena or other court order to do so or as related directly to the ADEA waiver in the Supplemental Release. Executive agrees both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its receipt, a copy of such subpoena or other court order, in each case unless prohibited by applicable law. Subject to Section 10 governing Protected Activity, if approached by anyone for counsel or assistance in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints against any of the Releasees,

Executive shall state no more than that Executive cannot provide counsel or assistance unless and solely to the extent compelled to do so by applicable law.

10.    Protected Activity Not Prohibited. Executive understands that nothing in this Agreement shall in any way limit or prohibit Executive from engaging in any Protected Activity as defined in this paragraph. “Protected Activity” includes filing a charge, complaint, or report with, or otherwise communicating, cooperating, or participating, voluntarily or as compelled, in any inquiry, examination, investigation or proceeding that may be conducted by, any federal, state or local government agency or commission, including the Securities and Exchange Commission, the Department of Justice, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, and the National Labor Relations Board (“Government Entitites”). Executive understands that in connection with such Protected Activity, Executive is permitted to disclose documents or other information as permitted by law, without giving notice to, or receiving authorization from, the Company. Notwithstanding the foregoing, Executive agrees to take all reasonable precautions to prevent any unauthorized use or disclosure of any information that may constitute Company confidential information to any parties other than the Government Entitites. Executive further understands that “Protected Activity” does not include the intentional and knowing disclosure of any Company attorney-client privileged communications or attorney work product. Any language in the Employment Agreement regarding Executive’s right to engage in Protected Activity that conflicts with, or is contrary to, this section is superseded by this Agreement. In addition, pursuant to the Defend Trade Secrets Act of 2016, Executive is notified that an individual will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (i) is made in confidence to a federal, state, or local government official (directly or indirectly) or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if (and only if) such filing is made under seal. In addition, an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

11.    Mutual Nondisparagement. Executive agrees to refrain from any disparagement, defamation, libel, or slander of any of the Company (including the executive management team and the members of the Board of Directors) and agrees to refrain from any tortious interference with the contracts and relationships of the Company or any of the Releasees. Executive shall direct any inquiries by potential future employers to the Company’s human resources department, which shall provide only the Executive’s last position and dates of employment. The Company agrees to refrain from any disparagement, defamation, libel or slander of Executive. Executive understands that the Company’s obligations under this paragraph extend only to the Company’s current executive officers and members of its Board of Directors and only for so long as each officer or member is an employee or Director of the Company. Protected Activity is expressly excluded from this paragraph.

12.    Breach. In addition to the rights provided in the “Attorneys’ Fees” section below, Executive acknowledges and agrees that any material breach of this Agreement, unless such breach constitutes a legal action by Executive challenging or seeking a determination in good faith of the validity of the waiver in the Supplemental Release under the ADEA, or of any provision of the Confidentiality Agreement shall entitle the Company immediately to recover and/or cease providing

the consideration provided to Executive under this Agreement and to obtain damages, except as provided by law.

13.    No Admission of Liability. Executive understands and acknowledges that this Agreement constitutes a compromise and settlement of any and all actual or potential disputed claims. No action taken by the Company, either previously or in connection with this Agreement, shall be deemed or construed to be (a) an admission of the truth or falsity of any actual or potential claims or (b) an acknowledgment or admission by the Company of any fault or liability whatsoever to Executive or to any third party.

14.    Costs. The Parties shall each bear their own costs, attorneys’ fees, and other fees incurred in connection with the preparation of this Agreement.

15.    Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payments and any other consideration provided to Executive or made on Executive’s behalf under the terms of this Agreement. Executive agrees and understands that Executive is responsible for payment, if any, of local, state, and/or federal taxes on the payments and any other consideration provided hereunder by the Company and any penalties or assessments thereon. Executive further agrees to indemnify and hold the Releasees harmless from any claims, demands, deficiencies, penalties, interest, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of (a) Executive’s failure to pay or delayed payment of federal or state taxes, or (b) damages sustained by the Company by reason of any such claims, including attorneys’ fees and costs. The Parties agree and acknowledge that the payments made pursuant to section 1 of this Agreement are not related to sexual harassment or sexual abuse and not intended to fall within the scope of 26 U.S.C. Section 162(q).

16.    Section 409A. It is intended that this Agreement comply with, or be exempt from, Code Section 409A and the final regulations and official guidance thereunder (“Section 409A”) and any ambiguities herein will be interpreted to so comply and/or be exempt from Section 409A. Each payment and benefit to be paid or provided under this Agreement is intended to constitute a series of separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. The Company and Executive will work together in good faith to consider either (i) amendments to this Agreement; or (ii) revisions to this Agreement with respect to the payment of any awards, which are necessary or appropriate to avoid imposition of any additional tax or income recognition prior to the actual payment to Executive under Section 409A. In no event will the Releasees reimburse Executive for any taxes that may be imposed on Executive as a result of Section 409A.

17.    Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that Executive has the capacity to act on Executive’s own behalf and on behalf of all who might claim through Executive to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

18.    Severability. In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes or is declared by a court of competent

jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement shall continue in full force and effect without said provision or portion of provision.

19.    Attorneys’ Fees. Except with regard to a legal action challenging or seeking a determination in good faith of the validity of the ADEA waiver in the Supplemental Release, in the event that either Party brings an action to enforce or effect its rights under this Agreement, the prevailing Party shall be entitled to recover its costs and expenses, including the costs of mediation, arbitration, litigation, court fees, and reasonable attorneys’ fees incurred in connection with such an action.

20.    Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Executive concerning the subject matter of this Agreement and Executive’s employment with and separation from the Company and the events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and understandings concerning the subject matter of this Agreement and Executive’s relationship with the Company, with the exception of the confidentiality and inventions assignment provisions incorporated by reference in the CIIA, the Indemnification Agreement, the Company’s Insider Trading Policy, and the Equity Agreements. Nothing in this Agreement shall alter Executive’s indemnification and advancement rights granted by the Indemnification Agreement, Company Bylaws, or by applicable law.

21.    No Oral Modification. This Agreement may only be amended in a writing signed by Executive and the Chief Executive Officer of the Company.

22.    Governing Law. This Agreement shall be governed by the laws of the State of California, without regard for choice-of-law provisions. Employee consents to personal and exclusive jurisdiction and venue in the State of California.

23.    Effective Date. Executive understands that this Agreement shall be null and void if not executed by Executive within five (5) days. This Agreement will become effective on the date it has been signed by both Parties (the “Effective Date”).

24.    Counterparts. This Agreement may be executed in counterparts and each counterpart shall be deemed an original and all of which counterparts taken together shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. The counterparts of this Agreement may be executed and delivered by facsimile, photo, email PDF, or other electronic transmission or signature.

25.    Voluntary Execution of Agreement. Executive understands and agrees that Executive executed this Agreement voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of Executive’s claims against the Company and any of the other Releasees. Executive acknowledges that:

(a) Executive has read this Agreement;

(b) Executive has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of Executive’s own choice or has elected not to retain legal counsel;

(c) Executive understands the terms and consequences of this Agreement and of the releases it contains;

(d) Executive is fully aware of the legal and binding effect of this Agreement; and

(e) Executive has not relied upon any representations or statements made by the Company that are not specifically set forth in this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

	Hubert C. Chen, M.D., an individual
Dated: August 16, 2018	/s/ Hubert C. Chen
	Hubert C. Chen, M.D.
	PFENEX INC.
Dated: August 16, 2018	By	/s/ Evert B. Schimmelpennink
		Evert B. Schimmelpennink
		Chief Executive Officer

EXHIBIT A

LETTER OF RESIGNATION

August 16, 2018

To the Board of Directors of Pfenex:

I hereby resign as the Chief Medical and Scientific Officer of Pfenex Inc. (the “Company”) and as an officer of any subsidiaries of the Company effective as of September 2, 2018 (the “Effective Date”). Following the Effective Date, I will cease to represent myself as an officer or executive of the Company, will not perform any managerial duties on behalf of the Company, and will cease to be a signatory for, and to otherwise obligate, the Company.

I also agree to execute any necessary documents or other forms necessary to effectuate or document my resignation as a matter of local, state, federal or international law.

Yours Truly,

Hubert C. Chen, M.D.

EXHIBIT B

SUPPLEMENT TO AGREEMENT

This Supplement to the Transition Agreement and Release is made by and between Executive and Company and is effective as of the Supplemental Release Effective Date.

NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Executive hereby agree as follows:

1. Consideration. In consideration for the Supplemental Release Payment in Section 1 of the Separation Agreement and Release signed between Executive and the Company on August 16, 2018 (the “Separation Agreement”), Executive hereby extends his release and waiver of claims to any claims that may have arisen between the Effective Date (as such term is defined in the Transition Agreement) and the Supplemental Release Effective Date, as defined below.

2. Incorporation of Terms of Release Agreement. The undersigned Parties further acknowledge that the terms of the Transition Agreement, including, but not limited to, No Further Severance, Payment of Salary and Receipt of All Benefits, General Release of Claims, California Civil Code Section 1542, Trade Secrets and Confidential Information/Company Property; Insider Trading Policy, Protected Activity Not Prohibited, and Mutual Nondisparagement shall apply to this Supplemental Release and are incorporated herein to the extent that they are not inconsistent with the express terms of this Supplemental Release.

3. Acknowledgment of Waiver of Claims under ADEA. Executive acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 (“ADEA”), and that this waiver and release is knowing and voluntary. Executive agrees that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date. Executive acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Supplemental Release, (b) he has 21 days within which to consider this Supplemental Release, (c) he has 7 days following his execution of this Supplemental Release to revoke this Supplemental Release, (d) this Supplemental Release shall not be effective until after the revocation period has expired, and (e) nothing in this Supplemental Release prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Executive signs this Supplemental Release and returns it to the Company in less than the 21 day period identified above, Executive hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering this Supplemental Release. Executive acknowledges and understands that revocation must be accomplished by a written notification to the person executing this Supplemental Release on the Company’s behalf that is received prior to the Effective Date. The Parties agree that changes, whether material or immaterial, do not restart the running of the 21-day period.

4. Supplemental Release Effective Date. Executive understands that this Supplemental Release shall be null and void if not executed by him within twenty-one (21) days after the end of the Transition Period (as defined in the Transition Agreement). Executive may not sign this Supplemental Release until after the end of the Transition Period. Each Party has seven (7) days after that Party signs this Agreement to revoke it. This Supplemental Release will become effective on the eighth (8th) day after Executive signs this Supplemental Release (the “Supplemental Release Effective Date”), so long as the Transition Agreement and this supplemental release have both been signed by the Parties and neither has been revoked by either Party before that date.

5. ARBITRATION. EXCEPT AS PROHIBITED BY LAW, THE PARTIES AGREE THAT ANY AND ALL DISPUTES ARISING OUT OF THE TERMS OF THIS SUPPLEMENTAL RELEASE, THEIR INTERPRETATION, EXECUTIVE’S EMPLOYMENT WITH THE COMPANY OR THE TERMS THEREOF, OR ANY OF THE MATTERS HEREIN RELEASED, SHALL BE SUBJECT TO ARBITRATION UNDER THE FEDERAL ARBITRATION ACT (THE “FAA”) AND THAT THE FAA SHALL GOVERN AND APPLY TO THIS ARBITRATION AGREEMENT WITH FULL FORCE AND EFFECT; HOWEVER, WITHOUT LIMITING ANY PROVISIONS OF THE FAA, A MOTION OR PETITION OR ACTION TO COMPEL ARBITRATION MAY ALSO BE BROUGHT IN STATE COURT UNDER THE PROCEDURAL PROVISIONS OF SUCH STATE’S LAWS RELATING TO MOTIONS OR PETITIONS OR ACTIONS TO COMPEL ARBITRATION. EMPLOYEE AGREES THAT, TO THE FULLEST EXTENT PERMITTED BY LAW, EMPLOYEE MAY BRING ANY SUCH ARBITRATION PROCEEDING ONLY IN EMPLOYEE’S INDIVIDUAL CAPACITY. ANY ARBITRATION WILL OCCUR IN SAN DIEGO COUNTY, CALIFORNIA BEFORE JAMS, PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES & PROCEDURES (“JAMS RULES”), EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION. THE PARTIES AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO DECIDE ANY MOTIONS BROUGHT BY ANY PARTY TO THE ARBITRATION, INCLUDING MOTIONS FOR SUMMARY JUDGMENT AND/OR ADJUDICATION, AND MOTIONS TO DISMISS AND DEMURRERS, APPLYING THE STANDARDS SET FORTH UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. THE PARTIES AGREE THAT THE ARBITRATOR SHALL ISSUE A WRITTEN DECISION ON THE MERITS. THE PARTIES ALSO AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO AWARD ANY REMEDIES AVAILABLE UNDER APPLICABLE LAW, AND THAT THE ARBITRATOR MAY AWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, EXCEPT WHERE PROHIBITED BY APPLICABLE LAW. THE ARBITRATOR MAY GRANT INJUNCTIONS AND OTHER RELIEF IN SUCH DISPUTES. THE DECISION OF THE ARBITRATOR SHALL BE FINAL, CONCLUSIVE, AND BINDING ON THE PARTIES TO THE ARBITRATION. THE PARTIES AGREE THAT THE PREVAILING PARTY IN ANY ARBITRATION SHALL BE ENTITLED TO INJUNCTIVE RELIEF IN ANY COURT OF COMPETENT JURISDICTION TO ENFORCE THE ARBITRATION AWARD. THE PARTIES TO THE ARBITRATION SHALL EACH PAY AN EQUAL SHARE OF THE COSTS AND EXPENSES OF SUCH ARBITRATION, AND EACH PARTY SHALL SEPARATELY PAY FOR ITS RESPECTIVE COUNSEL FEES AND EXPENSES; PROVIDED, HOWEVER, THAT THE ARBITRATOR MAY AWARD

ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, WHERE PERMITTED BY LAW. THE PARTIES HEREBY AGREE TO WAIVE THEIR RIGHT TO HAVE ANY SUCH DISPUTE BETWEEN THEM RESOLVED IN A COURT OF LAW BY A JUDGE OR JURY. NOTWITHSTANDING THE FOREGOING, THIS SECTION WILL NOT PREVENT EITHER PARTY FROM SEEKING INJUNCTIVE RELIEF (OR ANY OTHER PROVISIONAL REMEDY) FROM ANY COURT HAVING JURISDICTION OVER THE PARTIES AND THE SUBJECT MATTER OF THEIR DISPUTE RELATING TO THIS SUPPLEMENTAL RELEASE AND THE AGREEMENTS INCORPORATED HEREIN BY REFERENCE. SHOULD ANY PART OF THE ARBITRATION AGREEMENT CONTAINED IN THIS SECTION CONFLICT WITH ANY OTHER ARBITRATION AGREEMENT BETWEEN THE PARTIES, THE PARTIES AGREE THAT THIS ARBITRATION AGREEMENT SHALL GOVERN.

6. Governing Law. This Supplemental Release shall be governed by the laws of the State of California, without regard for choice-of-law provisions, except that any dispute regarding the enforceability of the arbitration section of this Supplemental Release shall be governed by the FAA.

7. Voluntary Execution of Supplemental Release. Executive understands and agrees that he executed this Supplemental Release voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Company and any of the other Releasees. Executive acknowledges that:

(a) he has read this Supplemental Release;

(b) he cannot sign the Supplemental Release before the end of the Transition Period, but that he must sign the Supplemental Release no later than 21 days following the end of the Transition Period;

(c) he has been represented in the preparation, negotiation, and execution of this Supplemental Release by legal counsel of his own choice or has elected not to retain legal counsel;

(d) he understands the terms and consequences of this Supplemental Release and of the releases it contains; and

(e) he is fully aware of the legal and binding effect of this Supplemental Release.

IN WITNESS WHEREOF, the Parties have executed this Supplement to the Agreement (or “Supplemental Release”) on the respective dates set forth below.

	Hubert C. Chen, M.D., an individual
Dated:
	Hubert C. Chen, M.D.
	PFENEX INC.
Dated:	By
		Evert B. Schimmelpennink
		Chief Executive Officer

EX-10.2

Exhibit 10.2

CONFIDENTIAL TREATMENT REQUESTED

CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION THAT WAS OMITTED IN THE EDGAR VERSION HAS BEEN NOTED IN THIS DOCUMENT WITH A PLACEHOLDER IDENTIFIED BY THE MARK “[***]”.

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT				1. CONTRACT ID CODE		PAGE        OF        PAGES
						1		2
2. AMENDMENT/MODIFICATION NO. 0007		3. EFFECTIVE DATE    See Block 16C	4. REQUISITION/PURCHASE REQ. NO.		5. PROJECT NO (If applicable)
6. ISSUED BY	CODE	HHS/OS/ASPR/BARDA	7. ADMINISTERED BY (If other than Item 6) CODE				ASPR-BARDA02
US DEPT OF HEALTH & HUMAN SERVICES ASST SEC OF PREPAREDNESS & RESPONSE ACQ MANAGEMENT, CONTRACTS, & GRANTS O’NEILL HOUSE OFFICE BUILDING Washington DC 20515			US DEPT OF HEALTH & HUMAN SERVICES ASST SEC OF PREPAREDNESS & RESPONSE ACQ MANAGEMENT, CONTRACTS, & GRANTS O’NEILL HOUSE OFFICE BUILDING Washington DC 20515
8. NAME AND ADDRESS OF CONTRACTOR (No., street, county, State and ZIP code) PFENEX, INC 1358378 PFENEX, INC.       10790 ROSELLE ST 10790 ROSELLE ST SAN DIEGO CA 921211508			(x)	9A. AMENDMENT OF SOLICITATION NO.
				9B. DATED (SEE ITEM 11)
			x	10A. MODIFICATION OF CONTRACT/ORDER NO. HHSO100201500011C
				10B. DATED (SEE ITEM 13) 08/14/2015
CODE 1358378	FACILITY CODE

11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS

☐ The above numbered solicitation is amended as set forth in Item 14. The hour and date specified for receipt of Offers         ☐     is extended,         ☐     is not extended.

Offers must acknowledge receipt of this amendment prior to the hour and date specified in the solicitation or as amended, by one of the following methods: (a) By completing Items 8 and 15, and returning              copies of the amendment; (b) By acknowledging receipt of this amendment on each copy of the offer submitted; or (c) By

separate letter or telegram which includes a reference to the solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGEMENT TO BE RECEIVED AT

THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by

virtue of this amendment you desire to change an offer already submitted, such change may be made by telegram or letter, provided each telegram or letter makes

reference to the solicitation and this amendment, and is received prior to the opening hour and date specified.

12. ACCOUNTING AND APPROPRIATION DATA (if required)

See Schedule

13. THIS ITEM ONLY APPLIES TO MODIFICATION OF CONTRACTS/ORDERS. IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.

CHECK ONE	A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
	B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE CHANGES (such as changes in paying office, appropriation date, etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
x	C.   THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF: 52.243-5 Alternate 1 Changes-Cost-reimbursement and Mutual agreement of the parties
	D.   OTHER (Specify type of modification and authority)

E. IMPORTANT: Contractor                     ☐     is not                 ☒     is required to sign this document and return     1   copies to the issuing office.

14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings, including solicitation/contract subject matter where feasible.)

Tax ID Number:27-1356759

DUNS Number: 013603710

The purpose of this modification is to extend the period of performance of contract and CLIN 0001, Phase 1A Study and Continuation of Stability Studies and CLIN 006, [***] at no additional cost to the government.

-

Discount Terms: NET 30P

Delivery Location Code: HHS

HHS

200 Independence Avenue, SW

Continued ...

Except as provided herein, all terms and conditions of the document referenced in Item 9A or 10A, as heretofore changed, remains unchanged and in full force and effect.

15A. NAME AND TITLE OF SIGNER (Type or print) SUSAN A. KNUDSON, CFO		16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print) WENDELL CONYERS
15B. CONTRACTOR/OFFEROR /s/ Susan A. Knudson                                                 (Signature of person authorized to sign)	15C. DATE SIGNED         09/13/18	16B. UNITED STATES OF AMERICA /s/ Wendell Conyers                                                                  (Signature of Contracting Officer)	16C. DATE SIGNED         9/14/18

NSN 7540-01-152-8070	STANDARD FORM 30 (REV. 10-83)
Previous edition unusable	Prescribed by GSA
	FAR (48 CFR) 53.243

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

CONTINUATION SHEET	REFERENCE NO. OF DOCUMENT BEING CONTINUED HHSO100201500011C/0007	PAGE	OF
		2	2

NAME OF OFFEROR OR CONTRACTOR     PFENEX, INC 1358378
ITEM NO. (A)	SUPPLIES/SERVICES (B)	QUANTITY  (C)	UNIT (D)	UNIT PRICE   (E)	AMOUNT (F)
	Washington DC 20201 US FOB: Destination Period of Performance: 08/14/2015 to 08/09/2020 Change Item 1 to read as follows (amount shown is the obligated amount):
1	Base Year – PHASE 1A STUDY AND CONTINUATION OF STABILITY STUDIES Obligated Amount: $0.00				0.00
	Accounting Info: 2015.1992015.25103 Appr. Yr.: 2015 CAN: 1992015 Object Class: 25103 Funded: $0.00
	Change Item 6 to read as follows (amount shown is the obligated amount):
6	Option 5 - [***] Obligated Amount: $0.00				0.00
	Accounting Info: 2017.1992017.25103 Appr. Yr.: 2017 CAN: 1992017 Object Class: 25103 Funded: $0.00

NSN 7540-01-152-8067 OPTIONAL FORM 336 (4-86) Sponsored by GSA FAR (48 CFR) 53.110

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Contract No. HHSO100201500011C Modification #07   Continuation Sheet Block 14 Page 3 of 4

SUMMARY OF CHANGES

Beginning with the effective date of this modification, the Government and Contractor mutually agree as follows:

1. The purpose of this modification is to (1) extend the period of performance of the contract and 2) extend the period of performance of CLIN 0001 and 0006. This is a ‘No Cost Extension’ strictly to allow Pfenex time to complete the planned scope of work and finalizes all reports.

2. Delete and replace ARTICLE B.2. BASE PERIOD due to the extension of CLIN 0001 period of performance:

CLIN	Estimated Period of Performance	Supplies/Services	Total Estimated Cost	Fixed Fee	Total Estimated Cost Plus Fixed Fee	Awarded
0001	08/13/2015-     09/30/2019	PHASE 1A STUDY AND CONTINUATION OF STABILITY STUDIES	$14,992,075	$899,525	$15,891,600	14 Aug 2015

a. Extend the period of performance (PoP) for CLIN 0001:From: August 14, 2015 thru September 30, 2018To: August 14, 2015 thru September 30, 2019

b. Reason for extension: CLIN0001: A $675K reservation fee was approved in Aug. 2017 for a GMP suite. Following an IPR meeting in Nov 2017, this GMP suite could not be utilized during the planned time, but Pfenex has been able to negotiate repurposing the majority of the fee for method optimization activities covered under CLIN 0001. Method qualification and verification activities will now be completed in 2Q CY2019.

3. Delete and replace ARTICLE 8.3. OPTION PRICES due to the extension of CLIN 0006 Option 5 period of performance:

CLIN	Opt	Estimated Period of Parf.	Supplies/ Services	Total Est Cost	Fixed Fee	Total Est. Cost Plus Fixed Fee	Exercised Yes/No
0002	1	08/12/2015- 11/03/2016	[***]	$2,480,823	$148,849	$2,629,672	No
0003	2	11/24/2016- 02/24/2019	[***]	$12,966,402	$777,984	$13,744,386	No
0004	3	05/27/2018- 08/02/2020	[***]	$44,230,173	$2,653,810	$46,883,983	No
0005	4	12/22/2016- 12/31/2019	[***]	$4,037,244	$137,984	$4,175,228	Yes

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

0006	5	12/22/2016- 12/30/2019	[***]	$2,304,571	$138,274	$2,442,845	Yes
0007	6	01/09/2016- 08/05/2020	[***]	$14,107,610	$846,457	$14,954,067	No
0008	7	11/24/2016- 08/09/2020	[***]	$41,202,354	$2,472,141	$43,674,496	No
0009	8	12/24/2016- 05/13/2017	[***]	$750,622	$45,037	$795,659	No

a. Extend the contract period of performance (PoP) for CLIN 0006:

From: December 22, 2016 thru September 30, 2018

To: December 22, 2016 thru December 30, 2019

b. Reason for extension: CLIN0006: [***].

4. Funding Total Summary: the total funded amount on the contract has not changed from $22,509,673.23.

5. Contract Total Summary (if all options are exercise): the total contract value has not changed from $145,191,936.

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EX-31.1

Exhibit 31.1

CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Evert B. Schimmelpennink, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Pfenex Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2018	/s/ Evert B. Schimmelpennink
	Evert B. Schimmelpennink
	Chief Executive Officer, President and Secretary (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Susan A. Knudson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Pfenex Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2018	/s/ Susan A. Knudson
	Susan A. Knudson
	Chief Financial Officer (Principal Financial and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Evert B. Schimmelpennink, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Pfenex Inc. on Form 10-Q for the quarterly period ended September 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pfenex Inc.

Date: November 7, 2018	By:	/s/ Evert B. Schimmelpennink
		Evert B. Schimmelpennink
		Chief Executive Officer, President and Secretary
		(Principal Executive Officer)

I, Susan A. Knudson, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Pfenex Inc. on Form 10-Q for the quarterly period ended September 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pfenex Inc.

Date: November 7, 2018	By:	/s/ Susan A. Knudson
		Susan A. Knudson
		Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

This certification accompanying the Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before, on or after the date of the Report), irrespective of any general incorporation language contained in such filing.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Oct. 31, 2018
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Trading Symbol	PFNX
Entity Registrant Name	Pfenex Inc.
Entity Central Index Key	0001478121
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Extended Transition Period	false
Entity Common Stock, Shares Outstanding		31,460,719

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Current assets
Cash and cash equivalents	$ 67,825	$ 57,664
Restricted cash	200	200
Accounts and unbilled receivables, net	1,745	1,306
Income tax receivable	206	638
Other current assets	1,972	1,705
Total current assets	71,948	61,513
Property and equipment, net	7,455	7,397
Other long-term assets	133	133
Intangible assets, net	4,381	4,771
Goodwill	5,577	5,577
Total assets	89,494	79,391
Current liabilities
Accounts payable	1,360	1,905
Accrued liabilities	10,585	8,913
Current portion of deferred revenue	7,141	7,421
Current portion of capital lease obligations	317	228
Total current liabilities	19,403	18,467
Deferred revenue, less current portion	2,500	2,742
Capital lease obligations, less current portion	272	419
Total liabilities	22,175	21,628
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding
Common stock, par value $0.001, 200,000,000 shares authorized; 31,460,719 and 23,548,280 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	32	24
Additional paid-in capital	261,764	219,446
Accumulated deficit	(194,477)	(161,707)
Total stockholders' equity	67,319	57,763
Total liabilities and stockholders' equity	$ 89,494	$ 79,391

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized	200,000,000	200,000,000
Common stock, shares issued	31,460,719	23,548,280
Common stock, outstanding	31,460,719	23,548,280

XML

Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Statement [Abstract]
Revenue	$ 3,570	$ 5,024	$ 11,506	$ 10,871
Cost of revenue	1,479	1,766	3,923	3,481
Gross profit	2,091	3,258	7,583	7,390
Operating expense
Research and development	9,045	8,112	28,590	24,708
Selling, general and administrative	3,823	3,999	11,920	13,973
Total operating expense	12,868	12,111	40,510	38,681
Loss from operations	(10,777)	(8,853)	(32,927)	(31,291)
Other income, net	115	35	157	117
Net loss	$ (10,662)	$ (8,818)	$ (32,770)	$ (31,174)
Net loss per common share, basic and diluted	$ (0.34)	$ (0.37)	$ (1.20)	$ (1.33)
Weighted-average common shares used in calculating basic and diluted net loss per share	31,437	23,539	27,288	23,488

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities
Net loss	$ (32,770)	$ (31,174)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	849	619
Amortization of intangible assets	400	398
Stock-based compensation expense	2,551	2,495
Loss (gain) on disposal of property and equipment	8	(20)
Changes in operating assets and liabilities
Accounts and unbilled receivables	(439)	(517)
Other current assets	(268)	205
Accounts payable	(560)	307
Accrued liabilities	2,031	1,558
Deferred revenue	(522)	(5,027)
Income tax receivable	432
Net cash used in operating activities	(28,288)	(31,156)
Cash flows from investing activities
Acquisitions of property and equipment	(1,010)	(1,954)
Purchase of intangible asset	(10)
Proceeds from sale of property and equipment		45
Net cash used in investing activities	(1,020)	(1,909)
Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs	39,522
Repayments of capital lease obligations	(212)	(43)
Proceeds from exercise of stock options and other stock issuances	197	180
Payment for taxes related to net share settlement of equity award	(38)
Net cash provided by financing activities	39,469	137
Net increase (decrease) in cash, cash equivalents, and restricted cash	10,161	(32,928)
Cash, cash equivalents and restricted cash
Beginning of period	57,864	81,501
End of period	68,025	48,573
Non-cash financing and investing transactions
Asset acquisitions in accounts payable and accrued expenses	92	304
Acquisitions under capital lease obligations	154	676
Restricted stock issuance for bonus accrual	56
Supplemental schedule of cash flow information
Interest paid	36	$ 11
Taxes paid	$ 48

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Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Summary of Significant Accounting Policies

1. Organization and Summary of Significant Accounting Policies

Business Activities and Organization

Pfenex Inc. (the Company or Pfenex) is a clinical-stage development and licensing biotechnology company focused on leveraging its Pfēnex Expression Technology ^® to develop and improve protein therapies for unmet patient needs. Using the patented Pfēnex Expression Technology platform, the Company has created an advanced pipeline of therapeutic equivalents, vaccines, biologics and biosimilars. The Company also uses its Pfēnex Expression Technology platform to produce CRM197, a diphtheria toxoid carrier protein used in prophylactic and therapeutic vaccines. The Company’s lead product candidates are PF708, a therapeutic equivalent candidate to Forteo^® (teriparatide) for the treatment of osteoporosis, and its novel anthrax vaccine candidates, Px563L and RPA563, funded through an advanced development contract with the U.S. government. In April 2018, the Company granted certain development and commercialization rights for PF708 in certain Asian countries to China NT Pharma Group Company Limited (NT Pharma). In June 2018, the Company granted Alvogen Malta Operations Ltd. (Alvogen) exclusive rights to commercialize and manufacture PF708 in the United States. In addition, the Company is developing hematology/oncology products in collaboration with Jazz Pharmaceuticals Ireland Limited (Jazz). Furthermore, the Company’s pipeline includes biosimilar candidates to Lucentis ^®and Neulasta^®.

Product Candidates and Collaborations

The following table summarizes certain information about the Company’s lead product candidates and collaborations:

Product Candidate	Branded Reference Drug	Program	Indication
Proposed Therapeutic Equivalent
PF708 – Teriparatide	Forteo	•  Licensed in the United States to Alvogen; •  Licensed in Mainland China, Hong Kong, Singapore, Malaysia, Thailand to NT Pharma; •  Wholly-Owned Rest of World	Osteoporosis
Multiple Hematology/Oncology Product Candidates	Various	•  Jazz Pharmaceuticals Ireland Limited	Various
Novel Vaccines
Px563L and RPA563 – rPA based anthrax vaccines	N/A	•  U.S. Government Funded	Anthrax post-exposure prophylaxis

Proposed Therapeutic Equivalent: PF708 – Teriparatide

PF708 is being developed as a therapeutic equivalent candidate to Forteo, which is approved and marketed by Eli Lilly and Company for the treatment of osteoporosis patients at a high risk of fracture. In April 2018, the Company and NT Pharma entered into a Development and License Agreement (NT Pharma Agreement), pursuant to which the Company granted an exclusive license to NT Pharma to commercialize PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand and a non-exclusive license to conduct development activities in such territories with respect to PF708. The Company will be responsible for commercial manufacturing and will provide NT Pharma with the product for commercial sale. NT Pharma will be responsible for all regulatory submissions, development costs and costs associated with regulatory approvals in such territories. The Company will retain exclusive rights to PF708 in all countries outside of such territories, except for the United States, for which rights were subsequently granted to Alvogen. In June 2018, the Company and Alvogen entered into a Development and License Agreement (Alvogen Agreement) pursuant to which Alvogen will have the exclusive right to commercialize and manufacture PF708 in the United States. The Company currently retains exclusive rights to PF708 in all countries outside of the United States, Mainland China, Hong Kong, Singapore, Malaysia and Thailand. The Company will continue to be responsible for development and registration of PF708, while Alvogen will provide additional regulatory and development expertise.

Collaboration Partner: Jazz Pharmaceuticals Ireland Limited

In July 2016, the Company and Jazz announced an agreement under which the Company granted Jazz worldwide rights to develop and commercialize multiple early stage hematology/oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology. In December 2017, the parties amended the Jazz agreement, bringing the total value of payments and potential payments associated with the collaboration to $224.5 million. In addition, the Company may be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement.

Novel Vaccines: Px563L and RPA563 – rPA based anthrax vaccines

The Company is also developing Px563L and RPA563, novel anthrax vaccine candidates, in response to the United States government’s unmet demand for increased quantity, stability and dose-sparing regimens of anthrax vaccine. The government contract is funded by the Biomedical Advanced Research and Development Authority (BARDA). Subject to continued funding from BARDA, the Company expects to continue to advance the programs with the potential to initiate a Phase 2 trial in 2019. The Company had initially entered into a development contract with BARDA in 2010. The $25.2 million fully-funded contract was completed in 2015, at which time BARDA awarded the Company a cost-plus fixed fee advanced development contract valued at up to approximately $143.5 million. In January 2017, BARDA exercised two options under its existing contract for further development of Px563L and RPA563. One of the exercised options was increased by $1.7 million in May 2018, which increased the total contract value to $145.2 million. In September 2018, BARDA extended the contract period of performance.

Pfēnex Expression Technology Licenses: CRM197

The Company has several development and commercial partnerships in place for CRM197, which is a non-toxic mutant of diphtheria toxin. It is a well-characterized protein and functions as a carrier for polysaccharides and haptens, making them immunogenic. The Company developed a unique CRM197 production strain based on its pseudomonas fluorescens platform and sells non-GMP and cGMP CRM197 to vaccine development-focused pharmaceutical partners. As a result of those efforts, the Company previously entered into commercial licenses for production strains capable of producing CRM197 with both Merck and Serum Institute of India. These commercial license agreements with Merck and Serum contemplate potential maintenance and milestone fees as well as royalties on net sales. Merck and Serum are currently using the Company’s CRM197 in multiple Phase 3 clinical trials for such diseases as pneumococcal and meningitis bacterial infections.

The Company’s revenue in the near term is primarily related to monetizing its protein production platform through CRM197 product sales, commercial license agreements, service agreements, and government contracts, which may provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees.

Other Pipeline Products

In addition to the Company’s lead product candidates, its pipeline includes various other biosimilar candidates, including PF582, the Company’s biosimilar candidate to Lucentis, and PF529, the Company’s biosimilar candidate to Neulasta, as well as vaccines and next generation biologic candidates. Following its strategic review in November 2017, the Company decided to pause its development activities for PF582 and PF529 and focus the Company’s efforts and resources elsewhere in its product portfolio.

At the Market Offering Program

In March 2018, the Company entered into an equity sales agreement (Sales Agreement) with William Blair & Company, L.L.C. (William Blair) to sell shares of the Company’s common stock having aggregate sales proceeds of up to $20.0 million, from time to time, through an “at the market” equity offering program under which William Blair will act as sales agent. Under the Sales Agreement, the Company sets the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. As of September 30, 2018, the Company had not sold any shares under the Sales Agreement.

Follow-on Public Offering

In May 2018, the Company completed a public offering of common stock in which it sold 7,820,000 shares of its common stock at an offering price of $5.50 per share, which included the full exercise by the underwriters of their option to purchase an additional 1,020,000 shares, pursuant to the Company’s existing shelf registration statement. The net proceeds generated from this transaction, after underwriting discounts and commissions and offering costs, were approximately $39.5 million.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the instructions of the Securities and Exchange Commission, or SEC, on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

Use of Estimates

The preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Estimates have been prepared on the basis of the most current and best available information. However, actual results could differ from those estimates.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s product candidates, uncertainty of market acceptance of the Company’s products if approved for sale, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals.

Products developed by the Company require clearances from international and domestic regulatory agencies prior to commercial sales in such jurisdictions. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed or the Company was unable to maintain clearance, it could have a materially adverse impact on the Company.

As of September 30, 2018, the Company had an accumulated deficit of $194.5 million and expects to incur substantial operating losses for the next several years. The Company believes that its existing cash and cash equivalents and cash inflow from operations will be sufficient to meet its anticipated cash needs for at least the next 12 months including all necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors.

Cash and Cash Equivalents

The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash amounts that are restricted as to withdrawal or usage are presented as restricted cash. In January 2017, the Company entered into a Borrower’s Pledge Agreement, which required $0.2 million in restricted cash to be provided as security for its commercial credit card arrangement with one of the Company’s banks.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments and accounts and unbilled receivables. The Company has established guidelines intended to limit its exposure to credit risk by placing investments with high credit quality financial institutions, diversifying its investment portfolio and placing investments with maturities that help maintain safety and liquidity. All cash and cash equivalents were held at three major financial institutions as of September 30, 2018 and December 31, 2017. For the Company’s cash position of $68.0 million as of September 30, 2018, which included restricted cash of $0.2 million, the Company has exposure to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, the Company does not anticipate non-performance.

Additional credit risk is related to the Company’s concentration of receivables. As of September 30, 2018 and December 31, 2017, receivables were concentrated among three customers representing 99% and 89% of total net receivables, respectively. No allowance for doubtful accounts was recorded at September 30, 2018 or December 31, 2017. For the three months ended September 30, 2018 and 2017, revenue was concentrated among two customers and/or collaboration partners representing 89% and two customers and/or collaborative partners representing 94% of total revenues, respectively. Revenue from two customers and/or collaboration partners represented 87% and 91% of total revenue for the nine months ended September 30, 2018 and 2017, respectively.

A portion of revenue is earned from sales outside the United States. Non-U.S. revenue is denominated in U.S. dollars. A breakdown of the Company’s net revenue from U.S. and non-U.S. sources for the three and nine months ended September 30, 2018 and 2017 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
US revenue	$	1,371	$	2,190	$	3,877	$	4,453
Non-US revenue		2,199		2,834		7,629		6,418
Total revenue	$	3,570	$	5,024	$	11,506	$	10,871

During the three and nine months ended September 30, 2018 and 2017, Ireland accounted for more than 10% of the Company’s revenue.

Revenue

The Company’s revenue is related to the monetization of its protein production platform through collaboration agreements, service agreements, license agreements, government contracts and sales of CRM197, which may provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees. The Company’s revenue generating agreements also include potential revenues for achieving milestones and for product royalties. The specifics of the Company’s significant agreements are detailed in Note 7—Significant Research and Development Agreements.

The Company considers a variety of factors in determining the appropriate method of accounting for its collaboration agreements, including whether multiple deliverables can be separated and accounted for individually as separate units of accounting. Where there are multiple deliverables within a collaboration agreement that cannot be separated and therefore are combined into a single unit of accounting, revenues are deferred and recognized using the relevant guidance over the estimated period of performance. To the extent an arrangement contains a contingent deliverable, the Company will recognize the allocated consideration once the deliverable has been fulfilled. If the deliverables can be separated, the Company applies the relevant revenue recognition guidance to each individual deliverable. The specific methodology for the recognition of the underlying revenue is determined on a case-by-case basis according to the facts and circumstances applicable to each agreement.

Upfront, nonrefundable licensing payments are assessed to determine whether or not the licensee is able to obtain standalone value from the license. Where the license does not have standalone value, non-refundable license fees are recorded as deferred revenue and recognized as revenue as the Company performs under the applicable agreement. Where the level of effort is relatively consistent over the performance period, the Company recognizes fixed or determined revenue on a straight-line basis over the estimated period of performance. Where the license has standalone value, the Company recognizes total license revenue at the time all revenue recognition criteria have been met.

Nonrefundable payments for research funding are generally recognized as revenue over the period the underlying research activities are performed.

Revenue under service agreements are recorded as services are performed. These agreements do not require development achievement as a performance obligation and provide for payment when services are rendered. All such revenue is nonrefundable. Upfront, nonrefundable payments for license fees, exclusivity and feasibility services received in excess of amounts earned are classified as deferred revenue and recognized as income over the contract term or period of performance based on the nature of the related agreement.

The Company recognizes revenue for its cost-plus fixed fee government contracts in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contractors. Reimbursable costs under the Company’s government contracts primarily include direct labor, materials, subcontracts, accountable property and indirect costs. In addition, the Company receives a fixed fee under its government contracts, which is unconditionally earned as allowable costs are incurred and is not contingent on success factors. Reimbursable costs under the Company’s government contracts, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable.

The Company assesses milestone payments on an individual basis and recognizes revenue from nonrefundable milestone payments when the earnings process is complete and the payment is reasonably assured. Nonrefundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the associated milestone, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the milestone event. For the nine months ended September 30, 2018, $1.3 million in revenue was recognized in connection with the Merck and Jazz collaborations, with no revenue recognized for the quarter. For the three and nine months ended September 30, 2017, $1.0 million in revenue was recognized in connection with the achievement of development milestones associated with the Jazz collaboration.

The Company’s reagent protein products are primarily comprised of internally developed reagent protein products. Revenues for reagent product sales are reflected net of attributable sales tax. The Company generally offers a 30-day return policy. The Company recognizes reagent product revenue from product sales when it is realized or realizable and earned. As of September 30, 2018, the Company has had minimal product returns related to reagent protein product sales. Therefore, no reserve for warranty and return rights was recorded as of September 30, 2018 and December 31, 2017, respectively.

Revenue under arrangements where the Company outsources the cost of fulfillment to third parties is evaluated as to whether the related amounts should be recorded gross or net. The Company records amounts collected from the customer as revenue, and the amounts paid to suppliers as cost of revenue when it holds all or substantially all of the risks and benefits related to the product or service. For transactions where the Company does not hold all or substantially all the risk, the Company uses net reporting and therefore records the transaction as if the end-user made a purchase from the supplier with the Company acting as a sales agent.

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Under the ASU, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statements of cash flows. The ASU is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. The ASU requires that the Consolidated Statement of Cash Flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the Consolidated Statement of Cash Flows and the cash and equivalents balance presented on the Consolidated Balance Sheet. The ASU was effective retrospectively on January 1, 2018, with early adoption permitted. This guidance was adopted during the quarter ended March 31, 2018. Upon adoption of this guidance, prior periods were retrospectively adjusted to conform to the current period’s presentation. For the nine months ended September 30, 2017, the Company had previously disclosed $0.2 million of restricted cash as net cash used in financing activities. The effect of the adoption of ASU 2016-18 on the Company’s consolidated statement of cash flows was to reduce net cash used in financing by $0.2 million and include restricted cash balances in the balances of cash and cash equivalents and restricted cash.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The new standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification.ASU 2017-09 was effective for the Company in the first quarter of 2018, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018, and the adoption did not have a material effect on its consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Numerous updates were issued in 2016 that provide clarification on a number of specific issues as well as requiring additional disclosures. The effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods: the full retrospective method or the modified retrospective method. The Company plans to adopt the standard in the first quarter of fiscal year 2019 using the modified retrospective method. The Company does not expect the new standard to have a material impact on the recognition of revenue from its reagent protein product sales. The Company is currently evaluating its agreements with BARDA, NT Pharma, Jazz and Alvogen.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which was subsequently amended in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases. This guidance is effective for the Company in the first quarter of fiscal year 2020. The Company is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This updated guidance eliminates Step 2 from the current two-step quantitative model for goodwill impairment tests. Step 2 required an entity to calculate an implied fair value, which included a hypothetical purchase price allocation requirement, for reporting units that failed Step 1. Per this updated guidance, a goodwill impairment will instead be measured as the amount by which a reporting unit’s carrying value exceeds its fair value as identified in Step 1. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact on its financial statements and related disclosures.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

2. Fair Value Measurements

The fair value measurements of the Company’s cash equivalents and investments, which are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, were determined using the inputs described above and are as follows:

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
September 30, 2018
Cash and money market funds	$	68,025	$	68,025	$	—	$	—
Total assets measured at fair value	$	68,025	$	68,025	$	—	$	—
December 31, 2017
Cash and money market funds	$	57,864	$	57,864	$	—	$	—
Total assets measured at fair value	$	57,864	$	57,864	$	—	$	—

Cash and money market funds at September 30, 2018 and December 31, 2017 include restricted cash, which is included in current assets on the balance sheet.

The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no significant transfers into or out of Level 1, 2, or 3 during the periods presented.

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Cash, Cash Equivalents and Restricted Cash

9 Months Ended

Sep. 30, 2018

Text Block [Abstract]

Cash, Cash Equivalents and Restricted Cash

3. Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.

	September 30, 2018		December 31, 2017
	(in thousands)
Cash and cash equivalents	$	67,825	$	57,664
Restricted cash		200		200
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	68,025	$	57,864

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Property and Equipment

9 Months Ended

Sep. 30, 2018

Property, Plant and Equipment [Abstract]

Property and Equipment

4. Property and Equipment
Property and equipment consisted of the following:
	September 30, 2018			December 31, 2017
	(in thousands)
Furniture and equipment	$	365		$	355
Computers and IT equipment		432			368
Purchased software		333			931
Lab and research equipment		8,832			8,131
Leasehold improvements		876			865
Construction in progress		196			162
Other fixed assets		83			64
Total property and equipment, gross		11,117			10,876
Less: accumulated depreciation and amortization		(3,662	)		(3,479	)
Total property and equipment, net	$	7,455		$	7,397

Total property and equipment assets under capital lease were $1.2 million and $1.1 million as of September 30, 2018 and December 31, 2017, respectively. Accumulated depreciation related to assets under capital lease as of these dates were $0.2 million and $0.1 million, respectively. For the three and nine months ended September 30, 2018 and 2017, total depreciation and amortization expense is included in research and development, selling, general and administrative expenses and cost of sales in the accompanying consolidated statements of operations as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	8	$	—	$	23	$	—
Research and development		242		139		709		382
Selling, general and administrative		41		89		117		237
Total depreciation and amortization expense	$	291	$	228	$	849	$	619

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Intangible Assets

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets

5. Intangible Assets

Intangible assets consisted of the following:

	September 30, 2018			December 31, 2017
	(in thousands)
Customer relationships	$	3,750		$	3,750
Developed technology		4,400			4,400
Trade names		920			910
Gross intangible assets		9,070			9,060
Less: Accumulated amortization		(4,689	)		(4,289	)
Total intangible assets, net	$	4,381		$	4,771

Amortization expense related to intangible assets was $0.1 million for both the three months ended September 30, 2018 and 2017, respectively, and $0.4 million for both the nine months ended September 30, 2018 and 2017, respectively. Amortization expense is included within selling, general and administrative expense in the accompanying consolidated statements of operations. As of September 30, 2018, estimated amortization expense for the next five years amounts to approximately $0.5 million per year.

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Accrued Liabilities

9 Months Ended

Sep. 30, 2018

Payables and Accruals [Abstract]

Accrued Liabilities

6. Accrued Liabilities

Accrued liabilities consisted of the following:

	September 30, 2018		December 31, 2017
	(in thousands)
Accrued vacation	$	495	$	477
Deferred rent		598		620
Accrued bonuses		1,439		1,672
Other accrued employee-related liabilities		360		462
Accrued professional fees		1,529		575
Accrued supplier liabilities		461		690
Accrued subcontractor costs		5,321		2,681
Accrued clinical trial costs		—		866
Other accrued liabilities		382		870
Total accrued liabilities	$	10,585	$	8,913

Clinical trial for PF708 ended in the first half of 2018. No further clinical trial costs were required to be accrued. Activity related to preparing for PF708’s NDA submission led to increased subcontractor accruals.

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Significant Research and Development Agreements

9 Months Ended

Sep. 30, 2018

Research and Development [Abstract]

Significant Research and Development Agreements

7. Significant Research and Development Agreements

The Company has two types of research and development agreements (i) those for which the Company co-develops or assists customers in developing their products (Collaboration Agreements), and (ii) those for which the Company receives funding to advance its own products (Funding Agreements).

Collaboration and License Agreements

Jazz

In July 2016, the Company entered into a development and license agreement with Jazz Pharmaceuticals for the development and commercialization of multiple early stage hematology/oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology, and in the third quarter of 2017, achieved a process development milestone. The agreement also includes an option for Jazz to negotiate a license for a recombinant pegaspargase product candidate with the Company. Under the agreement, the Company received an upfront and option payment totaling $15.0 million in July 2016 and may be eligible to receive additional payments based on achievement of certain research and development, regulatory and sales-related milestones.

In December 2017, the Company and Jazz entered into an amended and restated agreement. In connection with the amendment and restatement of the Jazz Agreement (as amended, the Amended Jazz Agreement), the Company received a total of $18.5 million, consisting of an upfront payment of $5.0 million and a payment of $13.5 million for development achievement. The Company may be eligible to receive additional payments under the Amended Jazz Agreement of up to $189.3 million based on achievement of certain research and development, regulatory and sales-related milestones. The total milestones are categorized as follows: $30.3 million based on achievement of certain research and development milestones; $34.0 million for certain regulatory milestones; and $125.0 million for sales milestones. For the non-sales-related milestones totaling $64.3 million, the Company conducted an evaluation as to whether they will be recorded using the milestone method and, as a result of this evaluation, estimates approximately $30.3 million of these non-sales-related milestones are deemed to be substantive. The Company may also be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement. Both Jazz and the Company will be contributing to the development efforts. Unless terminated earlier, the Amended Jazz Agreement will continue on a product-by-product basis for as long as Jazz is commercializing or having commercialized the products under the Amended Jazz Agreement.

In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the Jazz Agreement and again upon entering into the Amended Jazz Agreement. The deliverables have not changed under the amendment. The significant deliverables were determined to be the research and development services related to the pegaspargase product candidate option and for license and research and development activities of the other hematology/oncology products. The Company has determined that the license, together with the research and development activities, represent one unit of accounting for each product under license, as the license does not have standalone value from the respective development activities. The research and development activities related to the pegaspargase option were determined to have standalone value apart from the license and development activities for the other hematology/oncology products. The estimated selling price for the pegaspargase product candidate and the hematology/oncology products was determined using an income approach. In determining the estimated selling price, the Company considered costs expected to be incurred for internal labor, burden rates, internal margins, and subcontractors. Based on the Company’s considerations of estimated selling price, the Company allocated the original $15.0 million upfront and option payment as follows: $10.0 million to the pegaspargase product candidate and $2.5 million to each of the hematology/oncology products. For the $5.0 million upfront payment received under the terms of the Amended Jazz Agreement, the Company determined that $0.8 million represented development services performed prior to the amendment, which had been reimbursable under the original agreement. The remaining $4.2 million of the upfront payment was allocated to the remaining hematology product; the amount was deferred and will be recognized over the period of performance. The Amended Jazz Agreement provisions allow for Jazz to halt the advancement of one of the products under development and replace with others wherein the Company could potentially earn milestone revenue on those products. However, the Company believes it is unlikely Jazz would halt the advancement of the product under development and replace with other products. Therefore, none of the upfront payments were allocated to this option.

The upfront and option payment for the original Jazz agreement and the amendment are being deferred and will be recognized as revenue ratably over the period in which the Company expects services to be rendered for each respective unit of accounting. As previously disclosed, the estimated period of revenue recognition approximates a range of 15 to 32 months. Based on changes to this estimate that occurred during the quarter ended June 30, 2017, the Company modified the period of revenue recognition to range from 15 to 35 months. During the year ended December 31, 2017, the Company completed the service period related to one of the hematology products. In the second quarter of 2018, the Company achieved two development milestones and recognized $750 thousand in revenue for successful achievement of process development milestones for PF745. During the three months ended September 30, 2018 and 2017, the Company recorded revenue of approximately $1.8 million and $2.7 million related to the Jazz Collaboration, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded revenue of approximately $6.3 million and $6.0 million related to the Jazz collaboration, respectively. As of September 30, 2018 and December 31, 2017, deferred revenue associated with the Jazz collaboration was $4.6 million and $10.1 million, respectively. This deferred revenue will be recognized over the remaining period of performance from 6 to 9 months, subsequent to September 30, 2018.

NT Pharma

In April 2018, the Company entered into an agreement with NT Pharma under which the Company granted NT Pharma non-exclusive development and exclusive commercialization rights to PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand. In accordance with the agreement, the Company received an upfront payment of $2.5 million and may be eligible to receive up to $22.5 million in payments based on the achievement of certain development, regulatory, and sales-related milestones. In addition, the Company is eligible to receive double-digit royalties on net product sales. NT Pharma will be responsible for any further development required to achieve regulatory approval as well as commercialization activities in the applicable territories. The Company deems that none of the non-sales milestones are substantive. Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met.

In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the NT Pharma Agreement. The significant deliverables were determined to be the license and research and development services up through the NDA filing related to the PF708 product. The Company has determined that these deliverables meet the separation criteria and therefore are each treated as separate units of accounting.

The upfront payment of $2.5 million is not fixed and determinable. Due to a contract clause, the $2.5 million may be payable to NT Pharma if the NDA is not filed by a specified date; therefore, the upfront payment has been recorded as deferred revenue in the accompanying consolidated balance sheet.

Alvogen

In June 2018, the Company entered into an agreement with Alvogen in which the Company has granted Alvogen exclusive rights to commercialize PF708 in the United States. The Company will retain exclusive rights to PF708 in all countries outside of the United States except Mainland China, Hong Kong, Singapore, Malaysia and Thailand, where the Company has granted rights to NT Pharma. The Company will continue to be responsible for development and registration of PF708, while Alvogen will provide additional regulatory and development expertise. Alvogen will assume responsibility for costs related to litigation, commercial manufacturing and supply chain, and commercialization of PF708. In consideration for the licenses and other rights granted in the development and license agreement, the Company received an upfront payment of $2.5 million and may be eligible to receive an additional $25 million in support and regulatory milestone payments. The Company may also be eligible to receive a 50% gross profit split on sales if the product is rated as Therapeutically Equivalent (AP) to Forteo and up to 40% if rated differently. The Company deems that the support and regulatory milestones are substantive.

In accordance with ASC 605-25, the Company identified all of the deliverables at the inception of the Alvogen Agreement. The significant deliverables were determined to be the development and regulatory services up through the NDA filing and ultimate approval related to the PF708 product and the exclusive license granted to Alvogen to commercialize PF708 in the United States. The Company has determined that the license and the development and regulatory activities meet the separation criteria; therefore, they are each treated as separate units of accounting.

To determine the stand-alone value of the license, the Company considered our negotiation discussions with Alvogen that led to the final terms of the agreement and other information. The Company determined a selling price for the services by estimating costs expected to be incurred for internal labor, burden rates, internal margins, and subcontractors.

The upfront payment of $2.5 million is not fixed and determinable due to a contract clause that $2.5 million may be payable to Alvogen if the NDA approval is not transferred to Alvogen by a specified date; therefore, the upfront payment has been recorded as deferred revenue in the accompanying consolidated balance sheet. Alvogen is supporting certain agreed costs incurred by the Company related to the preparation and filing of the NDA for PF708. The Company records reimbursement amounts as net against research and development expenses in the accompanying consolidated statement of operations. The Company estimates the amounts to be received related to the reimbursement and records the amounts when they are fixed and determinable. For the nine months ended September 30, 2018, the Company recorded approximately $0.2 million for the estimated reimbursements. For the three months ended September 30, 2018, the Company did not record reimbursement amounts.

Funding Agreements

The U.S. Department of Health and Human Services

In July 2010, the Company entered into a contract with BARDA within the Office of the Assistant Secretary for Preparedness and Response in the U.S. Department of Health and Human Services to develop a production strain and process for the production of bulk recombinant protective antigen (rPA) from anthrax. The arrangement is a cost-plus fixed fee contract comprised of a base period and follow on options at BARDA’s election. At the inception of the contract, both BARDA and the Company entered into the arrangement with the expectation that BARDA would fund all costs of development and no costs in excess of the arrangement would be incurred by the Company. In December 2014, the Company filed the investigational new drug (IND) application for Px563L. BARDA extended the contract in December 2014 and provided additional funding, increasing the total contract to $25.2 million. The development contract was completed in August 2015.

In August 2015, the Company entered into a contract with BARDA for the advanced development of Px563L and RPA563 as novel vaccine candidates for the prevention of anthrax infection (BARDA Advanced Development Agreement). The BARDA Advanced Development Agreement is a cost-plus fixed fee development contract valued at up to approximately $143.5 million, including a 30-month base period of performance of approximately $15.9 million, and eight option periods valued at a total of approximately $127.6 million. The base period of performance was initially from August 2015 through February 2018 and later extended through September 2018. In addition to the base period, BARDA exercised additional phases of the development contract effective January 2017, totaling $4.9 million and allowing for the continuing development of Px563L and RPA563. The period of performance for the two option periods was extended through September 2018 and December 2019. Over the course of 2017 and 2018, the Company continued to collect favorable stability data for both products. Potential next milestones are the triggering of analytical and non-clinical animal study options, leading to a potential Phase 2 study in 2019, subject in each case to continued funding by BARDA. In May 2018, BARDA increased the funding for one of the option periods by approximately $1.7 million. This modification increased the total contract value if all options are exercised by BARDA to approximately $145.2 million.

Revenue is recognized in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contractors. Reimbursable costs under this government contract primarily include direct labor, materials, subcontracts, accountable property and indirect costs. In addition, the Company receives a fixed fee under the BARDA contract, which is unconditionally earned as allowable costs are incurred and is not contingent on success factors. Reimbursable costs under this BARDA contract, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable. The billing of any overage in indirect cost rates over the approved provisional rates in the contract is not allowed. Any such overage is expensed as incurred. When and if final rates with Defense Contract Audit Agency are approved, the Company will recognize any change in revenue resulting from the rate change in the period such revised rates are approved and as such this would be considered a change in estimate. This agreement is subject to early termination and stop-

work order in conformance with Federal Acquisition Regulations 52.249-6 and 52.242-15 whereupon BARDA may immediately terminate the agreement early for convenience or request the Company to stop all or any part of the work for a period of at least 90 days. If BARDA is not adequately funded, there is a potential that some or all of the follow-on options could be delayed or never elected.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

8. Commitments and Contingencies

Capital Lease Agreements

In February 2018, the Company signed a lease agreement (the Lease) for the purchase of specialized equipment totaling approximately $0.2 million. The Lease, which is classified as a capital lease, has a term of 24 months and commenced during the three months ended March 31, 2018.

Payment commitments for the Company’s capital leases are summarized as follows:

	September 30, 2018
	(in thousands)
2018	$	87
2019		342
2020		197
Total future minimum lease payments	$	626

In addition to the Lease, the Company has entered into operating and capital lease agreements for office and lab equipment that expire at various dates through 2021.

Clinical Study and Development Activity Commitments

The Company has entered into agreements with contract research organizations and subcontractors to further develop its product candidates. These contracts can be cancelled at any time, with some having certain cancellation fees associated with the termination of the contract, and others that only obligate the Company through the termination date.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

9. Stock-Based Compensation

Summary Stock-Based Compensation Information

The following table summarizes stock-based compensation expense:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	50	$	67	$	143	$	189
Research and development		339		202		1,149		764
Selling, general and administrative		404		498		1,259		1,542
Total	$	793	$	767	$	2,551	$	2,495
Stock-based compensation from:
Stock options	$	752	$	707	$	2,395	$	2,377
Employee stock purchase plan		41		60		156		118
Total	$	793	$	767	$	2,551	$	2,495

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2018:

	Number of Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017		3,237		$	7.50
Granted		1,568			3.63
Exercised		(37	)		2.17
Cancelled (forfeited)		(649	)		6.95
Outstanding at September 30, 2018		4,119		$	6.16		7.51	$	3,552
Vested and expected to vest at September 30, 2018		3,596		$	6.44		7.28	$	2,871
Vested and exercisable at September 30, 2018		1,923		$	7.95		5.80	$	938

The Company received approximately $80 thousand and $26 thousand from stock option exercises during the nine months ended September 30, 2018 and 2017, respectively. Options outstanding at September 30, 2018 have a weighted average remaining contractual term of 7.51 years.

The exercise price of all options granted during the nine months ended September 30, 2018 and 2017 was equal to the closing price of the Company’s common stock on the date of grant. The fair value of each stock option granted is estimated on the grant date under the fair value method using the Black-Scholes model. The estimated fair values of the stock option, including the effect of estimated forfeitures, are then expensed over the requisite service period which is generally the vesting period. The table below sets forth the weighted-average assumptions used to estimate the fair value of stock options:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Risk-free interest rate		2.8	%		1.9	%		2.7	%		2.0	%
Expected volatility		72.8	%		65.8	%		71.1	%		66.8	%
Dividend yield		0	%		0	%		0	%		0	%
Expected term (years)		6.3			6.3			6.3			6.2

The weighted average grant date fair value of options granted during the nine months ended September 30, 2018 and 2017 was $2.37 and $3.50, respectively. As of September 30, 2018, there was approximately $4.4 million of unrecognized compensation cost related to unvested stock option awards and the weighted average period over which this cost is expected to be recognized is 2.55 years.

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Income Taxes

9 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

During the three months and nine months ended September 30, 2018, the Company recorded no income tax expense. The Company expects to be in an overall taxable loss position for 2018. No tax expense is expected in the next several years as the Company expects to generate taxable net operating losses and corresponding valuation allowances due to its investments in its lead product candidates and other pipeline products.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.

Pursuant to the SEC Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), issued on December 22, 2017, a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. As of December 31, 2017, the Company was able to reasonably estimate provisional adjustments, based on current year operations only, related to Meals & Entertainment and Compensation related items that do not have an impact on its financial statements due to a full valuation allowance. As it relates to the Tax Act, the Company feels the calculations are completed and the measurement window is closed.

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Net Loss per Share of Common Stock

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Net Loss per Share of Common Stock

11. Net Loss per Share of Common Stock

The following table summarizes the calculation of basic and diluted net loss per share:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands, except per  share data)
Net loss	$	(10,662	)	$	(8,818	)	$	(32,770	)	$	(31,174	)
Weighted-average common shares used in calculating basic and diluted net loss per share		31,437			23,539			27,288			23,488
Net loss per common share, basic and diluted	$	(0.34	)	$	(0.37	)	$	(1.20	)	$	(1.33	)

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period, determined using the treasury-stock method, if inclusion of these is dilutive. Because the Company reported a net loss for the three and nine months ended September 30, 2018 and 2017, diluted net loss per common share is the same as basic net loss per common share for those periods.

The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the calculation of diluted shares outstanding because of their anti-dilutive impact to earnings per share:

	September 30,
	2018		2017
	(in thousands)
Options to purchase common stock		4,119		3,430
Employee stock purchase plan		70		68
Total		4,189		3,498

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Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Business Activities and Organization

Business Activities and Organization

Pfenex Inc. (the Company or Pfenex) is a clinical-stage development and licensing biotechnology company focused on leveraging itsPfēnex Expression Technology ^® to develop and improve protein therapies for unmet patient needs. Using the patentedPfēnex Expression Technology platform, the Company has created an advanced pipeline of therapeutic equivalents, vaccines, biologics and biosimilars. The Company also uses its Pfēnex Expression Technology platform to produce CRM197, a diphtheria toxoid carrier protein used in prophylactic and therapeutic vaccines. The Company’s lead product candidates are PF708, a therapeutic equivalent candidate to Forteo^® (teriparatide) for the treatment of osteoporosis, and its novel anthrax vaccine candidates, Px563L and RPA563, funded through an advanced development contract with the U.S. government. In April 2018, the Company granted certain development and commercialization rights for PF708 in certain Asian countries to China NT Pharma Group Company Limited (NT Pharma). In June 2018, the Company granted Alvogen Malta Operations Ltd. (Alvogen) exclusive rights to commercialize and manufacture PF708 in the United States. In addition, the Company is developing hematology/oncology products in collaboration with Jazz Pharmaceuticals Ireland Limited (Jazz). Furthermore, the Company’s pipeline includes biosimilar candidates to Lucentis ^® and Neulasta^®.

Product Candidates and Collaborations

The following table summarizes certain information about the Company’s lead product candidates and collaborations:

Product Candidate	Branded Reference Drug	Program	Indication
Proposed Therapeutic Equivalent
PF708 – Teriparatide	Forteo	•  Licensed in the United States to Alvogen; •  Licensed in Mainland China, Hong Kong, Singapore, Malaysia, Thailand to NT Pharma; •  Wholly-Owned Rest of World	Osteoporosis
Multiple Hematology/Oncology Product Candidates	Various	•  Jazz Pharmaceuticals Ireland Limited	Various
Novel Vaccines
Px563L and RPA563 – rPA based anthrax vaccines	N/A	•  U.S. Government Funded	Anthrax post-exposure prophylaxis

Proposed Therapeutic Equivalent: PF708 – Teriparatide

PF708 is being developed as a therapeutic equivalent candidate to Forteo, which is approved and marketed by Eli Lilly and Company for the treatment of osteoporosis patients at a high risk of fracture. In April 2018, the Company and NT Pharma entered into a Development and License Agreement (NT Pharma Agreement), pursuant to which the Company granted an exclusive license to NT Pharma to commercialize PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand and a non-exclusive license to conduct development activities in such territories with respect to PF708. The Company will be responsible for commercial manufacturing and will provide NT Pharma with the product for commercial sale. NT Pharma will be responsible for all regulatory submissions, development costs and costs associated with regulatory approvals in such territories. The Company will retain exclusive rights to PF708 in all countries outside of such territories, except for the United States, for which rights were subsequently granted to Alvogen. In June 2018, the Company and Alvogen entered into a Development and License Agreement (Alvogen Agreement) pursuant to which Alvogen will have the exclusive right to commercialize and manufacture PF708 in the United States. The Company currently retains exclusive rights to PF708 in all countries outside of the United States, Mainland China, Hong Kong, Singapore, Malaysia and Thailand. The Company will continue to be responsible for development and registration of PF708, while Alvogen will provide additional regulatory and development expertise.

Collaboration Partner: Jazz Pharmaceuticals Ireland Limited

In July 2016, the Company and Jazz announced an agreement under which the Company granted Jazz worldwide rights to develop and commercialize multiple early stage hematology/oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology. In December 2017, the parties amended the Jazz agreement, bringing the total value of payments and potential payments associated with the collaboration to $224.5 million. In addition, the Company may be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement.

Novel Vaccines: Px563L and RPA563 – rPA based anthrax vaccines

The Company is also developing Px563L and RPA563, novel anthrax vaccine candidates, in response to the United States government’s unmet demand for increased quantity, stability and dose-sparing regimens of anthrax vaccine. The government contract is funded by the Biomedical Advanced Research and Development Authority (BARDA). Subject to continued funding from BARDA, the Company expects to continue to advance the programs with the potential to initiate a Phase 2 trial in 2019. The Company had initially entered into a development contract with BARDA in 2010. The $25.2 million fully-funded contract was completed in 2015, at which time BARDA awarded the Company a cost-plus fixed fee advanced development contract valued at up to approximately $143.5 million. In January 2017, BARDA exercised two options under its existing contract for further development of Px563L and RPA563. One of the exercised options was increased by $1.7 million in May 2018, which increased the total contract value to $145.2 million. In September 2018, BARDA extended the contract period of performance.

Pfēnex Expression Technology Licenses: CRM197

The Company has several development and commercial partnerships in place for CRM197, which is a non-toxic mutant of diphtheria toxin. It is a well-characterized protein and functions as a carrier for polysaccharides and haptens, making them immunogenic. The Company developed a unique CRM197 production strain based on its pseudomonas fluorescens platform and sells non-GMP and cGMP CRM197 to vaccine development-focused pharmaceutical partners. As a result of those efforts, the Company previously entered into commercial licenses for production strains capable of producing CRM197 with both Merck and Serum Institute of India. These commercial license agreements with Merck and Serum contemplate potential maintenance and milestone fees as well as royalties on net sales. Merck and Serum are currently using the Company’s CRM197 in multiple Phase 3 clinical trials for such diseases as pneumococcal and meningitis bacterial infections.

The Company’s revenue in the near term is primarily related to monetizing its protein production platform through CRM197 product sales, commercial license agreements, service agreements, and government contracts, which may provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees.

Other Pipeline Products

In addition to the Company’s lead product candidates, its pipeline includes various other biosimilar candidates, including PF582, the Company’s biosimilar candidate to Lucentis, and PF529, the Company’s biosimilar candidate to Neulasta, as well as vaccines and next generation biologic candidates. Following its strategic review in November 2017, the Company decided to pause its development activities for PF582 and PF529 and focus the Company’s efforts and resources elsewhere in its product portfolio.

At the Market Offering Program

In March 2018, the Company entered into an equity sales agreement (Sales Agreement) with William Blair & Company, L.L.C. (William Blair) to sell shares of the Company’s common stock having aggregate sales proceeds of up to $20.0 million, from time to time, through an “at the market” equity offering program under which William Blair will act as sales agent. Under the Sales Agreement, the Company sets the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. As of September 30, 2018, the Company had not sold any shares under the Sales Agreement.

Follow-on Public Offering

In May 2018, the Company completed a public offering of common stock in which it sold 7,820,000 shares of its common stock at an offering price of $5.50 per share, which included the full exercise by the underwriters of their option to purchase an additional 1,020,000 shares, pursuant to the Company’s existing shelf registration statement. The net proceeds generated from this transaction, after underwriting discounts and commissions and offering costs, were approximately $39.5 million.

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the instructions of the Securities and Exchange Commission, or SEC, on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

Use of Estimates

Use of Estimates

The preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Estimates have been prepared on the basis of the most current and best available information. However, actual results could differ from those estimates.

Risk and Uncertainties

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s product candidates, uncertainty of market acceptance of the Company’s products if approved for sale, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals.

Products developed by the Company require clearances from international and domestic regulatory agencies prior to commercial sales in such jurisdictions. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed or the Company was unable to maintain clearance, it could have a materially adverse impact on the Company.

As of September 30, 2018, the Company had an accumulated deficit of $194.5 million and expects to incur substantial operating losses for the next several years. The Company believes that its existing cash and cash equivalents and cash inflow from operations will be sufficient to meet its anticipated cash needs for at least the next 12 months including all necessary activities leading up to and including potential commercial launch of PF708 in the United States as early as the fourth quarter of 2019, subject to FDA acceptance, approval of the new drug application and other factors.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash amounts that are restricted as to withdrawal or usage are presented as restricted cash. In January 2017, the Company entered into a Borrower’s Pledge Agreement, which required $0.2 million in restricted cash to be provided as security for its commercial credit card arrangement with one of the Company’s banks.

Concentrations

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments and accounts and unbilled receivables. The Company has established guidelines intended to limit its exposure to credit risk by placing investments with high credit quality financial institutions, diversifying its investment portfolio and placing investments with maturities that help maintain safety and liquidity. All cash and cash equivalents were held at three major financial institutions as of September 30, 2018 and December 31, 2017. For the Company’s cash position of $68.0 million as of September 30, 2018, which included restricted cash of $0.2 million, the Company has exposure to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, the Company does not anticipate non-performance.

Additional credit risk is related to the Company’s concentration of receivables. As of September 30, 2018 and December 31, 2017, receivables were concentrated among three customers representing 99% and 89% of total net receivables, respectively. No allowance for doubtful accounts was recorded at September 30, 2018 or December 31, 2017. For the three months ended September 30, 2018 and 2017, revenue was concentrated among two customers and/or collaboration partners representing 89% and two customers and/or collaborative partners representing 94% of total revenues, respectively. Revenue from two customers and/or collaboration partners represented 87% and 91% of total revenue for the nine months ended September 30, 2018 and 2017, respectively.

A portion of revenue is earned from sales outside the United States. Non-U.S. revenue is denominated in U.S. dollars. A breakdown of the Company’s net revenue from U.S. and non-U.S. sources for the three and nine months ended September 30, 2018 and 2017 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
US revenue	$	1,371	$	2,190	$	3,877	$	4,453
Non-US revenue		2,199		2,834		7,629		6,418
Total revenue	$	3,570	$	5,024	$	11,506	$	10,871

During the three and nine months ended September 30, 2018 and 2017, Ireland accounted for more than 10% of the Company’s revenue.

Revenue

Revenue

The Company’s revenue is related to the monetization of its protein production platform through collaboration agreements, service agreements, license agreements, government contracts and sales of CRM197, which may provide for various types of payments, including upfront payments, funding of research and development, milestone payments, intellectual property access fees and licensing fees. The Company’s revenue generating agreements also include potential revenues for achieving milestones and for product royalties. The specifics of the Company’s significant agreements are detailed in Note 7—Significant Research and Development Agreements.

The Company considers a variety of factors in determining the appropriate method of accounting for its collaboration agreements, including whether multiple deliverables can be separated and accounted for individually as separate units of accounting. Where there are multiple deliverables within a collaboration agreement that cannot be separated and therefore are combined into a single unit of accounting, revenues are deferred and recognized using the relevant guidance over the estimated period of performance. To the extent an arrangement contains a contingent deliverable, the Company will recognize the allocated consideration once the deliverable has been fulfilled. If the deliverables can be separated, the Company applies the relevant revenue recognition guidance to each individual deliverable. The specific methodology for the recognition of the underlying revenue is determined on a case-by-case basis according to the facts and circumstances applicable to each agreement.

Upfront, nonrefundable licensing payments are assessed to determine whether or not the licensee is able to obtain standalone value from the license. Where the license does not have standalone value, non-refundable license fees are recorded as deferred revenue and recognized as revenue as the Company performs under the applicable agreement. Where the level of effort is relatively consistent over the performance period, the Company recognizes fixed or determined revenue on a straight-line basis over the estimated period of performance. Where the license has standalone value, the Company recognizes total license revenue at the time all revenue recognition criteria have been met.

Nonrefundable payments for research funding are generally recognized as revenue over the period the underlying research activities are performed.

Revenue under service agreements are recorded as services are performed. These agreements do not require development achievement as a performance obligation and provide for payment when services are rendered. All such revenue is nonrefundable. Upfront, nonrefundable payments for license fees, exclusivity and feasibility services received in excess of amounts earned are classified as deferred revenue and recognized as income over the contract term or period of performance based on the nature of the related agreement.

The Company recognizes revenue for its cost-plus fixed fee government contracts in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contractors. Reimbursable costs under the Company’s government contracts primarily include direct labor, materials, subcontracts, accountable property and indirect costs. In addition, the Company receives a fixed fee under its government contracts, which is unconditionally earned as allowable costs are incurred and is not contingent on success factors. Reimbursable costs under the Company’s government contracts, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable.

The Company assesses milestone payments on an individual basis and recognizes revenue from nonrefundable milestone payments when the earnings process is complete and the payment is reasonably assured. Nonrefundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the associated milestone, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the milestone event. For the nine months ended September 30, 2018, $1.3 million in revenue was recognized in connection with the Merck and Jazz collaborations, with no revenue recognized for the quarter. For the three and nine months ended September 30, 2017, $1.0 million in revenue was recognized in connection with the achievement of development milestones associated with the Jazz collaboration.

The Company’s reagent protein products are primarily comprised of internally developed reagent protein products. Revenues for reagent product sales are reflected net of attributable sales tax. The Company generally offers a 30-day return policy. The Company recognizes reagent product revenue from product sales when it is realized or realizable and earned. As of September 30, 2018, the Company has had minimal product returns related to reagent protein product sales. Therefore, no reserve for warranty and return rights was recorded as of September 30, 2018 and December 31, 2017, respectively.

Revenue under arrangements where the Company outsources the cost of fulfillment to third parties is evaluated as to whether the related amounts should be recorded gross or net. The Company records amounts collected from the customer as revenue, and the amounts paid to suppliers as cost of revenue when it holds all or substantially all of the risks and benefits related to the product or service. For transactions where the Company does not hold all or substantially all the risk, the Company uses net reporting and therefore records the transaction as if the end-user made a purchase from the supplier with the Company acting as a sales agent.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Under the ASU, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statements of cash flows. The ASU is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. The ASU requires that the Consolidated Statement of Cash Flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the Consolidated Statement of Cash Flows and the cash and equivalents balance presented on the Consolidated Balance Sheet. The ASU was effective retrospectively on January 1, 2018, with early adoption permitted. This guidance was adopted during the quarter ended March 31, 2018. Upon adoption of this guidance, prior periods were retrospectively adjusted to conform to the current period’s presentation. For the nine months ended September 30, 2017, the Company had previously disclosed $0.2 million of restricted cash as net cash used in financing activities. The effect of the adoption of ASU 2016-18 on the Company’s consolidated statement of cash flows was to reduce net cash used in financing by $0.2 million and include restricted cash balances in the balances of cash and cash equivalents and restricted cash.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The new standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 was effective for the Company in the first quarter of 2018, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2018, and the adoption did not have a material effect on its consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Numerous updates were issued in 2016 that provide clarification on a number of specific issues as well as requiring additional disclosures. The effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods: the full retrospective method or the modified retrospective method. The Company plans to adopt the standard in the first quarter of fiscal year 2019 using the modified retrospective method. The Company does not expect the new standard to have a material impact on the recognition of revenue from its reagent protein product sales. The Company is currently evaluating its agreements with BARDA, NT Pharma, Jazz and Alvogen.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which was subsequently amended in July 2018 by ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as right-of-use assets and lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification dictates whether lease expense is to be recognized based on an effective interest method or on a straight-line basis over the term of the lease. Additional qualitative and quantitative disclosures will be required to give financial statement users information on the amount, timing and judgments related to a reporting entity’s cash flows arising from leases. This guidance is effective for the Company in the first quarter of fiscal year 2020. The Company is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This updated guidance eliminates Step 2 from the current two-step quantitative model for goodwill impairment tests. Step 2 required an entity to calculate an implied fair value, which included a hypothetical purchase price allocation requirement, for reporting units that failed Step 1. Per this updated guidance, a goodwill impairment will instead be measured as the amount by which a reporting unit’s carrying value exceeds its fair value as identified in Step 1. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard will be effective for the Company in the first quarter of fiscal year 2020, although early adoption is permitted (but no sooner than the adoption of Topic 606). The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact on its financial statements and related disclosures.

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Organization and Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Summary of Sales Revenue

A portion of revenue is earned from sales outside the United States. Non-U.S. revenue is denominated in U.S. dollars. A breakdown of the Company’s net revenue from U.S. and non-U.S. sources for the three and nine months ended September 30, 2018 and 2017 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
US revenue	$	1,371	$	2,190	$	3,877	$	4,453
Non-US revenue		2,199		2,834		7,629		6,418
Total revenue	$	3,570	$	5,024	$	11,506	$	10,871

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Schedule of Assets Measured at Fair Value on Recurring Basis

The fair value measurements of the Company’s cash equivalents and investments, which are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, were determined using the inputs described above and are as follows:

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
September 30, 2018
Cash and money market funds	$	68,025	$	68,025	$	—	$	—
Total assets measured at fair value	$	68,025	$	68,025	$	—	$	—
December 31, 2017
Cash and money market funds	$	57,864	$	57,864	$	—	$	—
Total assets measured at fair value	$	57,864	$	57,864	$	—	$	—

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Cash, Cash Equivalents and Restricted Cash (Tables)

9 Months Ended

Sep. 30, 2018

Text Block [Abstract]

Summary of Reconciliation of Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.

	September 30, 2018		December 31, 2017
	(in thousands)
Cash and cash equivalents	$	67,825	$	57,664
Restricted cash		200		200
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	68,025	$	57,864

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2018

Property, Plant and Equipment [Abstract]

Summary of Property and Equipment

Property and equipment consisted of the following:
	September 30, 2018			December 31, 2017
	(in thousands)
Furniture and equipment	$	365		$	355
Computers and IT equipment		432			368
Purchased software		333			931
Lab and research equipment		8,832			8,131
Leasehold improvements		876			865
Construction in progress		196			162
Other fixed assets		83			64
Total property and equipment, gross		11,117			10,876
Less: accumulated depreciation and amortization		(3,662	)		(3,479	)
Total property and equipment, net	$	7,455		$	7,397

Total property and equipment assets under capital lease were $1.2 million and $1.1 million as of September 30, 2018 and December 31, 2017, respectively. Accumulated depreciation related to assets under capital lease as of these dates were $0.2 million and $0.1 million, respectively. For the three and nine months ended September 30, 2018 and 2017, total depreciation and amortization expense is included in research and development, selling, general and administrative expenses and cost of sales in the accompanying consolidated statements of operations as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	8	$	—	$	23	$	—
Research and development		242		139		709		382
Selling, general and administrative		41		89		117		237
Total depreciation and amortization expense	$	291	$	228	$	849	$	619

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Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Summary of Intangible Assets

Intangible assets consisted of the following:

	September 30, 2018			December 31, 2017
	(in thousands)
Customer relationships	$	3,750		$	3,750
Developed technology		4,400			4,400
Trade names		920			910
Gross intangible assets		9,070			9,060
Less: Accumulated amortization		(4,689	)		(4,289	)
Total intangible assets, net	$	4,381		$	4,771

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Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2018

Payables and Accruals [Abstract]

Components of Accrued Liabilities

Accrued liabilities consisted of the following:

	September 30, 2018		December 31, 2017
	(in thousands)
Accrued vacation	$	495	$	477
Deferred rent		598		620
Accrued bonuses		1,439		1,672
Other accrued employee-related liabilities		360		462
Accrued professional fees		1,529		575
Accrued supplier liabilities		461		690
Accrued subcontractor costs		5,321		2,681
Accrued clinical trial costs		—		866
Other accrued liabilities		382		870
Total accrued liabilities	$	10,585	$	8,913

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Summary of Capital Lease

Payment commitments for the Company’s capital leases are summarized as follows:

	September 30, 2018
	(in thousands)
2018	$	87
2019		342
2020		197
Total future minimum lease payments	$	626

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Cost of revenue	$	50	$	67	$	143	$	189
Research and development		339		202		1,149		764
Selling, general and administrative		404		498		1,259		1,542
Total	$	793	$	767	$	2,551	$	2,495
Stock-based compensation from:
Stock options	$	752	$	707	$	2,395	$	2,377
Employee stock purchase plan		41		60		156		118
Total	$	793	$	767	$	2,551	$	2,495

Summary of Company's Stock Option Activity

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2018:

	Number of Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017		3,237		$	7.50
Granted		1,568			3.63
Exercised		(37	)		2.17
Cancelled (forfeited)		(649	)		6.95
Outstanding at September 30, 2018		4,119		$	6.16		7.51	$	3,552
Vested and expected to vest at September 30, 2018		3,596		$	6.44		7.28	$	2,871
Vested and exercisable at September 30, 2018		1,923		$	7.95		5.80	$	938

Weighted-Average Assumptions used to Estimate Fair Value of Stock Options

The table below sets forth the weighted-average assumptions used to estimate the fair value of stock options:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Risk-free interest rate		2.8	%		1.9	%		2.7	%		2.0	%
Expected volatility		72.8	%		65.8	%		71.1	%		66.8	%
Dividend yield		0	%		0	%		0	%		0	%
Expected term (years)		6.3			6.3			6.3			6.2

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Net Loss per Share of Common Stock (Tables)

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Computation of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders

The following table summarizes the calculation of basic and diluted net loss per share:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands, except per  share data)
Net loss	$	(10,662	)	$	(8,818	)	$	(32,770	)	$	(31,174	)
Weighted-average common shares used in calculating basic and diluted net loss per share		31,437			23,539			27,288			23,488
Net loss per common share, basic and diluted	$	(0.34	)	$	(0.37	)	$	(1.20	)	$	(1.33	)

Summary of Potentially Dilutive Securities Outstanding Excluded From Computation of Diluted Shares Outstanding

The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the calculation of diluted shares outstanding because of their anti-dilutive impact to earnings per share:

	September 30,
	2018		2017
	(in thousands)
Options to purchase common stock		4,119		3,430
Employee stock purchase plan		70		68
Total		4,189		3,498

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Organization and Summary of Significant Accounting Policies - Additional Information (Detail)			1 Months Ended				3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018 USD ($) Customer	Dec. 31, 2017 USD ($) Customer	May 31, 2018 USD ($) $ / shares shares	Mar. 31, 2018 USD ($)	Dec. 31, 2017 USD ($) Customer	Jan. 31, 2017 USD ($) Option	Sep. 30, 2018 USD ($) Customer	Sep. 30, 2017 USD ($) Customer	Sep. 30, 2018 USD ($) Customer	Sep. 30, 2017 USD ($) Customer	Dec. 31, 2017 USD ($) Customer	Dec. 31, 2015 USD ($)	Dec. 31, 2010 USD ($)	Dec. 31, 2016 USD ($)
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Proceeds from sale of common stock									$ 39,522,000
Accumulated deficit	$ (194,477,000)	$ (161,707,000)			$ (161,707,000)		$ (194,477,000)		$ (194,477,000)		$ (161,707,000)
Cash and cash equivalents original maturity, description									90 days or less
Restricted cash collateral						$ 200,000
Cash	68,025,000	57,864,000			57,864,000		68,025,000	$ 48,573,000	$ 68,025,000	$ 48,573,000	57,864,000			$ 81,501,000
Restricted cash	200,000	200,000			200,000		200,000		$ 200,000		200,000
Exposure to credit loss uninsured amounts									The Company has exposure to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, the Company does not anticipate non-performance.
Allowance for doubtful accounts receivable	0	0			0		0		$ 0		0
Revenue recognized							0	$ 1,000,000	$ 1,300,000	$ 1,000,000
Revenue recognized, milestones									Revenue was recognized in connection with the achievement of development milestones associated with the Jazz collaboration.
Product return policy period									30 days
Jazz Pharmaceuticals Ireland Limited [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Collaboration agreement potential payments					224,500,000
Revenue recognized									$ 4,600,000		10,100,000
Novel Anthrax Vaccine Candidate [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Amount of contract eligible for payment			$ 1,700,000
Total amount of contract			$ 145,200,000
Novel Anthrax Vaccine Candidate [Member] | Biomedical Advanced Research and Development Authority [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Contractual amount													$ 25,200,000
Number of options period exercised | Option						2
Reagent Protein Product [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Warranty reserve accrual	$ 0	$ 0			$ 0		$ 0		$ 0		$ 0
Credit Concentration Risk [Member] | Accounts Receivable [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Number of customers accounted for receivables | Customer	3	3			3		3		3		3
Concentration of risk percentage	99.00%	89.00%
Customer Concentration Risk [Member] | Sales Revenue, Net [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Concentration of risk percentage							89.00%	94.00%	87.00%	91.00%
Number of customers accounted for revenue | Customer							2	2	2	2
Follow On Public Offering [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Shares issued | shares			7,820,000
Offering price | $ / shares			$ 5.50
Option to purchase an additional shares to underwriters | shares			1,020,000
Net proceeds from public offering, after underwriting discounts and commissions and offering costs			$ 39,500,000
Maximum [Member] | William Blair & Company L.L.C. [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Proceeds from sale of common stock				$ 20,000,000
Maximum [Member] | Novel Anthrax Vaccine Candidate [Member] | Biomedical Advanced Research and Development Authority [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Advanced payment received on contracts performed												$ 143,500,000
Minimum [Member] | Ireland [Member] | Geographic Concentration Risk [Member] | Sales Revenue, Net [Member]
Basis Of Presentation And Summary Of Significant Accounting Policies [Line Items]
Concentration of risk percentage							10.00%	10.00%	10.00%	10.00%

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Organization and Summary of Significant Accounting Policies - Summary of Sales Revenue (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Concentration Risk [Line Items]
Revenue	$ 3,570	$ 5,024	$ 11,506	$ 10,871
Geographic Concentration Risk [Member]
Concentration Risk [Line Items]
Revenue	3,570	5,024	11,506	10,871
Geographic Concentration Risk [Member] | US [Member]
Concentration Risk [Line Items]
Revenue	1,371	2,190	3,877	4,453
Geographic Concentration Risk [Member] | Non - US [Member]
Concentration Risk [Line Items]
Revenue	$ 2,199	$ 2,834	$ 7,629	$ 6,418

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Fair Value Measurements - Schedule of Assets Measured at Fair Value on Recurring Basis (Detail) - Fair Value, Measurements, Recurring [Member] - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and money market funds	$ 68,025	$ 57,864
Total assets measured at fair value	68,025	57,864
Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and money market funds	68,025	57,864
Total assets measured at fair value	$ 68,025	$ 57,864

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Cash, Cash Equivalents and Restricted Cash - Summary of Reconciliation of Cash, Cash Equivalents and Restricted Cash (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Dec. 31, 2016
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents [Abstract]
Cash and cash equivalents	$ 67,825	$ 57,664
Restricted cash	200	200
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$ 68,025	$ 57,864	$ 48,573	$ 81,501

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Property and Equipment - Summary of Property and Equipment (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	$ 11,117	$ 10,876
Less: accumulated depreciation and amortization	(3,662)	(3,479)
Property and equipment, net	7,455	7,397
Furniture and Equipment [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	365	355
Computer and IT Equipment [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	432	368
Purchased Software [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	333	931
Lab and Research Equipment [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	8,832	8,131
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	876	865
Construction in Progress [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	196	162
Other Fixed Assets [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment, gross	$ 83	$ 64

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Property and Equipment - Additional Information (Detail) - USD ($) $ in Millions	Sep. 30, 2018	Dec. 31, 2017
Property, Plant and Equipment [Abstract]
Property and equipment assets under capital lease	$ 1.2	$ 1.1
Accumulated depreciation related to assets under capital lease	$ 0.2	$ 0.1

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Property and Equipment - Depreciation and Amortization Expense (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Property, Plant and Equipment [Line Items]
Total depreciation and amortization expense	$ 291	$ 228	$ 849	$ 619
Cost of Revenues [Member]
Property, Plant and Equipment [Line Items]
Total depreciation and amortization expense	8		23
Research and Development [Member]
Property, Plant and Equipment [Line Items]
Total depreciation and amortization expense	242	139	709	382
Selling, General and Administrative [Member]
Property, Plant and Equipment [Line Items]
Total depreciation and amortization expense	$ 41	$ 89	$ 117	$ 237

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Intangible Assets - Summary of Intangible Assets (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Total intangible assets, gross	$ 9,070	$ 9,060
Less: Accumulated amortization	(4,689)	(4,289)
Total intangible assets, net	4,381	4,771
Customer Relationships [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Total intangible assets, gross	3,750	3,750
Developed Technology [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Total intangible assets, gross	4,400	4,400
Trade Names [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Total intangible assets, gross	$ 920	$ 910

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Intangible Assets - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Goodwill and Intangible Assets Disclosure [Abstract]
Amortization of intangible assets	$ 100	$ 100	$ 400	$ 398
Estimated amortization expense of intangible assets, current	500		500
Estimated amortization expense of intangible assets, year two	500		500
Estimated amortization expense of intangible assets, year three	500		500
Estimated amortization expense of intangible assets, year four	500		500
Estimated amortization expense of intangible assets, year five	$ 500		$ 500

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Accrued Liabilities - Components of Accrued Liabilities (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Other Liabilities Disclosure [Abstract]
Accrued vacation	$ 495	$ 477
Deferred rent	598	620
Accrued bonuses	1,439	1,672
Other accrued employee-related liabilities	360	462
Accrued professional fees	1,529	575
Accrued supplier liabilities	461	690
Accrued subcontractor costs	5,321	2,681
Accrued clinical trial costs		866
Other accrued liabilities	382	870
Total accrued liabilities	$ 10,585	$ 8,913

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Significant Research and Development Agreements - Additional Information (Detail)		1 Months Ended								3 Months Ended		9 Months Ended		12 Months Ended
	Oct. 01, 2018	Jun. 30, 2018 USD ($)	May 31, 2018 USD ($)	Apr. 30, 2018 USD ($)	Dec. 31, 2017 USD ($)	Jan. 31, 2017 USD ($) Option	Jul. 31, 2016 USD ($)	Aug. 31, 2015 USD ($) Option	Dec. 31, 2014 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Deferred revenue recognized										$ 0	$ 1,000,000	$ 1,300,000	$ 1,000,000
Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront and option payment							$ 15,000,000
Upfront payment					$ 5,000,000
Payments of development achievement					13,500,000
Upfront and milestone payment total					18,500,000
Estimated selling price determination method												The estimated selling price for the pegaspargase product candidate and the hematology/oncology products was determined using an income approach. In determining the estimated selling price, the Company considered costs expected to be incurred for internal labor, burden rates, internal margins, and subcontractors.
Revenue recognized										1,800,000	$ 2,700,000	$ 6,300,000	$ 6,000,000
Deferred revenue recognized												4,600,000		$ 10,100,000
NT Pharma Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront payment				$ 2,500,000
Alvogen Malta Operations Ltd [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront payment		$ 2,500,000
Percentage of gross profit received from rating of therapeutic equivalent		50.00%
Percentage of gross profit received without rating of therapeutic equivalent		40.00%
Estimated reimbursement costs										0		$ 200,000
Research and Development, Regulatory and Sales Related Milestones [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Additional payment					189,300,000
Research and Development, Regulatory and Sales Related Milestones [Member] | NT Pharma Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Additional payment				22,500,000
Research and Development Milestones [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront payment					800,000
Milestone payments					30,300,000
Regulatory Milestones [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone payments					34,000,000
Sales Milestones [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone payments					125,000,000
Non-sales-related Milestones [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone payments					64,300,000
Substantive Non Sales Related Milestone [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Milestone payments					30,300,000
Process Development Milestones [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Revenue recognized										$ 750,000
Support and Regulatory Milestone [Member] | Alvogen Malta Operations Ltd [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Additional payment		$ 25,000,000
NDA [Member] | NT Pharma Agreement [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront payment				2,500,000
Deferred revenue				$ 2,500,000
NDA [Member] | Alvogen Malta Operations Ltd [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Upfront payment		2,500,000
Deferred revenue		$ 2,500,000
Pegaspargase Product [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Revenue recognition, selling price					10,000,000
Hematology Product [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Revenue recognition, selling price					2,500,000
Remaining upfront payment					4,200,000									$ 4,200,000
Oncology Product [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Revenue recognition, selling price					$ 2,500,000
Minimum [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Deferred revenue recognition period												6 months
Product development period											15 months	15 months
Minimum [Member] | Jazz Pharmaceuticals Ireland Limited [Member] | Subsequent Event [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Product development period	6 months
Maximum [Member] | Jazz Pharmaceuticals Ireland Limited [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Deferred revenue recognition period												9 months
Product development period											35 months	32 months
Maximum [Member] | Jazz Pharmaceuticals Ireland Limited [Member] | Subsequent Event [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Product development period	9 months
Funding Agreements [Member] | U.S. Department of Health and Human Services [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Total amount of contract			$ 145,200,000					$ 143,500,000	$ 25,200,000
Base program period								30 months
Number of follow on options | Option								8
Agreement description												The BARDA Advanced Development Agreement is a cost-plus fixed fee development contract valued at up to approximately $143.5 million, including a 30-month base period of performance of approximately $15.9 million, and eight option periods valued at a total of approximately $127.6 million. The base period of performance was initially from August 2015 through February 2018 and later extended through September 2018. In addition to the base period, BARDA exercised additional phases of the development contract effective January 2017, totaling $4.9 million and allowing for the continuing development of Px563L and RPA563. The period of performance for the two option periods was extended through September 2018 and December 2019. Over the course of 2017 and 2018, the Company continued to collect favorable stability data for both products. Potential next milestones are the triggering of analytical and non-clinical animal study options, leading to a potential Phase 2 study in 2019, subject in each case to continued funding by BARDA.
Amount of contract eligible for payment			$ 1,700,000
Agreement termination description												This agreement is subject to early termination and stop-work order in conformance with Federal Acquisition Regulations 52.249-6 and 52.242-15 whereupon BARDA may immediately terminate the agreement early for convenience or request the Company to stop all or any part of the work for a period of at least 90 days.
Funding Agreements [Member] | U.S. Department of Health and Human Services [Member] | Base Period Performance Contracts [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Total amount of contract						$ 4,900,000		$ 15,900,000
Number of follow on options | Option						2
Funding Agreements [Member] | U.S. Department of Health and Human Services [Member] | Option Period Contracts [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Total amount of contract								$ 127,600,000

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Commitments and Contingencies - Additional Information (Detail) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Feb. 28, 2018
Lease Agreements [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Lease agreements for the purchase of specialized equipment		$ 0.2
Term of lease		24 months
Office and Lab Equipment [Member]
Research and Development Arrangement, Contract to Perform for Others [Line Items]
Operating and capital lease expiration dates	Various dates through 2021.

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Commitments and Contingencies - Summary of Capital Lease (Detail) $ in Thousands	Sep. 30, 2018 USD ($)
Capital Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
2018	$ 87
2019	342
2020	197
Total future minimum lease payments	$ 626

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Stock-Based Compensation - Summary of Stock-Based Compensation Expense (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	$ 793	$ 767	$ 2,551	$ 2,495
Cost of Revenues [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	50	67	143	189
Research and Development [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	339	202	1,149	764
Selling, General and Administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	404	498	1,259	1,542
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	752	707	2,395	2,377
Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	$ 41	$ 60	$ 156	$ 118

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Stock-Based Compensation - Summary of Company's Stock Option Activity (Detail) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Number of Options, beginning balance | shares	3,237
Number of Options, Granted | shares	1,568
Number of Options, Exercised | shares	(37)
Number of Options, Cancelled (forfeited) | shares	(649)
Number of Options, ending balance | shares	4,119
Number of Options, Vested and expected to vest at June 30, 2018 | shares	3,596
Number of Options, Vested and exercisable at at June 30, 2018 | shares	1,923
Weighted Average Exercise Price, Outstanding, beginning balance | $ / shares	$ 7.50
Weighted Average Exercise Price, Granted | $ / shares	3.63
Weighted Average Exercise Price, Exercised | $ / shares	2.17
Weighted Average Exercise Price, Cancelled (forfeited) | $ / shares	6.95
Weighted Average Exercise Price, Outstanding, ending balance | $ / shares	6.16
Weighted Average Exercise Price, Vested and expected to vest at June 30, 2018 | $ / shares	6.44
Weighted Average Exercise Price, Vested and exercisable at June 30, 2018 | $ / shares	$ 7.95
Weighted Average Remaining Contractual Term (in years), Outstanding	7 years 6 months 3 days
Weighted Average Remaining Contractual Term (in years), Vested and expected to vest at June 30, 2018	7 years 3 months 10 days
Weighted Average Remaining Contractual Term (in years), Vested and expected to vest June 30, 2018	5 years 9 months 18 days
Aggregate Intrinsic Value, Outstanding | $	$ 3,552
Aggregate Intrinsic Value,Vested and expected to vest at June 30, 2018 | $	2,871
Aggregate Intrinsic Value,Vested and exercisable at June 30, 2018 | $	$ 938

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Stock-Based Compensation - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Compensation Related Costs [Abstract]
Proceeds from exercise of stock options	$ 80	$ 26
Weighted average remaining contractual term	7 years 6 months 3 days
Weighted average grant date fair value, granted	$ 2.37	$ 3.50
Unrecognized compensation cost related to unvested stock options	$ 4,400
Unrecognized compensation cost related to unvested stock options, weighted average period for recognition	2 years 6 months 18 days

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Stock-Based Compensation - Weighted-Average Assumptions used to Estimate Fair Value of Stock Options (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions and Methodology [Abstract]
Risk-free interest rate	2.80%	1.90%	2.70%	2.00%
Expected volatility	72.80%	65.80%	71.10%	66.80%
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected term (years)	6 years 3 months 18 days	6 years 3 months 18 days	6 years 3 months 18 days	6 years 2 months 12 days

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Income Taxes - Additional Information (Detail) - USD ($)	3 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Sep. 30, 2018	Dec. 31, 2017
Income Tax Disclosure [Abstract]
Income tax expense	$ 0	$ 0
U.S. statutory tax rate		21.00%	35.00%

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Net Loss Per Share of Common Stock - Computation of Basic and Diluted Net Income (Loss) Per Share Attributable to Common Stockholders (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Earnings Per Share [Abstract]
Net loss	$ (10,662)	$ (8,818)	$ (32,770)	$ (31,174)
Weighted-average common shares used in calculating basic and diluted net loss per share	31,437	23,539	27,288	23,488
Net loss per common share, basic and diluted	$ (0.34)	$ (0.37)	$ (1.20)	$ (1.33)

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Net Loss Per Share of Common Stock - Summary of Potentially Dilutive Securities Outstanding Excluded From Computation of Diluted Shares Outstanding (Detail) - shares shares in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities excluded from the computation of diluted shares	4,189	3,498
Options to Purchase Common Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities excluded from the computation of diluted shares	4,119	3,430
Employee Stock Purchase Plan [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities excluded from the computation of diluted shares	70	68