S-1/A 1 menlos-1a3.htm S-1/A Document


As filed with the Securities and Exchange Commission on January 23, 2018.
Registration No. 333- 222324
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
Menlo Therapeutics Inc.
(Exact name of Registrant as specified in its charter)
Delaware
2834
45-3757789
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
200 Cardinal Way, 2nd Floor
Redwood City, California 94063
(650) 486-1416
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
Steven L. Basta
President and Chief Executive Officer
Menlo Therapeutics Inc.
200 Cardinal Way, 2nd Floor
Redwood City, California 94063
(650) 486-1416
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
Stephen B. Thau
Alfredo B. D. Silva
Shannon E. Sibold
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304
Telephone: (650) 813-5600
Facsimile: (650) 494-0792
 
 
 
Alan C. Mendelson
Mark V. Roeder
Brian J. Cuneo
Latham & Watkins LLP
140 Scott Drive
Menlo Park, California 94025
Telephone: (650) 328-4600
Facsimile: (650) 463-2600
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
☒ (Do not check if a smaller reporting company)
 
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 to Section 7(a)(2)(B) of the Securities Act. ☒
 
CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
Amount to be Registered(1)
Proposed
Maximum
Aggregate
Offering Price Per Share
Proposed Maximum Aggregate Offering Price(2)
Amount of
Registration Fee(3)
Common Stock, $0.0001 par value per share
7,475,000
$17.00
$127,075,000
$15,820.84
(1)
Includes 975,000 shares of common stock that the underwriters have the option to purchase.
(2)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3)
The registrant previously paid a total of $12,981.20 in connection with previous filings of the registration statement. The remaining $2,839.64 is being paid in connection herewith.

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



The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated January 23, 2018
Preliminary Prospectus
6,500,000 Shares
menlologo.jpg
Common Stock

This is Menlo Therapeutics Inc.’s initial public offering. We are offering 6,500,000 shares of our common stock.
We expect that the initial public offering price will be between $16.00 and $17.00 per share. Currently, no public market exists for our common stock. Our common stock has been approved for listing on the Nasdaq Global Select Market under the symbol “MNLO.”
Certain of our existing institutional investors, including investors affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of up to approximately $40 million in shares of our common stock in this offering at the initial public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding agreements or commitments to purchase, these investors may determine to purchase fewer shares than they indicate an interest in purchasing or not to purchase any shares in this offering.
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, and will be subject to reduced public company reporting requirements. See “Prospectus Summary —Implications of Being an Emerging Growth Company.”
Investing in our common stock involves a high degree of risks. Please read “Risk Factors” beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
 
 
 
 
 
Per Share
 
Total
 
 
Public offering price
$
 
$
 
 
Underwriting discounts and commissions (1)
$
 
$
 
 
Proceeds, before expenses, to us
$
 
$
 
 
 
 
 
 
 
(1)
We refer you to “Underwriting” beginning on page 141 for additional disclosure regarding total underwriting compensation.
Delivery of the shares of common stock is expected to be made on or about        , 2018 through the book-entry facilities of The Depository Trust Company. We have granted the underwriters an option for a period of 30 days to purchase up to an additional 975,000 shares of our common stock. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $       , and the total proceeds to us, before estimated expenses, will be $       .
Joint Book‑Running Managers
 
 
 
 
 
Jefferies
 
Piper Jaffray
 
Guggenheim Securities
 
 
 
 
 
Lead Manager
 
 
 
 
 
 
 
JMP Securities
 
 
Prospectus dated , 2018



TABLE OF CONTENTS
Neither we nor the underwriters have authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.
No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction. Through and including        , 2018 (the 25th day after the date of this prospectus), all dealers effecting transactions in


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these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
Menlo Therapeutics™ and our logo are some of our trademarks used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® and ™ symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.


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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before deciding to invest in our common stock, you should read this entire prospectus carefully, including the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes contained elsewhere in this prospectus. Unless the context otherwise requires or as otherwise noted, references in this prospectus to the “Company,” “Menlo Therapeutics,” “we,” “us,” and “our” refer to Menlo Therapeutics Inc.
Overview
We are a late‑stage biopharmaceutical company focused on the development and commercialization of serlopitant for the treatment of pruritus, or itch, associated with dermatologic conditions such as atopic dermatitis, psoriasis and prurigo nodularis. We are concurrently evaluating the use of serlopitant for the treatment of refractory chronic cough, a cough that persists for greater than eight weeks despite treatment of any identified underlying cause. We believe that serlopitant, a highly selective small molecule inhibitor of the neurokinin 1 receptor, or NK1‑R, given as a once‑daily, oral tablet, has the potential to significantly alleviate pruritus and refractory chronic cough symptoms.
Pruritus is the primary patient complaint among atopic dermatitis, psoriasis and prurigo nodularis patients and represents a significant patient need. There are currently no therapies approved in the United States that are primarily intended to reduce the pruritus associated with these conditions. Refractory chronic cough also represents a significant opportunity, with no drugs specifically approved for this indication in the United States. We believe that serlopitant, if approved, could easily fit into the current treatment regimen for our target indications. We believe that serlopitant may be effective as an oral therapy adjunct to standard of care topical or systemic treatments for pruritic dermatologic conditions, and may also be effective as a monotherapy for patients for whom management of the pruritus or refractory chronic cough symptoms is the primary patient need.
We have initiated a broad clinical development program for serlopitant. We expect data from our ongoing Phase 2 clinical trial in pruritus associated with atopic dermatitis in the second quarter of 2018 and from our ongoing Phase 2 clinical trials in pruritus associated with psoriasis and refractory chronic cough by late 2018 or early 2019. We plan to initiate two Phase 3 clinical trials in pruritus associated with prurigo nodularis in the first half of 2018, with results expected in the first half of 2020. If these and future trials we may initiate are successful, we could potentially submit a New Drug Application, or NDA, for up to three indications in 2020: pruritus associated with atopic dermatitis, psoriasis and prurigo nodularis. Our development pipeline is summarized in the figure below:
updatedpipelineimagev2.jpg


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We have completed two double‑blind Phase 2 clinical trials in over 380 patients with pruritus and observed clinically relevant and statistically significant improvements in pruritus in patients treated with serlopitant compared with patients treated with placebo. The first Phase 2 clinical trial, conducted in 257 patients with chronic pruritus, met its primary and multiple secondary efficacy endpoints of pruritus reduction for patients treated at our two highest doses (5 mg and 1 mg daily). At week six, for the primary efficacy analysis, the serlopitant 5 mg group and the serlopitant 1 mg group showed an improvement in pruritus of 42.5% and 41.4% from baseline, respectively, measured by the itch visual analog scale, or VAS. Each represents a statistically greater improvement compared with the placebo group improvement of 28.3% (5 mg, p = 0.013; 1 mg, p = 0.022). The second Phase 2 clinical trial, conducted in 127 patients with prurigo nodularis, a severely pruritic skin condition with lesions, also met its primary and multiple secondary efficacy endpoints demonstrating significant pruritus reduction. At week eight, for the primary efficacy analysis, the serlopitant 5 mg group showed a 36 mm improvement from baseline in average itch VAS score compared with a 19 mm improvement for the placebo group (p = 0.001). Serlopitant has been dosed in more than 1,000 individuals and has been shown to be well‑tolerated, including when administered to patients in a clinical trial for up to one year.
The primary efficacy results from our completed Phase 2 pruritus clinical trials are illustrated in the figures below:
Chronic Pruritus Phase 2 Clinical Trial (N=257)
 
Prurigo Nodularis Phase 2 Clinical Trial (N=127)
tcp101vaschangefrombaselinen.jpg
 
image001a05.jpg
To report itch severity on the VAS, patients place a mark on a 100 mm line corresponding to the degree of severity of their pruritus. The distance from the origin of the line is measured to indicate pruritus severity, where 0 mm represents no itch and 100 mm represents the worst itch imaginable.

Our Strategy
Our goal is to become a fully integrated biopharmaceutical company focused on the development and commercialization of serlopitant. The key elements of our strategy are to:
Obtain regulatory approval for serlopitant for the treatment of pruritus associated with multiple highly pruritic dermatologic conditions. We plan to focus on the near‑term development and potential regulatory approval and commercialization of serlopitant for the treatment of pruritus associated with multiple dermatologic conditions. Following our discussions with the United States Food and Drug Administration, or FDA, and European regulatory agencies, we are advancing into Phase 3 clinical trials for the treatment of pruritus associated with prurigo nodularis. We have also commenced Phase 2 clinical trials for the treatment of pruritus associated with atopic dermatitis and psoriasis. If the results of these trials are promising, we intend to rapidly advance into Phase 3 clinical trials for these indications, with the goal of seeking regulatory approval in the United States and Europe.
Build a specialty sales organization to commercialize and market serlopitant in the United States, if approved. If approved by the FDA for pruritus associated with our target dermatologic conditions, we


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intend to commercialize serlopitant by developing our own sales organization targeting a subset of the 10,000 to 12,000 dermatologists in the United States. If approved for pruritus associated with atopic dermatitis, we anticipate that we may need to expand this sales organization to reach high prescribing pediatricians and primary care physicians. Outside the United States, we intend to establish commercialization strategies for serlopitant as we approach possible commercial approval in each market, which may include collaborations with other companies.
Develop serlopitant to treat refractory chronic cough. We believe that the mechanistic overlap of the NK1‑R pathway in the pathology of pruritus and cough supports the development of serlopitant as a potentially efficacious therapy for patients suffering from refractory chronic cough. Our program builds upon data from several proof of concept studies with other NK1‑R antagonists. We are evaluating the efficacy and safety of serlopitant in our ongoing Phase 2 clinical trial for refractory chronic cough.
Leverage our development and commercial infrastructure to expand our pipeline over time. We may elect in the future to pursue additional indications for serlopitant or in‑license or acquire drug candidates or commercial products that leverage our development or commercial capabilities.
Management
Members of our management team have extensive experience in product development, having held drug development, commercial and leadership roles at numerous biopharmaceutical and dermatology products companies, including Genentech/Roche, Gilead Sciences, Millennium Pharmaceuticals (acquired by Takeda), Relypsa (acquired by Galenica), Anacor Pharmaceuticals (acquired by Pfizer), Medicis Pharmaceutical (acquired by Valeant), Connetics Corporation (acquired by Stiefel, now a division of GSK), BioForm Medical (acquired by Merz) and Merz Aesthetics. At their prior companies, our management team members have been involved in product development or commercialization of many successful dermatology products.
Risks Factors
Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include the following, among others:
We have a limited operating history, have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We have only one product candidate in clinical trials and no commercial sales, which, together with our limited operating history, makes it difficult to assess our future viability.
We will require substantial additional financing and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts. 
We are substantially dependent on the success of our sole product candidate, serlopitant.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome.
Success in non‑clinical testing and early clinical trials does not ensure that later clinical trials will be successful.
The regulatory approval process is highly uncertain and we may not obtain regulatory approval for the commercialization of serlopitant.
We may not be successful in our efforts to obtain regulatory approval of serlopitant in multiple indications concurrently or at all.
We rely on third parties to conduct our non-clinical studies and our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize serlopitant.


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We rely completely on third‑party suppliers to manufacture serlopitant, and we intend to continue to rely on third parties to produce non-clinical, clinical and commercial supplies of serlopitant. 
We currently have no sales organization. If we are unable to establish sales capabilities on our own or through third parties, we may not be able to market and sell serlopitant, if approved, or generate product revenue.
We may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claims seeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay or prevent the development and commercialization of serlopitant.
Corporate Information
We were incorporated in October 2011 as a Delaware corporation under the name Tigercat Pharma, Inc. In May 2016, we changed our name to Menlo Therapeutics Inc. Our principal executive offices are located at 200 Cardinal Way, 2nd Floor, Redwood City, CA 94063 and our telephone number is (650) 486-1416. Our website is www.menlotherapeutics.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus. We have included our web address as an inactive textual reference only.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from some of the reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:
presentation of only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus;
exemption from the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;
reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and
no requirements for non‑binding advisory votes on executive compensation or golden parachute arrangements.
We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our capital stock held by non‑affiliates or issue more than $1.0 billion of non‑convertible debt over a three‑year period. We may choose to take advantage of some but not all of these reduced burdens. For example, we have taken advantage of the reduced reporting requirements with respect to disclosure regarding our executive compensation arrangements, have presented only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus, and have taken advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. To the extent that we take advantage of these reduced burdens, the information that we provide stockholders may be different than you might obtain from other public companies in which you hold equity interests.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.


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THE OFFERING
Issuer
Menlo Therapeutics Inc.
 
 
Common stock offered by us
6,500,000 shares.
 
 
Common stock to be outstanding
after the offering
21,427,998 shares.
 
 
Underwriters’ option to purchase
additional shares
975,000 shares.
 
 
Use of proceeds
We estimate that the net proceeds from this offering will be approximately $98.2 million, or approximately $113.2 million if the underwriters exercise their option to purchase additional shares in full, at the assumed initial public offering price of $16.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We currently expect to use the net proceeds from this offering: (i) to complete our ongoing Phase 2 clinical trials of serlopitant for pruritus associated with atopic dermatitis and psoriasis, and for refractory chronic cough; (ii) to significantly advance our planned Phase 3 development of serlopitant for pruritus associated with prurigo nodularis; (iii) to supply serlopitant for our clinical trials and for development and validation of our commercial manufacturing process for serlopitant in preparation for our NDA and Marketing Authorization Application, or MAA, submissions; (iv) $3.0 million for a milestone payment to Merck Sharp & Dohme Corp., or Merck, associated with initiating a Phase 3 clinical trial; and (v) the remainder for personnel expenses, other development activities, including potentially commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis and for refractory chronic cough, working capital, and other general corporate purposes, including the costs of operating as a public company. See “Use of Proceeds” on page 48 for a more complete description of the intended use of proceeds from this offering.
 
 
Risk factors
See “Risk Factors” beginning on page 9 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.
 
 
Nasdaq Global Select Market symbol
“MNLO”
The number of shares of common stock to be outstanding after this offering is based on 14,927,998 shares of common stock outstanding as of September 30, 2017, including an aggregate of 9,629,405 shares of common stock issuable upon conversion of our outstanding preferred stock, which will automatically convert on a one‑to‑one basis immediately prior to the completion of this offering, and excludes the following:
2,152,906 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2017 having a weighted‑average exercise price of $2.89 per share;


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246,793 shares of common stock reserved for issuance pursuant to future awards under our 2011 Stock Incentive Plan as of September 30, 2017, which will no longer be available for issuance effective on the day prior to the first public trading date of our common stock;
3,000,000 shares of common stock to be reserved for issuance pursuant to future awards under our 2018 Omnibus Incentive Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock; and
325,000 shares of common stock to be reserved for issuance pursuant to our 2018 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock.
In addition, unless we specifically state otherwise, all information in this prospectus assumes:
a 1‑for‑2.6975 reverse stock split of our capital stock effected on January 8, 2018, pursuant to which (i) every 2.6975 shares of outstanding common stock was decreased to one share of common stock, (ii) the number of shares of common stock for which each outstanding option to purchase common stock is exercisable was proportionally decreased on a 1-for-2.6975 basis, (iii) the exercise price of each outstanding option to purchase common stock was proportionately increased on a 1-for-2.6975 basis, and (iv) the conversion ratio for each share of outstanding preferred stock into common stock was proportionately reduced on a 1-for-2.6975 basis;
the automatic conversion of all shares of our preferred stock outstanding at September 30, 2017 into an aggregate of 9,629,405 shares of common stock immediately prior to the completion of this offering;
the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;
no exercise of stock options outstanding at September 30, 2017; and
no exercise of the underwriters’ option to purchase additional shares of common stock.
Unless otherwise specified and unless the context otherwise requires, we refer to our Series A, Series B and Series C convertible preferred stock collectively as “convertible preferred stock” or “preferred stock” in this prospectus, as well as for financial reporting purposes and in the financial tables included in this prospectus, as more fully explained in Note 6 to our audited financial statements included in this prospectus.
Certain of our existing institutional investors, including investors affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of up to approximately $40 million in shares of our common stock in this offering at the initial public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding agreements or commitments to purchase, these investors may determine to purchase fewer shares than they indicate an interest in purchasing or not to purchase any shares in this offering. It is also possible that these investors could indicate an interest in purchasing more shares of our common stock. In addition, the underwriters could determine to sell fewer shares to any of these investors than the investors indicate an interest in purchasing or not to sell any shares to these investors.



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SUMMARY FINANCIAL DATA
The following tables set forth a summary of our historical financial data as of and for the periods indicated. We have derived the summary statements of operations data for the years ended December 31, 2015 and 2016 from our audited financial statements included elsewhere in this prospectus. We have derived the summary statements of operations data for the nine months ended September 30, 2016 and 2017, and the summary balance sheet data as of September 30, 2017 from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results, and our interim results for the nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the full year ending December 31, 2017 or any other period.
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Nine Months Ended September 30,
 
2015
 
2016
 
2016
 
2017
 
(in thousands, except share and per share numbers)
Statements of Operations Data:
 
 
 
 
 
 
 
Collaboration and license revenue
$

 
$
674

 
$
224

 
$
1,807

Operating expenses:
 
 
 
 
 
 
 
Research and development
2,921

 
11,255

 
7,178

 
18,461

General and administrative
1,687

 
3,751

 
2,453

 
3,462

Total operating expenses
4,608

 
15,006

 
9,631

 
21,923

Loss from operations
(4,608
)
 
(14,332
)
 
(9,407
)
 
(20,116
)
Interest income and other expense, net

 
264

 
176

 
316

Net loss attributable to common stockholders
$
(4,608
)
 
$
(14,068
)
 
$
(9,231
)
 
$
(19,800
)
Net loss attributable to common stockholder per share, basic and diluted(1)   
$
(0.97
)
 
$
(2.82
)
 
$
(1.86
)
 
$
(3.89
)
Weighted‑average number of common shares used to compute basic and diluted net loss per share(1)   
4,735,148

 
4,987,133

 
4,965,807

 
5,093,418

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)   
 
 
$
(1.38
)
 
 
 
$
(1.72
)
Pro forma weighted‑average number of common shares outstanding, basic and diluted (unaudited)(2)   
 
 
10,221,933

 
 
 
11,539,193

 
 
 
 
 
 
 
 
(1)
See notes to our financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share, basic and diluted and the weighted‑average number of shares used in the computation of the per share amounts.
(2)
The pro forma net loss per share attributable to common stockholders, basic and diluted, and the pro forma weighted‑average number of common shares outstanding, basic and diluted, data is computed using the weighted‑average number of shares of common stock outstanding, after giving effect to the conversion of all


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the outstanding shares of our convertible preferred stock into an aggregate of 9,629,405 shares of our common stock, which will occur immediately prior to the completion of this offering, as if such transaction had occurred on September 30, 2017. The pro forma net loss per share of common stock, basic and diluted, and the pro forma weighted‑average number of common shares outstanding, basic and diluted, does not give effect to the issuance of shares from the proposed initial public offering nor do they give effect to potential dilutive securities where the impact would be anti‑dilutive. See Note 9 to our audited financial statements included elsewhere in this prospectus.
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
Actual
 
Pro Forma(1)
 
Pro Forma As Adjusted(2)
 
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
 
Cash, cash equivalents and investments
 
$
73,547

 
$
73,547

 
$
171,790

Working capital
 
68,560

 
68,560

 
166,803

Total assets
 
75,800

 
75,800

 
174,043

Convertible preferred stock
 
109,330

 

 

Accumulated deficit
 
(49,915
)
 
(49,915
)
 
(49,915
)
Total stockholders’ (deficit) equity
 
(47,961
)
 
61,369

 
159,612

 
 
 
 
 
 
 
(1)
Reflects the conversion of all the outstanding shares of our convertible preferred stock as of September 30, 2017 into an aggregate of 9,629,405 shares of our common stock, which will occur immediately prior to the completion of this offering.
(2)
Reflects the pro forma adjustment described in footnote (1) and the sale and issuance of 6,500,000 shares of our common stock by us in this offering, at the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our cash, cash equivalents and investments, working capital, total assets and total stockholders’ (deficit) equity by approximately $6.0 million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the amount of our cash, cash equivalents and investments, working capital, total assets and total stockholders’ (deficit) equity by approximately $15.3 million, assuming an initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us .



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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could have a material adverse effect on our business, results of operations, financial condition, prospects and stock price. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our Financial Position and Capital Needs 
We have a limited operating history, have incurred significant losses since our inception, and anticipate that we will continue to incur losses for the foreseeable future. We have only one product candidate in clinical trials and no commercial sales, which, together with our limited operating history, makes it difficult to assess our future viability.
We are a late‑stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focused principally on developing serlopitant, which is our only product in development. We are not profitable and have incurred losses in each year since our inception in 2011. We have only a limited operating history upon which you can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. We have not generated any revenue from product sales to date. We continue to incur significant research and development and other expenses related to our ongoing operations. Our net loss for the years ended December 31, 2015 and 2016 was approximately $4.6 million and $14.1 million, respectively, and $9.2 million and $19.8 million for the nine months ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $49.9 million. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase as we continue our development, seek regulatory approval of, and, if approved, begin to commercialize serlopitant. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We will require substantial additional financing, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.
We have devoted substantially all of our financial resources and efforts to the development of serlopitant as a once‑daily, oral tablet treatment of pruritus associated with underlying dermatologic conditions such as atopic dermatitis, psoriasis and prurigo nodularis, and for the treatment of chronic refractory cough. As of September 30, 2017, we had capital resources consisting of cash, cash equivalents and investments of $73.5 million. We expect to incur substantial expenditures in the foreseeable future as we advance serlopitant through clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2 and planned Phase 3 clinical trials, the development and validation of our commercial manufacturing process for serlopitant, and other development activities including potentially commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis, and for refractory chronic cough. In addition, we expect to pay a $3.0 million milestone payment to Merck upon the initiation of our Phase 3 clinical trials for pruritus associated with prurigo nodularis. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. We also expect to incur expenses related to the recruitment and retention of personnel, working capital and other general corporate purposes. We may incur additional expenses in connection with expanding our pipeline, including by pursuing additional indications for serlopitant or the in‑license or acquisition of additional drug candidates or commercial products.


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We believe that our existing cash, cash equivalents and investments, will be sufficient to fund our planned operations through at least the next 12 months. However, because the outcome of any clinical trial or regulatory approval process is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development, regulatory approval process and commercialization of serlopitant. Our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity, debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
Our future funding requirements will depend on many factors, including, but not limited to:
the time and cost necessary to complete our ongoing Phase 2 clinical trials for pruritus associated with atopic dermatitis and psoriasis and for refractory chronic cough, our planned Phase 3 clinical trials for pruritus associated with prurigo nodularis as well as any additional current and planned clinical trials of serlopitant;
the number, size and type of any additional clinical trials or studies we may choose to initiate or that we may be required to complete prior to obtaining regulatory approval of serlopitant;
the timing of, and costs involved in, seeking and obtaining approvals from the FDA and comparable foreign regulatory authorities, including the potential by the FDA or comparable regulatory authorities to require that we perform more studies than those that we current expect, and the costs of post‑marketing studies that could be required by regulatory authorities;
our ability to receive payments under our collaboration with Japan Tobacco Inc. and Torii Pharmaceutical Co. Ltd, together referred to as JT Torii, and the timing of receipt of any such payments;
the timing of the milestone payments we must make to Merck;
the costs of preparing to manufacture serlopitant on a commercial scale;
our ability to successfully commercialize serlopitant; 
the manufacturing, selling and marketing costs associated with serlopitant, including the cost and timing of forming and expanding our sales organization and marketing capabilities; 
the amount of sales and other revenues from serlopitant, including the sales price and the availability of adequate third‑party reimbursement;
the degree and rate of market acceptance of any products launched by us or our partners;
the cash requirements of any future acquisitions or discovery of product candidates; 
the progress, timing, scope and costs of our non‑clinical studies and clinical trials, including the ability to enroll patients in a timely manner in potential future clinical trials; 
the time and cost necessary to respond to technological and market developments;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
our need and ability to hire additional personnel;
our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements; and


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the emergence of competing technologies or other adverse market developments.
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate: 
clinical trials or other development activities for serlopitant or any future product candidate; or
our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize serlopitant or any future product candidate.
Risks Related to Our Business
We are substantially dependent on the success of our sole product candidate, serlopitant.
To date, we have invested substantially all of our efforts and financial resources in the development of serlopitant, which is currently our sole product candidate in development. Our prospects, including our ability to finance our operations and generate revenue from product sales, will currently depend entirely on the successful development and commercialization of serlopitant. The clinical and commercial success of serlopitant will depend on a number of factors, including the following:
the timely completion of and results from our three ongoing Phase 2 clinical trials of serlopitant for the treatment of pruritus associated with atopic dermatitis and psoriasis, and for refractory chronic cough;
the initiation of and results from our planned Phase 3 clinical trials of serlopitant for the treatment of pruritus associated with prurigo nodularis;
the initiation of and results from any Phase 3 clinical trials, if conducted, in pruritus associated with atopic dermatitis, pruritus associated with psoriasis, or refractory chronic cough;
whether the FDA disagrees with the number, design, size, conduct, or implementation of our planned and future clinical trials;
our ability to demonstrate serlopitant’s safety and efficacy to treat pruritus associated with atopic dermatitis, with psoriasis or with prurigo nodularis or to treat refractory chronic cough to the satisfaction of the FDA or foreign regulatory authorities; 
the timely completion and results of any additional clinical trials and non‑clinical studies conducted to support the filing for regulatory approvals of serlopitant;
whether we are required by the FDA or foreign regulatory authorities to conduct additional clinical trials prior to approval to market serlopitant for any indication; 
our ability to execute on our clinical trial plans and monitor the conduct of the studies by the contract research organizations, or CROs, and medical institutions;
the prevalence, frequency and severity of adverse side effects of serlopitant; 
the timely receipt of necessary marketing approvals from the FDA and foreign regulatory authorities to treat pruritus associated with atopic dermatitis, psoriasis or prurigo nodularis, or to treat refractory chronic cough;
our ability to raise sufficient additional capital to fund development, manufacturing and commercialization activities for serlopitant;
our ability to successfully commercialize serlopitant, if approved for marketing and sale by the FDA or foreign regulatory authorities, whether alone or in collaboration with others;


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the ability of our third‑party manufacturers to manufacture quantities of serlopitant using commercially sufficient processes at a scale sufficient to meet anticipated demand and at a cost appropriate for our commercialization;
the ability of our third‑party manufacturers to comply with current good manufacturing practices, or cGMP;
achieving and maintaining compliance with all regulatory requirements applicable to serlopitant;
our success in educating physicians and patients about the benefits, administration and use of serlopitant;
the willingness of physicians and patients to utilize or adopt serlopitant;
the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;
our ability to obtain and sustain an adequate level of reimbursement for serlopitant by third‑party payors;
the effectiveness of our own, our current collaborator’s, or any future strategic collaborators’ marketing, sales and distribution strategy and operations;
our ability to enforce our intellectual property rights in and to serlopitant;
our ability to avoid third‑party patent interference or patent infringement claims;
a continued acceptable safety profile of serlopitant following approval; and
emerging safety signals from other drugs generally perceived to be in the same drug class as serlopitant, including NK1-R antagonists.
Many of these factors are beyond our control. Accordingly, we cannot assure you that we will ever be able to generate revenue through the sale of serlopitant. If we are not successful in commercializing serlopitant, or are significantly delayed in doing so, our business will be materially harmed.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of serlopitant.  
To gain approval to market a drug product, we must provide the FDA and foreign regulatory authorities with non‑clinical, clinical, and chemistry, manufacturing, and controls, or CMC, data that adequately demonstrates the safety and efficacy of the product for the intended indication applied for in the NDA or other respective regulatory filing. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. Further, although members of our management team have conducted clinical trials and obtained marketing approvals for product candidates in the past while employed at other companies, we as a company have not done so. As a result, such activities may require more time and cost more than we anticipate.
Our business currently depends entirely on the successful development, regulatory approval and commercialization of serlopitant following completion of all required non‑clinical and clinical trials, and generation of adequate CMC data. We are in discussions with the FDA to finalize our Phase 3 clinical protocols for trials of serlopitant for the treatment of pruritus associated with prurigo nodularis, which we plan to initiate in the first half of 2018 under our investigational new drug application, or IND, for serlopitant for pruritus indications. We also met with the FDA prior to the start of our Phase 2 clinical trial in pruritus associated with atopic dermatitis to discuss clinical trial design elements, primary endpoint measures, statistical considerations and other key elements of the development program. We anticipate that development of serlopitant for use in pediatric patients will be a required element of our development program for some of our target indications. We are developing a pediatric plan for review with regulatory authorities in Europe and the United States. In


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September 2017, the FDA authorized us to proceed with our Phase 2 clinical trial in refractory chronic cough under a separate IND for this indication. We enrolled the first patients in the trial in October 2017 and we expect data from this trial to be available in late 2018 or early 2019.
We may experience numerous unforeseen events during or as a result of our non‑clinical studies and clinical trials that could delay or prevent our ability to receive marketing approval or commercialize serlopitant, including:
regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; 
we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites or CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; 
the number of subjects required for clinical trials of serlopitant may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials or fail to return for post‑treatment follow‑up at a higher rate than we anticipate; 
serlopitant may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminate the trials; 
our third‑party contractors and clinical trial sites may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; 
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical trials for various reasons, including noncompliance with regulatory requirements or a finding that the trial subjects are being exposed to unacceptable risks; and
the supply or quality of serlopitant or other materials necessary to conduct clinical trials of our drug candidates may be insufficient or inadequate. 
We could also encounter delays if a clinical trial is suspended or terminated by us, by the institutional review boards 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. Authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using serlopitant, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of, any clinical trial of serlopitant, the commercial prospects of serlopitant will be harmed, and our ability to generate product revenues from serlopitant will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our development of serlopitant and its approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of serlopitant. If we are required to conduct additional clinical trials or other testing of serlopitant beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of serlopitant candidates or other testing, if the results of these trials or tests are not favorable or if there are safety concerns, we may:
be delayed in obtaining marketing approval for serlopitant; 
not obtain marketing approval at all; 
obtain approval for indications or patient populations that are not as broad as intended or desired; 
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings; 


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be subject to additional post‑marketing testing requirements; or 
have the drug removed from the market after obtaining marketing approval.
Success in non-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot assure you that any of our current Phase 2 clinical trials, planned Phase 3 clinical trials or any other clinical trials that we may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market serlopitant in any indication.
The primary efficacy analysis in our completed Phase 2 clinical trials of pruritus was a statistically significant change in itch VAS from baseline compared to placebo measured at week six or eight. Based upon our interactions with the FDA, we will use a different efficacy analysis for our planned Phase 3 clinical trials, a 4‑point responder rate on the worst‑itch numeric rating scale, or WI‑NRS. We analyzed 4‑point responders in our Phase 2 clinical trials after the completion of the study. The analyses of the percentage of patients with at least a 40 mm response on the visual analogue scale, or VAS, or a 4‑point response on WI‑NRS, were not pre‑specified in our initial completed Phase 2 clinical trials’ statistical analysis plans, and are thus considered post‑hoc analyses. For these and other reasons, our Phase 2 clinical trials may not predict serlopitant’s ability to demonstrate a statistically significant reduction in pruritus using this measure in Phase 3 clinical trials. It is also possible that the FDA or other regulatory agencies may require additional endpoints that are not currently included in our serlopitant clinical trials.
In our completed Phase 2 clinical trial of serlopitant for pruritus associated with prurigo nodularis, concomitant medications for treatment of pruritus other than loratadine or cetirizine were excluded. In our planned Phase 3 clinical trials for pruritus associated with prurigo nodularis, patients will be permitted to take certain additional medications that were not permitted in the Phase 2 clinical trial. The efficacy or safety of serlopitant when used with other agents in the Phase 3 clinical trials may differ from the Phase 2 clinical trial as a result of these additional medications. Phase 3 clinical trials with larger numbers of patients or longer durations of therapy may also reveal safety concerns that were not identified in earlier smaller or shorter trials.
Other companies in the biopharmaceutical industry have frequently suffered significant setbacks in later clinical trials, even after achieving promising results in earlier non‑clinical studies or clinical trials.
Use of patient-reported outcome assessments, or PROs, in our clinical trials may delay or impair the development of serlopitant and/or adversely impact our clinical trials.
Due to the difficulty of objectively measuring pruritus, the assessment of pruritus in clinical trials typically involves the use of PROs. For example, our clinical trials evaluating serlopitant in pruritus indications have used both the VAS and NRS scales, which require patients to evaluate their pruritus according to a numerical scale with the lowest number representing no itch and the highest number representing the worst itch imaginable. PROs have an important role in the development and regulatory approval of treatments for pruritus such as serlopitant. PROs involve patients’ subjective assessments of efficacy, and this subjectivity can increase the uncertainty of clinical trial outcomes assessing pruritus. Such assessments can be influenced by factors outside of the patient’s control, and can vary widely from day to day for a particular patient, and from patient to patient and site to site within a clinical trial.
The variability of PRO measures for itch and the high placebo response rates could adversely impact our serlopitant development program. In addition, PROs for itch assessment have historically been observed to have high placebo group response rates, including in some of our trials. For example, in our Phase 2 clinical trial in patients with chronic pruritus, patients receiving placebo reported a greater than 25% decrease from baseline in itch VAS scores. Variability in the placebo group response has adversely impacted clinical results of other therapies being tested for itch reduction, and could adversely impact our clinical trial results. The variability of a PRO measure may be greater than some measures used for clinical trial assessments, and that variability can complicate clinical trial design, adversely impact the ability of a study to show a statistically significant improvement, and generally adversely impact a clinical development program by introducing additional uncertainties.


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It is also possible that the FDA may require changes in the PRO we are currently using or may indicate that the PRO we are using is not acceptable for demonstrating efficacy in pruritus reduction, potentially delaying clinical development of serlopitant, increasing our costs and making additional clinical trials necessary.
If we experience delays or difficulties in the enrollment of subjects in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
Successful and timely completion of clinical trials will require that we enroll a sufficient number of subjects. Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population and the ability of clinical sites to successfully recruit subjects to participate in clinical trials. Trials may be subject to delays as a result of patient enrollment taking longer than anticipated or patient withdrawal. For example, we previously initiated a clinical trial of serlopitant to treat pruritus following burn injury, but discontinued the trial due to lack of timely enrollment. Enrollment can also be affected by seasonality and other factors. We may not be able to initiate or continue clinical trials for our drug candidates if we are unable to locate and enroll a sufficient number of eligible subjects to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. In particular, among our target indications, prurigo nodularis is a relatively rare condition, and we are in discussions regarding the specific population of prurigo nodularis patients that we may enroll in our Phase 3 clinical trials. It is possible that the specific requirements by the FDA for our patients to be included in these trials may make the trials more difficult to conduct, or may significantly extend the time required for enrollment of these trials.
We cannot predict how successful we will be at enrolling subjects in future clinical trials. Subject enrollment is affected by other factors including:
the eligibility criteria for the trial in question; 
the prevalence and incidence of the conditions being studied in the clinical trials;
the perceived risks and benefits of serlopitant; 
clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs or therapeutic biologics that may be approved for the indications we are investigating; 
the efforts to facilitate timely enrollment in clinical trials; 
competition for patients from other clinical trials;
the success of any advertising campaigns conducted to recruit subjects to enroll in clinical trials;
the willingness of potential clinical trial subjects to provide informed consent to participate in the trial;
the patient referral practices of physicians; 
the ability to monitor subjects adequately during and after treatment; and 
the proximity and availability of clinical trial sites for prospective subjects. 
Our inability to enroll a sufficient number of subjects for clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether. Enrollment delays in these clinical trials may result in increased development costs for our drug candidates or delays in regulatory filings and progression, which would cause the value of our company to decline and limit our ability to obtain additional financing. Furthermore, we rely on and expect to continue to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and we will have limited influence over their performance. 


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We rely on third parties to conduct our non-clinical studies and our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize serlopitant or any future product candidates. 
We do not have the ability to independently conduct non‑clinical studies and clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to conduct non‑clinical studies and clinical trials on our drug candidates. The third parties with whom we contract for execution of our non‑clinical studies and clinical trials play a significant role in the conduct of these studies and trials and the subsequent collection and analysis of data. However, these third parties are not our employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs.
Although we rely on third parties to conduct our non‑clinical studies and clinical trials, we remain responsible for ensuring that each of our non‑clinical studies and clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, including some regulations commonly referred to as good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. In the past, we have experienced an issue of non‑compliance with dosing among several patients at one of the clinical sites in one of our trials. We determined through analysis of the results of the trial and a comprehensive third‑party audit that this single‑site issue did not affect the results of that clinical trial.
In addition, the execution of non‑clinical studies and clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. Under certain circumstances, these third parties may terminate their agreements with us upon as little as 30 days’ prior written notice. Some of these agreements may also be terminated by such third parties under certain other circumstances, including our insolvency. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or 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 trial protocols or GCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.
We rely completely on third-party suppliers to manufacture serlopitant, and we intend to continue to rely on third parties to produce non-clinical, clinical and commercial supplies of serlopitant. 
We currently contract with one third party for the manufacture of serlopitant drug substance and another third party for serlopitant drug products for clinical trials, and we do not plan to acquire the infrastructure or internal capability to produce our non‑clinical, clinical and commercial supplies of serlopitant. We anticipate that these third parties will have capacity to support commercial scale, but we do not have any formal agreements at this time to cover commercial production of serlopitant. We may engage additional contract manufacturers for production of supplies of precursor materials used to synthesize serlopitant drug substance and to assist in the manufacture of the drug product.
In order for us to obtain approval of serlopitant or any future product candidates, our contract manufacturers must, pursuant to inspections that will be conducted after we submit our NDA or relevant foreign regulatory submission, maintain a compliance status acceptable to the FDA and other comparable foreign regulatory agencies.We do not directly control the manufacturing of serlopitant, and we are completely dependent on our contract manufacturers for compliance with the cGMP requirements for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or foreign regulatory agencies, we will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In


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addition, we have no direct control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, all of our contract manufacturers are engaged with other companies to supply or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to meet the regulatory requirements for the production of those materials and products may generally affect the regulatory clearance of our contract manufacturers’ facilities. If the FDA or a comparable foreign regulatory agency does not approve these facilities for the manufacture of our product candidates or if it withdraws its approval in the future, we may need to find alternative manufacturing facilities, which would negatively impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved. 
We and our third‑party suppliers continue to refine and improve the manufacturing process, certain aspects of which are complex and unique, and we may encounter difficulties with new or existing processes, particularly as we seek to significantly increase our capacity to commercialize serlopitant. Our reliance on contract manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.
As drug candidates are developed through non‑clinical studies to late‑stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, methods of making drug formulations, and drug formulations, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our drug candidates to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. Such changes may also require additional testing, FDA notification or FDA approval. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our drug candidates and jeopardize our ability to commence sales and generate revenue.
Key manufacturing steps and materials used in our drug substance and in our drug product are provided by limited numbers of suppliers, and supply shortages or loss of these suppliers could result in interruptions in supply or increased costs.
Certain manufacturing steps and materials used in our serlopitant drug substance and in our serlopitant drug product, are currently performed by or purchased from a single outside source. The reliance on a sole or limited number of suppliers could result in:
delays associated with redesigning or revalidating a drug product or manufacturing process due to a failure to obtain a single source material from an existing validated supplier;
an inability to obtain an adequate supply of required materials; and
reduced control over pricing, quality and delivery time.
We have supply agreements in place for certain starting materials of our drug substance and drug products, but do not have in place long term supply agreements. Therefore, the supply of a particular starting material could be terminated at any time without penalty to the supplier. In addition, we may not be able to procure required starting materials from third‑party suppliers at a quantity, quality and cost acceptable to us. Any interruption in the supply of single source starting material could cause us to seek alternative sources of supply or manufacture these materials internally. Furthermore, in some cases, we are relying on our third‑party collaborators to procure supply of necessary materials. If the supply of any materials for our drug product is interrupted, materials from alternative suppliers may not be available in sufficient volumes or at acceptable quality levels, or at acceptable cost within required timeframes, if at all, to meet our needs or those of our third‑party collaborators. This could delay our ability to complete clinical trials and obtain approval for commercialization and marketing of our product candidates, causing us to incur additional costs, delay new product introductions, or lose sales, and could harm our reputation.


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Investigator sponsored trials of serlopitant may produce results and safety signals that are beyond our control and impact our development and commercialization of serlopitant.
Serlopitant is being evaluated in a 14‑patient exploratory investigator sponsored study at Stanford University as a potential treatment to reduce pruritus associated with epidermolysis bullosa, a rare primarily pediatric skin condition. If serious adverse events or other undesirable side effects, or unexpected characteristics of serlopitant, are observed in this trial, it may adversely affect or delay our clinical development of serlopitant, and the occurrence of these events would have a material adverse effect on our business.
We may in the future choose to permit other investigators to evaluate serlopitant or future product candidates in other investigator sponsored studies which could adversely impact our development programs.
We currently have no sales organization. If we are unable to establish sales capabilities on our own or through third parties, we may not be able to market and sell serlopitant, if approved, or any future product candidates or generate product revenue. 
We currently do not have a sales organization. In order to commercialize serlopitant, if approved, we must build our marketing, sales, distribution, managerial and other non‑technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so. If serlopitant receives regulatory approval, we expect to establish a specialty sales organization with technical expertise and supporting distribution capabilities to commercialize it to dermatologists and possibly also to pediatricians and primary care physicians or to pulmonologists and allergists, which will be expensive and time consuming. 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, provide adequate training to sales and marketing personnel, gain access to physicians or persuade adequate numbers of physicians to prescribe serlopitant, if approved, or any future drugs, and effectively manage a geographically dispersed sales and marketing team. Our efforts to commercialize serlopitant on our own may also be impacted by the lack of complementary drugs to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines, and any unforeseen costs and expenses associated with creating an independent sales and marketing organization. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products.
We may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales organization and distribution systems or in lieu of our own sales organization and distribution systems. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize serlopitant. If we are not successful in commercializing serlopitant or any future 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.
If we breach our license agreement for serlopitant, we could lose the ability to continue the development and commercialization of our product. Merck also retains rights to serlopitant in specific fields.
In December 2012, we entered into a license agreement with Merck to obtain exclusive worldwide rights to research, develop, manufacture, market and sell serlopitant, other than for the treatment or prevention of nausea and vomiting. This agreement requires us to use commercially reasonable efforts to develop and commercialize serlopitant, make timely milestone payments, provide certain information regarding our activities with respect to such products, maintain the confidentiality of information we receive from Merck and indemnify Merck with respect to our development and commercialization activities under the terms of the agreement.
If we fail to meet these obligations, Merck has the right to terminate our exclusive license and upon the effective date of such termination, has the right to re‑obtain the licensed technology as well as aspects of any intellectual property controlled by us and developed during the period the agreement was in force that relate to the licensed technology. This means that Merck could effectively take control of the development and commercialization of serlopitant after an uncured, material breach of our license agreement by us. This would also be the case if we voluntarily terminate the agreement. While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all. Any uncured, material


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breach under the license could result in our loss of exclusive rights and may lead to a complete termination of our product development and any commercialization efforts for serlopitant.
Merck could also develop serlopitant for treatment of nausea or vomiting, or license these rights to a third party. Development of serlopitant in other fields could increase the possibility of identification of adverse safety results that impact our development of serlopitant for pruritus associated with dermatologic conditions and refractory chronic cough. In addition, if approved, commercialization of serlopitant in other fields could result in an increased threat of off‑label use to compete with the sale of serlopitant to treat these indications.
We depend on our collaborative relationship with JT Torii for the development and commercialization of serlopitant in Japan. The collaboration relationship with JT Torii or any other collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize serlopitant.
We have a license and collaboration agreement with JT Torii under which we have granted JT Torii the rights to develop and commercialize products containing serlopitant in Japan in exchange for an up‑front payment and potential future development, regulatory and commercial milestone payments and royalties based on future sales of licensed product in Japan.
We may seek additional collaboration arrangements with pharmaceutical or biotechnology companies for the development or commercialization of serlopitant. We may enter into these arrangements on a selective basis depending on the merits of retaining commercialization rights ourselves compared to entering into selective collaboration arrangements with leading pharmaceutical or biotechnology companies for serlopitant internationally and possibly also in the United States.
Our ability to generate revenues from our collaboration arrangement with JT Torii will depend on JT Torii’s ability to successfully perform the functions assigned to it in the arrangement, and accordingly, any failure by JT Torii to develop and commercialize serlopitant could adversely affect our cash flows. Similarly, the success of future collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.
When entering collaboration arrangements, such as that with JT Torii, we are subject to a number of risks, including:
collaborators may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial or abandon products, repeat or conduct new clinical trials, require a new formulation of products for clinical testing, may decide not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in their strategic focus due to their acquisition of competitive products or their internal development of competitive products, availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities;
any safety issues or adverse side effects that result from trials conducted by a collaborator will adversely impact our ability to obtain regulatory approval for serlopitant or any other product we may develop in the future;
any failure by a collaborator to demonstrate efficacy of serlopitant, or any potential future product candidate, in its clinical trials could decrease the perceived likelihood of success for our clinical trials;
disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters may lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement;
collaboration arrangements are complex and time consuming to negotiate, document and implement, and we may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so chose to enter into such arrangements;


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collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party and any such termination or expiration would adversely affect us financially and could harm our business reputation;
collaboration agreements may be terminated and, if terminated, may result in delays or the need for a new collaborator or additional capital to pursue further development or commercialization of serlopitant or other future product candidates in certain markets;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates;
terms of any collaborations or other arrangements that we may establish may not be favorable to us;
we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;
we will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators;
collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party and any such termination or expiration could adversely affect us financially and could harm our business reputation;
collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;
collaborators may own or co‑own intellectual property covering products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property;
disputes may arise with respect to the ownership of any intellectual property developed pursuant to our collaborations;
collaborators’ sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings;
adverse regulatory determinations or other legal action may interfere with the ability of a collaborator to conduct clinical trials or other development activity;
one or more collaborator may be subject to regulatory or legal action resulting from the failure to meet healthcare industry compliance requirements in the conduct of clinical trials or the promotion and sale of products; and
collaboration arrangements could be adversely impacted by changes in collaborators’ key management personnel and other personnel that are administering collaboration agreements.
Additionally, JT Torii will be conducting clinical trials of serlopitant under our collaboration agreement. If serious adverse events or other undesirable side effects, or unexpected characteristics of serlopitant, are observed in these trials, it may adversely affect or delay our clinical development of serlopitant, and the occurrence of these events would have a material adverse effect on our business.
We face substantial competition, which may result in others discovering, developing or commercializing drugs before or more successfully than we do.
The biopharmaceutical industry is intensely competitive and is subject to rapid and significant change. We face competition from other pharmaceutical and biotechnology companies, research institutions, and other organizations, particularly companies that develop and market pharmaceutical products for dermatologic and respiratory conditions. Our commercial potential may be limited by other companies that develop and sell other


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novel products that are effective for our target indications, or that may be more effective, safer or cost less than serlopitant.
Although there are currently no approved drugs specifically indicated for pruritus associated with atopic dermatitis, psoriasis or prurigo nodularis, either in the United States or in Europe, we may face competition from those companies that are developing drugs specifically to treat pruritus associated with a variety of underlying dermatologic or systemic conditions, companies that are developing drugs specifically to treat chronic cough, companies that are developing and marketing other NK1‑R antagonists for pruritus or other conditions, that, when approved, could be used off‑label to treat pruritus or cough, and companies that currently market or are developing treatments intended directly to treat the underlying disease condition in atopic dermatitis, psoriasis, or prurigo nodularis that have also been shown to have anti‑pruritic effects.
We are aware of other companies targeting pruritus or chronic cough as the primary outcome measure in United States clinical studies of drugs. There are multiple companies developing products at varying stages of development specifically intended to treat pruritus including: Vanda Pharmaceuticals, Trevi Therapeutics, Galderma, Sienna Biopharmaceuticals, Tioga and Cara Therapeutics. In addition, Merck and Nerre Therapeutics are developing therapeutic treatments for chronic cough. Of these companies, Vanda and Nerre are developing NK1‑R antagonists for indications that may compete directly with serlopitant. Other companies, including Tesaro and Merck, are also marketing or developing NK1‑R antagonists for other indications and could compete with serlopitant.
Even if serlopitant receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success. 
If serlopitant receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third‑party payors and others in the medical community. If serlopitant does not achieve an adequate level of acceptance, we may not generate significant revenue and we may not become profitable. The degree of market acceptance of serlopitant, if approved for commercial sale, will depend on a number of factors, including:
its efficacy, safety and potential advantages compared to alternative treatments; 
our ability to offer serlopitant for sale at competitive prices; 
the convenience and ease of administration compared to alternative treatments; 
the willingness of the target patient population to try new treatments and of physicians to prescribe these treatments;
the risk that a competitor product may treat both the underlying condition and the associated pruritus; 
our ability to hire and retain a sales force in the United States; 
our ability to attract and retain potential commercialization collaborators in markets outside of the United States if we choose to do so;
the strength of our marketing and distribution support; 
the availability of third‑party coverage and adequate reimbursement; 
the willingness of patients to pay out of pocket for serlopitant to the extent it is not reimbursed by third‑party payors; 
the prevalence and severity of any side effects; and 
any restrictions on the use of serlopitant together with other medications. 


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If coverage and adequate reimbursement from third-party payors are not available, it may make it difficult for us to sell serlopitant profitably. 
Our ability to commercialize serlopitant successfully will depend in part on the extent to which governmental authorities, private health insurers and other third‑party payors establish adequate coverage and reimbursement for it. Patients who are prescribed treatments for their conditions and providers furnishing such services generally rely on third‑party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of serlopitant. 
Significant uncertainty exists as to the coverage and reimbursement status of newly approved products. A trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third‑party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. Third‑party payors also are increasingly challenging the effectiveness of and prices charged for medical products and services, including requiring companies to demonstrate the comparative effectiveness of a new therapy against other types of therapies that are available. The clinical trials we have conducted and plan to conduct on serlopitant test serlopitant’s performance against a placebo. Third‑party payors may request additional trials to demonstrate comparative effectiveness. Such trials would be expensive and time consuming, and the results are uncertain. As a result of these cost containment measures, coverage and reimbursement may not be available for serlopitant when it is approved for commercialization, and, even if available, the level of reimbursement may not be sufficient enough for successful commercialization of serlopitant or may significantly limit our revenue or profits, if any. 
In the United States, private third‑party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. However, no uniform policy requirement for coverage and reimbursement for products exists among third‑party payors and coverage and reimbursement can differ significantly from payor to payor. Each plan determines whether or not it will provide coverage, what amount it will pay, and with respect to pharmaceutical products, on what tier of its formulary such product will be placed. The position of a prescription drug on a formulary generally determines the co‑payment that a patient will need to make to obtain the product and can strongly influence the adoption of a product by patients and physicians. Each plan may separately require us to provide scientific and clinical support for the use of our products and, as a result, the coverage determination process is often a time‑consuming and costly process with no assurance that coverage and adequate reimbursement will be applied consistently or obtained at all. Our inability to obtain coverage and adequate reimbursement promptly from both government‑funded and private payors for any approved products that we develop could significantly harm our operating results, our ability to raise capital needed to commercialize our product candidates and our overall financial condition.
Serlopitant may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval or result in significant negative consequences following marketing approval, if any. The number of patients exposed to serlopitant treatment and the average exposure time in the clinical development program may be inadequate to detect rare adverse events that may only be detected once serlopitant is administered to more patients and for greater periods of time. 
Undesirable side effects caused by serlopitant could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Serlopitant has been dosed in more than 1,000 individuals across 13 completed Phase 1 clinical trials and four completed Phase 2 clinical trials and has been shown to be well‑tolerated, including when administered to patients in a clinical trial for up to one year, and in shorter trials at much higher doses than our current planned therapeutic dose. However, patients may experience adverse reactions when using serlopitant. In our clinical trials, the most commonly reported treatment‑emergent adverse events across all completed Phase 2 studies were nasopharyngitis, urinary tract infection, diarrhea and headache. Although we have not seen any evidence of these reactions causing a safety concern in our clinical programs, it is possible that the FDA may ask for additional data regarding any adverse events seen in our trials. Results of our future trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval for our product candidate for any or all targeted indications. The drug‑related side effects could affect patient recruitment or the


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ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.
Additionally, clinical trials by their nature utilize a sample of the potential patient population. However, with a limited number of subjects and limited duration of exposure, we cannot be fully assured that rare and severe side effects of serlopitant may only be uncovered with a significantly larger number of patients exposed to the drug. If one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
regulatory authorities may withdraw approvals of such product;
regulatory authorities may require additional warnings on the label;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
We must successfully manage multiple complex clinical trials simultaneously while growing our business.
We currently have three ongoing Phase 2 clinical trials of serlopitant and we plan to initiate two Phase 3 clinical trials in the first half of 2018. If the results of our Phase 2 clinical trials are promising, we plan to rapidly advance serlopitant into Phase 3 clinical trials in up to two additional dermatologic conditions and refractory chronic cough. As of September 30, 2017, we had 25 employees. In order to manage our operations, clinical trials, regulatory filings, manufacturing and supply activities, marketing and commercialization activities for serlopitant or any future product candidates, we will need to continue to expand our managerial, operational, finance, systems, facilities and other resources. To effectively execute our strategy we must: 
manage all of our clinical trials, which are being conducted at multiple trial sites globally through multiple third parties;
manage our internal development efforts effectively while carrying out our contractual obligations to third parties;
expand our general and administrative and sales and marketing organizations;
identify, recruit, retain, incentivize and integrate additional employees; and
continue to improve our operational, legal, financial and management controls, reporting systems and procedures.
Inability to effectively expand or manage our personnel and other resources, and complexities or unforeseen expenses or setbacks associated with managing our clinical trials and other activities, could delay or prevent completion of our planned clinical trials, the commercialization of serlopitant or any future product candidates, or the successful expansion of our product pipeline.
We are highly dependent on the services of our senior management and our ability to attract and retain qualified personnel. 
Our success depends in part on our continued ability to attract, retain and motivate highly qualified personnel. In particular, we are highly dependent upon our experienced senior management, including Steven Basta, Chief Executive Officer, Paul Kwon, M.D., Chief Medical Officer and Kristine Ball, Senior Vice President, Corporate Strategy and Chief Financial Officer. The loss of services of any of these individuals could materially adversely impact our ability to sustain or grow our operations.


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Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense due to the limited number of individuals who possess the skills and experience required by our industry. In addition to the competition for personnel, the San Francisco Bay Area in particular is characterized by a high cost of living. We will need to hire additional personnel as we expand our clinical development and commercial activities, and may be required to expend significant financial resources in our employee recruitment and retention efforts. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output or other proprietary knowledge.
We may not be successful in our efforts to obtain regulatory approval of serlopitant in multiple indications concurrently or at all.
One element of our strategy is to seek approval for and commercialize serlopitant for pruritus associated with multiple dermatologic conditions. If our planned Phase 3 clinical trials of serlopitant for pruritus associated with prurigo nodularis and any Phase 3 clinical trials we may initiate for pruritus associated with atopic dermatitis and psoriasis following the completion of our Phase 2 clinical trials for such indications, are successfully completed, and such clinical trials demonstrate efficacy and safety of the same dosage form and route of administration of serlopitant in more than one indication at approximately the same time, we may seek FDA approval concurrently for the treatment of pruritus in multiple indications. There can be no assurance that we will successfully initiate any Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis, or that any of the Phase 3 clinical trials that we do initiate will be completed in time to permit this, or that the FDA will review or approve multiple indications simultaneously. It is possible that our strategy of pursuing multiple indications may distribute our activities in a manner that is less advantageous than a strategy that may focus on fewer indications or a single indication. It is possible that the data from trials in multiple indications could adversely affect the regulatory review of serlopitant as compared with review for a single indication. The FDA may not accept our submission in a single NDA application and we may not be able to seek approval of multiple indications for review at the same time, which could increase the time and expense required to obtain approval of multiple indications, and delay the launch of one or more of our planned indications.
We may have chosen indications for serlopitant development that are more difficult or have less commercial potential than other possible indications. 
Because we have limited financial and management resources, we are focusing on development programs for specific indications. As such, we are currently primarily focused on the development of serlopitant for the treatment of pruritus associated with several dermatologic conditions and refractory chronic cough. As a result, we may forego or delay pursuit of opportunities in other indications, or with other drug candidates that we may identify or that may be available, that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on profitable market opportunities. Our spending on current and future development programs and drug candidates for specific indications may not yield any commercially viable indication. If we do not accurately evaluate the commercial potential or target market for a particular indication for serlopitant, or for any other drug candidate, we may relinquish valuable rights to that drug candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate. 
If we seek and obtain approval to commercialize serlopitant outside of the United States, a variety of risks associated with international operations could materially adversely affect our business. 
If serlopitant is approved for commercialization outside the United States, we may choose to commercialize it ourselves or enter into agreement with third parties to do so. For example, our agreement with JT Torii gives them rights to commercialize serlopitant in Japan. If we chose to commercialize internationally, we expect that we will be subject to additional risks, including: 
different regulatory requirements for drug approvals in foreign countries; 
differing United States and foreign drug import and export rules; 


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different protection for intellectual property rights in foreign countries; 
unexpected changes in tariffs, trade barriers and regulatory requirements; 
different reimbursement systems, and different competitive drugs indicated to treat pruritus and refractory chronic cough; 
economic weakness, including inflation, or political instability in particular foreign economies and markets; 
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad; 
foreign taxes, including withholding of payroll taxes; 
foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country; 
workforce uncertainty in countries where labor unrest is more common than in the United States; 
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; 
potential liability resulting from development work conducted by these distributors; and 
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of serlopitant or any future product candidates that we may develop. 
We face an inherent risk of product liability exposure related to the testing of serlopitant in human clinical trials and will face an even greater risk if we sell commercially any drugs that we may develop. If we cannot successfully defend ourselves against claims that serlopitant causes injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
delays in clinical trials;
decreased demand for serlopitant, if approved for marketing; 
injury to our reputation and significant negative media attention; 
withdrawal of clinical trial participants; 
significant costs to defend the related litigation; 
substantial monetary awards paid to trial participants or patients; 
loss of revenue; 
reduced resources of our management to pursue our business strategy; and 
the inability to commercialize any drugs that we may develop. 
We currently hold $7.0 million in product liability insurance coverage in the aggregate, with a per incident limit of $7.0 million, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commence commercialization of our drug candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.


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Our business involves the use of hazardous materials and we 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 activities and our third‑party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials, including the components of our product and product candidates and other hazardous compounds. We and our 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 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/or interrupt our business operations. Furthermore, 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. We do not currently carry biological or hazardous waste insurance coverage.
Significant disruptions of information technology systems or breaches of data security could materially adversely affect our business, results of operations and financial condition. 
We collect and maintain information in digital form that is necessary to conduct our business, and we are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have established physical, electronic and organizational measures to safeguard and secure our systems to prevent a data compromise, and rely on commercially available systems, software, tools and monitoring to provide security for our information technology systems and the processing, transmission and storage of digital information. We have also outsourced elements of our information technology infrastructure, and as a result a number of third‑party vendors may or could have access to our confidential information. Our internal information technology systems and infrastructure, and those of our current and any future collaborators, contractors and consultants and other third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber‑attacks or cyber‑intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. 
The risk of a security breach or disruption, particularly through cyber‑attacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information or other intellectual property. The costs to us to mitigate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service and other harm to our business and our competitive position. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Moreover, if a computer security breach affects our systems or results in the unauthorized release of personally identifiable information, our reputation could be materially damaged. In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to various federal and state privacy and security laws, if applicable, including the Health


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Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Clinical Health Act of 2009, and its implementing rules and regulations, as well as regulations promulgated by the Federal Trade Commission and state breach notification laws. We would also be exposed to a risk of loss or litigation and potential liability, which could materially adversely affect our business, results of operations and financial condition.
We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster. 
Our corporate headquarters and other facilities are located in the San Francisco Bay Area, which in the past has experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. 
If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business. 
Furthermore, integral parties in our supply chain are operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.
Risks Related to Our Intellectual Property 
We may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claims seeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay or prevent the development and commercialization of serlopitant or any future product candidates. 
There have been many lawsuits and other proceedings asserting patents and other intellectual property rights in the pharmaceutical and biotechnology industries. We cannot assure you that serlopitant or any future product candidates will not infringe existing or future third‑party patents. Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing serlopitant or future product candidates. Moreover, we may face claims from non‑practicing entities that have no relevant product revenue and against whom our own patent portfolio may thus have no deterrent effect. We may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of serlopitant. 
We may be subject to third‑party claims in the future against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing a third‑party’s patents. We may be required to indemnify future collaborators against such claims. If a patent infringement suit were brought against us or our collaborators, we or they 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 in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third‑party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to redesign it, or to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. Even if we are successful in defending against such claims, such litigation can be expensive and time consuming to litigate and would divert management’s attention from our core business. Any of these events could harm our business significantly. 


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In addition to infringement claims against us, if third parties prepare and file patent applications in the United States that also claim technology similar or identical to ours, we may have to participate in interference or derivation proceedings in the United States Patent and Trademark Office, or the USPTO, to determine which party is entitled to a patent on the disputed invention. We may also become involved in similar opposition proceedings in the European Patent Office or similar offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology. Since patent applications are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates.
If our intellectual property related to serlopitant or any future product candidates is 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 serlopitant and our development programs. Patents covering the composition of matter for serlopitant will expire in 2025, subject to potential extensions, where available, including, potential extension of up to five years in the United States. Patents and patent applications, if issued, covering methods‑of‑use for serlopitant to treat pruritus will expire in 2033 in the United States and 2034 in foreign countries. We have filed a U.S. provisional patent application covering methods‑of‑use of serlopitant to treat refractory chronic cough, but there can be no assurance that such patent will issue. The expiration of our patents will limit our ability to profit from the commercialization of serlopitant. Furthermore, any disclosure to or misappropriation by third parties of our confidential or proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. 
The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own, co‑own, or license may fail to result in issued patents in the United States or in foreign countries. Even if patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the USPTO may be subject to third‑party challenges such as (without limitation) re‑examination proceedings, post‑grant review, or inter partes review, and patents granted by the European Patent Office may be opposed by any person within nine months from the publication of the grant. Similar proceedings are available in other jurisdictions, and in some jurisdictions third parties can raise questions of validity with a patent office even before a patent has granted. 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. For example, a third‑party may develop a competitive product that provides therapeutic benefits similar to serlopitant but has a sufficiently different composition to fall outside the scope of our patent protection. If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with respect to serlopitant or any future product candidates is successfully challenged, then our ability to commercialize serlopitant or any future product candidates could be negatively affected, and we may face unexpected competition that could have a material adverse impact on our business. Further, if we encounter delays in our clinical trials, the period of time during which we could market serlopitant or any future product candidates under patent protection would be reduced. 
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. If we or one of our future collaborators were to initiate legal proceedings against a third party to enforce a patent covering serlopitant or one of our future products, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non‑enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability against our intellectual property related to serlopitant, we would lose at least part, and perhaps all, of the patent protection on serlopitant. Such a loss of patent protection would have a material adverse


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impact on our business. Moreover, our competitors could counterclaim that we infringe their intellectual property, and some of our competitors have substantially greater intellectual property portfolios than we do. 
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 and/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. Although we require all of our employees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our employees, consultants, advisors and any third parties who have access to our proprietary know‑how, information or technology, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or who had access to our proprietary information, nor can we be certain that our agreements will not be breached. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide‑ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on future actions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. 
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. 
The USPTO and various foreign patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions to maintain patent applications and issued patents. Noncompliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
We have not yet registered trademarks for a commercial trade name for serlopitant in the United States or elsewhere and failure to secure such registrations could adversely affect our business.
We have not yet registered trademarks for a commercial trade name for serlopitant in the United States or elsewhere. During trademark registration proceedings, our trademark application may be rejected. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties can oppose pending trademark applications and seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to


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expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. 
Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in our expected significant markets, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market serlopitant or any future products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain and enforce adequate intellectual property protection for our technology.
If we are unable to protect the confidentiality of our proprietary information and know‑how, the value of our technology and products could be adversely affected. 
We may not be able to protect our proprietary information and technology adequately. Although we use reasonable efforts to protect our proprietary information, technology, and know‑how, our employees, consultants, contractors and outside scientific advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our proprietary information, technology or know‑how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect proprietary information, technology and know‑how. We rely, in part, on non‑disclosure and confidentiality agreements with our employees, consultants and other parties to protect our proprietary information, technology and know‑how. These agreements may be breached and we may not have adequate remedies for any breach. Moreover, others may independently develop similar or equivalent proprietary information, and third parties may otherwise gain access to our proprietary knowledge.
Our intellectual property agreements with third parties may be subject to disagreements over contract interpretation, which could narrow the scope of our rights to the relevant intellectual property or technology or increase our financial or other obligations to our licensors.
Certain provisions in our intellectual property agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology, or affect financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact conceives or develops intellectual property that we regard as our own. Our assignment agreements may not be self‑executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.


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Risks Related to Government Regulation
The regulatory approval process is lengthy, time-consuming, and highly uncertain, and we may experience significant delays and may not obtain regulatory approval for the commercialization of serlopitant or any future product candidates. 
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We currently have no products approved for sale, and we may never obtain regulatory approval to commercialize serlopitant. Neither we nor any current or future collaborator is permitted to market serlopitant or any future product candidate in the United States or in any foreign countries until we or they receive approval of an NDA from the FDA or marketing authorization from the applicable regulatory authorities of such jurisdictions. We have not submitted an application or obtained marketing approval for serlopitant anywhere in the world. Obtaining regulatory approval of an NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable United States and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions or other actions, including: 
warning or untitled letters; 
civil and criminal penalties; 
injunctions; 
withdrawal of regulatory approval of products; 
product seizure or detention; 
product recalls; 
total or partial suspension of production; and 
refusal to approve pending NDAs or supplements to approved NDAs. 
Prior to obtaining approval to commercialize a drug candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well‑controlled clinical trials, and to the satisfaction of the FDA or other foreign regulatory agencies, that such drug candidate is safe and effective for its intended uses. The number of non-clinical studies and clinical trials that will be required for FDA approval varies depending on many factors, including the drug candidate, the disease or condition that the drug candidate is designed to address, and results of non-clinical studies and clinical trials of the drug candidate. Even if we believe the non‑clinical or clinical data for our drug candidates is promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering drug candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials and result in the FDA or other regulatory authorities denying approval of a drug candidate for any or all targeted indications. 
Regulatory approval of an NDA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process and we may encounter matters with the FDA that requires us to expend additional time and resources and delay or prevent the approval of our product candidates. For example, the FDA may require us to conduct additional studies or trials for serlopitant either prior to or post‑approval, such as additional drug‑drug interaction studies or safety or efficacy studies or trials, or it may object to elements of our clinical development program such as the number of subjects in our current clinical trials from the United States. The FDA can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to, the following: 
a drug candidate may not be deemed safe or effective; 
FDA officials may not find the data from non‑clinical studies and clinical trials sufficient; 


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the FDA might not approve our third‑party manufacturers’ processes or may find objectionable conditions at our third‑party manufacturers’ facilities that must be corrected before our drug candidate can be approved; or 
the FDA may change its approval policies or adopt new regulations. 
If serlopitant or any future product candidate fails to demonstrate safety and efficacy in clinical trials or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed. Additionally, if the FDA requires that we conduct additional clinical studies, places limitations on serlopitant in our label, delays approval to market serlopitant or limits the use of serlopitant, our business and results of operations may be harmed.
Even if we receive regulatory approval of serlopitant or any future product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.
Any regulatory approvals or other marketing authorizations we obtain for serlopitant or any future product candidates may be subject to limitations on the indicated uses for which the product may be marketed or the conditions of approval or marketing authorization, or contain requirements for potentially costly post‑market testing and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA or a comparable foreign regulatory authority authorizes our product candidates for marketing, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and record keeping for our product candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post‑marketing information and reports, registration, as well as continued compliance with cGMPs, and GCP requirements for any clinical trials that we conduct post‑approval. Later discovery of previously unknown problems with our product candidates, including adverse events of unanticipated severity or frequency, or with our third‑party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things: 
restrictions on the marketing or manufacturing of our product, withdrawal of the product from the market, or product recalls; 
fines, warning or untitled letters or holds on clinical trials; 
refusal by the FDA to accept new marketing applications or supplements, approve or otherwise authorize for marketing pending applications or supplements to applications filed by us or current or future collaborators or suspension or revocation of approvals or other marketing authorizations; 
product seizure or detention, or refusal to permit the import or export of our product; and 
injunctions or the imposition of civil or criminal penalties. 
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and devices and to spur innovation, but its ultimate implementation is unclear. In addition, in August 2017, the FDA Reauthorization Act was signed into law, which reauthorized the FDA’s user fee programs and included additional drug and device provisions that build on the Cures Act. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may not obtain marketing approval or we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations. 
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third‑party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products and services, implementing reductions in Medicare and other healthcare funding, and applying new payment methodologies. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively the


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Affordable Care Act, was enacted, which, among other things, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program; introduced a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans; imposed mandatory discounts for certain Medicare Part D beneficiaries as a condition for manufacturers’ outpatient drugs coverage under Medicare Part D; subjected drug manufacturers to new annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs; imposed a new federal excise tax on the sale of certain medical devices; created a new Patient Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; created the Independent Payment Advisory Board, which, once empaneled, will have authority to recommend certain changes to the Medicare program that could result in reduced payments for prescription drugs; and established a Center for Medicare Innovation at the CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges and amendments to the Affordable Care Act in the future. The Trump administration and members of the U.S. Congress have indicated that they may continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. Most recently, the Tax Cuts and Jobs Acts was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. It is uncertain the extent to which any such changes may impact our business or financial condition.
In addition, we cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, that requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two‑for‑one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within the Office of Management and Budget, or OMB, on February 2, 2017, the administration indicates that the “two‑for‑one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two‑for‑one provisions and other previously issued executive orders relating to the review of federal regulations, and on September 8, 2017, the FDA published notices in the Federal Register soliciting broad public comment to identify regulations that could be modified in compliance with these Executive Orders. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
We expect that any regulatory approval to market serlopitant in the United States will be limited by indication. If we fail to comply or are found to be in violation of FDA and other regulations restricting the promotion of serlopitant for unapproved uses, we could be subject to criminal penalties, substantial fines or other sanctions and damage awards. 
If our clinical trials are successful, we intend to seek approval to market serlopitant for the treatment of pruritus associated with specified dermatologic conditions, as well as for refractory chronic cough. We do not have plans to seek approval of serlopitant for any other indication at this time, including for the treatment of pruritus associated with any dermatologic condition other than atopic dermatitis, psoriasis or prurigo nodularis. If we


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obtain regulatory approval to market serlopitant with an indication statement for the treatment of one or more of these indications, we will likely be prohibited from marketing serlopitant using any promotional claims relating to treatment of pruritus generally. Marketing of serlopitant may also be limited by regulatory authorities based on use as a monotherapy or adjuvant, concomitant medications, severity of pruritus and other factors.
The regulations relating to the promotion of products for unapproved uses are complex and subject to substantial interpretation by the FDA and other government agencies. While serlopitant is being studied in pruritus associated with each of atopic dermatitis, psoriasis and prurigo nodularis, as well as refractory chronic cough, serlopitant may not be promoted for uses that are not approved in the labeling by the FDA or EMA. Physicians may nevertheless prescribe serlopitant off‑label to their patients in a manner that is inconsistent with the approved label. We intend to implement compliance and training programs designed to ensure that our sales and marketing practices comply with applicable regulations. Notwithstanding these programs, the FDA or other government agencies may allege or find that our practices constitute prohibited promotion of serlopitant for unapproved uses. We also cannot be sure that our employees will comply with company policies and applicable regulations regarding the promotion of products for unapproved uses. 
In recent years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and other sales practices, including the Department of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Federal Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti‑kickback laws and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. Many of these investigations originate as “qui tam” actions under the False Claims Act. Under the False Claims Act, any individual can bring a claim on behalf of the government alleging that a person or entity has presented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a qui tam suit is entitled to a share of any recovery or settlement. Qui tam suits, also commonly referred to as “whistleblower suits,” are often brought by current or former employees. In a qui tam suit, the government must decide whether to intervene and prosecute the case. If it declines, the individual may pursue the case alone. 
If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, we could be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have an adverse effect on our revenue, business, financial prospects and reputation.
If approved, serlopitant or any future products may cause or contribute to adverse medical events that we are required to report to regulatory agencies and if we fail to do so we could be subject to sanctions that would materially harm our business. 
If we are successful in commercializing serlopitant or any other products, FDA and foreign regulatory agency regulations require that we 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 may fail to report adverse events we become aware of within the prescribed time frame. We may also fail to appreciate that we 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 fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action, including criminal prosecution, the imposition of civil monetary penalties, seizure of our products or delay in approval or clearance of future products. 


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If third-party manufacturers fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected. 
Before our contract manufacturers can begin commercial manufacture of serlopitant, the process and systems used in the manufacture of serlopitant must be approved and each facility must have a compliance status that is acceptable to the FDA and other regulatory authorities. In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and foreign regulatory authorities, before and after product approval. Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, any potential third‑party manufacturer may be unable to continue to pass or initially pass federal, state or international regulatory inspections in a cost‑effective manner. Furthermore, although we do not have day‑to‑day control over the operations of our contract manufacturers, we are responsible for ensuring compliance with applicable laws and regulations, including cGMPs.
If a third‑party manufacturer with whom we contract is unable to comply with applicable laws and regulations, including cGMPs, serlopitant may not be approved, or we may be subject to fines, unanticipated compliance expenses, recall or seizure of our products, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our financial results and financial condition. 
Our failure to obtain regulatory approvals for serlopitant in foreign jurisdictions would prevent us from marketing our products internationally. 
In order to market any product in the European Economic Area, or EEA (which is composed of the 28 Member States of the European Union plus Norway, Iceland and Liechtenstein), and many other foreign jurisdictions, separate regulatory approvals are required. In the EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. Before granting the MA, the European Medicines Agency, or EMA, or the competent authorities of the Member States of the EEA make an assessment of the risk‑benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatory approvals or to do so on a timely basis, and even if we do file we may not receive necessary approvals to commercialize our products in any market.
We may be subject to healthcare laws and regulations relating to our business, and could face substantial penalties if we are determined not to have fully complied with such laws, which would have an adverse impact on our business. 
Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third‑party payors, customers and patients, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell and distribute our products for which we obtain marketing approval. Such laws include: 
the U.S. federal Anti‑Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a U.S. healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the U.S. federal Anti‑Kickback Statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the U.S. federal Anti‑Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act; 


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U.S. federal civil and criminal false claims laws and civil monetary penalties laws, including the civil False Claims Act, which, among other things, impose criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the U.S. government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the U.S. government; 
the U.S. Health Insurance Portability and Accountability Act of 1996, or HIPAA, which 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, 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. Similar to the U.S. federal Anti‑Kickback Statute, 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; 
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and its implementing regulations, which also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without appropriate authorization by covered entities subject to the rule, such as health plans, healthcare clearinghouses and healthcare providers as well as their business associates that perform certain services for or on their behalf involving the use or disclosure of individually identifiable health information; 
the U.S. Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members; 
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and 
analogous state and non‑U.S. laws and regulations, such as state anti‑kickback and false claims laws, which 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 non‑governmental third‑party payors, including private insurers; state laws that require pharmaceutical and device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws and regulations that require manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and pricing information; and state and non‑U.S. laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. 
Efforts to ensure that our current and future business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities may conclude that our business practices, including our consulting and advisory board arrangements with physicians and other healthcare providers, some of whom receive stock options as compensation for services provided, do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws. If our operations are found to be in violation of any of these or any other health regulatory laws that may apply to us, we may be subject to significant penalties, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid and other U.S. healthcare programs,


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contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Defending against any such actions can be costly, time‑consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired. If any of the above occur, it could adversely affect our ability to operate our business and our results of operations. 
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain. 
In the United States and some non‑U.S. jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post‑approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. 
For example, in March 2010, the Affordable Care Act was enacted in the United States to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The law has continued the downward pressure on the pricing of medical items and services, especially under the Medicare program, and increased the industry’s regulatory burdens and operating costs. Among the provisions of the Affordable Care Act of importance to our potential product candidates are the following: 
an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents; 
an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States; 
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; 
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; 
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 brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; 
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations; 
expansion of eligibility criteria for Medicaid programs in certain states; 
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; 
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; 
a new Patient‑Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research; and 
an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate. 


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Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, and we expect there will be additional challenges and amendments to the Affordable Care Act in the future. The new Presidential Administration and U.S. Congress will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the Affordable Care Act. It is uncertain the extent to which any such changes may impact our business or financial condition. 
In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. These changes include the Budget Control Act of 2011, which, among other things, resulted in reductions to Medicare payments to providers of 2% per fiscal year and will remain in effect through 2025; the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years; and the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, ended the use of the sustainable growth rate formula and provides for a 0.5% update to physician payment rates for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products. 
Individual states in the United States have also become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical product and medical device pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. For example, in October 2017, California passed a new law, to become effective in January 2019, which will require transparency from biopharmaceutical companies regarding price increases for prescription drugs. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and medical devices to purchase and which suppliers will be included in their prescription drug and other healthcare programs. 
We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any approved or cleared product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to new requirements or policies, or if we are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.
Risks Related to this Offering, Ownership of Our Common Stock and Our Status as a Public Company
An active trading market for our common stock may not develop and you may not be able to resell your shares of our common stock at or above the initial offering price, if at all.
Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters and may not be indicative of the price at which our common stock will trade after the closing of this offering. Although we have been approved to list our common stock on the Nasdaq Global Select Market, an active trading market for our shares may never develop or be sustained following this offering. Further, certain of our existing institutional investors, including investors affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of up to approximately $40 million in shares of our common stock in this offering at the initial public offering price and on the same terms as the other purchasers in this offering and, to the extent these affiliated investors purchase shares in this offering, fewer shares may be actively traded in the public market because these stockholders will be restricted from selling the shares by restrictions under applicable securities laws, which would reduce the liquidity of the market for our common stock.


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If an active market for our common stock does not develop or is not sustained, it may be difficult for you to sell shares you purchased in this offering at an attractive price or at all.
The trading price of the shares of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.
Our stock price may be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:
the commencement, enrollment or results of our ongoing and planned clinical trials of serlopitant or any future clinical trials we may conduct, or changes in the development status of serlopitant;
announcements of clinical trials results by competitors;
adverse results from, delays in or termination of clinical trials;
any delay in our regulatory filings for serlopitant or any other drug candidate and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;
adverse regulatory decisions, including failure to receive regulatory approval of our drug candidates;
unanticipated serious safety concerns related to the use of serlopitant or any other drug candidate;
changes in financial estimates by us or by any securities analysts who might cover our stock;
conditions or trends in our industry;
changes in the market valuations of similar companies;
stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the biopharmaceutical industry;
publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;
announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
investors’ general perception of our company and our business;
recruitment or departure of key personnel;
overall performance of the equity markets;
trading volume of our common stock;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
significant lawsuits, including patent or stockholder litigation;
general political and economic conditions; and


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other events or factors, many of which are beyond our control.
In addition, in the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources from our business.
If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that equity research analysts publish about us and our business. We do not currently have and may never obtain research coverage by equity research analysts. Equity research analysts may elect not to provide research coverage of our common stock after this offering, and such lack of research coverage may adversely affect the market price of our common stock. In the event we do have equity research analyst coverage, we will not have any control over 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 ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.
We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma as adjusted net tangible book value per share after this offering. Based on an assumed initial public offering price of $16.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, you will experience immediate dilution of $9.05 per share, representing the difference between our pro forma as adjusted net tangible book value per share after this offering and the assumed initial public offering price.
In addition, as of September 30, 2017, we had outstanding stock options to purchase an aggregate of 2,152,906 shares of common stock at a weighted average exercise price of $2.89 per share. To the extent these outstanding options are exercised, there will be further dilution to investors in this offering.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.
Upon the closing of this offering, we will have outstanding 21,427,998 shares of common stock, after giving effect to the conversion of our convertible preferred stock outstanding as of September 30, 2017 into 9,629,405 shares of our common stock, and assuming no exercise of outstanding options. Of these shares, the 6,500,000 shares sold in this offering will be freely tradable and 14,927,998 additional shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of lock‑up agreements between some of our stockholders and the underwriters. Jefferies LLC and Piper Jaffray & Co. may release these stockholders from their lock‑up agreements with the underwriters at any time and without notice, which would allow for earlier sales of shares in the public market.
In addition, promptly following the closing of this offering, we intend to file one or more registration statements on Form S‑8 under the Securities Act registering the issuance of approximately 5,477,906 shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S‑8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock‑up agreements described above and the restrictions of Rule 144 in the case of our affiliates.


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Additionally, after this offering, the holders of an aggregate of approximately 12.6 million shares of our common stock, or their transferees, will have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.
Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect immediately prior to the completion of this offering will contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions will include the following:
a classified board of directors with three‑year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chief executive officer or the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.
In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.
We are also subject to the anti‑takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction. For a description of our capital stock, see the section titled “Description of Capital Stock.”


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Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third‑party claims against us and may reduce the amount of money available to 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 to be effective immediately prior to the completion of this offering 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.
Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees.
Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
We do not currently intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future. Since we do not intend to pay dividends, your ability to receive a return on your investment will depend on any future appreciation in the market value of our


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common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.
Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
Upon the closing of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates will, in the aggregate, beneficially own 60.2% of our outstanding common stock. Certain of our existing institutional investors, including investors affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of up to approximately $40 million in shares of our common stock in this offering at the initial public offering price. Any such purchases, if completed, would be made on the same terms as the shares that are sold to the public generally and not pursuant to any pre-existing contractual rights or obligations. If such investors purchase all of the shares they have indicated interests in purchasing, our executive officers, directors, current beneficial owners of 5% or more of our capital stock and their respective affiliates will, in the aggregate, beneficially own approximately 71.3% of our outstanding common stock upon the completion of this offering (based on the assumed initial public offering price of $16.50 per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and assuming no exercise of the underwriters' option to purchase additional shares and no exercise of outstanding options).
As a result, these persons, acting together, would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets, or other significant corporate transactions.
Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.
We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including:
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus;
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 in our periodic reports, proxy statements and registration statements; and
not being required to hold a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth


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company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non‑affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non‑convertible debt during the prior three‑year period.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.
After the closing of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes‑Oxley Act and the rules and regulations of the stock market on which our common stock is listed. The Sarbanes‑Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending December 31, 2018, we must 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 in our Form 10‑K filing for that year, as required by Section 404 of the Sarbanes‑Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we have never been required to test our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.
We may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If we are not able to comply with the requirements of Section 404 of the Sarbanes‑Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the Securities and Exchange Commission, or SEC, or other regulatory authorities.
We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not increase the value of your investment.
We will have broad discretion over the use of proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. We expect to use the net proceeds to us from this offering, together with our existing cash and cash equivalents: (i) to complete our ongoing Phase 2 clinical trials of serlopitant for prutitus associated with atopic dermatitus and psoriasis, and for refractory chronic cough; (ii) to significantly advance our planned Phase 3 development of serlopitant for pruritus associated with prurigo nodularis; (iii) to supply serlopitant for our clinical trials and for the development and validation of our commercial manufacturing process for serlopitant in preparation for our NDA and Marketing Authorization Application, or MAA submissions; (iv) for a $3.0 million milestone payment to Merck, associated with initiating a Phase 3 clinical trial; and (v) the remainder for personnel expenses, other development activities, including potentially commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis, and for refractory chronic cough, working capital and other general corporate purposes, including the costs of operating as a public company. See “Use of Proceeds” on page 48 for a more complete description of the intended use of proceeds from this offering. Our failure to apply the net proceeds from this offering effectively could compromise our ability to pursue our growth strategy and we might not be able to yield a


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significant return, if any, on our investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.
We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.
As of December 31, 2016, we had federal and state net operating loss carryforwards of $28.2 million and $15.0 million, respectively. These carryforwards will begin to expire in 2031 for federal and state purposes, if not utilized before they expire. As of December 31, 2016, we had federal and state research and development tax credit carryforwards of $0.5 million and $0.4 million, respectively. The federal credits begin to expire in 2031 and the California research credits have no expiration dates. These net operating loss and tax credit carryforwards could expire unused and be unavailable if we do not generate sufficient taxable income prior to their expiration. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change, by value, in its equity ownership over a three‑year period, the corporation’s ability to use its pre‑change net operating loss carryforwards and other pre‑change tax attributes to offset its post‑change income or tax liability may be limited. We have not determined if we have experienced Section 382 ownership changes in the past and if a portion of our net operating loss and tax credit carryforwards are subject to an annual limitation under Sections 382 or 383. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including this offering, some of which may be outside of our control. As a result, even if we earn net taxable income, our ability to use our net operating loss and tax credit carryforwards may be materially limited, which could harm our future operating results by effectively increasing our future tax obligations.
We will incur increased costs and demands upon management as a result of being a public company.
As a public company listed in the United States, we will incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and The NASDAQ Stock Market, LLC, may increase legal and financial compliance costs and make some activities more time‑consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue‑generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.


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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward‑looking statements. In some cases, you can identify forward‑looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward‑looking statements include, but are not limited to, statements about:
our clinical and regulatory development plans for serlopitant, including the timing of the commencement of, and receipt of results from, our ongoing Phase 2 and planned Phase 3 clinical trials and the timing of our submission of an NDA to the FDA for serlopitant;
our expectations regarding the potential market size and size of the potential patient populations for serlopitant, if approved or cleared for commercial use;
the timing of commencement of future non-clinical studies and clinical trials;
our ability to successfully complete, clinical trials;
our intentions and our ability to establish collaborations;
the timing or likelihood of regulatory filings and approvals or clearances for our product candidates;
our commercialization, marketing and manufacturing capabilities and expectations;
our intentions with respect to the commercialization of serlopitant or any other candidates;
the pricing and reimbursement of serlopitant, if approved;
the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates, including the projected terms of patent protection;
estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital;
our use of proceeds from this offering;
our future financial performance;
developments and projections relating to our competitors and our industry, including competing drugs and therapies; and
other risks and uncertainties, including those listed under the caption “Risk Factors.”
These forward‑looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward‑looking statements in this prospectus may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating the forward‑looking statements. These forward‑looking statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise these forward‑looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find More Information.”


46



INDUSTRY AND MARKET DATA
This prospectus contains estimates, projections and other information concerning our industry, our business and the markets for our product candidates, including data regarding the estimated patient population and market size for our product candidates prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.


47



USE OF PROCEEDS
We estimate that the net proceeds from the sale of 6,500,000 shares of common stock in this offering will be approximately $98.2 million at an assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that net proceeds will be approximately $113.2 million at an assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $6.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $15.3 million, assuming the assumed initial public offering price stays the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.
We currently expect to use our net proceeds from this offering, together with our existing cash, as follows:
approximately $16.0 million of external clinical costs to complete our ongoing Phase 2 clinical trials of serlopitant for pruritus associated with atopic dermatitis and psoriasis, and for refractory chronic cough;
approximately $23.0 million of external clinical costs to significantly advance our planned Phase 3 development of serlopitant for pruritus associated with prurigo nodularis;
approximately $13.0 million of external development and manufacturing costs primarily associated with supplying serlopitant for our clinical trials, and development and validation of our commercial manufacturing process for serlopitant in preparation for our NDA and MAA submissions;
$3.0 million milestone payment to Merck associated with initiating a Phase 3 clinical trial; and
the remainder for personnel expenses, other development activities, including potentially commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis and for refractory chronic cough, working capital and other general corporate purposes, including the costs of operating as a public company.
However, due to the uncertainties inherent in the clinical development and regulatory approval process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes. As such, our management will retain broad discretion over the use of the net proceeds from this offering. The amounts and timing of our expenditures will depend upon numerous factors, including (i) the time and cost necessary to advance serlopitant through our ongoing and planned non-clinical studies and clinical trials; (ii) our ability to obtain regulatory approval or clearance for and subsequently commercialize our product candidates; and (iii) the time and cost necessary to develop non-clinical and clinical supplies and a commercial‑scale manufacturing process for product candidates, as well as the infrastructure to commercialize our product candidates.
We believe that our existing cash, together with the net proceeds from this offering, will be sufficient to fund our planned operations into the fourth quarter of 2019, enabling us to complete our three ongoing Phase 2 clinical


48



trials and to significantly advance our planned Phase 3 clinical trials and our NDA and MAA preparations. Following this offering, we will require substantial capital to complete clinical development, seek regulatory approval of, and, if approved, commercialize, serlopitant. We may seek additional funds through public or private equity, debt financings or other sources, including strategic collaborations. For additional information regarding our potential capital requirements, see “Risks Related to Our Financial Position and Capital Needs” under the heading “Risk Factors.”
Pending the use of the proceeds from this offering, we intend to invest the net proceeds in interest‑bearing, investment‑grade securities, certificates of deposit, or government securities.


49



DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.


50



CAPITALIZATION
The following table sets forth our cash, cash equivalents and investments and capitalization as of September 30, 2017:
on an actual basis;
on a pro forma basis to give effect to:
the automatic conversion of all shares of our convertible preferred stock outstanding into an aggregate of 9,629,405 shares of our common stock, which conversion will be effective immediately prior to the closing of this offering; and
the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and
on a pro forma as adjusted basis to give further effect to the sale of 6,500,000 shares of common stock in this offering at an assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 
 
 
 
 
 
September 30, 2017
 
Actual
 
Pro Forma
 
Pro
Forma, as
Adjusted (1)
 
(in thousands, except share and per share data)
Cash, cash equivalents and investments
$
73,547

 
$
73,547

 
$
171,790

Convertible preferred stock, par value $0.001 per share: 28,322,761 shares authorized, 25,975,346 shares issued and outstanding at September 30, 2017; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted
109,330

 

 

Preferred stock, $0.0001 par value per share; no shares authorized, issued and outstanding, actual; 20,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

 

 

Common stock, $0.0001 par value per share: 55,000,000 shares authorized, 5,298,593 shares issued and outstanding at September 30, 2017; 300,000,000 shares authorized, 14,927,998 shares issued and outstanding, pro forma; and 300,000,000 shares authorized, 21,427,998 shares issued and outstanding, pro forma as adjusted
1

 
1

 
1

Additional paid‑in capital
1,968

 
111,298

 
209,541

Accumulated other comprehensive income
(15
)
 
(15
)
 
(15
)
Accumulated deficit
(49,915
)
 
(49,915
)
 
(49,915
)
Total stockholders’ (deficit) equity
(47,961
)
 
61,369

 
159,612

Total capitalization
$
61,369

 
$
61,369

 
$
159,612

 
 
 
 
 
 


51



(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) would increase (decrease) the amount of cash, cash equivalents and investments, additional paid‑in capital, total stockholders’ (deficit) equity and total capitalization by approximately $6.0 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) cash, cash equivalents and investments, additional paid‑in capital, total stockholders’ (deficit) equity and total capitalization by approximately $15.3 million, assuming the assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
The outstanding share information in the table above excludes the following:
2,152,906 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2017 having a weighted‑average exercise price of $2.89 per share;
246,793 shares of common stock reserved for issuance pursuant to future awards under our 2011 Stock Incentive Plan as of September 30, 2017, which will no longer be available for issuance effective on the day prior to the first public trading date of our common stock;
3,000,000 shares of common stock to be reserved for issuance pursuant to future awards under our 2018 Omnibus Incentive Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock; and
325,000 shares of common stock to be reserved for issuance pursuant to our 2018 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock.


52



DILUTION
If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of our common stock after this offering. As of September 30, 2017, we had a historical net tangible book value of $61.4 million, or $11.58 per share of common stock. Our net tangible book value represents total tangible assets less total liabilities all divided by the number of shares of common stock outstanding on September 30, 2017. Our pro forma net tangible book value as of September 30, 2017, before giving effect to this offering, was $61.4 million, or $4.11 per share of our common stock. Pro forma net tangible book value, before the issuance and sale of shares in this offering and gives effect to the conversion of all shares of our convertible preferred stock outstanding at September 30, 2017, which will be effective immediately prior to the closing of this offering.
After giving effect to the sale of 6,500,000 shares of common stock in this offering at an assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2017 would have been approximately $159.6 million, or $7.45 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.34 per share to existing stockholders and an immediate dilution of $9.05 per share to new investors. The following table illustrates this per share dilution:
 
 
 
 
 
Assumed initial public offering price per share
 
 
 
$
16.50

Historical net tangible book value per share as of September 30, 2017
 
$
11.58

 
 
Pro forma decrease in net tangible book value per share
 
(7.47
)
 
 
Pro forma net tangible book value per share as of September 30, 2017
 
4.11

 
 
Increase in pro forma net tangible book value per share attributable to new investors
 
3.34

 
 
Pro forma as adjusted net tangible book value per share after this offering
 
 
 
7.45

Dilution per share to new investors participating in this offering
 
 
 
$
9.05

 
 
 
 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value as of September 30, 2017 after this offering by approximately $6.0 million, or approximately $0.28 per share, and would decrease (increase) dilution to investors in this offering by approximately $0.72 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Assuming the assumed initial public price per share remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, an increase of 1,000,000 in the number of shares we are offering would increase our pro forma as adjusted net tangible book value as of September 30, 2017 after this offering by approximately $15.3 million, or approximately $0.35 per share, and would decrease dilution to investors in this offering by approximately $0.35 per share, and a decrease of 1,000,000 in the number of shares we are offering would decrease our pro forma as adjusted net tangible book value as of September 30, 2017 after this offering by approximately $15.3 million, or approximately $0.39 per share, and would increase dilution to investors in this offering by approximately $0.39 per share. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.
If the underwriters fully exercise their option to purchase additional shares, pro forma as adjusted net tangible book value after this offering would increase to approximately $7.79 per share, and there would be an immediate dilution of approximately $8.71 per share to new investors.


53



To the extent that outstanding options with an exercise price per share that is less than the pro forma as adjusted net tangible book value per share are exercised, new investors will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
The following table shows, as of September 30, 2017, on a pro forma as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $16.50 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus), before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us (in thousands, except share and per share amounts and percentages):
 
 
 
 
 
 
 
 
 
 
 
Shares Purchased
 
Total Consideration
 
Average
Price Per
Share
 
Number
 
Percent
 
Amount
 
Percent
 
Existing stockholders(1)
14,927,998

 
70.0
%
 
$
109,940

 
51.0
%
 
$
7.36

Investors participating in this offering
6,500,000

 
30.0

 
107,250

 
49.0

 
16.50

Total
21,427,998

 
100
%
 
$
217,190

 
100
%
 
$
10.14

 
 
 
 
 
 
 
 
 
 
(1)
Certain of our existing institutional investors have indicated an interest in purchasing an aggregate of up to approximately $40 million in shares of our common stock in this offering at the initial public offering price. The presentation in this table regarding ownership by existing stockholders does not give effect to any purchases in this offering by such investors. See the footnotes to the beneficial ownership table in "Principal Stockholders" for more details.
If the underwriters exercise their option to purchase additional shares in full, the number of shares of common stock held by existing stockholders will be reduced to 66.6% of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 33.4% of the total number of shares of common stock to be outstanding after this offering.
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 2017 and excludes the following:
2,152,906 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2017 having a weighted‑average exercise price of $2.89 per share;
246,793 shares of common stock reserved for issuance pursuant to future awards under our 2011 Stock Incentive Plan as of September 30, 2017, which will no longer be available for issuance effective on the day prior to the first public trading date of our common stock;
3,000,000 shares of common stock to be reserved for issuance pursuant to future awards under our 2018 Omnibus Incentive Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock; and
325,000 shares of common stock to be reserved for issuance pursuant to our 2018 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective on the day prior to the first public trading date of our common stock.


54


SELECTED FINANCIAL DATA
The following tables set forth a summary of our historical financial data as of and for the periods indicated. We have derived the selected statements of operations data for the years ended December 31, 2015 and 2016 from our audited financial statements included elsewhere in this prospectus. We have derived the selected statements of operations data for the nine months ended September 30, 2016 and 2017, and the selected balance sheet data as of September 30, 2017, from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. You should read this data together with our financial statements and related notes appearing elsewhere in this prospectus and the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results, and our interim results for the nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the full year ending December 31, 2017, or any other period.
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Nine Months Ended September 30,
 
 
2015
 
2016
 
2016
 
2017
 
 
(in thousands, except share and per share numbers)
Statements of Operations Data:
 
 
 
 
 
 
 
 
Collaboration and license revenue
 
$

 
$
674

 
$
224

 
$
1,807

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
2,921

 
11,255

 
7,178

 
18,461

General and administrative
 
1,687

 
3,751

 
2,453

 
3,462

Total operating expenses
 
4,608

 
15,006

 
9,631

 
21,923

Loss from operations
 
(4,608
)
 
(14,332
)
 
(9,407
)
 
(20,116
)
Interest income and other expenses, net
 

 
264

 
176

 
316

Net loss attributable to common stockholders
 
$
(4,608
)
 
$
(14,068
)
 
$
(9,231
)
 
$
(19,800
)
Net loss attributable to common stockholder per share, basic and diluted(1)   
 
$
(0.97
)
 
$
(2.82
)
 
$
(1.86
)
 
$
(3.89
)
Weighted-average number of common shares used to compute basic and diluted net loss per share(1)   
 
4,735,148

 
4,987,133

 
4,965,807

 
5,093,418

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)   
 
 
 
$
(1.38
)
 
 
 
$
(1.72
)
Pro forma weighted‑average number of common shares outstanding, basic and diluted (unaudited)(2)   
 
 
 
10,221,933

 
 
 
11,539,193

 
 
 
 
 
 
 
 
 
(1)
See notes to our financial statements included elsewhere in this prospectus for an explanation of the calculations of our net loss per share, basic and diluted and the weighted‑average number of shares used in the computation of the per share amounts.
(2)
The pro forma net loss per share, attributable to common stockholders basic and diluted, and the pro forma weighted‑average number of common shares outstanding, basic and diluted, data is computed using the


55


weighted‑average number of shares of common stock outstanding, after giving effect to the conversion of all the outstanding shares of our convertible preferred stock into an aggregate of 9,629,405 shares of our common stock, which will occur immediately prior to the completion of this offering, as if such transaction had occurred on September 30, 2017. The pro forma net loss per share of common stock, basic and diluted, and the pro forma weighted‑average number of common shares outstanding, basic and diluted, does not give effect to the issuance of shares from the proposed initial public offering nor do they give effect to potential dilutive securities where the impact would be anti‑dilutive. See Note 9 to our audited financial statements included elsewhere in this prospectus.
 
 
 
 
 
 
 
 
 
December 31,
 
September 30,
 
 
2015
 
2016
 
2017
 
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
 
Cash, cash equivalents and investments
 
$
43,808

 
$
41,328

 
$
73,547

Working capital
 
43,115

 
27,637

 
68,560

Total assets
 
43,885

 
42,053

 
75,800

Convertible preferred stock
 
59,003

 
59,003

 
109,330

Accumulated deficit
 
(16,047
)
 
(30,115
)
 
(49,915
)
Total stockholders’ deficit
 
(15,953
)
 
(29,441
)
 
(47,961
)
 
 
 
 
 
 
 


56


MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the section of this prospectus entitled “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward‑looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward‑looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this prospectus entitled “Risk Factors.”
Overview
We are a late‑stage biopharmaceutical company focused on the development and commercialization of serlopitant for the treatment of pruritus associated with dermatologic conditions such as atopic dermatitis, psoriasis and prurigo nodularis. We are concurrently evaluating the use of serlopitant for the treatment of refractory chronic cough. We believe that serlopitant, a highly selective small molecule inhibitor of the neurokinin 1 receptor, or NK1‑R, has the potential to significantly alleviate pruritus and refractory chronic cough symptoms.
Since commencing operations in 2011, we have devoted substantially all of our efforts and financial resources to the clinical development of serlopitant. We have not generated any revenue from product sales and, as a result, we have never been profitable and have incurred net losses in each year since commencement of our operations. As of December 31, 2016 and September 30, 2017, we had accumulated deficits of $30.1 million and $49.9 million, respectively, primarily as a result of research and development and general and administrative expenses. We incurred net losses of approximately $4.6 million, $14.1 million and $19.8 million in the years ended December 31, 2015 and 2016 and the nine months ended September 30, 2017, respectively. We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize serlopitant for the treatment of pruritus associated with one or more dermatologic conditions or for refractory chronic cough, and we can provide no assurance that we will ever generate significant revenue or profits.
To date, we have financed our operations primarily through private placements of convertible preferred stock, from which we have received net proceeds of $109.3 million through September 30, 2017, including gross proceeds of $50.5 million from the sale of Series C convertible preferred stock in July 2017, and from an upfront, non‑refundable payment of $11.0 million under our August 2016 license and collaboration agreement with Japan Tobacco Inc. and Torii Pharmaceutical Co. Ltd., together referred to as JT Torii, which we refer to as the Collaboration Agreement.
As of September 30, 2017, our cash and cash equivalents and investments totaled $73.5 million. We believe that our existing cash, cash equivalents and investments will be sufficient to fund our planned operations for at least the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. See “— Liquidity and Capital Resources.”
We expect to incur substantial expenditures in the foreseeable future as we advance serlopitant through clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2 and planned Phase 3 clinical trials, the development and validation of our commercial manufacturing process for serlopitant, and other development activities including potentially commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis, and for refractory chronic cough. In addition, we expect to pay a $3.0 million milestone payment to Merck upon the initiation of our Phase 3 clinical trials for pruritus associated with prurigo nodularis. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
We will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from sales of serlopitant, if ever, we expect to finance


57


our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of serlopitant for one or more indications or delay our efforts to expand our product pipeline.
Components of Operating Results
Revenue
We have not generated any revenue from the sale of products since our inception and do not expect to generate any revenue from the sale of products in the near future.
Collaboration and License Revenue
We recognize revenue pursuant to the Collaboration Agreement and our services agreement with JT Torii in connection with the clinical development and commercialization of products covered by the collaboration, including non-refundable upfront license fees, contingent consideration payments based on the achievement of defined collaboration milestones and royalties on sales of commercialized products.
Under the Collaboration Agreement, we granted to JT Torii the right to develop and commercialize products containing serlopitant in Japan, for the treatment of diseases and conditions other than nausea or vomiting. In exchange, JT Torii paid us an upfront, non‑refundable payment of $11.0 million in August 2016. In addition, we are entitled to receive aggregate payments of up to $28.0 million upon the achievement of specified development and regulatory milestones, and $15.0 million upon the achievement of a commercial milestone, as well as tiered royalties from the mid-single digits up to the mid‑teens on sales of licensed products in Japan.
Revenue from the upfront payment is being amortized over the period of performance of the Collaboration Agreement, the period which we expect to provide research and development services to JT Torii.
On September 1, 2017, we entered into a new services agreement with JT Torii to provide research and development services, including regulatory, chemistry and manufacturing support and related materials, that is distinct from the original Collaboration Agreement. We evaluated the new services agreement and determined that the research and materials delivered to JT Torii represent a separate contractual arrangement that provides stand alone value to JT Torii. The fees received under the services agreement are recognized as and when such services are performed by us and JT Torii consumes the benefits of those services. We have no obligation to provide services unless requested by JT Torii and agreed to by us. We are eligible to receive reimbursement of estimated costs incurred, and payment for research services performed directly by us, at agreed upon rates.
Operating Expenses
Research and Development Expenses
Substantially all of our research and development expenses consist of expenses incurred in connection with the development of serlopitant. These expenses include certain payroll and personnel expenses including stock‑based compensation, consulting costs, contract manufacturing costs and fees paid to clinical research organizations or CROs to conduct certain research and development activities on our behalf. We do not allocate our costs by each indication for which we are developing serlopitant, as a significant amount of our development activities broadly support all indications.  In addition, several of our departments support our serlopitant drug candidate development program and we do not identify internal costs for each potential indication. We do not separately track costs incurred in connection with our agreements with JT Torii, which are also included in research and development expenses. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.
We expense both internal and external research and development expenses as they are incurred. We are focusing substantially all of our resources and development efforts on the development of serlopitant. We expect our research and development expenses to increase during the next few years as we seek to complete our clinical program, pursue regulatory approval of serlopitant in the United States and prepare for a possible commercial launch of serlopitant. Predicting the timing or the final cost to complete our clinical program or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors,


58


including factors outside of our control. For example, if the FDA or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Furthermore, we are unable to predict when or if serlopitant will receive regulatory approval in the United States with any certainty.
General and Administrative Expenses
General and administrative expenses consist principally of personnel‑related costs, including stock‑based compensation, for personnel in executive, finance, business and corporate development, and other administrative functions, professional fees for legal, consulting, accounting services, rent and other general operating expenses not otherwise classified as research and development expenses.
We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, including stock‑based compensation, expanded infrastructure and higher consulting, legal and accounting services associated with maintaining compliance with stock exchange listing and SEC requirements, investor relations costs and director and officer insurance premiums associated with being a public company.
Interest Income and Other Expense, Net
Interest income consists primarily of interest earned on our investments in corporate notes and government agency notes.
Results of Operations
Comparison of the Nine Months Ended September 30, 2016 and 2017
The following table summarizes our results of operations for the periods indicated (in thousands):  
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
September 30,
 
Increase
 
% Change
 
 
2016
 
2017
 
 
Collaboration and license revenue
 
$
224

 
$
1,807

 
$
1,583

 
*
Operating expenses:
 
 
 
 
 


 
 
Research and development
 
7,178

 
18,461

 
11,283

 
157
General and administrative
 
2,453

 
3,462

 
1,009

 
41
Loss from operations
 
(9,407
)
 
(20,116
)
 
(10,709
)
 
114
Interest income and other expense, net
 
176

 
316

 
140

 
80
Net loss
 
$
(9,231
)
 
$
(19,800
)
 
$
(10,569
)
 
114
 
 
 
 
 
 
 
 
 
*
Not meaningful.

Collaboration and License Revenue
Collaboration and license revenue of $1.8 million for the nine months ended September 30, 2017 was primarily due to the allocation of revenue we recognized during the period from the initial upfront payment of $11.0 million under the Collaboration Agreement with JT Torii we entered into in August 2016, as well as additional revenue of $0.5 million from JT Torii for development support services recognized by us during the period. We had collaboration and license revenue of $0.2 million for the nine months ended September 30, 2016 related to two months of revenue that we recognized from the $11.0 million upfront payment under the Collaboration Agreement.


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Research and Development Expenses
Research and development expenses increased $11.3 million, or 157%, from $7.2 million for the nine months ended September 30, 2016 to $18.5 million for the nine months ended September 30, 2017. The increase was primarily due to an increase in clinical trial expenses of $6.9 million, an increase in personnel expenses of $1.8 million as a result of an increase in our employee headcount, as well as an increase of $2.4 million in consulting expenses and professional fees. For the periods presented, substantially all of our research and development expenses related to our development activity for serlopitant.
General and Administrative Expenses
General and administrative expenses increased $1.0 million, or 41%, from $2.5 million for the nine months ended September 30, 2016 to $3.5 million for the nine months ended September 30, 2017. The increase was primarily due to increases in consulting expenses and professional fees of $0.7 million and personnel expenses of $0.3 million as we expanded our operations.
Interest Income and Other Expense, Net
Interest income and other expense, net was $0.2 million and $0.3 million for the nine months ended September 30, 2016 and 2017, respectively, which related to interest earned on our outstanding investment balances.
Comparison of the Years Ended December 31, 2015 and 2016
The following table summarizes our results of operations for the periods indicated (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Year Ended
December 31,
 
Increase
 

 % change
 
 
2015
 
2016
 
 
Collaboration and license revenue
 
$

 
$
674

 
$
674

 
*
Operating expenses:
 
 
 
 
 


 
 
Research and development
 
2,921

 
11,255

 
8,334

 
285
General and administrative
 
1,687

 
3,751

 
2,064

 
122
Loss from operations
 
(4,608
)
 
(14,332
)
 
(9,724
)
 
211
Interest income and other expense, net
 

 
264

 
264

 
*
Net loss
 
$
(4,608
)
 
$
(14,068
)
 
$
(9,460
)
 
205
 
 
 
 
 
 
 
 
 
*
Not meaningful.

Collaboration and License Revenue
Collaboration and license revenue of $0.7 million for the year ended December 31, 2016 was entirely due to the allocation of revenue we recognized during the period from the initial upfront payment of $11.0 million under the Collaboration Agreement with JT Torii we entered into in August 2016. We had no collaboration and license revenue for the year ended December 31, 2015.
Research and Development Expenses
Research and development expenses increased $8.3 million, or 285%, from $2.9 million for the year ended December 31, 2015 to $11.3 million for the year ended December 31, 2016. The increase was primarily due to a $5.2 million increase in clinical trial costs, an increase of $1.5 million in personnel expenses as a result of an increase in our employee headcount, and a $1.2 million increase in consulting expenses and professional fees. For the years ended December 31, 2015 and 2016, substantially all of our research and development expenses related to our development activity for serlopitant.


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General and Administrative Expenses
General and administrative expenses increased $2.1 million, or 122%, from $1.7 million for the year ended December 31, 2015 to $3.8 million for the year ended December 31, 2016. The increase was primarily due to an increase in personnel expenses of $1.0 million and an increase in consulting expenses and professional fees of $0.9 million incurred as we expanded our operations.
Interest Income and Other Expense, Net
Interest income and other expense, net was $0.3 million for the year ended December 31, 2016, which related to interest earned on our outstanding investment balances. We had no interest income and other expense, net for the year ended December 31, 2015.
Liquidity and Capital Resources
To date, we have financed our operations primarily through private placements of convertible preferred stock and from a payment under the Collaboration Agreement. We received net proceeds of $109.3 million from the sale and issuance of preferred stock through September 30, 2017, including $50.5 million received from the sale of our Series C convertible preferred stock in July 2017. In August 2016, we received an upfront, non-refundable payment of $11.0 million from JT Torii in connection with the entry into the Collaboration Agreement. As of September 30, 2017, we had cash, cash equivalents and investments of $73.5 million. Our cash, cash equivalents and investments are held in money market accounts and investments in corporate notes and government notes.
We expect to incur substantial expenditures in the foreseeable future as we advance serlopitant through clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing Phase 2 and planned Phase 3 clinical trials, the development and validation of our commercial manufacturing process for serlopitant, and other development activities including potentially commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis and for refractory chronic cough. In addition, we expect to pay a $3.0 million milestone payment to Merck upon the initiation of our Phase 3 clinical trials for pruritus associated with prurigo nodularis. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
We will continue to require additional capital to develop our product candidate and fund operations for the foreseeable future. We may seek to raise capital through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
the time and cost necessary to complete our ongoing Phase 2 clinical trials for pruritus associated with atopic dermatitis and psoriasis and for refractory chronic cough, our planned Phase 3 clinical trials for pruritus associated with prurigo nodularis as well as any additional current and planned clinical trials of serlopitant;
the number, size and type of any additional clinical trials or studies we may choose to initiate or that we may be required to complete prior to obtaining regulatory approval of serlopitant;
the timing of, and costs involved in, seeking and obtaining approvals from the FDA and comparable foreign regulatory authorities, including the potential by the FDA or comparable regulatory authorities to require that we perform more studies than those that we current expect, and the costs of post‑marketing studies that could be required by regulatory authorities;
our ability to receive payments under our collaboration with JT Torii, and the timing of receipt of any such payments;
the timing of the milestone payments we must make to Merck;


61



the costs of preparing to manufacture serlopitant on a commercial scale;
our ability to successfully commercialize serlopitant; 
the manufacturing, selling and marketing costs associated with serlopitant, including the cost and timing of forming and expanding our sales organization and marketing capabilities;
the degree and rate of market acceptance of any products launched by us or our partners;
the cash requirements of any future acquisitions or discovery of product candidates; 
the progress, timing, scope and costs of our non-clinical studies and clinical trials, including the ability to enroll patients in a timely manner for potential future clinical trials; 
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
our need and ability to hire additional personnel;
our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements; and
the emergence of competing technologies or other adverse market developments.
If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others rights to serlopitant in certain territories or indications that we would prefer to develop and commercialize ourselves.
See “Risk Factors” for additional risks associated with our substantial capital requirements.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Year Ended
December 31,
 
Nine Months
Ended September 30,
 
 
2015
 
2016
 
2016
 
2017
Net cash (used in) provided by:
 
 
 
 
 
 
 
 
Operating activities
 
$
(4,183
)
 
$
(2,291
)
 
$
2,258

 
$
(18,054
)
Investing activities
 

 
(37,490
)
 
(38,646
)
 
(21,376
)
Financing activities
 
47,718

 

 

 
50,361

Net increase (decrease) in cash
 
$
43,535

 
$
(39,781
)
 
$
(36,388
)
 
$
10,931

 
 
 
 
 
 
 
 
 
Cash Provided By (Used In) Operating Activities
Cash provided by operating activities for the nine months ended September 30, 2016 was $2.3 million compared to cash used in operations of $18.1 million for the nine months ended September 30, 2017. Cash provided by operating activities in the nine months ended September 30, 2016 was primarily due to changes in


62



operating assets and liabilities, including an increase in deferred revenue of $10.8 million and an increase in accounts payable and accrued liabilities of $0.9 million, which were partially offset by the net loss for the period of $9.2 million. The cash used in operating activities in the nine months ended September 30, 2017 was primarily due to the net loss for the period of $19.8 million as well as non‑cash stock‑based compensation expense of $1.2 million, and was also affected by changes in operating assets and liabilities, including a decrease of $1.3 million in deferred revenue, an increase in prepaid expenses of $1.1 million and an increase in accounts receivable of $0.5 million, offset by an increase in accounts payable and accrued liabilities of $3.3 million.
Cash used in operating activities was $4.2 million for the year ended December 31, 2015 and cash used in operating activities was $2.3 million for the year ended December 31, 2016. Cash used in operating activities in 2015 was primarily due to the use of funds in our operations related to the development of serlopitant and the resulting net loss of $4.6 million, offset by a decrease in accrued expenses of $0.3 million. Cash used in operating activities in 2016 was primarily due an increase of $10.3 million in deferred revenue associated with the upfront cash payment received in August 2016 in connection with the Collaboration Agreement, non‑cash stock‑based compensation expense of $0.6 million, offset by use of funds in our operations that resulted in a net loss of $14.1 million, as well as changes in other operating assets and liabilities, including an increase of $0.6 million in prepaid expenses and an increase in accounts payable and accrued liabilities of $1.4 million.
Cash Used in Investing Activities
Cash used in investing activities for the nine months ended September 30, 2016 represented purchases of investments of $49.5 million, offset by proceeds received from maturities and sales of investments of $10.9 million. Cash used in investing activities for the nine months ended September 30, 2017 represented purchases of investments of $59.2 million, offset by proceeds received from maturities and sales of investments of $37.8 million.
Cash used in investing activities for the year ended December 31, 2016 represented purchases of investments of $55.3 million, offset by proceeds from maturities and sales of investments of $17.9 million. We had no cash used in investing activities for the year ended December 31, 2015.
Cash Provided by Financing Activities
Cash provided by financing activities was $0 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017 cash provided by financing activities was $50.4 million, consisting primarily of net proceeds from the sale of Series C convertible preferred stock.
Cash provided by financing activities was $47.7 million for the year ended December 31, 2015 consisted primarily of net proceeds from the issuance of Series A and Series B convertible preferred stock. We had no cash provided by financing activities for the year ended December 31, 2016.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2016 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
Payments due by period
 
 
Less than
1 year
 
1 to 3
years
 
4 to 5
years
 
After 5
years
 
Total
Lease obligations, net
 
$
244

 
$
124

 
$

 
$

 
$
368

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016, we have lease obligations consisting of an operating lease for our operating facility for approximately 4,000 square feet, which we executed in April 2016. The term of the lease commenced in May 2016 and expires in June 2018. In September 2017, we entered into a new operating facility lease in Redwood City, California for 13,904 square feet, with a term from October 2017 to March 2020. The monthly lease payments under the new lease are approximately $55,000, with annual increases.


63



In December 2012, we entered into an exclusive worldwide royalty‑free license agreement with Merck for exclusive worldwide rights for the development and commercialization of serlopitant and two other NK1‑R antagonists in all human diseases, disorders or conditions, except for the treatment and prevention of nausea or vomiting. We have agreed to make aggregate payments of up to $25.0 million dollars upon the achievement of specified development and regulatory milestones for serlopitant. However, because the achievement of these milestones is not fixed and determinable, such commitments have not been included on our balance sheet or in the Contractual Obligations and Commitments table above. In the near term, upon dosing our first patient in our Phase 3 clinical trials for serlopitant for the treatment of pruritus associated with prurigo nodularis, we will be obligated to make a milestone payment of $3.0 million to Merck pursuant to our license agreement, which we anticipate paying from our existing cash resources. For additional information regarding future payments to third parties, including milestone and royalty payments to Merck, please see “Business—Commercial Agreements.”
We enter into contracts in the normal course of business with CROs for clinical trials, non‑clinical studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non‑cancelable obligations under these agreements are not material.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, 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 expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in the Notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.
Revenue Recognition
To date, our clinical drug candidate, serlopitant, has not been approved for sale by the FDA and we have not generated any revenue from the sale of products. We generate revenue pursuant to the Collaboration Agreement and our services agreement with JT Torii in connection with the clinical development and commercialization of products covered by these agreements.
On August 10, 2016, we entered into the Collaboration Agreement with JT Torii. Under the Collaboration Agreement, we granted to JT Torii the rights to develop and commercialize products containing serlopitant in Japan, for the treatment of diseases and conditions other than nausea or vomiting. In exchange, JT Torii paid us an upfront, non‑refundable payment of $11.0 million. In addition, we are entitled to receive aggregate payments of up to $28.0 million upon the achievement of specified development and regulatory milestones, and $15.0 million upon the achievement of a commercial milestone, as well as tiered royalties from the mid-single digits up to the mid‑teens on sales of licensed products in Japan. Our performance obligations under the license agreement include the transfer of intellectual property rights in the form of licenses, obligations to participate on certain development and/or commercialization committees with the collaboration partners and supply manufactured drug product for clinical trials.
We recognize revenue pursuant to the Collaboration Agreement in connection with the clinical development and commercialization of products covered by the collaboration, including non-refundable upfront license fees, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products. Revenue from our Collaboration Agreement is recognized when (i) persuasive evidence of an arrangement exists; (ii) transfer of technology has been completed, services have been performed or products have been delivered; (iii) the fee is fixed and determinable, and (iv) collection is reasonably assured.


64



For revenue agreements with multiple elements such as the Collaboration Agreement, we evaluate the agreements in accordance with ASC 605-25 Revenue Recognition - Multiple Element Arrangements to identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on the achievement of certain criteria including whether the deliverable has stand alone value. Upfront payments for licenses are evaluated to determine if the licensee can obtain standalone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by us. The assessment of multiple-element arrangements also requires judgment in order to determine the allocation of revenue to each deliverable and the appropriate period of time over which the revenue should be recognized.
Under the Collaboration Agreement, we have determined that the license does not have standalone value separate from the research and development services because JT Torii cannot resell such license on a standalone basis or use the license with its available resources to obtain any economic value without our participation. The license and the services are combined as one unit of accounting and upfront payments are recorded initially as deferred revenue in the balance sheet. Revenue is then recognized on a straight-line basis over an estimated performance period that is consistent with the term of performance obligations, unless we determine there is a discernible pattern of performance other than straight-line, in which case we use a proportionate performance method to recognize the revenue over the estimated performance period. We are recognizing the upfront fee on a straight-line basis over the initial period of performance of six years, which represents the estimated development period in the territories based on the initial development plan managed by the joint steering committee. The term of the agreement is through the expiration of the patents associated with serlopitant. We periodically review our estimated periods of performance based on the progress under each arrangement and account for the impact of any changes in estimated periods of performance on a prospective basis.
At the inception of each agreement that includes milestone payments, including the Collaboration Agreement, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. We evaluate factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone, and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Non‑refundable payments that are contingent upon achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved, assuming all other revenue recognition criteria are met. Other contingent payments in which a portion of the milestone consideration is refundable or adjusts based on future performance or non‑performance (e.g., through a penalty or clawback provision) are not considered to relate solely to past performance, and therefore, not considered substantive. Amounts that are not recognized as revenue due to the uncertainty as to whether they will be retained or because they are expected to be refunded are recorded as a liability. We recognize non‑substantive milestone payments over the remaining estimated period of performance once the milestone is achieved. Contingent payments associated with the achievement of specific objectives in certain contracts that are not considered substantive because we do not contribute effort to the achievement of such milestones are recognized as revenue upon achievement of the objective, as long as there are no undelivered elements remaining and no continuing performance obligations by us, assuming all other revenue recognition criteria are met. We are entitled to receive aggregate payments of up to $28.0 million upon the achievement of specified development and regulatory milestones, and $15.0 million upon the achievement of a commercial milestone. Certain of the milestones related to preparation of an IND for submission to regulatory authorities in the territory are considered substantive given that they are triggered by our performance relative to the achievement of pre-specified, “at risk” milestone events, such as the initiation or successful completion of regulatory development phases. All other milestones are considered non-substantive because the milestone is dependent upon the performance of the collaboration partner rather than us.
On September 1, 2017, we entered into a new services agreement with JT Torii to provide research and development services, including regulatory, chemistry and manufacturing support and related materials that is distinct from the original Collaboration Agreement. We evaluated the new services agreement and determined that the research and materials delivered to JT Torii represents a separate earnings process that provides stand alone value to JT Torii. The fees received under the services agreement will be recognized as and when such services are performed by us and JT Torii consumes the benefits of those services. We have no obligation to provide services unless requested by JT Torii and agreed to by us. We are eligible to receive reimbursement of


65



estimated costs incurred and payment for research services performed directly by us at agreed upon rates. During the quarter ended September 30, 2017, we recognized revenue of $0.5 million related to the new services agreement. The services agreement terminates upon the termination of the Collaboration Agreement or by mutual agreement of the parties. Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in our balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, current portion. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.
Research and Development Expenses
Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.
We estimate non‑clinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage non‑clinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.
Stock-Based Compensation Expense
We account for stock‑based compensation arrangements with employees in accordance with ASC 718, Stock Compensation. ASC 718 requires the recognition of compensation expense, using a fair value‑based method, for costs related to all stock‑based payments including stock options. Our determination of the fair value of stock options on the date of grant utilizes the Black‑Scholes option‑pricing model for stock options with time‑based vesting, and is impacted by our common stock price as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk‑free interest rates and expected dividends.
The fair value is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period) on a straight‑line basis.
Equity instruments issued to non‑employees are recorded at their fair value on the measurement date and are subject to periodic adjustments as the underlying equity instruments vest. The fair value of options granted to consultants is expensed when vested.
Estimating the fair value of equity‑settled awards as of the grant date using valuation models, such as the Black‑Scholes option pricing model, is affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock‑based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop.
Expected Term—The expected term assumption represents the weighted average period that the stock‑based awards are expected to be outstanding. We have elected to use the “simplified method” for estimating the expected term of the options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.
Expected Volatility—For all stock options granted to date, the volatility data was estimated based on a study of publicly traded industry peer companies. For purposes of identifying these peer companies, we considered the industry, stage of development, size and financial leverage of potential comparable companies.
Expected Dividend—The Black‑Scholes valuation model valuation model calls for a single expected dividend yield as an input. We currently have no history or expectation of paying cash dividends on our common stock.


66



Risk‑Free Interest Rate—The risk‑free interest rate is based on the yield available on U.S. Treasury zero‑coupon issues similar in duration to the expected term of the equity‑settled award.
The following assumptions were used to calculate the fair value of awards granted to employees and directors during the periods indicated:
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Nine Months Ended September 30,
 
 
2015
 
2016
 
2016
 
2017
Expected term (in years)
 
3.1
 
4.6 - 6.1
 
4.6 - 6.1
 
6.0 - 6.1
Volatility
 
74%
 
68% - 74%
 
68% - 71%
 
75% - 100%
Risk-free interest rate
 
1.0%
 
1.3% - 2.1%
 
1.3% - 1.5%
 
1.9% - 2.2%
Dividend yield
 
 
 
 
 
 
 
 
 
 
 
 
 
The following assumptions were used to calculate the fair value of awards granted to non employees during the periods indicated:
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Nine Months Ended September 30,
 
 
2015
 
2016
 
2016
 
2017
Expected term (in years)
 
1.0 - 1.8
 
9.3 - 10.0
 
9.5 - 9.8
 
8.5 - 10.0
Volatility
 
62% - 74%
 
84% - 86%
 
84% - 86%
 
74% - 100%
Risk-free interest rate
 
0.5% - 0.7%
 
1.6% - 2.5%
 
1.6%
 
2.1% - 2.5%
Dividend yield
 
 
 
 
 
 
 
 
 
 
 
 
 
We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock‑based compensation expense calculations on a prospective basis.
Stock‑based compensation expense, net of estimated forfeitures, is reflected in the statements of operations and comprehensive loss as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
Nine Months Ended September 30,
 
 
2015
 
2016
 
2016
 
2017
Research and development
 
$
1

 
$
257

 
$
127

 
$
676

General and administrative
 
64

 
316

 
184

 
541

Total stock-based compensation