S-1/A 1 d617454ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on November 5, 2018

Registration No. 333-227902

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CENTREXION THERAPEUTICS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   2834   32-0402377

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

200 State Street

Boston, Massachusetts 02109

(781) 301-7277

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

 

 

Jeffrey B. Kindler

Chief Executive Officer

Centrexion Therapeutics Corporation

200 State Street

Boston, Massachusetts 02109

(617) 837-6911

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

 

 

Copies to:

 

Peter N. Handrinos

Wesley C. Holmes

Latham & Watkins LLP

200 Clarendon Street

Boston, Massachusetts 02116

(617) 948-6000

  Ilir Mujalovic
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
(212) 848-4000

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement is declared effective.

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

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

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

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

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

 

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

If an emerging growth company, indicate by checkmark 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   Proposed Maximum
Aggregate Offering
Price(1)(2)
 

Amount of Registration

Fee(3)(4)

Common Stock, $0.001 par value per share

  $92,000,000   $11,151

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

(3)

$10,454 of this registration fee was previously paid by the Registrant in connection with the filing of its Registration Statement on Form S-1 on October 19, 2018.

(4)

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

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

 

 

 


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

 

Subject to Completion

Preliminary Prospectus dated November 5, 2018.

PROSPECTUS

5,000,000 Shares

 

LOGO

Common Stock

 

 

This is Centrexion Therapeutics Corporation’s initial public offering. We are selling 5,000,000 shares of our common stock.

We expect the public offering price to be between $14.00 and $16.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on The Nasdaq Global Select Market under the symbol “CNTX.”

We are an “emerging growth company” under the federal securities laws and are subject to reduced public company disclosure standards. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 14 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $          $    

Underwriting discount(1)

   $          $    

Proceeds, before expenses, to us

   $          $    

 

  (1)

We refer you to “Underwriting” beginning on page 192 for additional information regarding underwriting compensation.

The underwriters may also exercise their option to purchase up to an additional 750,000 shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Certain of our existing stockholders, including entities affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of approximately $30 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering.

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.

The shares will be ready for delivery on or about                     , 2018.

 

 

 

BofA Merrill Lynch           Leerink Partners   Evercore ISI

 

 

The date of this prospectus is                     , 2018.


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TABLE OF CONTENTS

 

    

Page

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     14  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     71  

INDUSTRY AND OTHER DATA

     71  

USE OF PROCEEDS

     72  

DIVIDEND POLICY

     74  

CAPITALIZATION

     75  

DILUTION

     78  

SELECTED FINANCIAL DATA

     82  

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

     84  

BUSINESS

     106  

MANAGEMENT

     147  

EXECUTIVE AND DIRECTOR COMPENSATION

     155  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     169  

PRINCIPAL STOCKHOLDERS

     173  

DESCRIPTION OF CAPITAL STOCK

     177  

SHARES ELIGIBLE FOR FUTURE SALE

     184  

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

     187  

UNDERWRITING

     192  

LEGAL MATTERS

     200  

EXPERTS

     200  

WHERE YOU CAN FIND MORE INFORMATION

     200  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                 , 2018 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

We have proprietary rights to trademarks, trade names and service marks appearing in this prospectus that are important to our business. Solely for convenience, the trademarks, trade names and service marks may appear in this prospectus without the ® and TM symbols, but any such references are not intended to indicate, in any way, that we forgo or will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, trade names and service marks. All trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

 

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For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

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PROSPECTUS SUMMARY

This summary highlights, and is qualified in its entirety by, the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus carefully, especially the “Risk Factors” section beginning on page 14 and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock.

As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our” and “Centrexion” refer to Centrexion Therapeutics Corporation.

Overview

We are a late clinical-stage biopharmaceutical company focused on becoming the leader in identifying, developing and commercializing novel, non-opioid and non-addictive therapies to address the large unmet medical need for the treatment of chronic pain.

As of 2011, over 40 million adults in the United States and over 1 billion people worldwide suffer from chronic pain each year. This epidemic exacts a tremendous cost in terms of direct treatment and rehabilitation expenditures, lost worker productivity, prevalent addiction to opioid-based drugs, and emotional and financial burden for patients and their families. The World Health Organization, or WHO, and European Commission estimate the worldwide prevalence of osteoarthritis, or OA, alone will impact 130 million people by 2050, of whom 40 million will be severely disabled by the disease. According to an Institute of Medicine of the National Academies report, pain is a significant public health problem in the United States that costs society between $560 and $635 billion annually. Despite the magnitude of the pain problem, innovation in the development of therapeutic solutions has been largely absent. Since 2010, there have been 19 approvals by the U.S. Food and Drug Administration, or FDA, for the treatment of pain, of which 11 were opioid variants, one was an extended release generic corticosteroid, five were variants of aspirin, and two were variants of other existing drugs. We are developing a portfolio of novel product candidates designed to overcome the limitations of current treatment options for chronic pain and to present patients and physicians with better and safer treatment alternatives.

Our most advanced product candidate, CNTX-4975, is designed to selectively and locally target and disrupt the signaling of pain-sensing nerve fibers. CNTX-4975 is in pivotal Phase 3 development for the treatment of patients with moderate to severe pain due to knee OA. In a Phase 2 randomized, double-blinded, placebo-controlled clinical trial in 175 subjects with moderate to severe pain due to knee OA, we observed that, compared to placebo, subjects receiving a single intra-articular, or IA, injection of 1.0 mg of CNTX-4975 experienced:

 

   

statistically significant and clinically meaningful reduction in pain with walking on a flat surface, corresponding to question A1 of the Western Ontario and McMaster Universities Arthritis Index, or WOMAC index;

 

   

onset of pain relief observed by second day;

 

   

durable pain relief, lasting six months after a single treatment;

 

   

improvement in knee stiffness;

 

   

improvement in knee function; and

 

   

no detectable systemic exposure of CNTX-4975 by 24 hours after IA injection; and



 

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an observed adverse event, or AE, profile similar to the placebo group based on the overall incidence of AEs and distribution of specific AEs.

In the first quarter of 2018, we began enrolling subjects in VICTORY-1, the first of two planned pivotal Phase 3 registration trials for CNTX-4975, and we expect to report topline results in the first quarter of 2020. In the second half of 2018, we began enrolling subjects in OA-303, an open label safety trial with approximately 850 subjects, and in VICTORY-2, the second pivotal Phase 3 registration trial for CNTX-4975 that includes repeat dosing. We expect to report topline results from OA-303 in the second half of 2019 and VICTORY-2 in the second half of 2020. If the results of these trials are positive, we plan to submit a new drug application, or NDA, in the United States, and a marketing authorization application, or MAA, in Europe, in the second half of 2021. CNTX-4975 was granted Fast Track Designation by the FDA in January 2018 for the treatment of moderate to severe pain associated with knee OA.

We hold worldwide commercialization rights to CNTX-4975, and, if successfully developed and approved, we anticipate initial commercial sales in 2022. Issued and pending patent applications are expected to provide protection for CNTX-4975 through 2038.

In addition to CNTX-4975, we have three other product candidates in clinical development and one in pre-clinical development for the treatment of multiple types of pain. We believe that we have one of the industry’s largest pipelines of novel, non-opioid and non-addictive, clinical-stage product candidates for the treatment of chronic pain.

The pharmaceutical industry is highly competitive and we, along with our competitors, face a number of regulatory and technical challenges. Before obtaining marketing approval from regulatory authorities for the sale of any product candidates, we must complete pre-clinical and clinical development to demonstrate the safety and efficacy of our product candidates. However, we believe that several factors have positioned us to be a leader in the treatment of chronic pain, including our:

 

   

Unique Approach to the Treatment of Chronic Pain—Chronic pain is a highly complex and often misunderstood medical condition. We have a deep understanding of the pathophysiology of chronic pain. We believe we can leverage our knowledge of pain biology to develop targeted treatments that are specific to both the type and source of pain.

 

   

Extensive Clinical Data—We have generated Phase 2 clinical data for our most advanced product candidate, CNTX-4975, that showed onset of response by the second day after administration, a significant reduction from baseline knee OA pain and a clinically meaningful difference compared to the placebo group in subjects with moderate to severe pain associated with knee OA, and the potential for six months of significant pain reduction with a single IA injection. Additionally, in clinical trials to date the safety profile of CNTX-4975 has been similar to placebo with limited systemic exposure of CNTX-4975 after an IA injection.

 

   

Significant Management Team Expertise—We have assembled a senior management team with over 135 years of collective experience in leadership positions at companies such as Abbott, Celgene, Merck, Pfizer and Roche, with substantial product development experience and a successful track record of navigating complex drug development and regulatory pathways. Our clinical team has led or contributed to the development of 20 products, including Rituxan for rheumatoid arthritis, Otezla for psoriasis and psoriatic arthritis and Actemra for rheumatoid arthritis, all three of which have achieved multi-billion dollars in annual sales.



 

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Our product candidates are designed to treat pain conditions of multiple etiologies associated with a wide variety of common disease states. The following table summarizes our current product candidate pipeline:

 

LOGO

Our Strategy

Our mission is to develop and commercialize novel, non-opioid and non-addictive therapies to safely and effectively address the significant unmet medical need of chronic pain. The principal elements of our strategy to achieve this mission include the following:

 

   

Create novel, non-opioid and non-addictive therapies by leveraging our understanding of pain biology to address the large and growing problem of chronic pain. While innovation in medical sciences has led to exciting new treatment options in many disease areas, chronic pain has seen limited innovation in recent years. We have a deep understanding of the pathophysiology of chronic pain. We intend to leverage this understanding to bring innovation in the chronic pain treatment paradigm through targeted drug development. Our senior management team has over 135 years of collective experience in leadership positions at companies with substantial product development experience, and understands the complexity of designing and executing clinical trials for and developing pain therapies.

 

   

Advance the development of our lead product candidate, CNTX-4975, designed for the treatment of patients with moderate to severe chronic pain associated with knee OA. There are limited therapeutic options available for patients with moderate to severe knee OA and we believe that CNTX-4975 has the potential to transform the standard of care to a once-every-six months IA injection to substantially improve knee OA pain. In the first quarter of 2018, we began enrolling subjects in VICTORY-1, the first of two planned pivotal Phase 3 registration trials for CNTX-4975, and we expect to report topline results in the first quarter of 2020. In the second half of 2018, we began enrolling subjects in OA-303, an open label safety trial with approximately 850 subjects, and in VICTORY-2, the second pivotal Phase 3 registration trial for CNTX-4975 that includes repeat dosing. We expect to report topline results from OA-303 in the second half of 2019 and VICTORY-2 in the second half of 2020. In January 2018, the FDA granted Fast Track Designation for CNTX-4975 for the treatment of moderate to severe pain associated with knee OA. If successfully developed and approved, we anticipate initial commercial sales in 2022.



 

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Leverage clinical activity of CNTX-4975 to expand into new indications, including pain associated with the arthritis of other joints. We believe that CNTX-4975 may have analgesic utility in additional joints, including small sized joints such as the carpometacarpal joint, or base of the thumb, medium sized joints such as the ankle, and other large joints such as the shoulder. If we are successful in obtaining safety and efficacy data that support the use of CNTX-4975 in both a small and a medium sized joint, in addition to the large joint of the knee, we believe the indication for use of CNTX-4975, if approved, could potentially be broadened to the treatment of moderate to severe pain associated with OA, with no limitation as to which joint is involved. In addition, there are other types of joint disorders associated with chronic pain, such as rheumatoid and psoriatic arthritis, post-traumatic joint injury and temporomandibular joint disorders, where we believe CNTX-4975 may have potential for use as an analgesic.

 

   

Advance our other product candidates through clinical development and pursue development of additional product candidates. Our objective is to build a well-balanced, multi-asset portfolio targeting the large population of patients with chronic pain. To achieve this, in addition to CNTX-4975, we intend to pursue development of our other product candidates, CNTX-0290, CNTX-6970, CNTX-2022 and CNTX-6016, in indications where we believe they could have meaningful impact and address the large unmet medical need. In addition, we may choose to selectively in-license or acquire complementary product candidates by leveraging the insights, network and experience of our management team.

 

   

Maximize the commercial potential of all our product candidates. We currently intend to retain all commercial rights to CNTX-4975 in the United States and selectively partner outside of the United States. Because injectable IA therapies for chronic joint pain in the United States are administered by a relatively small number of specialists, particularly pain management physicians, sports medicine specialists, orthopedists and rheumatologists, we believe that we can effectively commercialize CNTX-4975 in the United States to each of these specialist groups with our own targeted sales and marketing organization and, thereby, retain greater commercial value versus a partnership. As we continue to build and develop our product portfolio, we may opportunistically pursue strategic partnerships that maximize the value of our pipeline while seeking to maintain commercialization rights in the United States for select specialists that treat chronic pain conditions.

 

   

Leverage our management team background and expertise. We have assembled a management team with extensive experience in product development. Our Chief Medical Officer is a rheumatologist with 28 years of drug development experience, our Chief Scientific Officer is a neurosurgeon who also led a pain research laboratory, and our Chief Development Operations Officer is a veterinary surgeon with 22 years of development experience including participation in the development of four approved pain therapies. Their experience with both patients and drug development provides them with deep insight into chronic pain as well as the changing treatment landscape. We believe this experience enables us to better understand unmet medical needs in chronic pain and design and execute efficient clinical trial programs and regulatory strategies.

Risk Factors

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

 

   

we have a limited operating history, have incurred significant losses since our inception, expect to incur losses for the foreseeable future, may never achieve or maintain profitability, and our



 

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recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern;

 

   

even if this offering is successful, we will need additional funding in order to complete development of and obtain regulatory approval for our product candidates and commercialize our products, if approved;

 

   

our pre-clinical studies and clinical trials may fail to demonstrate adequately the safety and efficacy of any of our product candidates and the development of our product candidates may be delayed or unsuccessful, which could prevent or delay regulatory approval and commercialization;

 

   

our business is highly dependent on the success of our lead product candidate, CNTX-4975, which will require significant additional clinical testing before we can seek regulatory approval and potentially launch commercial sales, and if CNTX-4975 does not receive regulatory approval or is not successfully commercialized, our business may be harmed;

 

   

the clinical trial and regulatory approval processes are lengthy, time consuming and inherently unpredictable, and we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates;

 

   

if the FDA does not conclude that certain of our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates may take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful;

 

   

developments by competitors may render our products or technologies obsolete or non-competitive or may reduce the size of our markets;

 

   

failure to obtain or maintain coverage and adequate reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue;

 

   

our product candidates may cause serious adverse events or undesirable side effects, including injury and death;

 

   

we rely on third parties, some of which are sole suppliers, for the manufacture and supply of materials for our research programs, pre-clinical studies and clinical trials and we do not have long-term contracts with any of these parties, which increases the risk that we will not have sufficient quantities of such materials, product candidates, or any therapies that we may develop and commercialize, or that such supply will not be available to us at an acceptable cost, which could delay, prevent, or impair our development or commercialization efforts;

 

   

our existing collaborations are important to our business and future licenses may also be important to us, and if we are unable to maintain any of these collaborations, or if these arrangements are not successful, our business could be adversely affected;

 

   

if we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents which are sufficient to protect our product candidates, others could compete against us more directly, which would negatively impact our business; and



 

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our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

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

 

   

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

 

   

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

 

   

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

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if any of the following events occur prior to the end of such five-year period, (i) our annual gross revenue exceeds $1.07 billion, (ii) we issue more than $1.0 billion of non-convertible debt in any three-year period or (iii) if we become a “large accelerated filer” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act), we will cease to be an emerging growth company prior to the end of such five-year period. We will be deemed to be a “large accelerated filer” at such time that we (a) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Exchange Act, for a period of at least 12 months and (c) have filed at least one annual report pursuant to the Exchange Act.

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

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



 

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Corporate Information

We were incorporated under the laws of the State of Delaware in February 2013. Our principal executive offices are located at 200 State Street, Boston, Massachusetts 02109 and our telephone number is (617) 837-6911. Our website address is www.centrexion.com. The information contained in, or accessible through, our website does not constitute a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.



 

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The Offering

 

Common stock offered by us

5,000,000 shares

 

Common stock to be outstanding after this offering

22,162,604 shares (or 22,912,604 shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares

The underwriters have a 30-day option to purchase up to 750,000 additional shares of our common stock at the public offering price less estimated underwriting discounts and commissions.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $66.7 million (or approximately $77.1 million if the underwriters exercise in full their option to purchase additional shares of common stock), at an assumed public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. We anticipate that we will use the net proceeds of this offering, together with our cash and cash equivalents, to fund the Phase 3 program and pre-commercialization expenses for CNTX-4975 through topline results in the first pivotal Phase 3 registration trial, VICTORY-1; to fund the development of CNTX-0290 to complete Phase 1 development and initiate a Phase 2 trial for chronic pain; to fund the development of CNTX-6970 to complete Phase 1 development and initiate a Phase 2 trial for chronic pain; to fund the development of CNTX-6016 to complete Phase 1 development; and the remainder, if any, for other research and development expenses for our pipeline, including unallocated expenses and expenses for CNTX-2022, and for working capital and other general corporate purposes. See “Use of Proceeds” beginning on page 72 for additional information.

 

Risk factors

You should carefully read the “Risk Factors” beginning on page 14 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

 

Dividend policy

The terms of our current certificate of incorporation provide that, upon conversion of our preferred stock into our common stock upon the closing of this offering, the holders of Series D preferred stock will receive a cumulative accrued dividend calculated at a rate per annum of $0.117 per share of Series D preferred stock (subject to certain adjustment provisions), payable in shares of common stock based on a value of $11.24 per share. Based on an assumed closing date of November 19, 2018, we expect to issue 392,504 shares of our common stock for cumulative accrued dividends to our Series D preferred stockholders. For each day prior to or following the assumed closing date that this offering actually closes, such dividends



 

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decrease or increase, respectively, by an aggregate of approximately 1,157 shares of common stock. The stock dividends will not be paid on any shares of our common stock purchased in this offering. We do not pay dividends on our common stock and do not anticipate paying any dividends on our common stock for the foreseeable future. Any future determinations relating to our dividend policy will be made at the discretion of our board of directors and will depend on various factors. See “Dividend Policy” on page 73.

 

Proposed Nasdaq Global Select Market symbol

“CNTX”

 

 

Certain of our existing stockholders, including entities affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of approximately $30 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering.

The number of shares of our common stock to be outstanding after this offering is based on 1,244,493 shares of our common stock outstanding as of September 30, 2018 and excludes:

 

   

1,981,815 shares of our common stock issuable upon exercise of stock options outstanding as of September 30, 2018, at a weighted-average exercise price of $4.36 per share;

 

   

83,189 shares of our common stock issuable upon the exercise of certain warrants to purchase common stock outstanding as of September 30, 2018 at a weighted average exercise price of $6.59 per share;

 

   

1,284,465 shares of our common stock issuable upon the exercise of stock options to be granted in connection with this offering under our 2018 Incentive Award Plan, or the 2018 Plan, which will become effective in connection with this offering, to certain of our directors, executive officers and employees, at an exercise price per share equal to the initial public offering price in this offering;

 

   

843,829 shares of our common stock reserved for future issuance under the 2018 Plan, as well as shares of our common stock that become available pursuant to provisions in the 2018 Plan that automatically increase the share reserve under the 2018 Plan as described in “Executive and Director Compensation—Incentive Plans—2018 Incentive Award Plan”; and

 

   

266,000 shares of our common stock that will become available for future issuance under our 2018 Employee Stock Purchase Plan, or the 2018 ESPP, which will become effective in connection with this offering, as well as shares of our common stock that become available pursuant to provisions in the 2018 ESPP that automatically increase the share reserve under the 2018 ESPP as described in “Executive and Director Compensation—Incentive Plans—2018 Employee Stock Purchase Plan.”

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

a 1-for- 6.245 reverse split of our common stock, which became effective on November 2, 2018;



 

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the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 14,979,055 shares of our common stock upon the closing of this offering;

 

   

the issuance of an aggregate of 392,504 shares of our common stock upon the closing of this offering to pay accrued dividends on our Series D preferred stock, assuming a closing date for this offering of November 19, 2018 (for each day prior to or following such assumed closing date that this offering actually closes, such dividends shall decrease or increase, respectively, by an aggregate of approximately 1,157 shares of common stock);

 

   

the automatic cashless exercise of certain outstanding warrants to purchase shares of common stock and preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrants will be equal to the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and assuming the automatic conversion of the shares of preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of 139,009 shares of our common stock upon the closing of this offering (a $1.00 increase in the assumed initial public offering price of $15.00 per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of 33,128 shares; a $1.00 decrease in the assumed initial public offering price of $15.00 per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of 37,864 shares);

 

   

the assumed exercise prior to the closing of this offering of certain outstanding warrants that shall otherwise expire upon such closing to purchase 2,545,405 shares of preferred stock for an aggregate purchase price of approximately $4.5 million, which, assuming the automatic conversion of the shares of preferred stock issued pursuant to such exercise into shares of common stock, would result in the issuance of 407,543 shares of our common stock upon the closing of this offering;

 

   

for purposes of any automatic cashless exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of the applicable warrant;

 

   

no exercise of outstanding options or warrants after September 30, 2018, other than as described above;

 

   

the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur in connection with the closing of this offering; and

 

   

no exercise by the underwriters of their option to purchase additional shares of our common stock.



 

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Summary Financial Data

The following tables set forth a summary of our financial data as of, and for the periods ended on, the dates indicated. We have derived the summary statement of operations data for the years ended December 31, 2016 and 2017 from our audited financial statements appearing at the end of this prospectus. The statement of operations data for the nine months ended September 30, 2017 and 2018 and the balance sheet data as of September 30, 2018 have been derived from our unaudited financial statements appearing at the end of this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and results for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018. You should read the following summary financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus.

 

    

Year Ended
December 31,

   

Nine Months Ended

September 30,

 
    

2016

   

2017

   

2017

   

2018

 
     (in thousands, except share and per share data)  
                 (unaudited)  

Statements of Operations Data:

        

Revenue

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Research and development

     27,788       17,622       14,077       17,420  

General and administrative

     5,443       6,433       5,119       6,612  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     33,231       24,055       19,196       24,032  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (33,231     (24,055     (19,196     (24,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

        

Interest income

     22       43       19       564  

Interest expense

     (2,126     (983     (617     (205

Loss on conversion of convertible notes payable

     (2,412     (497     —         —    

Loss on disposal of property and equipment

     —         (38     (38     —    

Loss on forgiveness of notes receivable from stockholders

     —         —         —         (599

Loss on extinguishment of long-term debt

     —         —         —         (298

Revaluation of warrant liabilities

     75       475    

 

 

 

339

 

 

    (763
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (4,441     (1,000  

 

 

 

 

 

(297

 

 

    (1,301
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income tax benefit

     (37,672     (25,055  

 

 

 

(19,493

 

    (25,333

Income tax benefit

     —         441    

 

 

 

—  

 

 

    —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (37,672     (24,614  

 

 

 

(19,493

 

    (25,333

Plus: Cumulative dividends on convertible preferred stock

     —         (128  

 

 

 

—  

 

 

    (2,791
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (37,672   $ (24,742  

 

 

$

 

 

(19,493

 

 

  $ (28,124
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (30.36   $ (19.91  

 

 

$

 

 

(15.68

 

 

  $ (22.60
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted(1)

     1,240,991       1,242,744    

 

 

 

 

1,243,366

 

 

 

 

    1,244,493  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

         $ (1.56
        

 

 

 

Weighted average shares used in computing pro forma net loss attributable to common stockholders, basic and diluted (unaudited)(1)

           16,382,243  
        

 

 

 


 

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(1)

See Note 2 to our audited financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the historical and pro forma basic and diluted net loss per common share and the weighted average number of shares used in the computation of the per share amounts.

 

    

As of September 30, 2018

    

 

 
    

Actual

    

Pro Forma(1)

    

Pro Forma As
Adjusted(2)(3)

 
           

(unaudited)

(in thousands)

        

Balance Sheet Data:

        

Cash and cash equivalents

   $ 42,059      $ 46,555      $ 113,205  

Total assets

     52,786        57,282        123,932  

Working capital(4)

     39,963        44,459        111,109  

Long term debt

     7,740        7,740        7,740  

Common stock

     1        17        22  

Convertible preferred stock

     155,627        —          —    

Additional paid-in capital

     5,695        170,309        236,954  

Accumulated deficit

     (125,671      (126,969      (126,969

Total stockholders’ (deficit) equity

     (119,951      43,357        110,007  

 

(1)

The pro forma balance sheet data gives effect to the:

 

   

automatic conversion of all outstanding shares of our preferred stock into an aggregate of 14,979,055 shares of our common stock upon the closing of this offering;

 

   

the issuance of an aggregate of 392,504 shares of our common stock upon the closing of this offering to pay accrued dividends on our Series D preferred stock, assuming a closing date for this offering of November 19, 2018 (for each day prior to or following such assumed closing date that this offering actually closes, such dividends shall decrease or increase, respectively, by an aggregate of approximately 1,157 shares of common stock);

 

   

the automatic cashless exercise of certain outstanding warrants to purchase shares of common stock and preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrants will be equal to the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and assuming the automatic conversion of the shares of preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of 139,009 shares of our common stock upon the closing of this offering (a $1.00 increase in the assumed initial public offering price of $15.00 per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of 33,128 shares; a $1.00 decrease in the assumed initial public offering price of $15.00 per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of 37,864 shares);

 

   

the assumed exercise prior to the closing of this offering of certain outstanding warrants that shall otherwise expire upon such closing to purchase 2,545,405 shares of preferred stock for an aggregate purchase price of approximately $4.5 million, which, assuming the automatic conversion of the shares of preferred stock issued pursuant to such exercise into shares of common stock, would result in the issuance of 407,543 shares of our common stock upon the closing of this offering; and



 

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for purposes of any automatic cashless exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of the applicable warrant.

 

(2)

Reflects the pro forma adjustments described in footnote (1) and the issuance and sale of shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total assets, additional paid-in capital and total stockholders’ equity (deficit) by $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price would increase (decrease) each of cash and cash equivalents, total assets, additional paid-in capital and total stockholders’ equity (deficit) by $14.0 million. The pro forma information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

(4)

We define working capital as current assets less current liabilities.



 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment in our common stock. Our business, financial condition, results of operations or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our common stock could decline and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below.

Risks Related to Our Financial Position and Need for Additional Capital

We have a limited operating history and a history of escalating operating losses, which may make it difficult to evaluate the prospects for our future viability.

We are a late clinical-stage biopharmaceutical company established in February 2013 and have only a limited operating history. Our operations to date have been limited to financing and staffing our company, developing our technology and identifying and developing our product candidates. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations. We have not yet demonstrated an ability to obtain marketing approval, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing, obtaining marketing approval for and commercializing chronic pain treatments.

In addition, as a business with a limited operating history, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown obstacles. We will eventually need to transition from a company with a research focus and development to a company capable of supporting commercial activities. We may not be successful in such a transition.

As we continue to build our business, we expect our financial condition and operating results may fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any particular quarterly or annual period as indications of future operating performance.

We have incurred significant losses since inception and expect to incur significant additional losses for the foreseeable future. We may never achieve or maintain profitability.

We have incurred significant operating losses since our inception, including operating losses of approximately $33.2 million and $24.1 million for the fiscal years ended December 31, 2016 and December 31, 2017, respectively, and $19.2 million and $24.0 million for the nine months ended September 30, 2017 and 2018, respectively. In addition, we have not commercialized any products and have never generated any revenue from product sales. We have devoted most of our financial resources to research and development, including our pre-clinical development activities.

In addition, we expect to continue to incur significant additional operating losses for the foreseeable future as we seek to advance product candidates through pre-clinical and clinical development, expand our research and development activities, develop new product candidates, complete pre-clinical studies and clinical trials, seek regulatory approval and, if we receive FDA approval, commercialize our products. In order to obtain FDA approval of any product candidate, we must submit to the FDA an NDA demonstrating that the product

 

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candidate is safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are referred to as non-clinical or pre-clinical studies, as well as human tests, which are referred to as clinical trials. Furthermore, the costs of advancing product candidates into each succeeding clinical phase tend to increase substantially over time. The total costs to advance any of our product candidates to marketing approval in even a single jurisdiction would be substantial. Because of the numerous risks and uncertainties associated with chronic pain treatment product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to begin generating revenue from the commercialization of products or achieve or maintain profitability. Our expenses will also increase substantially if and as we:

 

   

continue our current research programs and our pre-clinical and clinical development and approval of product candidates from our current research programs;

 

   

seek to identify, assess, acquire and/or develop additional research programs and additional product candidates;

 

   

initiate pre-clinical testing and clinical trials for any product candidates in our pipeline or any other product candidates we identify and develop in the future;

 

   

seek regulatory approvals for our product candidates;

 

   

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

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

add clinical, scientific, commercial and support personnel;

 

   

utilize external vendors for support with respect to research, development, commercialization, regulatory, pharmacovigilance and other functions;

 

   

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

 

   

acquire or in-license other commercial products, product candidates and technologies;

 

   

make royalty, milestone or other payments under current and any future in-license agreements;

 

   

implement additional internal systems and infrastructure; and

 

   

operate as a public company.

Furthermore, our ability to successfully develop, commercialize and license our products and generate product revenue is subject to substantial additional risks and uncertainties. Each of our product candidates will require additional pre-clinical and clinical development and, for some of our product candidates, additional pre-clinical development, potential regulatory approval in multiple jurisdictions, the securing of manufacturing supply, capacity and expertise, the use of external vendors, the building of a commercial organization, substantial investment and significant marketing efforts before we generate any revenue from product sales. As a result, we expect to continue to incur net losses and negative cash flows for the foreseeable future. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

 

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The amount of future losses and when, if ever, we will achieve profitability are uncertain. We have no products that have generated any commercial revenue, do not expect to generate revenues from the commercial sale of products in the foreseeable future, and might never generate revenues from the sale of products. Our ability to generate revenue and achieve profitability will depend on, among other things, successful completion of the clinical development of our product candidates; obtaining necessary regulatory approvals from the FDA and international regulatory agencies; establishing manufacturing, sales, and marketing infrastructure to commercialize our product candidates for which we obtain approval; and raising sufficient funds to finance our activities. We might not succeed at any of these undertakings. If we are unsuccessful at some or all of these undertakings, our business, prospects, and results of operations may be materially adversely affected.

Even if this offering is successful, we will need additional funding in order to complete development of and obtain regulatory approval for our product candidates and commercialize our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Even after the consummation of this offering, we will continue to need additional capital beyond the proceeds of this offering, which we may raise through equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or other sources. Additional sources of financing might not be available on favorable terms, if at all. If we do not succeed in raising additional funds on acceptable terms, we might be unable to complete planned clinical trials or obtain approval of any of our product candidates from the FDA, or any foreign regulatory authorities, and could be forced to discontinue product development. In addition, attempting to secure additional financing may divert the time and attention of our management from day-to-day activities and harm our product candidate development efforts.

We will require substantial funds to further develop, obtain approval for and commercialize our product candidates, including CNTX-4975, which is currently in Phase 3 clinical development. We will also require substantial funds to further develop, obtain approval for and commercialize our other product candidates, CNTX-2022, CNTX-6970, CNTX-0290 and CNTX-6016, which are in various stages of development.

Based on our current operating plan, we believe that the net proceeds from this offering and our current cash and cash equivalents will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2020, including the funding of the Phase 3 program and precommercialization expenses for CNTX-4975 through topline results in the first pivotal Phase 3 registration trial, VICTORY-1; the funding of the development of CNTX-0290 to complete Phase 1 development and initiate a Phase 2 trial for chronic pain; the funding of the development of CNTX-6970 to complete Phase 1 development and initiate a Phase 2 trial for chronic pain; the funding of the development of CNTX-6016 to complete Phase 1 development; and the remainder, if any, for other research and development expenses for our pipeline, including unallocated expenses and expenses for CNTX-2022, and for working capital and other general corporate purposes. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more than currently expected because of circumstances beyond our control. Because the length of time and activities associated with successful development of CNTX-4975 and our other product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development, approval and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

   

the scope and results of our pre-clinical studies and clinical trials;

 

   

the timing of, and the costs involved in, obtaining regulatory approvals for CNTX-4975 and our other product candidates;

 

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the costs and timing of changes in the regulatory environment and enforcement rules;

 

   

the costs and timing in changes in pharmaceutical pricing and reimbursement infrastructure;

 

   

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including any litigation costs and the results of such litigation;

 

   

the effect of competing technological and market developments;

 

   

the costs of operating as a public company;

 

   

the extent to which we in-license or acquire other products and technologies;

 

   

the cost of establishing sales, marketing and distribution capabilities for our product candidates in regions where we choose to commercialize our products; and

 

   

the initiation, progress, timing and results of our commercialization of CNTX-4975 and our other product candidates, if approved for commercial sale.

Depending on our business performance, the economic climate and market conditions, we may be unable to raise additional funds through any sources. If we are unable to obtain adequate funding on a timely basis, we may be required to curtail or discontinue one or more of our development programs for CNTX-4975, CNTX-0290, CNTX-6970, CNTX-2022 or CNTX-6016 or to reduce our operations. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience dilution and the terms of any new equity securities may have preference over those of our existing common stock.

Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

We have incurred significant operating losses since our inception and have never generated revenue or profit, and it is possible we will never generate revenue or profit. Meaningful revenues will likely not be available until and unless any future product candidates are approved by the FDA or comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome which may not occur. Accordingly, we have concluded that substantial doubt exists regarding our ability to continue as a going concern. Our audited financial statements appearing at the end of this prospectus have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties related to our ability to operate on a going concern basis. However, in its report on our financial statements for the year ended December 31, 2017, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern.The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.

Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

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Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial revenue, we may finance our cash needs through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that 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, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our operations, our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, redeeming our stock, making certain investments and engaging in certain merger, consolidation or asset sale transactions, among other restrictions. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt. In addition, we may still incur substantially more debt.

As of September 30, 2018, our total indebtedness (excluding facility lease obligations) was approximately $7.7 million, comprised of borrowings under our loan and security agreement with Silicon Valley Bank, or the term loan facility. We may also incur additional indebtedness to meet future financing needs. There is a risk that we may be unable to generate enough cash to pay amounts due in respect of our indebtedness.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our current indebtedness obligations and any future indebtedness we may incur, as well as to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional debt or equity financing on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time.

In addition, the loan and security agreement contains, and the agreements that may govern any future indebtedness that we may incur may contain, financial and other restrictive covenants that will limit our ability to engage in activities that may be in our best interests. Our failure to comply with those covenants could result in an event of default under such agreements that, if not cured or waived, could result in the acceleration of a portion or all of our indebtedness. All obligations under the term loan facility are secured by a first priority lien on substantially all of our personal property, subject to certain exceptions including intellectual property assets. As a result, if we default on any of our obligations under the term loan facility, Silicon Valley Bank could foreclose on its security interest and liquidate some or all of the collateral, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations.

 

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We have no approved products.

To date, we have no approved product on the market and have generated no product revenues. Unless we receive approval from the FDA or other regulatory authorities for our product candidates, we will not have product revenues. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from the net proceeds of this offering, cash on hand, and licensing fees and grants, if any.

Our product candidates are in various stages of development.

We are a biopharmaceutical company focused on the development of therapeutics that are intended to provide patients with relief from chronic pain, all of which treatments are at stages of clinical development. Favorable results in pre-clinical or early stage clinical trials may not be predictive of success in later clinical trials and may not lead to commercially viable products for any of several reasons. For example, our product candidates may fail to be safe and effective in clinical trials or additional pre-clinical studies, or we may have inadequate financial or other resources to pursue discovery and development efforts for new product candidates. Our product candidates will require significant additional development, clinical trials, regulatory clearances and additional investment by us before they can be commercialized.

Our business is highly dependent on the success of our lead product candidate, CNTX-4975, which is being developed as a synthetic, ultra-pure IA injection of trans-capsaicin. CNTX-4975 and our other product candidates will require significant additional clinical testing before we can seek regulatory approval and potentially launch commercial sales. If CNTX-4975 does not receive regulatory approval or is not successfully commercialized, our business may be harmed.

A substantial portion of our business and future success depends on our ability to develop, obtain regulatory approval for and successfully commercialize our lead product candidate, CNTX-4975. We currently have no products that are approved for commercial sale and may never be able to develop marketable products. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted to CNTX-4975, which will require additional clinical development, management of clinical, medical affairs and manufacturing activities, regulatory approval in multiple jurisdictions, the securing of manufacturing supply, the building of a commercial organization, substantial investment and significant marketing efforts before we can generate any revenues from any commercial sales. We cannot be certain that CNTX-4975 will be successful in ongoing or future clinical trials, receive regulatory approval or be successfully commercialized even if we receive regulatory approval. Even if we receive approval to market CNTX-4975 from the FDA or other regulatory bodies, we cannot be certain that our product candidates will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. Nor can we be certain that, if and when approved, the safety and efficacy profile of CNTX-4975 or our other product candidates will be consistent with the profiles observed in clinical trials.

CNTX-4975 is being developed as a synthetic, ultra-pure IA injection of trans-capsaicin for the treatment of moderate to severe chronic pain associated with knee OA as our lead indication. We have also studied CNTX-4975 in Morton’s neuroma and in canine OA, although neither of these programs is actively in development at this time due to our prioritization of the knee OA program. If the CNTX-4975 knee OA program is not successfully completed, required regulatory approvals are not obtained, or any approved products are not commercially successful, our business, financial condition and results of operations may be materially harmed.

CNTX-4975 is our most advanced product candidate, and if we experience regulatory or developmental issues with respect to CNTX-4975, our development plans and business could be significantly harmed. Moreover, if we experience similar regulatory or developmental issues with our other pipeline product candidates, our development plans and business could be significantly harmed. Further, our competitors may be developing products with similar mechanisms of action and may experience problems with their products that could identify problems that would potentially harm our business.

 

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We may not be successful in our efforts to identify and successfully commercialize additional product candidates.

Part of our strategy involves identifying novel product candidates. The process by which we identify product candidates may fail to yield product candidates for clinical development for a number of reasons, including those discussed in these risk factors and also:

 

   

we may not be able to assemble sufficient resources to acquire or discover additional product candidates;

 

   

competitors may develop alternatives that render our potential product candidates obsolete or less attractive;

 

   

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

 

   

potential product candidates may, on further study, be shown to have harmful side effects, toxicities or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance;

 

   

potential product candidates may not be effective in treating their targeted diseases or symptoms;

 

   

the market for a potential product candidate may change so that the continued development of that product candidate is no longer reasonable;

 

   

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

 

   

the regulatory pathway for a potential product candidate is highly complex and difficult to navigate successfully or economically.

In addition, we may choose to focus our efforts and resources on a potential product candidate that ultimately proves to be unsuccessful, or to license or purchase a marketed product that does not meet our financial expectations. As a result, we may fail to capitalize on viable commercial products or profitable market opportunities, be required to forego or delay pursuit of opportunities with other product candidates or other diseases that may later prove to have greater commercial potential, or relinquish valuable rights to such product candidates through collaboration, licensing or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights. If we are unable to identify and successfully commercialize additional suitable product candidates, this would adversely impact our business strategy and our financial position.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may

 

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relinquish valuable rights to that product 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 product candidate.

Risks Related to Discovery, Development, Clinical Testing, Manufacturing and Regulatory Approval

Clinical trials required for our product candidates are expensive and time-consuming, their outcome is uncertain, and if our clinical trials do not meet safety or efficacy endpoints in these evaluations, or if we experience significant delays in these trials, our ability to commercialize our product candidates and our financial position will be impaired.

We dosed our first patient in a pivotal Phase 3 clinical trial of our lead product, CNTX-4975, in February 2018. Our other product candidates are in pre-clinical or clinical development. It is impossible to predict when or if any of our product candidates will prove effective and safe in humans or will receive regulatory approval, and the risk of failure through the development process is high. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete pre-clinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans.

Clinical development is a long, expensive and uncertain process that is subject to significant delays. Due to known or unknown circumstances beyond our control, it may take us several years to complete our testing, and failure can occur at any stage of testing. Delays associated with products for which we are directly conducting pre-clinical studies or clinical trials may cause us to incur additional operating expenses. The commencement and rate of completion of pre-clinical studies or clinical trials may be delayed by, or terminated because of, many factors, including:

 

   

the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our pre-clinical studies or clinical trials;

 

   

failure to obtain regulatory approval to commence a trial;

 

   

failure to reach an agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

slower than expected rates of recruitment of patients or failure to recruit a sufficient number of patients;

 

   

modification of pre-clinical studies or clinical trial protocols;

 

   

changes in regulatory requirements for pre-clinical studies or clinical trials;

 

   

the impact of unusual placebo effects;

 

   

the lack of effectiveness during pre-clinical studies or clinical trials;

 

   

the emergence of unforeseen safety issues;

 

   

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

 

   

delays, suspension, or termination of clinical trials by the IRB responsible for overseeing the trial at a particular trial site;

 

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failure of patients in completing a trial or returning for post-treatment follow-up;

 

   

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

 

   

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

 

   

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

 

   

government, IRB or other regulatory delays or “clinical holds” requiring suspension or termination of the trials.

We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates or significantly increase the cost of such trials, including:

 

   

we may receive feedback from regulatory authorities that requires us to modify the design of our clinical trials;

 

   

clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon development programs;

 

   

the number of patients required for clinical trials of our product candidates 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 at a higher rate than we anticipate;

 

   

we may be unable to enroll a sufficient number of patients in our clinical trials to ensure adequate statistical power to detect any statistically significant treatment effects;

 

   

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

   

regulators, IRBs or independent ethics committees, or IECs, may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site or may require that we or our investigators suspend or terminate clinical trials of our product candidates for various reasons, including non-compliance with regulatory requirements, a finding that our product candidates have undesirable side effects or other unexpected characteristics, or a finding that the participants are being exposed to unacceptable health risks;

 

   

we may experience delays in reaching or fail to reach agreement on acceptable pre-clinical studies or clinical trial contracts or pre-clinical studies or clinical trial protocols with prospective trial sites;

 

   

the cost of pre-clinical studies or clinical trials of our product candidates may be greater than we anticipate and we may not have funds to cover the costs;

 

   

the supply or quality of our product candidates or other materials necessary to conduct pre-clinical studies or clinical trials of our product candidates may be insufficient or inadequate;

 

   

regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate; and

 

   

any future collaborators that conduct pre-clinical studies or clinical trials may face any of the above issues, and may conduct pre-clinical studies or clinical trials in ways they view as advantageous to them but that are suboptimal for us.

 

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If we are required to extend the duration of current pre-clinical studies or clinical trials or to conduct additional pre-clinical studies or clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete pre-clinical studies or clinical trials of our product candidates or other testing, if the results of these trials, studies or tests are not positive or are only modestly positive, if there are safety concerns or if we determine that the observed safety or efficacy profile would not be competitive in the marketplace, we may:

 

   

incur unplanned costs;

 

   

be delayed in obtaining marketing approval for our product candidates or not obtain marketing approval at all;

 

   

obtain marketing approval in some countries and not in others;

 

   

obtain marketing approval for indications or patient populations that are not as broad as intended or desired;

 

   

obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

   

be subject to additional post-marketing testing requirements; or

 

   

have the product removed from the market after obtaining marketing approval.

We could encounter delays if a clinical trial is materially modified, suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may impose such a material modification, 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 for our product candidates, or other products or product candidates in the same drug class, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Furthermore, we may rely on CROs and clinical trial sites to ensure the proper and timely conduct of clinical trials and while we would have agreements governing their committed activities, we would have limited influence over their actual performance, as described in “—Risks Related to Our Dependence on Third Parties.”

Our most advanced product candidate, CNTX-4975, is in clinical development and will require the completion of clinical testing before we are prepared to submit an NDA for regulatory approval. We cannot predict if or when we might complete the development of CNTX-4975 and submit an NDA or whether any such NDA will be approved by the FDA. We may also seek feedback from the FDA or other regulatory authorities on our clinical development programs, and the FDA or such regulatory authorities may not provide such feedback on a timely basis, or such feedback may not be favorable, which could further delay our development programs. If the results of ongoing and future clinical trials for CNTX-4975 are positive, we plan to submit an NDA in the United States, and an MAA in Europe, in the second half of 2021. If CNTX-4975 is successfully developed and approved, we anticipate initial commercial sales in 2022. However, no assurance can be given that we will be successful to meet this timeline, obtain regulatory approval or have any commercial sales of CNTX-4975.

Any clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities. Pre-clinical and clinical data can be interpreted in different ways by different reviewers and regulators, which could delay, limit or prevent regulatory approval. Drug-related adverse events during a pre-clinical study or clinical trial could cause us to repeat a trial or study, perform an additional trial or study, expand the size and/or

 

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duration of a trial or study, terminate a trial or study or even cancel a pre-clinical or clinical program. The failure of pre-clinical studies or clinical trials to demonstrate safety and effectiveness for the desired indications could harm the development of that product candidate and other product candidates. This failure could cause us to abandon a product candidate and could delay development of other product candidates. Any delay in, or termination of, our clinical trials would delay the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues. A number of companies in the biotechnology and pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Even if our future and ongoing pre-clinical studies and clinical trials are completed as planned, we cannot be certain that their results will support the safety and effectiveness of CNTX-4975 for any potential indication.

If we experience delays in the commencement or completion of, or have to extend or expand, our pre-clinical studies or clinical trials, or if we terminate a pre-clinical study or clinical trial prior to completion, the commercial prospects of CNTX-4975 could be harmed, and our ability to generate revenues from CNTX-4975 may be delayed. In addition, any delays in our pre-clinical studies or clinical trials could increase our costs, slow down the development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and results of operations. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of pre-clinical studies or clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

Our pre-clinical studies and clinical trials may fail to demonstrate adequately the safety and efficacy of any of our product candidates and the development of our product candidates may be delayed or unsuccessful, which could prevent or delay regulatory approval and commercialization.

All of our product candidates are in clinical or pre-clinical development stages. Notwithstanding the data obtained to date with respect to CNTX-4975 in both knee OA and Morton’s neuroma, CNTX-4975, as well as all of our other product candidates, will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from our product sales. In addition, if we encounter safety or efficacy problems, developmental delays or regulatory issues or other problems, our developmental plans and business could be significantly harmed.

If the clinical development of CNTX-4975 or any of our other product candidates is unsuccessful, our ability to generate revenues will be adversely affected. Our development of current and future product candidates is subject to the risks of failure and delay inherent in the development of new products and product candidates, including:

 

   

delays in product development, pre-clinical or clinical testing or manufacturing;

 

   

unplanned expenditures in product development, pre-clinical or clinical testing or manufacturing;

 

   

failure to receive regulatory approvals;

 

   

failure to secure rights from third parties for new technology;

 

   

failure to achieve market acceptance; and

 

   

emergence of superior or equivalent products.

In addition, product candidates in later stages of clinical trials may fail to show the desired safety profiles and efficacy results despite having progressed through pre-clinical studies and initial clinical trials. A

 

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number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative or inconclusive results, we may decide, or regulators may require us, to conduct additional clinical trials or pre-clinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval.

Additionally, we have not conducted, nor do we believe we are required to conduct, any head-to-head trials comparing CNTX-4975 to other approved or experimental OA pain management drugs. Any such head-to-head trial, if conducted, may show that CNTX-4975 is not more effective than any of such other drugs. Material adverse differences in the relative efficacy of CNTX-4975 could significantly harm the adoptions of CNTX-4975 and our business prospects.

Because of these risks, our research and development efforts may not result in any commercially viable products. If a significant portion of these development efforts are not successfully completed, required regulatory approvals are not obtained, or any approved products are not commercially successful, our business, financial condition and results of operations may be materially harmed.

If the FDA does not conclude that certain of our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates may likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.

We are developing proprietary product candidates, including CNTX-4975 and CNTX-2022, for which we may seek FDA approval through the Section 505(b)(2) regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from trials that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDA we submit to the FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved compounds, which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as we anticipated, we may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.

In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to accelerated product development or earlier approval.

Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of

 

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approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.

Any breakthrough therapy designation that we may receive from the FDA for our product candidates may not lead to a faster development or regulatory review or approval process, and it would not increase the likelihood that our product candidates will receive marketing approval.

A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. For drugs that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA are also eligible for accelerated approval.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. The availability of breakthrough therapy designation was established recently with the passage of the Food and Drug Administration Safety and Innovation Act of 2012. We cannot be sure that any evaluation we may make of our product candidates as qualifying for breakthrough therapy designation will meet the FDA’s expectations. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that such product candidates no longer meet the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.

A Fast Track Designation by the FDA may not actually lead to a faster development or regulatory review or approval process.

CNTX-4975 for the treatment of moderate to severe pain associated with knee OA was granted Fast Track Designation in January 2018, and for Morton’s neuroma in August 2016, and we may seek Fast Track Designation for our other product candidates. If a product is intended for the treatment of a serious or life-threatening condition and the product demonstrates the potential to address unmet medical needs for this condition, the product sponsor may apply for FDA Fast Track Designation. The FDA has broad discretion whether or not to grant this designation, and even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. A Fast Track Designation may not actually lead to a faster development process, review or approval compared to conventional FDA processes. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program.

We may not be able to obtain orphan drug designation for our product candidates, and even if we do, we may be unable to maintain the benefits associated with orphan drug designation, including the potential for market exclusivity.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. CNTX-4975 for Morton’s neuroma was granted orphan drug designation by the FDA in September 2006. We may seek orphan drug designation for other product candidates, although we have not yet applied for or obtained such designation. Under the Orphan Drug Act of 1983, the FDA may designate a product as an orphan product if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population of greater than 200,000 individuals in the United States, but for which there is no

 

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reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the United States.

In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product candidate that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA to market the same drug for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity. The applicable exclusivity period is ten years in Europe, but such exclusivity period can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified.

Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior if it is shown to be safer, more effective or otherwise makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process, nor does it prevent competitors from obtaining approval of the same product candidate as ours for indications other than those in which we have been granted orphan drug designation.

We have conducted, and in the future, we may conduct clinical trials for our product candidates in sites outside the United States, and the FDA may not accept data from trials conducted in foreign locations.

We have conducted clinical trials of certain of our product candidates outside the United States, and we may in the future choose to conduct other clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with good clinical practice, or GCP, including review and approval by an IEC and informed consent from subjects. The study population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In general, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to label the product in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from our clinical trials of our product candidates, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of our product candidates.

Interim “top-line” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publish interim “top-line” or preliminary data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary or “top-line” data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.

 

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If we fail to obtain the necessary U.S. regulatory approvals to commercialize any product candidate, we will not be able to generate revenue in the U.S. market.

We cannot assure you that we will receive the approvals necessary to commercialize our product candidates, or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the United States and approvals from equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our research and clinical efforts will result in drugs that the FDA will determine are safe for humans and effective for their intended uses. The FDA has substantial discretion in the drug approval process and may require us to conduct additional pre-clinical and clinical testing, perform post-marketing studies, address manufacturing concerns, or otherwise limit or impose conditions on any approval we obtain. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals may:

 

   

delay commercialization of, and our ability to derive product revenues from, our product candidates;

 

   

impose costly procedures on us; and

 

   

diminish any competitive advantages that we may otherwise enjoy.

Even if we receive approval of an NDA or comparable foreign regulatory filing for our product candidates, the FDA or the applicable foreign regulatory body may approve our product candidates for a more limited indication than we originally requested, and the FDA may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates.

Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our NDAs. We cannot be sure that we will ever obtain regulatory clearance for our product candidates. Failure to obtain FDA approval of our product candidates will severely undermine our business by leaving us without a commercially available product, and therefore without any source of revenues, until another product candidate can be developed or obtained and ultimately approved. There is no guarantee that we will ever be able to develop or acquire another product candidate or that we will be able to obtain FDA approval to commercialize such product candidate.    

Even if we obtain FDA approval for CNTX-4975 in the United States, we may never obtain approval for or commercialize it in any other jurisdiction, which would limit our ability to realize its full market potential.

We intend to market our products in international markets. In order to market any products in the European Union and many other foreign jurisdictions, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA in the United States does not ensure approval by regulatory authorities in other countries or jurisdictions. However, the failure to obtain approval in one jurisdiction may negatively impact our ability to obtain approval elsewhere. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country.

Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and increased costs for us and require additional pre-clinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the

 

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introduction of our products in those countries. We do not have any product candidates approved for sale in any jurisdiction, including in international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of any product we develop will be unrealized.

We may never obtain approval with respect to CNTX-4975 for the other indications we intend to seek or for a broadened indication of the treatment of beyond moderate to severe pain associated with knee OA and into other joint pain associated with OA, which would limit our ability to realize our full market potential.

Our lead indication for CNTX-4975 is the treatment of moderate to severe pain associated with knee OA. If we obtain regulatory approval for this indication, we intend to follow the knee OA indication with data to support use in small joints, such as the carpometacarpal joint, or the base of the thumb, and medium joints, such as the ankle. If we are successful, then the indication for use of CNTX-4975 could potentially be broadened to the treatment of moderate to severe pain associated with OA generally, with no limitation as to which joint is involved. However, there can be no assurance that, even if we obtain approval for one or more of these additional indications, we will obtain approval for any other or all of these additional indications, or for a broadened indication for the treatment of moderate to severe pain associated with OA. If we fail to obtain and maintain required approvals for these additional or broadened indications, or if regulatory approvals are delayed, our ability to realize the full market potential of CNTX-4975 will be unrealized.

Pain trials are difficult to design and execute due to many factors, including a more pronounced placebo effect, which may make efficacy endpoints harder to achieve and, in the case of CNTX-4975, potential pain on administration, which may affect trial blinding, and could adversely impact the likelihood of regulatory approval from FDA or other regulatory agencies, or could adversely impact product labeling, if approved.

The placebo effect refers generally to a clinical response reported by a patient receiving placebo that cannot be attributed to the properties of the placebo itself, and must therefore be due to the patient’s perception of the treatment or other response. The placebo effect can be considered as a form of contextual healing since the beneficial outcome is due to the context of the clinical encounter, rather than to the efficacy of the actual treatment. This complex phenomenon is influenced by many factors including the doctor-subject relationship, interaction with clinical site staff, complexity of the procedure, the subject’s memory of previous treatments, and the subject’s personal characteristics and expectations. Because one of the primary measurements of efficacy in pain trials is based on a patient’s subjective assessment of their pain and not an objective test or measurement, the placebo effect in pain trials can be more pronounced. While we train all of our clinical sites staff on the placebo effect, there can be no assurance that we will not experience an increased placebo effect in our trials, which could impact the ability of our product candidates to achieve significant separation from placebo and ultimately could adversely impact our ability to achieve regulatory approval for such product candidates.

While our clinical trials include a procedure pain control technique and a retrospective statistical analysis of subjects in our TRIUMPH trial demonstrated that procedure pain had no impact on predicted efficacy outcome, transient pain associated with the IA injection of CNTX-4975 could impact the ability of trial subjects to determine whether they have received placebo or CNTX-4975, which could adversely impact trial blinding and the likelihood of regulatory approval from FDA or other regulatory agencies, or could adversely impact product labeling, if approved.

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

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous

 

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factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that neither CNTX-4975 nor any other product candidates we may seek to develop in the future will ever obtain regulatory approval. Neither we nor any future collaborator is permitted to market any of our product candidates in the United States until we receive regulatory approval of an NDA from the FDA. It is possible that the FDA may refuse to accept for substantive review any NDAs that we submit for our product candidates or may conclude after review of our data that our application is insufficient to obtain marketing approval of our product candidates.

Prior to obtaining approval to commercialize a product 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 foreign regulatory agencies, that such product candidates are safe and effective for their intended uses in patients. Results from non-clinical studies and clinical trials can be interpreted in different ways. Even if we believe the non-clinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. The FDA may also require us to conduct additional pre-clinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program. Depending on the extent of these or any other FDA-required studies, approval of any NDA or other application that we submit may be delayed by several years, or may require us to expend significantly more resources than we have available.

Of the large number of potential products in development, only a small percentage successfully completes the FDA or foreign regulatory approval processes and are commercialized. The lengthy and costly approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We may encounter delays in enrolling, or be unable to enroll, a sufficient number of patients to complete any of our clinical trials, and even once enrolled we may be unable to retain a sufficient number of patients to complete any of our trials. The enrollment of patients depends on many factors, including:

 

   

the patient eligibility criteria defined in the protocol;

 

   

the size of the patient population required for analysis of the trial’s primary endpoints;

 

   

the proximity of patients to trial sites;

 

   

the design of the trial;

 

   

our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

   

clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new products that may be approved for the indications we are investigating;

 

   

our ability to obtain and maintain patient consents; and

 

   

the risk that patients enrolled in clinical trials will drop out of the trials before completion.

 

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In addition, our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial site.

Delays or failures in planned patient enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop CNTX-4975 or our other product candidates, or could render further development impossible.

Our product candidates may cause serious adverse events or undesirable side effects including injury and death or have other properties which may delay or prevent their regulatory approval, limit the commercial profile of an approved label, or, result in significant negative consequences following marketing approval, if any.

Serious adverse events, or SAEs, or undesirable side effects caused by our product candidates 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. Results of our clinical trials or pre-clinical studies could reveal a high and unacceptable severity and prevalence of side effects, toxicities or unexpected characteristics, including death. To date, subjects treated with our lead product candidate, CNTX-4975, have experienced adverse events, including joint pain, headache, pain not otherwise specified, injection site pain, peripheral pain, joint swelling, injection site hemorrhage, nasopharyngitis, burning sensation and nervousness or anxiety, among others. Across the 12 clinical trials of CNTX-4975 we have conducted to date, there were four SAEs in the active groups, all of which were considered not related to CNTX-4975, and which included shoulder OA pain, chest pain, femoral hernia and metrorrhagia.

Subjects enrolled in clinical trials for our other product candidates have also experienced adverse events, albeit at low incidences. In the case of CNTX-0290, subjects in single dose and repeat dose trials reported headache, diarrhea, temporomandibular joint syndrome, nausea, and dry eye. In the case of CNTX-6970, subjects in a single dose trial reported headache and vomiting, among others. The repeat dose trial is ongoing and the clinical trial report will be available before the end of 2018. In the case of CNTX-2022, subjects in a single dose trial reported gastroenteritis, headache and upper respiratory tract infection, among others. CNTX-6016 has not been studied in humans to date. In non-clinical safety toxicology studies of CNTX-6016 in dogs, reported adverse events included increased epileptiform waves at doses 100-times greater than, and seizures at doses equivalent to 400-times greater than, the equivalent starting dose in humans for Phase 1 clinical trials, among others.

If unacceptable side effects arise in the development of our product candidates, we, the FDA, the IRBs at the institutions in which our studies are conducted or DSMB, could materially modify, suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease pre-clinical studies or clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff. We currently train and expect to have to train medical personnel using our product candidates to understand the side effect profiles for our clinical trials and upon any commercialization of any of our product candidates. Inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death. Any of these occurrences may harm our business, financial condition and prospects significantly.

If any of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by any such product, including during any long-term follow-up observation period

 

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recommended or required for patients who receive treatment using our products, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may withdraw approvals of such product;

 

   

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

 

   

additional restrictions may be imposed on the marketing of the particular product or the manufacturing processes for the product;

 

   

regulatory authorities may require additional warnings on the label, such as a “black box” warning or contraindication;

 

   

regulatory authorities may require long-term patient registries for the product;

 

   

we may be required to implement a Risk Evaluation and Mitigation Strategy, or REMS, or create a medication guide outlining the risks of such side effects for distribution to patients;

 

   

the product could become less competitive;

 

   

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

 

   

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects.

Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers’ compensation, umbrella, and directors’ and officers’ insurance.

Any additional product liability insurance coverage we acquire in the future, may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If we obtain marketing approval for CNTX-4975, we intend to acquire insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. A successful product liability claim or series of claims brought against us could cause our share price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business, including preventing or limiting the development and commercialization of any product candidates we develop. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more

 

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difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

Our employees and independent contractors, including principal investigators, CROs, consultants, vendors, and any third parties we may engage in connection with research, development, regulatory, manufacturing, quality assurance and other pharmaceutical functions and commercialization may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.

Misconduct by our employees and independent contractors, including principal investigators, CROs, consultants, vendors, and any third parties we may engage in connection with research, development, regulatory, manufacturing, quality assurance and other pharmaceutical functions and commercialization, could include intentional, reckless or negligent conduct or unauthorized activities that violate: (i) the laws and regulations of the FDA, the European Medicines Agency, or the EMA, and other similar regulatory authorities, including those laws that require the reporting of true, complete and accurate information to such authorities; (ii) manufacturing standards; (iii) data privacy, security, fraud and abuse and other healthcare laws and regulations; or (iv) laws that require the reporting of true, complete and accurate financial information and data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws could also involve the improper use or misrepresentation of information obtained in the course of pre-clinical studies or clinical trials, creation of fraudulent data in pre-clinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid, other U.S. federal healthcare programs or healthcare programs in other jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, individual imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations.

Our business and operations would suffer in the event of system failures.

Our computer systems, as well as those of our CROs and other contractors and consultants, are vulnerable to damage from computer viruses, unauthorized access, natural disasters (including hurricanes), terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product candidate development programs. For example, the loss of pre-clinical studies or clinical trial data from completed, ongoing or planned trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of personal, confidential or proprietary information, we could incur liability and the further development of CNTX-4975 or any other product candidate could be delayed.

In the ordinary course of our business, we directly or indirectly collect and store sensitive data, including intellectual property, confidential information, pre-clinical and clinical trial data, proprietary business

 

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information, personal data and personally identifiable health information of our clinical trial subjects and employees, in our data centers and on our networks, or on those of third parties. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or internal bad actors, or breached due to employee error, a technical vulnerability, malfeasance or other disruptions. Although, to our knowledge, we have not experienced any such material security breach to date, any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, significant regulatory penalties, and such an event could disrupt our operations, damage our reputation, and cause a loss of confidence in us and our ability to conduct clinical trials, which could adversely affect our reputation and delay our clinical development of our product candidates.

Risks Related to Healthcare Laws and Other Legal Compliance Matters

We will be subject to extensive and costly government regulation.

Product candidates employing our technology will be subject to extensive and rigorous domestic government regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the United States Department of Health and Human Services, the United States Department of Justice, state and local governments, and their respective equivalents outside of the United States. The FDA regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record-keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import, and export of pharmaceutical products. The FDA generally regulates biotechnology products under the Public Health Service Act, as amended. If products employing our technologies are marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not they have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding United States regulation.

Government regulation substantially increases the cost and risk of researching, developing, manufacturing, and selling our products. The regulatory review and approval process, which includes pre-clinical testing and clinical trials of each product candidate, is lengthy, expensive, and uncertain. We or our collaborators must obtain and maintain regulatory authorization to conduct pre-clinical studies and clinical trials. We or our collaborators must obtain regulatory approval for each product we intend to market, and the manufacturing facilities used for the products must be inspected and meet legal requirements. Securing regulatory approval requires the submission of extensive pre-clinical and clinical data and other supporting information for each proposed therapeutic indication in order to establish the product’s safety and efficacy, potency and purity, for each intended use. The development and approval process takes many years, requires substantial resources, and may never lead to the approval of a product.

Even if we are able to obtain regulatory approval for a particular product, the approval may limit the indicated medical uses for the product, may otherwise limit our ability to promote, sell, and distribute the product, may require that we conduct costly post-marketing surveillance, and/or may require that we conduct ongoing post-marketing studies. Material changes to an approved product, such as, for example, manufacturing changes or revised labeling, may require further regulatory review and approval. Once obtained, any approvals may be withdrawn, including, for example, if there is a later discovery of previously unknown problems with the product, such as a previously unknown safety issue.

If we, our collaborators, consultants, contract manufacturers, CROs or other vendors, fail to comply with applicable regulatory requirements at any stage during the regulatory process, such noncompliance could result in, among other things, delays in the approval of applications or supplements to approved applications; refusal of a regulatory authority, including the FDA, to review pending market approval applications or

 

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supplements to approved applications; warning letters; fines; import and/or export restrictions; product recalls or seizures; injunctions; total or partial suspension of production; civil penalties; withdrawals of previously approved marketing applications or licenses; recommendations by the FDA or other regulatory authorities against governmental contracts; and/or criminal prosecutions.

Enacted and future healthcare legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and could adversely affect our business.

In the United States, the EU and other jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed changes to the healthcare system that could prevent or delay marketing approval of our products in development, restrict or regulate post-approval activities of our products, impact pricing and reimbursement and impact our ability to sell our products profitably. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare. In addition, new regulations and interpretations of existing healthcare statutes and regulations are frequently adopted.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, was enacted, which substantially changed the way healthcare is financed by both governmental and private insurers. Among the provisions of the ACA, those of greatest importance to the pharmaceutical and biotechnology industries include the following:

 

   

an annual, non-deductible fee payable by any entity that manufactures or imports certain branded prescription drugs and biologic agents (other than those designated as orphan drugs), which is apportioned among these entities according to their market share in certain government healthcare programs;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 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;

 

   

new requirements to report certain financial arrangements with physicians and teaching hospitals, including reporting “transfers of value” made or distributed to prescribers and other healthcare providers and reporting investment interests held by physicians and their immediate family members;

 

   

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

 

   

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;

 

   

extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

   

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;

 

   

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

 

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establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future. For example, the creation of the Independent Payment Advisory Board, which had been included as part of the provisions of the ACA, was repealed in February 2018. The current presidential administration and Congress will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. 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 ACA was enacted. In August 2011, the Budget Control Act of 2011 resulted in aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional action is taken by Congress. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws or any other similar laws introduced in the future may result in additional reductions in Medicare and other healthcare funding, which could negatively affect our customers and accordingly, our financial operations.

Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, CMS may develop new payment and delivery models, such as bundled payment models. In addition, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed and enacted federal legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, and review the relationship between pricing and manufacturer patient programs. The Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint”, or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. We expect that additional U.S. federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that the U.S. federal government will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.

Individual states in the United States have also increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product 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. Legally-mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical

 

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products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate demand for our product candidates or put pressure on our product pricing.

In the EU, similar political, economic and regulatory developments may affect our ability to profitably commercialize our product candidates, if approved. In addition to continuing pressure on prices and cost containment measures, legislative developments at the EU or member state level may result in significant additional requirements or obstacles that may increase our operating costs. The delivery of healthcare in the EU, including the establishment and operation of health services and the pricing and reimbursement of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers have different priorities and approaches to the delivery of healthcare and the pricing and reimbursement of products in that context. In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions on the pricing and reimbursement of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory burdens on those wishing to develop and market products, this could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to commercialize our product candidates, if approved.

In markets outside of the United States and the EU, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies.

We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action in the United States, the EU or any other jurisdiction. If we or any third parties we may engage are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or such third parties 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.

Even if we receive regulatory approval of our 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 product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, packaging, distribution, adverse event reporting, storage, recordkeeping, export, import, advertising and promotional activities for such product, among other things, will be subject to extensive and ongoing requirements of and review by the FDA, the EMA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, establishment registration and drug listing requirements, continued compliance with current good manufacturing practice, or cGMP, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping and GCP requirements for any clinical trials that we conduct post-approval. In addition, the sponsor of an approved NDA is subject to periodic inspections and other FDA monitoring and reporting obligations, including obligations to monitor and report adverse events and other information such as the failure of a product to meet the specifications in the NDA. NDA sponsors must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling, or manufacturing process. Application holders must also submit advertising and other promotional material to the FDA and report on ongoing clinical trials. The FDA may require changes in the labeling of already approved drug products and require that sponsors conduct post-marketing studies.

Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and state laws. The distribution of product samples to physicians must comply with the requirements of the FDCA. NDA sponsors must obtain FDA approval for product, manufacturing, and labeling changes, depending on the nature of the change.

 

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Depending on the circumstances, failure to meet these post-approval requirements can result in criminal prosecution, fines, injunctions, consent decrees of permanent injunction, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, or refusal to allow us to enter into supply contracts, including government contracts.

In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, 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 yield various results, including:

 

   

restrictions on manufacturing such products;

 

   

restrictions on the labeling or marketing of a product;

 

   

restrictions on product distribution or use;

 

   

requirements to conduct post-marketing studies or clinical trials;

 

   

warning letters or holds on clinical trials;

 

   

withdrawal of the products from the market;

 

   

refusal to approve pending applications or supplements to approved applications that we submit;

 

   

recall of products;

 

   

fines, restitution or disgorgement of profits or revenues;

 

   

suspension or withdrawal of marketing approvals;

 

   

refusal to permit the import or export of our products;

 

   

product seizure or detention; or

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of CNTX-4975 or any other product candidate. 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 lose any marketing approval that we may have obtained which would adversely affect our business, prospects and ability to achieve or sustain profitability.

We also 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. 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 FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

 

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Our business operations and current and future relationships with investigators, healthcare professionals, consultants, third-party payors, patient organizations and customers will be subject to applicable healthcare regulatory laws, which could expose us to penalties.

Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors, patient organizations and customers, 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 product candidates, if approved. Such laws include:

 

   

the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration (including any kickback, bribe, or certain rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under U.S. federal and state healthcare programs such as Medicare and Medicaid. 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;

 

   

the U.S. federal civil and criminal false claims 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. federal 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. federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;

 

   

the federal civil monetary penalties laws, which impose civil fines for, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies;

 

   

the U.S. federal 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 and its implementing regulations, which also imposes certain 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 involving the use or disclosure of individually identifiable health information;

 

   

the FDCA, which prohibits, among other things, the adulteration or misbranding of drugs, biologics and medical devices;

 

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the U.S. Physician Payments Sunshine Act and its implementing regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the government information related to certain payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as 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;

 

   

analogous U.S. state laws and regulations, including: 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 any third-party payor, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws and regulations that require drug manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities; state and local laws that require the registration of pharmaceutical sales representatives; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts; and

 

   

similar healthcare laws and regulations in the EU and other jurisdictions, including reporting requirements detailing interactions with and payments to healthcare providers and laws governing the privacy and security of certain protected information, such as the General Data Protection Regulation, or the GDPR, which imposes obligations and restrictions on the collection and use of personal data relating to individuals located in the EU (including health data).

Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, such as Medicare and Medicaid or similar programs in other countries or jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, disgorgement, individual imprisonment, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs and imprisonment, which could affect our ability to operate our business. Further, defending against any such actions can be costly, time-consuming and may require significant 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.

 

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We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and we are subject to consumer protection laws that regulate our marketing practices and prohibit unfair or deceptive acts or practices. Our actual or perceived failure to comply with such obligations could harm our business.

We are subject to diverse laws and regulations relating to data privacy and security, including, in the United States, HIPAA and, in the EU and the European Economic Area, or EEA, Regulation 2016/679, known as the GDPR. New privacy rules are being enacted in the United States and globally, and existing ones are being updated and strengthened. Complying with these numerous, complex and often changing regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could adversely affect our business, financial condition and results of operations, including but not limited to: investigation costs, material fines and penalties; compensatory, special, punitive and statutory damages; litigation; consent orders regarding our privacy and security practices; requirements that we provide notices, credit monitoring services and/or credit restoration services or other relevant services to impacted individuals; adverse actions against our licenses to do business; and injunctive relief. Furthermore, these rules are constantly changing; for example, the GDPR came into force in May 2018 changing the European regime. Before that, the US-EU Safe Harbor framework was declared invalid in 2015 and replaced with the EU-U.S. Privacy Shield framework which, along with other methods which permit transfer under European privacy law, are under ongoing review and subject to challenge.

The privacy laws in the EU have been significantly reformed. On May 25, 2018, the GDPR entered into force and became directly applicable in all EU member states. The GDPR implements more stringent operational requirements than its predecessor legislation. For example, the GDPR requires us to make more detailed disclosures to data subjects, requires disclosure of the legal basis on which we can process personal data, makes it harder for us to obtain valid consent for processing, will require the appointment of data protection officers when sensitive personal data, such as health data, is processed on a large scale, provides more robust rights for data subjects, introduces mandatory data breach notification through the EU, imposes additional obligations on us when contracting with service providers and requires us to adopt appropriate privacy governance including policies, procedures, training and data audit. If we do not comply with our obligations under the GDPR, we could be exposed to fines of up to the greater of €20 million or up to 4% of our total global annual revenue in the event of a significant breach. In addition, we may be the subject of litigation and/or adverse publicity, which could adversely affect our business, results of operations and financial condition.

We cannot assure you that our third-party service providers with access to our or our customers’, suppliers’, trial patients’ and employees’ personally identifiable and other sensitive or confidential information in relation to which we are responsible will not breach contractual obligations imposed by us, or that they will not experience data security breaches or attempts thereof, which could have a corresponding effect on our business, including putting us in breach of our obligations under privacy laws and regulations and/or which could in turn adversely affect our business, results of operations and financial condition. We cannot assure you that our contractual measures and our own privacy and security-related safeguards will protect us from the risks associated with the third-party processing, storage and transmission of such information.

We are subject to environmental, health and safety laws and regulations, and we may become exposed to liability and substantial expenses in connection with environmental compliance or remediation activities.

Our operations, including our development, testing and manufacturing activities, are subject to numerous environmental, health and safety laws and regulations. These laws and regulations govern, among other things, the controlled use, handling, release and disposal of and the maintenance of a registry for, hazardous materials and biological materials, such as chemical solvents, human cells, carcinogenic compounds, mutagenic compounds and compounds that have a toxic effect on reproduction, laboratory procedures and exposure to

 

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blood-borne pathogens. If we fail to comply with such laws and regulations, we could be subject to fines or other sanctions.

As with other companies engaged in activities similar to ours, we face a risk of environmental liability inherent in our current and historical activities, including liability relating to releases of or exposure to hazardous or biological materials. Environmental, health and safety laws and regulations are becoming more stringent. We may be required to incur substantial expenses in connection with future environmental compliance or remediation activities, in which case, the production efforts of our third-party manufacturers or our development efforts may be interrupted or delayed.

Risks Related to Commercialization

Developments by competitors may render our products or technologies obsolete or non-competitive or may reduce the size of our markets.

Our industry has been characterized by extensive research and development efforts, rapid developments in technologies, intense competition and a strong emphasis on proprietary products. We face potential competition from many different sources, including pharmaceutical, biotechnology and specialty pharmaceutical companies either marketing or developing therapeutics to treat chronic pain. Academic research institutions, governmental agencies, as well as public and private institutions are also potential sources of competitive products and technologies. Our competitors may have or may develop superior technologies or approaches, which may provide them with competitive advantages. Our potential products may not compete successfully. If these competitors access the marketplace before we do with better or less expensive drugs, our product candidates, if approved for commercialization, may not be profitable to sell or worthwhile to continue to develop. Technology in the pharmaceutical industry has undergone rapid and significant change, and we expect that it will continue to do so. Any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development. The success of our product candidates will depend upon factors such as product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things. Other important factors to our success include speed in developing product candidates, completing clinical development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products.

Our product candidates are intended to compete directly or indirectly with existing drugs. Even if approved and commercialized, our product candidates may fail to achieve market acceptance with hospitals, physicians or patients. Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than these existing drugs. If our product candidates do not receive market acceptance for any reason, our revenue potential would be diminished, which would materially adversely affect our ability to become profitable.

Significant competition exists in the chronic pain field. We will need to compete with all currently available or future therapies within the indications where our development is focused. CNTX-4975, if approved and commercialized, will face significant competition. The main classes of marketed products that are available for the treatment of knee OA pain include opioids, immediate-release and sustained-release injectable steroids, hyaluronic acid, or HA, injections and, to a lesser extent, non-FDA approved treatments such as platelet rich plasma and stem cell injections. Furthermore, numerous monoclonal antibodies targeting nerve growth factor, or NGF inhibitors, are in clinical development, including two product candidates in Phase 3. Also in development are several compounds that seek to produce disease modification through the regeneration of cartilage and/or to reduce cartilage degeneration, though these compounds do not directly treat the pain itself.

There are a number of companies developing or marketing therapies for the treatment and management of chronic pain that may compete with our current product candidates, including many major pharmaceutical and biotechnology companies. Among the companies that currently market or are developing therapies that, if

 

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approved, our product candidates would potentially compete with include: Acorda Therapeutics, Assertio Therapeutics, Biogen, Cara Therapeutics, Eli Lilly and Company, Endo Pharmaceuticals, Flexion Therapeutics, Grunenthal, Horizon Pharma, Janssen Research & Development, Merck & Co., Novartis, Pacira Pharmaceutics, Pain Therapeutics, Pfizer, Purdue Pharma, Sanofi Trevena and Vertex Pharmaceuticals.

Most of our competitors, including many of those listed above, have substantially greater capital resources, robust drug pipelines, established presence in the market and expertise in research and development, manufacturing, pre-clinical and clinical testing, obtaining regulatory approvals and reimbursement and marketing approved products than we do. As a result, our competitors may achieve product commercialization or patent protection earlier than we can. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified clinical, regulatory, scientific, sales, marketing and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any products that we may develop or that would render any products that we may develop obsolete or noncompetitive.

The successful commercialization of our product candidates will depend in part on the extent to which governmental authorities and health insurers establish coverage, adequate reimbursement levels and pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.

The availability of coverage and adequacy of reimbursement by governmental healthcare programs such as Medicare and Medicaid, private health insurers and other third-party payors are essential for most patients to be able to afford medical services and pharmaceutical products such as our product candidates, assuming FDA approval. Our ability to achieve acceptable levels of coverage and reimbursement for our products or procedures using our products by governmental authorities, private health insurers and other organizations will have an effect on our ability to successfully commercialize our product candidates. Obtaining coverage and adequate reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. Separate reimbursement for the product itself or the treatment or procedure in which our product is used may not be available. A decision by a third-party payor not to cover or separately reimburse for our products or procedures using our products, could reduce physician utilization of our products once approved. Assuming there is coverage for our product candidates or procedures using our product candidates by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Similarly, some of our product candidates, including our lead product candidate, CNTX-4975, are physician-administered injectables and as such, separate reimbursement for the product itself may or may not be available. Instead, the hospital or administering physician may be reimbursed only for providing the treatment or procedure in which our product is used. To the extent separate coverage and reimbursement should become available for CNTX-4975, we anticipate that it will be sold to physicians on a “buy and bill” basis. Buy and bill products must be purchased by healthcare providers before they can be administered to patients. Healthcare providers subsequently must seek reimbursement for the product from the applicable third-party payor, such as Medicare or a health insurance company. Healthcare providers may be reluctant to administer our product candidates, if approved, because they would have to fund the purchase of the product and then seek reimbursement, which may be lower than their purchase price, or because they do not want the additional administrative burden required to obtain reimbursement for the product.

Further, the status of reimbursement codes for any of our product candidates, if approved, could also affect reimbursement. J-Codes and Q-Codes are reimbursement codes maintained by the Centers for Medicare and Medicaid Services, or CMS, that are a component of the Healthcare Common Procedure Coding System and

 

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are typically used to report injectable drugs that ordinarily cannot be self-administered. We currently do not have a specific J-Code or Q-Code for any of our product candidates. If our product candidates are approved, we may apply for one but cannot guarantee that a J-Code or Q-Code will be granted. To the extent separate coverage or reimbursement is available for any product candidate, if approved, and a specific J-Code or Q-Code is not available, physicians would need to use a non-specific miscellaneous J-Code to bill third-party payors for these physician-administered drugs. Because miscellaneous J-Codes may be used for a wide variety of products, health plans may have more difficulty determining the actual product used and billed for the patient. These claims must often be submitted with additional information and manually processed, which can delay claims processing times as well as increase the likelihood for claim denials and claim errors. We cannot be sure that coverage and reimbursement in the United States, the EU or elsewhere will be available for our product candidates or any product that we may develop, and any reimbursement that may become available may not be adequate or may be decreased or eliminated in the future.

Third-party payors increasingly are challenging prices charged for pharmaceutical products and services, and many third-party payors may refuse to provide coverage and reimbursement for particular drugs and biologics when an equivalent generic drug, biosimilar or a less expensive therapy is available. It is possible that a third-party payor may consider our product candidates as substitutable and only offer to reimburse patients for the less expensive product. Even if we show improved efficacy or improved convenience of administration with our product candidates, pricing of existing third-party therapeutics may limit the amount we will be able to charge for our product candidates. These payors may deny or revoke the reimbursement status of a given product or establish prices for new or existing marketed products at levels that are too low to enable us to realize an appropriate return on our investment in our product candidates. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our product candidates, and may not be able to obtain a satisfactory financial return on our product candidates.

There is significant uncertainty related to the insurance coverage and reimbursement of newly-approved products. In the United States, third-party payors, including private and governmental payors, such as the Medicare and Medicaid programs, play an important role in determining the extent to which new drugs and biologics will be covered. The Medicare and Medicaid programs increasingly are used as models in the United States for how private payors and other governmental payors develop their coverage and reimbursement policies for drugs and biologics. Some third-party payors may require pre-approval of coverage for new or innovative drug therapies before they will reimburse healthcare providers who use such therapies. We cannot predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.

No uniform policy for coverage and reimbursement for products exists among third-party payors in the United States. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Furthermore, rules and regulations regarding reimbursement change frequently, in some cases on short notice, and we believe that changes in these rules and regulations are likely.

Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in the EU and other jurisdictions have and will continue to put pressure on the pricing and usage of our product candidates. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. Other countries allow companies to fix their own prices for medical products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our product candidates may be reduced compared with the United States and may be insufficient to generate commercially-reasonable revenue and profits.

 

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Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection with the sale of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and biologics and surgical procedures and other treatments, has become intense. As a result, increasingly high barriers are being erected to the entry of new products.

Even if CNTX-4975 receives marketing approval, it may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success.

If CNTX-4975 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 it does not achieve an adequate level of acceptance, we may not generate significant product revenues or become profitable. The degree of market acceptance of CNTX-4975, if approved for commercial sale, will depend on a number of factors, including but not limited to:

 

   

perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drug product;

 

   

the perception by patients and clinicians that our procedure pain control technique does not adequately reduce the pain associated with local application of trans-capsaicin;

 

   

the perception by members of the healthcare community, including physicians, or patients that the process of administering CNTX-4975, including our procedure pain control technique, is not unduly cumbersome;

 

   

the efficacy and potential advantages compared to alternative treatments;

 

   

effectiveness of sales and marketing efforts;

 

   

the cost of treatment in relation to alternative treatments;

 

   

our ability to offer our products 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 therapies and of physicians to prescribe these therapies;

 

   

the strength of marketing and distribution support;

 

   

the timing of market introduction of competitive products;

 

   

the availability of third-party coverage and adequate reimbursement;

 

   

product labeling or product insert requirements of the FDA, the EMA or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling;

 

   

the prevalence and severity of any side effects; and

 

   

any restrictions on the use of our product together with other medications.

 

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If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, healthcare payors, and patients, we may not generate sufficient revenue from these products, and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful. In addition, our ability to successfully commercialize our product candidates will depend on our ability to manufacture our products through third-party manufacturers, differentiate our products from competing products and defend the intellectual property of our products.

Because we expect sales of CNTX-4975, if approved, to generate substantially all of our product revenues for a substantial period, the failure of this product to find market acceptance would harm our business and could require us to seek additional financing.

If we are unable to establish sales, marketing and distribution capabilities either on our own or in collaboration with third parties, we may not be successful in commercializing CNTX-4975, if approved.

We do not have any infrastructure for the sales, marketing or distribution of our products, and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so.

We expect to build our own focused sales, distribution and marketing infrastructure to market CNTX-4975 in the United States, if approved. There are significant expenses and risks involved with establishing our own sales, marketing and distribution capabilities, including our ability to hire, retain and appropriately incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities could delay any product launch, which would adversely impact the commercialization of CNTX-4975. Additionally, if the commercial launch of CNTX-4975 for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of CNTX-4975 or our other product candidates in markets outside of the United States. Therefore, our future sales in these markets will largely depend on our ability to enter into and maintain collaborative relationships for such capabilities, the collaborator’s strategic interest in the product and such collaborator’s ability to successfully market and sell the product. We intend to selectively pursue collaborative arrangements regarding the sale and marketing of CNTX-4975, if approved, for certain markets outside of the United States; however, we cannot assure that we will be able to establish or maintain such collaborative arrangements, or if able to do so, that they will have effective sales forces.

If we are unable to build our own sales force or negotiate a collaborative relationship for the commercialization of CNTX-4975, we may be forced to delay the potential commercialization of CNTX-4975 or reduce the scope of our sales or marketing activities for CNTX-4975. If we elect to increase our expenditures to fund commercialization activities ourselves, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. We could enter into arrangements with collaborative partners at an earlier stage than otherwise would be ideal and we may be required to relinquish rights to CNTX-4975 or otherwise agree to terms unfavorable to us, any of which may have an adverse effect on our business, operating results and prospects.

If we are unable to establish adequate sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing CNTX-4975 and may not become profitable and may incur significant additional losses. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support

 

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of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

If we cannot compete for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.

If our product candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by other companies. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors may have compounds already approved or in development in the therapeutic categories that we are targeting with our current and future product candidates. In addition, many of these competitors, either alone or together with their collaborative partners, may operate larger research and development programs or have substantially greater financial resources than we do, as well as greater experience in:

 

   

developing product candidates;

 

   

undertaking pre-clinical testing and clinical trials;

 

   

obtaining NDA approval by the FDA and comparable foreign regulatory approvals of product candidates;

 

   

formulating and manufacturing products; and

 

   

launching, marketing and selling products.

If we obtain approval to commercialize any products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

If CNTX-4975 is approved for commercialization, we intend to selectively partner with third parties to market it in certain jurisdictions outside the United States. We expect that we will be subject to additional risks related to international pharmaceutical operations, including:

 

   

different regulatory requirements for drug approvals and rules governing drug commercialization in foreign countries;

 

   

reduced protection for intellectual property rights;

 

   

foreign reimbursement, pricing and insurance regimes;

 

   

potential noncompliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and similar anti-bribery and anticorruption laws in other jurisdictions; and

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad.

 

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We have no prior experience in these areas. In addition, there are complex regulatory, tax, labor and other legal requirements imposed by both the European Union and many of the individual countries in Europe with which we will need to comply. Many U.S.-based biotechnology companies have found the process of marketing their own products in Europe to be very challenging.

Certain legal and political risks are also inherent in foreign operations. For example, it may be more difficult for us to enforce our agreements or collect receivables through foreign legal systems. There is a risk that foreign governments may nationalize private enterprises in certain countries where we may operate. In certain countries or regions, terrorist activities and the response to such activities may threaten our operations more than in the United States. Social and cultural norms in certain countries may not support compliance with our corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where we may operate are a risk to our financial performance and future growth. Additionally, the need to identify financially and commercially strong partners for commercialization outside the United States who will comply with the high manufacturing and legal and regulatory compliance standards we require is a risk to our financial performance. As we operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our international operations will not have an adverse effect on our business, financial condition or results of operations.

Potential product liability lawsuits against us could cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

The use of our product candidates, including CNTX-4975, in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated adverse effects. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs, which may not be covered by insurance. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

   

impairment of our business reputation and significant negative media attention;

 

   

withdrawal of participants from our clinical trials;

 

   

significant costs to defend the related litigation and related litigation;

 

   

distraction of management’s attention from our primary business;

 

   

substantial monetary awards to patients or other claimants;

 

   

inability to commercialize CNTX-4975 or any other product candidate;

 

   

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

   

decreased demand for CNTX-4975 or any other product candidate, if approved for commercial sale; and

 

   

loss of revenue.

 

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Risks Related to Our Dependence on Third Parties

We rely on third parties for the manufacture of materials for our research programs, pre-clinical studies and clinical trials and we do not have long-term contracts with any of these parties. This reliance on third parties increases the risk that we will not have sufficient quantities of such materials, product candidates, or any therapies that we may develop and commercialize, or that such supply will not be available to us at an acceptable cost, which could delay, prevent, or impair our development or commercialization efforts.

We do not own or operate manufacturing facilities and have no plans to build our own clinical or commercial scale manufacturing capabilities. We rely, and expect to continue to rely, on third parties for the manufacture of our product candidates and related raw materials for pre-clinical and clinical development, as well as for commercial manufacture if any of our product candidates receive marketing approval. We do not have a long-term agreement with any of the third-party manufacturers we currently use to provide pre-clinical and clinical drug supply, and purchase any required materials on a purchase order basis. Certain of these manufacturers are critical to our production and the loss of these manufacturers to one of our competitors or otherwise would materially and adversely affect our development and commercialization efforts. Additionally, since certain of our manufacturers have only one facility, we face the risk of not having sufficient supply of our products in the case of a natural disaster, calamity, acts of war or terrorism or other major disturbance. The facilities used by third-party manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit an NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, third-party manufacturers for compliance with cGMP requirements for manufacture of drug products. If these third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, including requirements related to the manufacturing of high potency compounds, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. Some of our contract manufacturers have not produced a commercially-approved product and therefore have not obtained the requisite FDA approvals to do so. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.

Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products. In addition, we may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms.

Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

   

failure of third-party manufacturers to comply with regulatory requirements and maintain quality assurance;

 

   

breach of the manufacturing agreement by the third party;

 

   

failure to manufacture our product according to our specifications;

 

   

failure to manufacture our product according to our schedule or at all;

 

   

misappropriation of our proprietary information, including our trade secrets and know-how; and

 

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termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.

Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us. Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval, and any related remedial measures may be costly or time-consuming to implement. We do not currently have arrangements in place for redundant supply or a second source for all required raw materials used in the manufacture of our product candidates. If our current third-party manufacturers cannot perform as agreed, we may be required to replace such manufacturers and we may be unable to replace them on a timely basis or at all. Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

We rely on third parties to conduct many of our pre-clinical studies and clinical trials. Any failure by a third party to conduct the clinical trials according to GCPs and in a timely manner may delay or prevent our ability to seek or obtain regulatory approval for or commercialize our product candidates.

We are dependent on third parties to conduct our pre-clinical studies and clinical trials, including our ongoing clinical trials for CNTX-4975, CNTX-0290 and CNTX-6970, and any future clinical trials and pre-clinical studies for our product candidates, including CNTX-6016 and CNTX-2022. Specifically, we have used and relied on, and intend to continue to use and rely on, medical institutions, clinical investigators, CROs and consultants to conduct our clinical trials in accordance with our clinical protocols and regulatory requirements. These CROs, investigators and other third parties play a significant role in the conduct and timing of these trials and subsequent collection and analysis of data. While we have agreements governing the activities of our third-party contractors, we have limited influence over their actual performance. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs and other third parties does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs or trial sites fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

There is no guarantee that any such CROs, investigators or other third parties will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, or otherwise performs in a substandard manner, our clinical trials may be extended, delayed or terminated. In addition, many of the third parties with whom we contract may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities that could harm our competitive position. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned, and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any NDA we submit to the FDA. Any such delay or rejection could prevent us from commercializing our product candidates.

 

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If any of our relationships with these third-parties terminate, we may not be able to enter into arrangements with alternative third parties or do so on commercially reasonable terms. Switching or adding additional CROs, investigators and other third parties involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, investigators and other third parties, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

We may collaborate with third parties for the development and commercialization of CNTX-4975 and our other clinical and pre-clinical product candidates. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to develop and commercialize CNTX-4975 or our other clinical and pre-clinical product candidates successfully, if at all.

We may seek collaborative relationships for the development and commercialization of CNTX-4975. Failure to obtain a collaborative relationship for CNTX-4975 may significantly impair the potential for this product candidate. We also will need to enter into collaborative relationships to provide funding to support our other research and development programs. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty, such as:

 

   

a collaboration partner may shift its priorities and resources away from our product candidates due to a change in business strategies, or a merger, acquisition, sale or downsizing;

 

   

a collaboration partner may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical results, manufacturing issues, a change in business strategy, a change of control or other reasons;

 

   

a collaboration partner may cease development in therapeutic areas which are the subject of our strategic collaboration;

 

   

a collaboration partner may not devote sufficient capital or resources towards our product candidates;

 

   

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

 

   

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

 

   

a collaboration partner could develop a product that competes, either directly or indirectly, with our product candidate;

 

   

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

 

   

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

 

   

a collaboration partner may terminate a strategic alliance;

 

   

a dispute may arise between us and a partner concerning the research, development or commercialization of a product candidate resulting in a delay in milestones, royalty payments or

 

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termination of an alliance and possibly resulting in costly litigation or arbitration which may divert management attention and resources; and

 

   

a partner may use our products or technology in such a way as to invite litigation from a third party.

If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, our research, clinical development, manufacturing or commercialization efforts related to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities that would otherwise have been the responsibility of our collaborator. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully transition terminated collaborative agreements, we may have to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of capital. Moreover, any collaborative partners we enter into agreements with in the future may shift their priorities and resources away from our product candidates or seek to renegotiate or terminate their relationships with us.

Data provided by collaborators and others upon which we rely that has not been independently verified could turn out to be false, misleading, or incomplete.

We rely on third-party vendors, such as CROs, scientists and collaborators to provide us with significant data and other information related to our projects, pre-clinical studies or clinical trials and our business. If such third parties provide inaccurate, misleading or incomplete data, our business, prospects and results of operations could be materially adversely affected.

We have also in-licensed three products from Boehringer Ingelheim International GmbH, or BI. Our decision to obtain a license to these products was based on pre-clinical and clinical data as well as intellectual property generated by BI. If any such data or information from BI proves to be inaccurate, misleading or incomplete, our business, prospects and results of operations could be materially adversely affected.

We do not have multiple sources of supply for the components used in CNTX-4975 and our other product candidates, nor long-term supply contracts, and certain of our suppliers are critical to our production. If we were to lose a supplier, it could have a material adverse effect on our ability to complete the development of CNTX-4975. If we obtain regulatory approval for CNTX-4975, we would need to expand the supply of its components in order to commercialize them.

We do not have multiple sources of supply for the components used in the manufacturing of CNTX-4975 and our other product candidates. We also do not have long-term supply agreements with any of our component suppliers. We are currently evaluating manufacturers that will commercially manufacture CNTX-4975 and our other product candidates. It is our intention to qualify a second source of supply for CNTX-4975 drug substance and drug product prior to approval by the FDA. If this does not occur and we only qualify one initial supplier that will be approved by the FDA, or if for any reason we are unable to obtain product from the manufacturer we select, then we would have to qualify new manufacturers. We may not be able to establish additional sources of supply for our product candidates, or may be unable to do so on acceptable terms. Manufacturing suppliers are subject to cGMP quality and regulatory requirements, covering manufacturing, testing, quality control and record keeping relating to our product candidates and subject to ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions in supply. Manufacturing suppliers are also subject to local, state and federal regulations and licensing requirements. Failure by any of our suppliers to comply with all applicable regulations and requirements may result in long delays and interruptions in supply.

The number of suppliers of the raw material components of our product candidates is limited. In the event it is necessary or desirable to acquire supplies from alternative suppliers, we might not be able to obtain them on commercially reasonable terms, if at all. It could also require significant time and expense to redesign

 

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our manufacturing processes to work with another company. Additionally, certain of our suppliers are critical to our production and the loss of these suppliers to one of our competitors or otherwise would materially and adversely affect our development and commercialization efforts.

As part of any marketing approval, a manufacturer of CNTX-4975 and our other product candidates is required to be licensed by the FDA prior to commercialization. This licensing process includes inspections by regulatory authorities that must be successful prior to them being licensed. Failure of manufacturing suppliers to successfully complete these regulatory inspections will result in delays. If supply from the approved supplier is interrupted, there could be a significant disruption in commercial supply. An alternative vendor would need to be qualified through an NDA amendment or supplement which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional studies if a new supplier is relied upon for commercial production. Switching vendors may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

If we are unable to obtain the supplies we need at a reasonable price or on a timely basis, it could have a material adverse effect on our ability to complete the development of CNTX-4975 and our other product candidates or, if we obtain regulatory approval for CNTX-4975 or our other product candidates, to commercialize them.

We may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships with third-parties that may not result in the development of commercially viable products or the generation of significant future revenues.

In the ordinary course of our business, we may enter into collaborations, in-licensing arrangements, joint ventures, strategic alliances, partnerships or other arrangements to develop new products and to pursue new markets. Proposing, negotiating and implementing collaborations, in-licensing arrangements, joint ventures, strategic alliances or partnerships may be a lengthy and complex process. Other companies, including those with substantially greater financial, marketing, sales, technology or other business resources, may compete with us for these opportunities or arrangements. We may not identify, secure, or complete any such transactions or arrangements in a timely manner, on a cost-effective basis, on acceptable terms or at all. We have limited institutional knowledge and experience with respect to these business development activities, and we may also not realize the anticipated benefits of any such transaction or arrangement. In particular, these collaborations may not result in the development of products that achieve commercial success or result in significant revenues and could be terminated prior to developing any products.

Additionally, we may not be in a position to exercise sole decision making authority regarding the transaction or arrangement, which could create the potential risk of creating impasses on decisions, and our future collaborators may have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals. It is possible that conflicts may arise with our collaborators, such as conflicts concerning the achievement of performance milestones, or the interpretation of significant terms under any agreement, such as those related to financial obligations or the ownership or control of intellectual property developed during the collaboration. If any conflicts arise with any future collaborators, they may act in their self-interest, which may be adverse to our best interest, and they may breach their obligations to us. In addition, we may have limited control over the amount and timing of resources that any future collaborators devote to our or their future products. Disputes between us and our collaborators may result in litigation or arbitration which would increase our expenses and divert the attention of our management. Further, these transactions and arrangements will be contractual in nature and will generally be terminable under the terms of the applicable agreements and, in such event, we may not continue to have rights to the products relating to such transaction or arrangement or may need to purchase such rights at a premium.

If we enter into in-bound intellectual property license agreements, we may not be able to fully protect the licensed intellectual property rights or maintain those licenses. Future licensors could retain the right to

 

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prosecute and defend the intellectual property rights licensed to us, in which case we would depend on the ability of our licensors to obtain, maintain and enforce such licensed intellectual property. These licensors may determine not to pursue litigation against other companies or may pursue such litigation less aggressively than we would. Further, entering into such license agreements could impose various diligence, commercialization, royalty or other obligations on us. Future licensors may allege that we have breached our license agreement with them, and accordingly seek to terminate our license, which could adversely affect our competitive business position and harm our business prospects.

Risks Related to Our Intellectual Property

If we are unable to obtain, maintain or adequately protect our intellectual property rights, we may not be able to compete effectively in our markets.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect our intellectual property and prevent others from duplicating our product candidates.

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 may fail to result in issued patents with claims that cover our product candidates in the United States or in other foreign countries. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates or prevent others from designing around our claims. In addition, no assurances can be given that third parties will not create new products or methods that achieve similar results without infringing upon our patents. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

If the patent applications we hold with respect to our programs or product candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for our product candidates, it could dissuade companies from collaborating with us to develop product candidates, and threaten our ability to commercialize future products. Several patent applications covering our product candidates have been filed recently. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patents or whether any issued patents will be found invalid or unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by us could deprive us of rights necessary for the successful commercialization of any product candidates that we may develop.

Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate under patent protection could be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file any patent application related to a product candidate. Furthermore, if third parties have filed such patent applications before enactment of the Leahy-Smith Act on March 16, 2013, an interference proceeding in the United States can be initiated by a third party to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. In addition, patents have a limited lifespan. In the United States, the expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired for the patent covering a product, we may be open to competition from generic medications.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is either not patentable or that we elect not to patent, processes

 

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for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach.

Although we require all of our employees and consultants to assign their inventions to us, to the extent that employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Further, although we require that all of our employees, consultants, collaborators, advisors and any third parties who have access to our proprietary know-how, information or technology enter into confidentiality agreements, we cannot provide any assurances 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 discover our trade secrets or develop substantially equivalent information and techniques. Any of these parties may breach these agreements and we may not have adequate remedies for any specific breach. Misappropriation or unauthorized disclosure of our trade secrets or other confidential proprietary information could impair our competitive position and may have a material adverse effect on our business. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. Additionally, if the steps taken to maintain our trade secrets or other confidential proprietary information are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret or other confidential proprietary information.

If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may 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.

Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our avoiding infringement, or allegations of infringement, of the patents and other proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, reexamination, and inter partes review proceedings before the United States Patent and Trademark Office, or USPTO, and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing development candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a

 

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license under the applicable patents, which may not be available or may not be available on commercially reasonable terms, or until such patents expire. Similarly, if any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtained a license, which may not be available or may not be available on commercially reasonable terms, or until such patent expires.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates and/or harm our reputation and financial results. Defense of these claims, regardless of their merit, could involve substantial litigation expense and could be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may require substantial time and monetary expenditure. Furthermore, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us; alternatively or additionally it could include terms that impede or destroy our ability to compete successfully in the commercial marketplace.

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

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. There can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded.

In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

Recent patent reform legislation has increased the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, and may diminish the value of patents in general.

As is the case with other biopharmaceutical companies, our commercial success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Recent wide-ranging patent reform legislation in the United States, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, could increase those uncertainties and costs.

The Leahy-Smith Act includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The Leahy-Smith Act enlarged the scope of disclosures that qualify as prior art, and it expanded the scope of procedures that a third

 

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party may use to challenge a U.S. patent, including post grant review and inter partes review procedures. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

In addition, recent court rulings in cases such as Association for Molecular Pathology v. Myriad Genetics, Inc., BRCA1- & BRCA2-Based Hereditary Cancer Test Patent Litigation, and Promega Corp. v. Life Technologies Corp. have narrowed the scope of patent protection available in certain circumstances and weakened 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 U.S. courts, the USPTO and the relevant law-making bodies in other countries, 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.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

We may employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employers or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, or our ability to hire personnel, which, in any case of the foregoing, could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

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.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-U.S. patent agencies. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market, which could have a material adverse effect on our business.

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

If we initiated legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or

 

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unenforceable. 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. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our product candidates. For example, our European patent, EP 1605956, which is directed towards the administration of certain capsaicinoids and related to the CNTX-4975 product candidate for treating knee OA pain, was opposed by a third party in 2016. Oral proceedings were held at the European Patent Office in January 2018, and the European Patent Office’s Opposition Division mailed a communication on September 10, 2018 revoking the European patent on grounds that changes to the claims during prosecution of the application resulted in patent claims that do not meet written support requirements of European law. We intend to appeal the decision of the European Patent Office’s Opposition Division.

The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, 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, we would lose at least part, and perhaps all, of the patent protection on one or more of our product candidates. Such a loss of patent protection could have a material adverse impact on our business. A defendant could also challenge our ownership of patents assigned to us. For example, our patents and some of our patent applications with respect to CNTX-4975 were acquired from Vallinex, Inc., which acquired them from Arcion Therapeutics, Inc. In turn, Arcion Therapeutics, Inc. acquired them from Anesiva, Inc., which was formed as a result of a reverse merger of AlgoRx Pharmaceuticals into Corgentech Inc., during bankruptcy. Because of the foregoing, we cannot be certain that a third party would not challenge our rights to these patents and patent applications. Any legal proceeding or enforcement action can also be expensive and time-consuming.

Patent terms may be inadequate to protect our competitive position on our products for an adequate amount of time.

Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. For patents that are eligible for extension of patent term, we expect to seek extensions of patent terms in the United States and, if available, in other countries. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the normal expiration of the patent, which is limited to the approved indication (or any additional indications approved during the period of extension). We might not be granted an extension because of, for example, failure to apply within applicable periods, failure to apply prior to the expiration of relevant patents or otherwise failure to satisfy any of the numerous applicable requirements. Moreover, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to obtain approval of competing products following our patent expiration by referencing our clinical and pre-clinical data and launch their product earlier than might otherwise be the case. If this were to occur, it could have a material adverse effect on our ability to generate revenue.

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

Filing, prosecuting and defending our intellectual property in all countries throughout the world could be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we

 

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may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuit that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. In addition, many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the invention in that country, or the third party has patented improvements) or limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent.

We depend on intellectual property licensed from third parties and termination or modification of any of these licenses could result in the loss of significant rights, which would materially harm our business.

In November 2015, we entered into a patent assignment and licensing agreement with Boehringer Ingelheim International GmbH, or the BI Agreement, pursuant to which BI assigned to us certain patents, and granted us an exclusive, royalty-bearing license to certain know-how owned or controlled by BI, to develop, manufacture and commercialize products containing the CCR2, CB2 and SSTR4 compounds or compounds covered by a claim in the assigned patents, for the treatment or prevention of diseases or conditions in humans or animals.

We are dependent on these patents and the know-how licensed under the BI Agreement. Any termination of or loss of rights under this agreement, or a finding that such intellectual property lacks legal effect, could harm our ability to commercialize any product candidates containing the CCR2, CB2 and SSTR4 compounds. Pursuant to the BI Agreement, in the event that we (or an affiliate or a sublicensee) begin clinical trials or commercialize a competing product that modulates the same target as a product containing the CCR2, CB2 and SSTR4 compounds, BI has the right to convert the exclusivity of our license so that we only have a non-exclusive right to the know-how. In such a situation, BI will also have the right to obtain a perpetual license-back to the assigned patents to independently exploit the products and we will grant BI a license to use any results from our independent exploitation of the compounds and products.

BI may also terminate the BI Agreement in its entirety if we materially breach or default on our obligations under the agreement and do not cure within a specified period of time, which includes a material breach of our obligations to use commercially reasonably efforts to develop and commercialize products under the BI Agreement. If we terminate the BI Agreement for convenience or if BI terminates it due to our uncured material breach, we will no longer have any rights to the patents assigned to us by BI under the BI Agreement and ownership of those patents will transfer back to BI. We will also be obligated to transfer to BI, at its request, all development data and regulatory documentation, approvals and agreements related to the product(s) that are

 

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the subject of the BI Agreement, as well as grant to BI a non-exclusive license to use certain of our intellectual property as may be necessary for the continued development, manufacture and/or commercialization of such product(s).

Disputes may also arise between us and our current or future licensors, including BI, our current or future licensors and their licensors, or us and third parties that co-own intellectual property with our licensors or their licensors, regarding intellectual property subject to a license agreement, including those relating to:

 

   

the scope of rights, if any, granted under the applicable license agreement and other interpretation-related issues;

 

   

whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the applicable license agreement;

 

   

whether our licensor or its licensor had the right to grant the applicable license agreement;

 

   

whether third parties are entitled to compensation or equitable relief, such as an injunction, for our use of the intellectual property without their authorization;

 

   

our right to sublicense rights to third parties under collaborative development relationships;

 

   

whether we are complying with our obligations with respect to the use of licensed technology in relation to our development and commercialization of product candidates;

 

   

the allocation of ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and by us and our partners; and

 

   

the amounts of royalties, milestones or other payments due under the applicable license agreement.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, or are insufficient to provide us the necessary rights to use the intellectual property, we may be unable to successfully develop and commercialize the affected product candidates. If we or any such licensors fail to adequately protect this intellectual property, our ability to commercialize our products could suffer.

We may be required to pay certain milestones and royalties under our license agreements with third-party licensors.

Under our current and future license agreements, we may be required to pay milestones and royalties based on our revenues from sales of our products utilizing the technologies licensed or sublicensed from licensors, including BI, and these royalty payments could adversely affect the overall profitability for us of any products that we may seek to commercialize. In order to maintain our license rights under current and future license agreements, we may need to meet certain specified milestones, subject to certain cure provisions, in the development of our product candidates and in the raising of funding. In addition, these agreements may contain diligence milestones and we may not be successful in meeting all of the milestones in the future on a timely basis or at all. We may need to outsource and rely on third parties for many aspects of the clinical development, sales and marketing of our products covered under our current and future license agreements. Delay or failure by these third parties could adversely affect the continuation of our license agreements with their third-party licensors. Pursuant to the BI Agreement, if we succeed in developing and commercializing products containing compounds active against CCR2, CB2 or SSTR4 we will owe BI regulatory and commercial milestone payments.

 

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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our trademarks of interest and our business may be adversely affected.

While we seek to protect the trademarks we use in the United States and in other countries, we may be unsuccessful in obtaining registrations and/or otherwise protecting these trademarks. If that were to happen, we may be prevented from using our names, brands and trademarks unless we enter into appropriate royalty, license or coexistence agreements, which may not be available or may not be available on commercially reasonable terms. Over the long term, if we are unable to establish name recognition based on our trademarks, trade names, service marks and domain names, then we may not be able to compete effectively, resulting in a material adverse effect on our business. Our trademarks or trade names that we have already obtained may be challenged, infringed, diluted, misappropriated or declared generic, or determined to be infringing on other marks. We rely on both registration and common law protection for our trademarks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. During trademark registration proceedings, we may receive rejections. Although we would be 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 are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Effective trademark protection may not be available or may not be sought in every country in which our products are made available. Any name we propose to use for our products 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 product names, we may be required to expend significant additional resources in an effort to identify a usable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be adversely affected.

Risks Related to Employee Matters and Managing Growth

We will need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of product candidate development, regulatory affairs and sales, marketing and distribution. As of November 1, 2018, we had 14 full-time employees. To manage our growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. As we expand our organization, we may have difficulty identifying, hiring and integrating new personnel. Future growth would impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy. Our future

 

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financial performance and our ability to commercialize our product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

Many of the biotechnology and pharmaceutical companies that we compete against for qualified personnel and consultants have greater financial and other resources, different risk profiles and a longer history in the industry than we do. If we are unable to continue to attract and retain high-quality personnel and consultants, the rate and success at which we can discover and develop product candidates and operate our business will be limited.

If we lose key management or scientific personnel, cannot recruit qualified employees, directors, officers or other significant personnel or experience increases in our compensation costs, our business may materially suffer.

We are highly dependent on our management and directors, including Jeffrey B. Kindler, James N. Campbell and Sol J. Barer, among others. Due to the specialized knowledge each of our officers and key employees possesses with respect to our product candidates and our operations, the loss of service of any of our officers or directors could delay or prevent the successful enrollment and completion of our clinical trials. We do not carry key man life insurance on our officers or directors. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time.

In addition, our future success and growth will depend in part on the continued service of our directors, employees and management personnel and our ability to identify, hire, and retain additional personnel. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize product candidates successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be engaged by entities other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidates will be limited.

Many of our employees have become or will soon become vested in a substantial amount of our common stock or a number of common stock options. Our employees may be more likely to leave us if the shares they own have significantly appreciated in value relative to the original purchase prices of the shares, or if the exercise prices of the options that they hold are significantly below the market price of our common stock, particularly after the expiration of the lock-up agreements described herein. Our future success also depends on our ability to continue to attract and retain additional executive officers and other key employees.

We may engage in acquisitions that could disrupt our business, cause dilution to our stockholders or reduce our financial resources.

In the future, we may enter into transactions to acquire other businesses, products or technologies. If we do identify suitable candidates, we may not be able to make such acquisitions on favorable terms, or at all. Any acquisitions we make may not strengthen our competitive position, and these transactions may be viewed negatively by customers or investors. We may decide to incur debt in connection with an acquisition or issue our common stock or other equity securities to the stockholders of the acquired company, which would reduce the

 

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percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business that are not covered by the indemnification we may obtain from the seller. In addition, we may not be able to successfully integrate the acquired personnel, technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions may also divert management attention from day-to-day responsibilities, lead to a loss of key personnel, increase our expenses and reduce our cash available for operations and other uses. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our operating results.

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

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 the manufacturing facilities on which we rely, 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 may prove inadequate 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 could have a material adverse effect on our business. For example, following Hurricane Maria, shortages in production and delays in a number of medical supplies produced in Puerto Rico resulted, and any similar interruption due to a natural disaster affecting us or any of our third-party manufacturers could materially delay our operations.

Risks Related to Our Common Stock and this Offering

An active trading market for our common stock may not develop.

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. Although we have applied to have our common stock listed on The Nasdaq Global Select Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares, or at all.

The market price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

Our stock price is likely to be volatile. The stock market in general and the market for smaller 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, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

   

the success of competitive products or technologies;

 

   

actual or expected changes in our growth rate relative to our competitors;

 

   

results of clinical trials of our product candidates or those of our competitors;

 

   

developments related to our existing or any future collaborations;

 

   

regulatory actions with respect to our product candidates or our competitors’ products and product candidates;

 

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

 

   

development of new product candidates that may address our markets and make our product candidates less attractive;

 

   

changes in physician, hospital or healthcare provider practices that may make our product candidates less useful;

 

   

announcements by us, our partners or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

 

   

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

   

the recruitment or departure of key personnel;

 

   

the level of expenses related to any of our product candidates or clinical development programs;

 

   

failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

   

the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;

 

   

actual or expected changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

   

variations in our financial results or those of companies that are perceived to be similar to us;

 

   

changes in the structure of healthcare payment systems;

 

   

market conditions in the pharmaceutical and biotechnology sectors;

 

   

general economic, industry and market conditions; and

 

   

the other factors described in this “Risk Factors” section and elsewhere in this prospectus.

After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control or significantly influence all matters submitted to stockholders for approval.

Upon the closing of this offering, based on the number of shares of common stock outstanding as of September 30, 2018, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering and their respective affiliates will, in the aggregate, hold shares representing approximately 49.5% of our outstanding voting stock. As a result, if these stockholders choose to act together, they would be able to control or significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control or significantly influence the election of directors, the composition of our management and approval of any merger, consolidation or sale of all or substantially all of our assets.

Certain of our existing stockholders, including entities affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of approximately $30 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer or no shares in this offering to any or all of these stockholders, or any or all of these stockholders may determine to purchase more, fewer or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these stockholders as they will on any other shares sold to the public in this offering. The foregoing ownership percentage does not give effect to any purchases of shares of our common stock by the stockholders.

 

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If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

The initial public offering price of our common stock will 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 net tangible book value per share after this offering. To the extent shares subsequently are issued under outstanding options or warrants, you will incur further dilution. Based on an assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), you will experience immediate dilution of $10.35 per share as of September 30, 2018, representing the difference between our pro forma as adjusted net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately 72.7% of the aggregate price paid by all purchasers of our stock but will own only approximately 22.6% of our common stock outstanding after this offering.

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

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. We expect that we will use the net proceeds of this offering to advance the clinical development of CNTX-4975 and our other product candidates, pursue additional research and development efforts and for general and administrative expenses, working capital and other general corporate purposes as set forth under “Use of Proceeds.” However, our use of these proceeds may differ substantially from our current plans. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which 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, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 22,162,604 shares of common stock based on the number of shares outstanding as of September 30, 2018. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing stockholders. The remaining shares are currently restricted as a result of securities laws or lock-up agreements (which may be waived, with or without notice, by Merrill Lynch, Pierce, Fenner & Smith Incorporated, Leerink Partners LLC and Evercore Group L.L.C.) but will become eligible to be sold at various times beginning 180 days after this offering, unless held by one of our affiliates, in which case the resale of those securities will be subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended, or Rule 144. Moreover, after this offering, holders of an aggregate of 17,105,305 shares of our common stock will have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, until such shares can otherwise be sold without restriction under Rule 144 or until the rights terminate pursuant to the terms of the stockholders’ agreement between us and such holders. We also intend to register all shares of common

 

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stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

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

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the closing of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

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; and

 

   

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

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we 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 reduced or more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements

 

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of The Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.

We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing whether such controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. We may discover significant deficiencies or material weaknesses, which we may not successfully remediate on a timely basis or at all. Any failure to remediate any significant deficiencies or material weaknesses identified by us or to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock performance, or if our target pre-clinical studies or clinical trials and operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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Provisions in our restated certificate of incorporation and restated bylaws and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and our restated bylaws, which will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions include those establishing:

 

   

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 filling 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 terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

   

the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

 

   

the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our 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 chairman of the board of directors, the chief executive officer, 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 acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. Furthermore, our restated certificate of incorporation, which

 

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will become effective upon the closing of this offering, specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving claims brought against us by stockholders; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our restated certificate of incorporation described above.

We believe this provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors, officers, employees and agents as it may limit any stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for disputes with us or our directors, officers, employees or agents. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our restated certificate of incorporation to be inapplicable or unenforceable in such action. If a court were to find the choice of forum provision contained in our restated 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, financial condition or results of operations.

Because we do not anticipate paying any cash dividends on our common shares in the foreseeable future, capital appreciation, if any, would be your sole source of gain.

We have never declared or paid any cash dividends on our common shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. As a result, capital appreciation, if any, of our common shares would be your sole source of gain on an investment in our common shares for the foreseeable future. See the “Dividend Policy” section of this prospectus for additional information.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biopharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our ability to use our net operating loss carryforwards and research and development credits to offset future taxable income may be subject to certain limitations.

As of December 31, 2017, we had net operating loss carryforwards, or NOLs, of $28.2 million for federal income tax purposes and $28.1 million for state income tax purposes, which may be available to offset our future taxable income, if any, and begin to expire in various amounts in 2030. As of December 31, 2017, we also had federal and state research and development tax credit carryforwards of $2.5 million, which begin to expire in various amounts in 2021. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities. In general, under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to use its pre-change NOLs and tax credits to offset future taxable income. Our

 

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existing NOLs or credits may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs or credits could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or credits may also be impaired under state law. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to use a material portion of the NOLs or tax credits, even if we attain profitability. The reduction of the corporate tax rate under the Tax Cuts and Jobs Act of 2017, or the TCJA, may cause a reduction in the economic benefit of our NOLs and other deferred tax assets available to us. Furthermore, under the TCJA, although the treatment of tax losses generated before December 31, 2017 has generally not changed, tax losses generated in calendar year 2018 and beyond may only offset 80% of taxable income. This change may require us to pay federal income taxes in future years despite generating a loss for federal income tax purposes in prior years.

Recent U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash flows.

The TCJA has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, and revising the rules governing net operating losses. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The TCJA is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service, or IRS, any of which could lessen or increase certain adverse impacts of the TCJA. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

While some of the changes made by the TCJA may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors to determine the full impact that the TCJA as a whole will have on us. We urge our investors to consult with their legal and tax advisors with respect to the TCJA.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that can involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, future revenue, timing and likelihood of success, plans and objectives of management for future operations, future results of anticipated products and prospects, plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “would” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

INDUSTRY AND OTHER DATA

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research as to such matters is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our issuance and sale of shares of our common stock in this offering will be approximately $66.7 million, assuming an initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that our net proceeds will be approximately $77.1 million. Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by $14.0 million, assuming the assumed initial public offering price stays the same.

We anticipate that we will use the net proceeds of this offering, together with our cash, cash equivalents and investments, for the following purposes:

 

   

approximately $52.0 million to $54.0 million to fund the Phase 3 program and pre-commercialization expenses for CNTX-4975 through topline results in the first pivotal Phase 3 registration trial;

 

   

approximately $12.0 million to $14.0 million to fund the development of CNTX-0290 to complete Phase 1 development and initiate a Phase 2 trial for chronic pain;

 

   

approximately $6.0 million to $8.0 million to fund the development of CNTX-6016 to complete Phase 1 development;

 

   

approximately $5.0 million to $7.0 million to fund the development of CNTX-6970 to complete Phase 1 development and initiate a Phase 2 trial for chronic pain; and

 

   

the remainder, if any, for other research and development expenses for our pipeline, including unallocated expenses and expenses for CNTX-2022, and for working capital and other general corporate purposes.

Our priority is to advance the development of CNTX-4975 through Phase 3 registration trials and prepare for potential commercialization. To the extent that our CNTX-4975 development costs are more than we anticipate, we are not able secure additional sources of funding, and/or we raise less than the anticipated amount of net proceeds in this offering, we may elect or be required to delay the initiation of the Phase 2 clinical trials for CNTX-0290 and CNTX-6970, as well as other development efforts, in order to enable funding for the CNTX-4975 Phase 3 development program and pre-commercialization preparations for CNTX-4975.

This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. We may also use a portion of the net proceeds to in-license, acquire, or invest in additional businesses, technologies, products or assets, although currently we have no specific agreements, commitments or understandings in this regard. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. Predicting the cost necessary to develop product candidates can be difficult and we anticipate that we will need additional funds to complete the development of any product candidates we identify. The amounts and timing of our actual expenditures and the extent of clinical development may vary significantly

 

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depending on numerous factors, including the progress of our development efforts, the status of and results from pre-clinical studies and any ongoing clinical trials or clinical trials we may commence in the future, as well as any collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Based on our current operating plan, we believe that the net proceeds from this offering and our current cash and cash equivalents will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2020. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect. In any event, we do not expect that the net proceeds from this offering and our current cash and cash equivalents will be sufficient to enable us to complete the clinical development of CNTX-4975 or any of our other product candidates, and we will need additional funds to complete such clinical development and initiate commercialization. We may satisfy our future cash needs through the sale of equity securities, debt financings, working capital lines of credit, corporate collaborations or license agreements, grant funding, interest income earned on invested cash balances or a combination of one or more of these sources.

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

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments. In addition, our term loan facility with Silicon Valley Bank, or SVB, restricts our ability to pay any dividends or make any distribution of our capital stock.

Holders of our Series D preferred stock are entitled to dividends upon the conversion of such shares of preferred stock to our common stock in connection with an initial public offering, which will occur immediately prior to the completion of this offering. Each Series D preferred stockholder is entitled to a cumulative accrued dividend calculated at a rate per annum of $0.117 per share of Series D preferred stock (subject to certain adjustment provisions), payable in shares of common stock based on a value of $11.24 per share.

As of September 30, 2018, cumulative dividends of an aggregate of 2,089,808 shares of our common stock had accrued to our Series D preferred stockholders. These cumulative dividends have continued to accrue subsequent to September 30, 2018. Assuming a closing date of November 19, 2018, we expect to issue 392,504 shares of our common stock in payment of such cumulative accrued dividends to our Series D preferred stockholders. For each day prior to or following the assumed closing date that this offering actually closes, such cumulative accrued dividends decrease or increase, respectively, by an aggregate of approximately 1,157 shares of common stock. Stock dividends will not be paid on any shares purchased in this offering.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2018, as follows:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect:

 

   

the automatic conversion of all outstanding shares of our preferred stock into 14,979,055 shares of common stock upon the closing of this offering;

 

   

the issuance of an aggregate of 392,504 shares of our common stock upon the closing of this offering to pay accrued dividends on our Series D preferred stock, assuming a closing date for this offering of November 19, 2018 (for each day prior to or following such assumed closing date that this offering actually closes, such dividends shall decrease or increase, respectively, by an aggregate of approximately 1,157 shares of common stock);

 

   

the automatic cashless exercise of certain outstanding warrants to purchase shares of common stock and preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrants will be equal to the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and assuming the automatic conversion of the shares of preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of 139,009 shares of our common stock upon the closing of this offering (a $1.00 increase in the assumed initial public offering price of $15.00 per share would increase the number of additional shares of our common stock issuable in connection with such automatic exercise by an aggregate of 33,128 shares; a $1.00 decrease in the assumed initial public offering price of $15.00 per share would decrease the number of additional shares of our common stock issuable in connection with such exercise by an aggregate of 37,864 shares);

 

   

the assumed exercise prior to the closing of this offering of certain outstanding warrants that shall otherwise expire upon such closing to purchase 2,545,405 shares of preferred stock for an aggregate purchase price of approximately $4.5 million, which, assuming the automatic conversion of the shares of preferred stock issued pursuant to such exercise into shares of common stock, would result in the issuance of 407,543 shares of our common stock upon the closing of this offering;

 

   

for purposes of any automatic cashless exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of the applicable warrant; and

 

   

the filing and effectiveness of our restated certificate of incorporation which will occur upon the closing of this offering.

 

   

on a pro forma as adjusted basis to give further effect to our issuance and sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in

 

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conjunction with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

    

As of September 30, 2018

 
     (in thousands, except share data)  
    

Actual

   

Pro Forma

   

Pro Forma As
Adjusted(1)

 

Cash and cash equivalents

   $ 42,059     $ 46,555     $ 113,205  
  

 

 

   

 

 

   

 

 

 

Long term debt

     7,740       7,740       7,740  

Warrant liabilities

     3,209       —         —    

Convertible preferred stock (Series A, B, C and D), par value $0.001 per share; 103,555,395 shares authorized, 93,545,253 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     155,627       —         —    

Stockholders’ (deficit) equity:

      

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted

     —         —         —    

Common stock, par value $0.001 per share; 200,000,000 shares authorized, 1,244,493 shares issued and outstanding, actual; 200,000,000 shares authorized, pro forma and pro forma as adjusted; 17,162,604 shares issued and outstanding, pro forma; 22,162,604 shares issued and outstanding, pro forma as adjusted

     1       17       22  

Additional paid-in capital

     5,695       170,309       236,954  

Accumulated deficit

     (125,671     (126,969     (126,969
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (119,975     43,357       110,007  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 46,601     $ 51,097     $ 117,747  
  

 

 

   

 

 

   

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share (the midpoint of the price range set forth on the cover page of this prospectus), would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $14.0 million.

The number of shares in the table above does not include:

 

   

1,981,815 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2018, at a weighted-average exercise price of $4.36 per share;

 

   

83,189 shares of our common stock issuable upon the exercise of certain warrants to purchase common stock outstanding as of September 30, 2018 at a weighted average exercise price of $6.59 per share;

 

   

1,284,465 shares of our common stock issuable upon the exercise of stock options to be granted in connection with this offering under the 2018 Plan, which will become effective in connection with this offering, to certain of our directors, executive officers and employees, at an exercise price per share equal to the initial public offering price in this offering;

 

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843,829 shares of our common stock reserved for future issuance under the 2018 Plan, as well as shares of our common stock that become available pursuant to provisions in the 2018 Plan that automatically increase the share reserve under the 2018 Plan as described in “Executive and Director Compensation—Incentive Plans—2018 Incentive Award Plan”; and

 

   

266,000 shares of our common stock that will become available for future issuance under the 2018 ESPP, which will become effective in connection with this offering, as well as shares of our common stock that become available pursuant to provisions in the 2018 ESPP that automatically increase the share reserve under the 2018 ESPP as described in “Executive and Director Compensation—Incentive Plans—2018 Employee Stock Purchase Plan.”

 

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DILUTION

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

As of September 30, 2018, we had a historical net tangible book value of $(126.9) million, or $(101.94) per share of common stock. Our historical net tangible book value per share represents total tangible assets less total liabilities and less convertible preferred stock, divided by the number of shares of our common stock outstanding as of September 30, 2018.

Our pro forma net tangible book value as of September 30, 2018 was $36.5 million, or $2.13 per share. Pro forma net tangible book value represents the amount of our total tangible assets less total liabilities, after giving effect to (1) the automatic conversion of all shares of our preferred stock outstanding as of September 30, 2018 into an aggregate of 14,979,055 shares of our common stock upon the closing of this offering, (2) the issuance of an aggregate of 392,504 shares of our common stock immediately prior to the closing of this offering to pay accrued dividends on our Series D preferred stock, assuming a closing date for this offering of November 19, 2018, (3) the automatic cashless exercise of certain outstanding warrants to purchase shares of common stock and preferred stock, which, based on an assumption that the fair market value of our common stock for purposes of automatic exercise under the warrants will be equal to the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the automatic conversion of the shares of preferred stock issued pursuant to such automatic cashless exercise into shares of common stock, would result in the issuance of 139,009 shares of our common stock upon the closing of this offering, (4) the assumed exercise prior to the closing of this offering of certain outstanding warrants that shall otherwise expire upon such closing to purchase 2,545,405 shares of preferred stock for an aggregate purchase price of approximately $4.5 million, which, assuming the automatic conversion of the shares of preferred stock issued pursuant to such exercise into shares of common stock, would result in the issuance of 407,543 shares of our common stock upon the closing of this offering and (5) for purposes of any automatic cashless exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of the applicable warrant. Pro forma net tangible book value per share represents our pro forma net tangible book value divided by the total number of shares outstanding as of September 30, 2018, after giving effect to the pro forma adjustment described above.

 

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After giving further effect to receipt of the net proceeds from our issuance and the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2018 would have been approximately $103.1 million, or approximately $4.65 per share. This amount represents an immediate increase in pro forma net tangible book value of $2.53 per share to our existing stockholders and an immediate dilution of approximately $10.35 per share to new investors participating in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $ 15.00  

Historical net tangible book value per share as of September 30, 2018

   $ (101.94  

Increase (decrease) per share attributable to (1) the conversion of our preferred stock, (2) the issuance of shares of common stock to pay accrued dividends on our Series D preferred stock, (3) the automatic cashless exercise of certain outstanding warrants to purchase shares of common stock and preferred stock, (4) the assumed exercise of certain outstanding warrants to purchase shares of preferred stock that shall otherwise expire upon the closing of this offering and the conversion thereof and (5) for purposes of any automatic cashless exercise of warrants, that the fair market value of our common stock immediately prior to the closing of this offering exceeds the exercise price of the applicable warrant

     104.06    
  

 

 

   

Pro forma net tangible book value (deficit) per share as of September 30, 2018

     2.13    

Increase per share attributable to this offering

     2.53    
  

 

 

   

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

     $ 4.65  
    

 

 

 

Dilution per share to new investors in this offering

     $ 10.35  
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $0.21, and dilution in pro forma net tangible book value per share to new investors by $0.21, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $0.63 per share and decrease (increase) the dilution to new investors by $0.63 per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares of our common stock in full, the pro forma as adjusted net tangible book value after this offering would be $4.96 per share, the increase in pro forma net tangible book value per share would be $2.83 and the dilution per share to new investors would be $10.04 per share, in each case assuming an initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

The following table summarizes on the pro forma as adjusted basis described above, as of September 30, 2018, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing stockholders and new investors paid. The calculation below is based on an assumed initial public offering price of $15.00 per share (the midpoint of the

 

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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.

 

    

Shares Purchased

   

Total Consideration

   

Average Price

Per Share

 
    

Number

    

Percent

   

Amount

    

Percent

 

Existing stockholders

     17,162,604        77.4   $ 28,119        27.3   $ 1.64  

New investors

     5,000,000        22.6   $ 75,000        72.7   $ 15.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     22,162,604        100.0   $ 103,119        100.0   $ 4.65  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1)

Certain of our existing stockholders, including entities affiliated with certain of our directors, have indicated an interest in purchasing an aggregate of approximately $30 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 stockholders.

A $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), would increase or decrease the total consideration paid by new investors by $5.0 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 1.5 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by 1.6 percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase or decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $15.0 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 3.5 percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by 4.6 percentage points, assuming no change in the assumed initial public offering price.

The foregoing tables and calculations are based on the number of shares of our common stock outstanding as of September 30, 2018, and exclude:

 

   

1,981,815 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2018, at a weighted-average exercise price of $4.36 per share;

 

   

83,189 shares of our common stock issuable upon the exercise of certain warrants to purchase common stock outstanding as of September 30, 2018 at a weighted average exercise price of $6.59 per share;

 

   

1,284,465 shares of our common stock issuable upon the exercise of stock options to be granted in connection with this offering under the 2018 Plan, which will become effective in connection with this offering, to certain of our directors, executive officers and employees, at an exercise price per share equal to the initial public offering price in this offering;

 

   

843,829 shares of our common stock reserved for future issuance under the 2018 Plan, as well as shares of our common stock that become available pursuant to provisions in the 2018 Plan that automatically increase the share reserve under the 2018 Plan as described in “Executive and Director Compensation—Incentive Plans—2018 Incentive Award Plan”; and

 

   

266,000 shares of our common stock that will become available for future issuance under the 2018 ESPP, which will become effective in connection with this offering, as well as shares of our common stock that become available pursuant to provisions in the 2018 ESPP that automatically increase the share reserve under the 2018 ESPP as described in “Executive and Director Compensation—Incentive Plans—2018 Employee Stock Purchase Plan.”

 

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To the extent any of these outstanding options or warrants is exercised, there will be further dilution to new investors. If all of such outstanding options had been exercised as of September 30, 2018, the pro forma as adjusted net tangible book value per share after this offering would be $5.07, and total dilution per share to new investors would be $9.93.

If the underwriters exercise their option to purchase additional shares of our common stock in full:

 

   

the percentage of shares of common stock held by existing stockholders will decrease to approximately 74.9% of the total number of shares of our common stock outstanding after this offering; and

 

   

the number of shares held by new investors will increase to 5,750,000, or approximately 25.1% of the total number of shares of our common stock outstanding after this offering.

 

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SELECTED FINANCIAL DATA

The following tables set forth, for the periods and as of the dates indicated, our selected historical financial data. The statements of operations data for the years ended December 31, 2016 and 2017 and the balance sheet data as of December 31, 2016 and 2017 are derived from our audited financial statements appearing at the end of this prospectus. The statement of operations data for the nine months ended September 30, 2017 and 2018 and the balance sheet data as of September 30, 2018 have been derived from our unaudited financial statements appearing at the end of this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and results for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018. You should read this data together with the more detailed information contained in our audited financial statements and the related notes thereto and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    

Year Ended December 31,

   

Nine Months Ended September 30,

 
    

2016

   

2017

   

2017

   

2018

 
    

(in thousands, except share data)

 
           (unaudited)  

Revenue

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     27,788       17,622       14,077       17,420  

General and administrative

     5,443       6,433       5,119       6,612  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     33,231       24,055       19,196       24,032  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (33,231     (24,055     (19,196     (24,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

        

Interest income

     22       43       19       564  

Interest expense

     (2,126     (983     (617     (205

Loss on conversion of convertible notes payable

     (2,412     (497     —         —    

Loss on disposal of property and equipment

     —         (38     (38     —    

Loss on forgiveness of notes receivable from stockholders

     —         —         —         (599

Loss on extinguishment of long-term debt

     —         —         —         (298

Revaluation of stock warrant liabilities

     75       475       339       (763
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (4,441     (1,000     (297     (1,301
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income tax benefit

     (37,672     (25,055     (19,493     (25,333

Income tax benefit

     —         441       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (37,672     (24,614     (19,493     (25,333

Plus: Cumulative dividends on convertible preferred stock

     —         (128     —         (2,791
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (37,672   $ (24,742   $ (19,493   $ (28,124
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (30.36   $ (19.91   $ (15.68   $ (22.60
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted(1)

     1,240,991       1,242,744       1,243,366       1,244,493  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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As of December 31,

    

As of September 30,

 
    

2016

    

2017

    

2018

 
    

(in thousands)

 
            (unaudited)  

Balance Sheet Data:

        

Cash and cash equivalents

   $ 16,231      $ 60,679      $ 42,059  

Working capital(2)

     12,146        56,373        39,963  

Total assets

     24,006        68,337        52,786  

Long-term debt, net of discount

     3,545        1,973        7,740  

Warrant liabilities

     2,348        2,446        3,209  

Convertible preferred stock

     83,678        152,836        155,627  

Accumulated deficit

     (72,805      (97,547      (125,671

Total stockholders’ deficit

     (70,563      (93,884      (119,975

 

(1)

See Note 11 to our financial statements appearing at the end of this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

(2)

We define working capital as current assets less current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Financial Data” and our financial statements and related notes appearing at the end of this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. 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 “Risk Factors” section of this prospectus. For convenience of presentation some of the numbers have been rounded in the text below.

Overview

We are a late clinical-stage biopharmaceutical company focused on becoming the leader in identifying, developing and commercializing novel, non-opioid and non-addictive therapies to address the large unmet medical need for the treatment of chronic pain.

Our most advanced product candidate, CNTX-4975, is designed to selectively and locally target and disrupt the signaling of pain-sensing nerve fibers. CNTX-4975 is in pivotal Phase 3 development for the treatment of patients with moderate to severe pain due to knee OA. In a Phase 2 randomized, double-blinded, placebo-controlled clinical trial in 175 subjects with moderate to severe pain due to knee OA, subjects receiving a single IA injection of 1.0 mg of CNTX-4975 experienced statistically significant, onset of activity by second day and durable pain relief, as measured by the Western Ontario and McMaster Universities Arthritis Index, or WOMAC index, and showed an AE profile similar to the placebo group. In this trial, we observed a significant reduction from baseline pain and a clinically meaningful difference compared to the placebo group in subjects with moderate to severe pain associated with knee OA. If the results of our ongoing and future clinical trials are positive, we plan to submit an NDA in the United States, and an MAA in Europe, in the second half of 2021. CNTX-4975 was granted Fast Track Designation by the FDA in January 2018 for the treatment of moderate to severe pain associated with knee OA. We hold worldwide commercialization rights to CNTX-4975, and, if successfully developed and approved, we anticipate initial commercial sales in 2022. In addition to CNTX-4975, we have three other product candidates in clinical development and one in pre-clinical development for the treatment of multiple types of chronic pain. We believe that we have one of the industry’s largest pipelines of novel, non-opioid and non-addictive clinical-stage product candidates for the treatment of chronic pain.

Since our inception in 2013, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date with proceeds from the issuance and sale of convertible notes and preferred stock and borrowings under the term loan facility with Silicon Valley Bank. Through December 31, 2017, we had received gross proceeds of $148.5 million from the sale of our convertible notes and issuances and sales of preferred stock. In addition, as of September 30, 2018, the outstanding principal balance under the term loan facility was $7.7 million.

Since our inception, we have incurred significant operating losses. Our operating loss was $33.2 million for the year ended December 31, 2016, $24.1 million for the year ended December 31, 2017 and $24.0 million for the nine months ended September 30, 2018. Our net loss was $37.7 million for the year ended December 31, 2016 and $24.7 million for the year ended December 31, 2017 and $28.1 for the nine months ended September 30, 2018. As of December 31, 2017, we had an accumulated deficit of $97.5 million and as of September 30, 2018, our accumulated deficit was $125.7 million. We expect to continue to incur significant expenses and

 

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

 

   

continue clinical trials for CNTX-4975;

 

   

advance our other product candidates through pre-clinical and clinical development;

 

   

seek regulatory approval for our product candidates;

 

   

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

 

   

commercialize CNTX-4975 in the United States with our own targeted sales and marketing organization and selectively partner outside of the United States; and

 

   

pursue strategic partnerships that maximize the value of our other pipeline while seeking to maintain commercialization rights in the United States for select specialists that treat chronic pain conditions.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. Further, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company.

As a result, 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 product sales, if ever, we expect to finance our operations through the sale of equity, debt financings, including borrowings under the existing or additional term loan facilities, or other capital sources, including potential collaborations with other companies or other strategic transactions, including potentially through licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we raise additional funds through collaborations, strategic alliances, or, if applicable, licensing arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. 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 one or more of our product candidates. We will need to generate significant revenue to achieve profitability, and we may never do so.

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

As of December 31, 2017, we had cash and cash equivalents of $60.7 million and as of September 30, 2018, we had cash and cash equivalents of $42.1 million. We believe that our existing cash and cash equivalents as of September 30, 2018, will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2019, without giving effect to any anticipated proceeds from this offering. We believe that the anticipated net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2020. If we are unable to raise sufficient funding, we may be unable to continue to operate in the long-term. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

 

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In its report on our financial statements for the year ended December 31, 2017, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. See “Risk Factors—Risks Related to Our Financial Position and Need for Additional Capital—Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.”

Components of our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and we do not expect to generate revenue from sales of any product for several years, if at all.

Operating Expenses

Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates, which include:

 

   

expenses incurred in connection with the pre-clinical and clinical development of our product candidates and under agreements with CROs;

 

   

employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions;

 

   

facilities, depreciation and other expenses, which include direct and allocated expenses for rent of facilities, travel and insurance; and

 

   

payments made under third-party licensing agreements.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, central laboratories, contractors and CROs in connection with our pre-clinical and clinical development activities. We do not allocate employee costs and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources to manage our development activities.

 

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The table below summarizes our research and development expenses incurred by development program:

 

    

Year Ended December 31,

     Nine Months Ended September 30,  
    

2016

    

2017

    

2017

    

2018

 
    

(in thousands)

 
            (unaudited)  

Direct research and development expenses by program:

           

CNTX-4975 program

   $ 10,789      $ 6,525      $ 4,850      $ 11,028  

Other pre-clinical and clinical programs

     12,628        4,899        4,413        1,708  

Unallocated and other research and development expenses:

                                                     

Personnel related (including stock-based compensation)

     2,341        2,348        1,909        2,135  

Services

     1,487        3,072        2,257        2,054  

Other

     543        778        648        495  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unallocated and other research and development expenses

     4,371        6,198        4,814        4,684  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 27,788      $ 17,622      $ 14,077      $ 17,420  
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development activities are critical to our business model. We expect that our research and development expenses will increase substantially in connection with our planned pre-clinical and clinical development activities in the near term and our planned clinical trials in the future. At this time, we cannot reasonably estimate the costs for completing the pre-clinical and clinical development of any of our other product candidates.

The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

 

   

the scope, progress, outcome and costs of our pre-clinical development activities, clinical trials and other research and development activities;

 

   

establishing an appropriate safety profile with IND-enabling studies;

 

   

successful patient enrollment in, and the initiation and completion of, clinical trials;

 

   

the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

 

   

establishing commercial manufacturing and supply capabilities or making arrangements with third-party manufacturers and suppliers;

 

   

obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

 

   

significant and changing government regulation;

 

   

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

 

   

maintaining a continued acceptable safety profile of the product candidates following approval.

Any changes in the outcome of any of these variables with respect to the development of our product candidates in pre-clinical and clinical development could mean a significant change in the costs and timing

 

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associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation for employees and consultants and other non-employees, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, accounting, audit and other non-employee services.

We anticipate that our general and administrative expenses will increase in the future as we support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, tax, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.

Other Income and Expense

Other income and expense items include cash paid for interest and non-cash interest expense for the end-of-term charge and amortization of debt discount associated with our term loan facility. Other income and expense items also include non-cash interest expense on convertible note financings for the years ended December 31, 2016 and 2017 ahead of our Series C preferred stock and Series D preferred stock financings, accounting losses on the conversion of those convertible notes into preferred stock, periodic fair value adjustments on warrants issued in connection with those convertible note financings and interest income on the money market fund investments we make with the proceeds from our preferred stock, convertible notes and debt financings prior to the cash being deployed into operations.

Income Taxes

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2017, we had federal and state net operating loss carryforwards of $28.2 million and $28.1 million, respectively, both of which begin to expire in 2030. As of December 31, 2017, we also had federal and state research and development tax credit carryforwards of $2.5 million, which begin to expire in 2021.

Critical Accounting Policies and Significant Judgments and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

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

 

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Research Contract Costs and Accruals

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. However, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

   

vendors in connection with the pre-clinical and clinical development activities;

 

   

third-party manufacturers in connection with the production of pre-clinical and clinical trial materials;

 

   

CROs in connection with pre-clinical studies and clinical trials; and

 

   

investigative sites in connection with clinical trials.

We base our expenses related to pre-clinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage pre-clinical studies and clinical trials and third-party manufacturers that manufacture product for our research and development activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from party to party and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. 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 adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Stock-Based Compensation

We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize the corresponding compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue stock option awards with only service-based vesting conditions and record the expense for these awards using the straight-line method.

We measure stock-based awards granted to consultants and non-employees based on the fair value of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, we remeasure the fair value of these awards using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our

 

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common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Determination of the Fair Value of Common Stock

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations were prepared using back-solve method, relying on the implied option created in our then most recent preferred stock financings to determine exit value where those investors could break even. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. These third-party valuations were performed at various dates, which resulted in valuations of our common stock of $4.02 per share as of December 31, 2015, $5.53 per share as of January 31, 2017, $5.63 as of May 30, 2017, $6.93 as of February 16, 2018, $8.31 as of July 27, 2018, $8.56 as of September 12, 2018 and $8.74 as of October 2, 2018. In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, which may be as a date later than the most recent third-party valuation date, including:

 

   

the prices at which we sold shares of preferred stock and the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant;

 

   

the progress of our research and development programs, including the status of pre-clinical and planned clinical trials for our product candidates;

 

   

our stage of development and commercialization and our business strategy;

 

   

external market conditions affecting the biotechnology industry, and trends within the biotechnology industry;

 

   

our financial position, including cash on hand, and our historical and forecasted performance and operating results;

 

   

the lack of an active public market for our common stock and our preferred stock;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or a sale of our company in light of prevailing market conditions; and

 

   

the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

 

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Following the closing of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock.

Options Granted

The following table sets forth by grant date the number of shares subject to options granted between January 1, 2016 and September 30, 2018, the per share exercise price of the options, the fair value of common stock on each grant date, and the per share estimated fair value of the options:

 

Grant Date

  

Number of Shares
Subject to
Options Granted

    

Per Share
Exercise Price
of Options

    

Fair Value of
Common Stock
per Share
on  Date of
Option Grant

    

Per Share
Estimated Fair
Value of
Options

 

February 2016

     182,315      $ 4.00      $ 4.00      $ 2.50  

February 2016

     97,134        4.00        4.00        2.62  

February 2016

     29,298        4.00        4.00        3.37  

March 2017

     180,803        5.56        5.56        3.62  

March 2017

     106,645        5.56        5.56        3.81  

March 2017

     42,525        5.56        5.56        4.75  

March 2017

     2,402        5.56        5.56        4.62  

June 2017

     5,604        5.62        5.62        3.87  

April 12, 2018

     3,122        6.93        6.93        5.12  

April 12, 2018

     140,519        6.93        6.93        4.93  

April 12, 2018

     29,114        6.93        6.93        6.18  

August 16, 2018

     238,878        8.31        8.31        6.37  

August 16, 2018

     9,608        8.31        8.31        6.37  

On October 3, 2018, we granted options to purchase 268,282 shares of our common stock under the 2013 Plan. The options vest over four years, expire after 10 years and have an exercise price of $8.74 per share.

Valuation of Warrant Liabilities

Outstanding warrants for the purchase of shares of our preferred stock and a number of the warrants for the purchase of shares of our common stock are free-standing financial instruments classified on our balance sheet as liabilities. On issuance, the liability for warrants is initially recorded at fair value, and the liability is subsequently re-measured to fair value at each balance sheet date. Changes in the fair value of warrant liabilities are recognized as a component of other income and expense in our statement of operations and comprehensive loss. We will continue to adjust warrant liabilities for changes in fair value until the earlier of the exercise, conversion or expiration of the warrants.

Fair value of our warrants is determined with reference to the periodic third-party valuations of the Company and our common stock performed with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, with reference to the AICPA’s Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (AICPA, Professional Standards, VS sec. 100), ASC 820 (Fair Value Measurement and Disclosures), and ASC 815 (Derivatives and Hedging). Specifically, the valuation of our warrants involves:

 

   

Estimating our value as of the issuance and subsequent remeasurement dates by relying on the periodic third-party valuation performed in compliance with IRS section 409A and for the purposes of estimating the fair value of our common stock for purposes of ASC 718 (Compensation—Stock Compensation), or 409A valuation reports.

 

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For warrants issued prior to the issuance of the underlying securities, or the Pre-Issuance Warrants, we initially estimate the value of the warrant for the purchase of the underlying securities using an Option Pricing Model, or OPM, and allocating our estimated value through the capital structure, or a waterfall analysis.

 

   

For warrants issued concurrent with or after the underlying securities and from the time the underlying securities associated with the pre issuance warrants are issued, or post-issuance warrants, we estimate the value of the warrant for the purchase of the underlying security using scenario analysis first to estimate possible values for the underlying security and subsequently using an OPM model to allocate our estimated value via a waterfall analysis, thereby estimating the value of the post-issuance warrants in each scenario, and ultimately arriving at a probability-weighted-value for the post-issuance warrants.

 

   

On warrant issuance and subsequent remeasurement dates at a time where the probability of an IPO are known or knowable, we adjust the value of the pre-issuance and post-issuance warrants to capture the optionality of this scenario through a Black-Scholes model.

 

   

In the circumstances where we do not have 409A valuation report dated at or near a balance sheet remeasurement date, and provided that no material changes to our business or to our capital structure have taken place, we value the pre-issuance and post-issuance warrants using a linear interpolation of the warrant fair value estimates made at the time of 409A valuation reports before and after the balance sheet remeasurement date.

 

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The following table provides a roll forward of the aggregate fair values of our warrants to purchase convertible preferred stock and common stock for which fair value is determined by Level 3 inputs (in thousands, except number of warrants):

 

   

Warrants for
Series B
Preferred Stock

   

Warrants for

Series C
Preferred Stock

   

Warrants for
Series D
Preferred Stock

   

Warrants for
Common Stock

   

Total

Warrant
Liability

 
   

Number

   

Liability
Amount

   

Number

   

Liability
Amount

   

Number

   

Liability
Amount

   

Number

   

Liability
Amount

 

Balance at January 1, 2016

    619,314     $ 276       —       $ —         —       $ —         126,033       472     $ 748  

Issued as inducement for 2019 Notes

    —         —         1,714,285       982       —         —         —         —         982  

Issued as compensation to placement agent

    —         —         1,353,978       693       —         —         —         —         693  

Exercised

    —         —         —         —         —         —         —         —         —    

Cancelled

    —         —         —         —         —         —         —         —         —    

Adjustment to fair value

    —         42       —         (37     —         —         —         (80     (75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

    619,314       318       3,068,263       1,638       —         —         126,033       392       2,348  

Issued as inducement for 2018 Notes

    —         —         —         —         831,120       514       —         —         514  

Issued as compensation to placement agent

    —         —         —         —         —         —         18,905       59       59  

Exercised

    —         —         —         —         —         —         —         —         —    

Cancelled

    —         —         —         —         —         —         —         —         —    

Adjustment to fair value

    —         (52     —         (252     —         (103     —         (68     (475
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    619,314     $ 266       3,068,263     $ 1,386       831,120     $ 411       144,938     $ 383     $ 2,446  

Exercised

    —         —         —         —         —         —         —         —         —    

Cancelled

    —         —         —         —         —         —         —         —         —    

Adjustment to fair value

    —         6       —         565       —         117       —         75       763  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018 (unaudited)

    619,314     $ 272       3,068,263     $ 1,951       831,120     $ 528       144,938     $ 458     $ 3,209  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Emerging Growth Company Status

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

 

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Results of Operations

Comparison of Nine Months Ended September 30, 2017 and 2018

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2018:

 

    

Nine Months Ended
September 30,

    

Increase
(Decrease)

 
    

2017

    

2018

    

 

 
     (in thousands and unaudited)  

Revenue

   $ —        $     —        $       —    
  

 

 

    

 

 

    

 

 

 

Operating expenses:

        

Research and development

     14,077        17,420        3,343  

General and administrative

     5,119        6,612        1,493  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     19,196        24,032        4,836  
  

 

 

    

 

 

    

 

 

 

Loss from operations

     (19,196      (24,032      4,836  
  

 

 

    

 

 

    

 

 

 

Other income (expense), net:

        

Interest income

     19        564        (545

Interest expense

     (617      (205      (412

Loss on disposal of property and equipment

     (38      —          (38

Loss on forgiveness of notes receivable from stockholders

     —          (599      599  

Loss on extinguishment of long-term debt

     —          (298      298  

Revaluation of stock warrant liabilities

     339        (763      1,102  
  

 

 

    

 

 

    

 

 

 

Total other income (expense), net

     (297      (1,301      1,004  
  

 

 

    

 

 

    

 

 

 

Net loss

   $ (19,493    $ (25,333    $ 5,840  
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

 

    

Nine Months Ended
September 30,

    

Increase
(Decrease)

 
    

2017

    

2018

    

 

 
     (in thousands and unaudited)  

Direct research and development expenses by program:

                                                           

CNTX-4975 program

   $ 4,850      $ 11,028      $ 6,178  

Other pre-clinical and clinical programs

     4,413        1,708        (2,705

Unallocated and other research and development expenses:

        

Personnel related (including stock-based compensation)

     1,909        2,135        226  

Services

     2,257        2,054        (203

Other

     648        495        (153
  

 

 

    

 

 

    

 

 

 

Total unallocated and other research and development expenses

     4,814        4,684        130  
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 14,077      $ 17,420      $ 3,342  
  

 

 

    

 

 

    

 

 

 

Research and development expenses were $14.1 million for the nine months ended September 30, 2017 compared to $17.4 million for the nine months ended September 30, 2018.

Research and development expenses with regard to our most advanced product candidate, CNTX-4975, for the treatment of patients with moderate to severe pain due to knee OA were $4.9 million for the nine months ended September 30, 2017 compared to $11.0 million for the nine months ended September 30, 2018. For the

 

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nine months ended September 30, 2017, expenditures on CNTX-4975 were related primarily to regulatory interactions with the FDA, manufacturing clinical batches of product, and preparing for the initiation of our Phase 3 program. During the nine months ended September 30, 2017, we also conducted Phase 1 Clinical Trial OA-101 to refine options regarding the cooling techniques used as part of the administration of CNTX-4975. In October 2017, we were advised by the FDA that it concurred with our plans to proceed with the Phase 3 program for CNTX-4975 and we are currently in Phase 3 development, which will increase our research and development expense as we advance this product candidate through the Phase 3 clinical trial. The $6.1 million increase in spending on the program in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 is primarily attributable to initiation of two pivotal Phase 3 trials, with the first trial now at more than two-thirds of the targeted enrollment, and an open label safety exposure trial, plus the associated manufacturing of the clinical batch.

In addition to CNTX-4975, we have three other product candidates in clinical development and one in pre-clinical development for the treatment of multiple types of chronic pain, including chronic pain of neuropathic and inflammatory origin. Research and development expenses with regard to these other clinical development programs were $4.4 million for the nine months ended September 30, 2017 as compared to $1.7 million for the nine months ended September 30, 2018, representing a decrease of $2.7 million attributable to all four programs.

 

   

CNTX-0290: In the nine months ended September 30, 2017, our expenses related to CNTX-0290 were related primarily to our MAD clinical trial and more limited pre-clinical toxicology studies. In the nine months ended September 30, 2018, our expenses related to CNTX-0290 were related primarily to preparation of documents to support a clinical trial application for a Phase 1 clinical trial in Germany.

 

   

CNTX-6970: In the nine months ended September 30, 2017, our activities were focused on supporting ongoing stability for manufacturing batches and starting the Phase 1 MAD clinical trial in the second half of the year. In the nine months ended September 30, 2018, our expenses related to CNTX-6970 were related primarily to completion of the Phase 1 MAD clinical trial.

 

   

CNTX-2022: Activity and costs in the nine months ended September 30, 2017 and 2018 on CNTX- 2022 related primarily to support of the ongoing drug product stability studies.

 

   

CNTX-6016: In the nine months ended September 30, 2017 and 2018, our expenses related to CNTX-6016 were related primarily to pre-clinical toxicology studies. We have opened an Investigational New Drug Application, or IND, with FDA and are preparing to initiate a Phase 1 SAD clinical trial in the second half of 2018.

Unallocated and other research and development expenses were $4.8 million for the nine months ended September 30, 2017, and $4.7 million for the nine months ended September 30, 2018. We had nine persons employed and engaged in research and development activities as of September 30, 2017 and ten employees engaged in research and development activities as of September 30, 2018. We plan to recruit and hire additional staff in support of research and development activities as we further develop and advance our product candidates.

General and Administrative Expenses

General and administrative expenses were $5.1 million for the nine months ended September 30, 2017, compared to $6.6 million for the nine months ended September 30, 2018. The increase of $1.5 million in general and administrative expenses was due to:

 

   

An increase of $0.1 million in personnel-related costs. As of September 30, 2017, we had three persons employed and engaged in general and administrative activities and as of September 30, 2018, we added two additional employees for a total of five employees engaged in general and administrative activities. We plan to recruit and hire additional staff in support of general and administrative activities as we continue to develop and advance our product candidates.

 

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Services, including commercialization consulting, communications and investor relations, business development, finance and legal fees increased $1.5 million for the for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.

 

   

Other general and administrative expenses in total decreased $0.1 million for the for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.

Other Income (Expense), Net

 

    

Nine Months Ended
September 30,

    

Increase
(Decrease)

 
    

2017

    

2018

    

 

 
     (in thousands and unaudited)  

Interest income

   $ 19      $ 564      $ (545

Interest expense

     (617      (205      (412

Loss on disposal of property and equipment

     (38      —          (38

Loss on forgiveness of notes receivable from stockholders

     —          (599      599  

Loss on extinguishment of long-term debt

     —          (298      298  

Revaluation of stock warrant liabilities

     339        (763      1,102  
  

 

 

    

 

 

    

 

 

 

Total other income (expense), net

   $ (297    $ (1,301    $ 1,004  
  

 

 

    

 

 

    

 

 

 

We earn interest income on the money market fund investments we make with the proceeds from our preferred stock, convertible notes and debt financings prior to the cash being deployed into operations. For the nine months ended September 30, 2018, our interest income has increased as a result of having invested the proceeds of our Series D preferred stock financing in December 2017.

Our interest expense in the nine months ended September 30, 2017 primarily relates to the principal amount of $5.3 million of convertible notes payable issued in the first nine months of 2017 ahead of our Series D preferred stock financing, which closed in December 2017. Interest expense includes accrual of the stated interest rate of the convertible notes, which is 10.0% on convertible notes payable issued in 2017 together with the amortization of the discount on the convertible notes that arose on allocation of proceeds to our warrant liability for the fair value of warrants issued together with the convertible notes payable and amortization of costs associated with the issuance of the convertible notes payable. Interest expense in the nine months ended September 30, 2017 and 2018 also includes interest expense and amortization of debt discount associated with our term loan facility.

In April 2018, we fully released executive officers from all liabilities and obligations under partial recourse promissory notes, dated October 8, 2013, resulting in a loss of $0.6 million.

In June 2018, we further amended our loan and security agreement, dated April 22, 2015, entered into with SVB, to provide for a facility of $7.7 million. In connection with this amendment, we wrote-off the discount on the pre-amendment debt balance, the unamortized balance of capitalized debt issue costs and the non-cash charge attendant to the warrants issued to SVB in connection with the 2018 Term Loan, in the aggregate amounting to a loss on extinguishment of long-term debt of $0.3 million.

The fair value of our warrant liabilities has generally been decreasing with each round of additional preferred stock financing we have entered into through the Series D preferred stock financing in December 2017. In 2018, the fair value of our warrant liabilities has been increasing largely due to our assuming an increased probability of an IPO in our scenario analysis. We will continue to adjust warrant liabilities for changes in fair value until the earlier of the exercise, conversion or expiration of the warrants.

 

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Results of Operations

Comparison of the Years Ended December 31, 2016 and 2017

 

    

Year Ended December 31,

    

Increase
(Decrease)

 
    

2016

    

2017

 
     (in thousands)  

Revenue

   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

 

Operating expenses:

        

Research and development

     27,788        17,622        (10,166

General and administrative

     5,443        6,433        990  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     33,231        24,055        (9,176
  

 

 

    

 

 

    

 

 

 

Loss from operations

     (33,231      (24,055      (9,176
  

 

 

    

 

 

    

 

 

 

Other income (expense), net:

        

Interest income

     22        43        (21

Interest expense

     (2,126      (983      (1,143

Loss on conversion of convertible notes payable

     (2,412      (497      (1,915

Loss on disposal of property and equipment

     —          (38      38  

Revaluation of stock warrant liabilities

     75        475        (400
  

 

 

    

 

 

    

 

 

 

Total other income (expense), net

     (4,441      (1,000      (3,441
  

 

 

    

 

 

    

 

 

 

Net loss before income tax benefit

   $ (37,672    $ (24,742    $ (12,930

Income Tax benefit

     —          441        (441
  

 

 

    

 

 

    

 

 

 

Net loss

     (37,672      (24,614      (13,058
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

 

    

Year Ended December 31,

    

Increase
(Decrease)

 
    

2016

    

2017

 
     (in thousands)  

Direct research and development expenses by program:

                                                  

CNTX-4975 program

   $ 10,789      $ 6,525      $ (4,264

Other pre-clinical and clinical programs

     12,628        4,899        (7,729

Unallocated and other research and development expenses:

        

Personnel related (including stock-based compensation)

     2,341        2,348        7  

Services

     1,487        3,072        1,585  

Other

     543        778        235  
  

 

 

    

 

 

    

 

 

 

Total unallocated and other research and development expenses

     4,371        6,198        1,827  
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 27,788      $ 17,622      $ (10,166
  

 

 

    

 

 

    

 

 

 

Research and development expenses were $27.8 million for the year ended December 31, 2016, compared to $17.6 million for the year ended December 31, 2017.

Research and development expenses with regard to our most advanced product candidate, CNTX-4975 for the treatment of patients with moderate to severe pain due to knee OA were $10.8 million for the year ended December 31, 2016, compared to $6.5 million for the year ended December 31, 2017. During 2016, we conducted our Phase 2 TRIUMPH trial and, in December 2016, we announced the results of this trial. In October 2017, we were advised by the FDA that it concurred with our plans to proceed with the Phase 3 program for CNTX-4975 and we are currently in Phase 3 development. We expect our research and development expenses

 

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will significantly increase as we advance this product candidate through Phase 3 clinical trials. In 2017, we also conducted Phase 1 Clinical Trial OA-101 to refine options regarding the procedure pain control technique used as part of the administration of CNTX-4975. The $4.3 million decrease in spending on the program in 2017 as compared to 2016 is primarily attributable to the ongoing Phase 2 TRIUMPH trial for which the last patient visit was in October 2016 and in respect of which topline data became available in December 2016. In 2017, expenditures on CNTX-4975 were related primarily to regulatory interactions with the FDA, manufacturing clinical batches of product, and preparing for the initiation of our Phase 3 program.

In addition to CNTX-4975, we have three other product candidates in clinical development and one in pre-clinical development for the treatment of multiple types of chronic pain, including chronic pain of neuropathic and inflammatory origin. Research and development expenses with regard to these other clinical development programs were $12.6 million for the year ended December 31, 2016, compared to $4.9 million for the year ended December 31, 2017, representing a decrease of $7.7 million attributable to all four programs.

 

   

CNTX-0290: In the year ended December 31, 2016, we conducted our Phase 1 single ascending dose, or SAD, clinical trial in healthy volunteers, non-clinical toxicology studies and had extensive manufacturing activities to optimize bulk drug substance and formulate finished drug product whereas, in the year ended December 31, 2017, our expenses related to CNTX-0290 were related primarily to our multiple ascending dose, or MAD, clinical trial and more limited non-clinical toxicology studies. In addition, in the year ended December 31, 2016, we paid to Boehringer Ingelheim a milestone payment of $1.0 million related to the initiation of the single ascending dose clinical trial in our CNTX-0290 program.

 

   

CNTX-6970: In the year ended December 31, 2016, we conducted extensive manufacturing activities to optimize the drug substance process and formulate tablet finished product for Phase 1 clinical trials, as well as carried-out chronic non-clinical toxicology studies. In the year ended December 31, 2017, our activities were focused on supporting ongoing stability for manufacturing batches and starting the Phase 1 MAD clinical trial in the second half of the year.

 

   

CNTX-2022: In the year ended December 31, 2016, we conducted activities related to planning a Phase 1 clinical trial in healthy volunteers in Australia and a non-clinical toxicology study. We ultimately decided not to move forward with the trial in Australia due to prioritization of other programs. Activity and costs in the year ended December 31, 2017, on CNTX-2022 related primarily to support of the ongoing drug product stability studies.

 

   

CNTX-6016: In the year ended December 31, 2016, we conducted extensive manufacturing activities to optimize bulk drug substance and formulate finished drug product and non-clinical toxicology studies. In the year ended December 31, 2017, our expenses related to CNTX-6016 were related primarily to non-clinical toxicology studies.

Unallocated and other research and development expenses were $4.4 million for the year ended December 31, 2016, compared to $6.2 million for the year ended December 31, 2017, representing an increase of $1.8 million principally due to various contracted research and development services. We had six persons employed and engaged in research and development activities throughout 2016 and 2017. We plan to recruit and hire additional staff in support of research and development activities as we develop and advance our product candidates.

 

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General and Administrative Expenses

General and administrative expenses were $5.4 million for the year ended December 31, 2016, compared to $6.4 million for the year ended December 31, 2017. The increase of $1.0 million in general and administrative expenses was due to:

 

   

An increase of $0.4 million in personnel-related costs. As of December 31, 2016, we had two persons employed and engaged in general and administrative activities and, in the year ended December 31, 2017, we added an additional employee for a total of three employees engaged in general and administrative activities as of December 31, 2017. We plan to recruit and hire additional staff in support of general and administrative activities as we continue to develop and advance our product candidates.

 

   

Services, including commercialization consulting, communications and investor relations, business development, finance and legal fees increased $0.2 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

 

   

Other general and administrative expenses in total increased $0.3 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

Other Income (Expense), Net

 

    

Year Ended December 31,

    

Increase
(Decrease)

 
    

2016

    

2017

 
     (in thousands)  

Interest income

   $ 22      $ 43      $ (21

Interest expense

     (2,126      (983      (1,143

Loss on conversion of convertible notes payable

     (2,412      (497      (1,915

Loss on disposal of property and equipment

     —          (38      38  

Revaluation of warrant liabilities

     75        475        (400
  

 

 

    

 

 

    

 

 

 

Total other income (expense), net

   $ (4,441    $ (1,000    $ (3,441
  

 

 

    

 

 

    

 

 

 

We earn interest income on the money market fund investments we make of the proceeds from our preferred stock, convertible notes and debt financings prior to the cash being deployed into operations.

Our interest expense in the year ended December 31, 2016 primarily relates to the principal amount of $30.0 million of convertible notes payable issued in 2016 ahead of our Series C preferred stock financing closed in December 2016. Our interest expense in the year ended December 31, 2017 primarily relates to the principal amount of $9.2 million of convertible notes payable issued in 2017 ahead of our Series D preferred stock financing closed in December 2017. Interest expense includes accrual of the stated interest rate of the convertible notes, which is 5.0% on convertible notes payable issued in 2016 and 10.0% on convertible notes payable issued in 2017 together with the amortization of the discount on the convertible notes that arose on allocation of proceeds to our warrant liability for the fair value of warrants issued together with the convertible notes payable and amortization of costs associated with the issuance of the convertible notes payable. Interest expense in the years ended December 31, 2016 and 2017 also includes interest expense and amortization of debt discount associated with our term loan facility.

Our losses on conversion of convertible notes payable into preferred stocks result from the write-off of unamortized discount on the convertible notes together with unamortized issuance costs at the time of conversion of the convertible notes payable into shares of Series C preferred stock, which occurred in 2016, and Series D preferred stock, which occurred in 2017.

 

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The fair value of our warrant liabilities has generally been decreasing with each round of additional preferred stock financing we have entered into. We will continue to adjust warrant liabilities for changes in fair value until the earlier of the exercise, conversion or expiration of the warrants.

Income Tax Benefit

Our income tax benefit for the year ended December 31, 2017 of $441,000 reflects the impact of the reduction in the United States corporate income tax rate from 35% (34% as applies to us) to 21% on our deferred tax liability.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our product candidates, which are in various phases of pre-clinical or clinical development, and we do not expect to generate revenue from sales of any product for several years, if at all. We have funded our operations to date with proceeds from the issuance and sales of convertible notes and preferred stock and borrowings under the term loan facility. Through December 31, 2017, we had received gross proceeds of $148.5 million from the issuance and sale of convertible notes and preferred stock. As of December 31, 2017, we had cash and cash equivalents of $60.7 million and as of September 30, 2018, we had cash and cash equivalents of $42.1 million.

On April 22, 2015, we entered into a $10 million term loan facility (the loan thereunder, the “Initial Loan”) with Silicon Valley Bank, or SVB, pursuant to which we could borrow under two separate tranches. Under the Initial Loan, we could borrow up to $7.5 million through February 29, 2016 and, at SVB’s sole and absolute direction, an additional $2.5 million from the date of receipt of positive data with respect to certain clinical trials for CNTX-4975 through June 30, 2016. The repayment requirements and term under each tranche varied. In addition, at the end of each repayment term (or at early termination of the term loan facility), a final payment of 5% of the original principal amount would have been due and payable. Interest accrued under the Initial Loan at a floating rate per annum equal to the sum of the prime rate plus 3.25%. We borrowed an aggregate of $4.8 million under the Initial Loan.

On January 20, 2016, in connection with our entry into the patent assignment and licensing agreement, or the BI Agreement, with Boehringer Ingelheim International, GmbH, or BI, we entered into the consent and first amendment to the loan and security agreement with SVB. Under the amendment, SVB consented to certain milestone and royalty payments to be made under the BI Agreement, waived the then existing default under the term loan facility resulting from our payment of a certain upfront payment under the BI Agreement and amended certain other provisions of the loan and security agreement.

On June 27, 2018, we entered into a second amendment to the loan and security agreement. Under this second amendment, SVB agreed to extend an additional term loan, or the 2018 Loan, of $7.7 million, the proceeds of which were required to be used to pay down the Initial Loan, including certain premiums, interest and fees. Until the earlier of the repayment-in-full of the 2018 Loan or November 1, 2021, we are required to (i) make monthly interest payments in respect of the 2018 Loan, (ii) commencing June 1, 2019 (or, subject to certain conditions, December 1, 2019), make principal repayments in respect of the 2018 Loan and (iii) make a final payment equal to 5% of the 2018 Loan principal amount in addition to any unpaid principal or interest upon the earliest to occur of (x) maturity of the 2018 Loan, (y) early prepayment (whether voluntary or mandatory) in full of the 2018 Loan, or (z) the termination of the loan and security agreement. In addition, any voluntary or mandatory prepayments of the 2018 Loan are subject to payment of a premium of (x) 3% for a prepayment made on or prior to June 27, 2019, (y) 2% for a prepayment made after June 27, 2019 but on or prior to June 27, 2020 and (z) 1% for a prepayment made after June 27, 2020 but prior to the maturity date of the 2018 Loan, in each case of the then outstanding principal amount of the 2018 Loan as of the date immediately preceding such prepayment. The 2018 Loan matures on November 1, 2021 and interest thereunder accrues at a floating rate per annum equal to the greater of 3.5% or the prime rate minus 1.25%. In addition, our obligations under the term

 

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loan facility are secured by a first priority security interest in substantially all of our assets, subject to certain exceptions, including intellectual property assets. The loan and security agreement includes customary restrictive covenants and events of default. On June 27, 2018, we borrowed the full principal amount under the 2018 Loan.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

 

   

Year Ended December 31,

   

Nine Months Ended September 30,

 
   

2016

    

2017

   

2017

   

2018

 
   

(in thousands)

 
          (unaudited)  

Cash used in operating activities

  $ (30,568    $ (22,349   $ (16,827   $ (24,345

Cash used in investing activities

    —          (28     (28     —    

Cash provided by financing activities

    44,176        66,825       3,930       5,725  
 

 

 

    

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $ 13,608      $ 44,448     $ (12,925   $ (18,620
 

 

 

    

 

 

   

 

 

   

 

 

 

Operating activities. During the year ended December 31, 2016, net cash used by operating activities was $30.6 million, primarily resulting from the $33.2 million of operating expenses partially offset by non-cash charges of $1.3 million, and by an increase of cash resulting from a net change in our operating assets and liabilities of $1.7 million. During the year ended December 31, 2017, net cash used by operating activities was $22.3 million, primarily resulting from our operating expenses of $24.1 million partially offset by non-cash charges of $1.7 million, and by an increase of cash resulting from a net change in our operating assets and liabilities of $0.2 million.

During the nine months ended September 30, 2017, net cash used by operating activities was $16.8 million, primarily resulting from our operating expenses of $19.2 million partially offset by non-cash charges of $1.5 million, and by an increase of cash resulting from a net decrease in our operating assets and liabilities of $1.0 million. During the nine months ended September 30, 2018, net cash used by operating activities was $24.3 million, primarily resulting from the $24.0 million of operating expenses partially offset by non-cash charges of $1.1 million, $0.6 million of interest income and by an decrease of cash resulting from a net increase in our operating assets and liabilities of $1.9 million.

Investing activities. We had no investing activities during the year ended December 31, 2016. During the year ended December 31, 2017, net cash used in investing activities was $28,000, consisting of our purchases of property and equipment.

During the nine months ended September 30, 2017, net cash used in investing activities was $28,000, consisting of our purchases of property and equipment. We had no investing activities during the nine months ended September 30, 2018.

Financing activities. During the year ended December 31, 2016, net cash provided by financing activities was $44.2 million. During the course of the year, we raised $28.3 million, net, in a series of convertible notes payable financing before we closed our Series C issuance of preferred stock in December 2016, netting a further $15.3 million. In addition, we borrowed an additional $1.8 million and repaid $1.2 million on our term loan facility.

During the year ended December 31, 2017, net cash provided by financing activities was $66.8 million. During the course of the year, we raised, $9.0 million, net, in a series of convertible notes payable financing before we closed our Series D issuance of preferred stock in December 2017, netting a further $59.4 million. In addition, we made payments of $1.6 million on our term loan facility.

 

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During the nine months ended September 30, 2017, net cash provided by financing activities was $3.9 million. During the course of the first nine months of the year, we raised, $5.1 million, net, in a series of convertible notes payable financing before we closed our Series D issuance of preferred stock in December 2017. In addition, we made payments of $1.2 million on our term loan facility.

During the nine months ended September 30, 2018, net cash provided by financing activities was $5.5 million. Financing activities for the first nine months of the year, principally relate to additional borrowings of $7.7 million on our amended term loan facility and repayments of $2.0 million of principal on the term loan facility.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the pre-clinical activities and clinical trials of our product candidates in development. In addition, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company.

Our expenses will also increase as we:

 

   

pursue the clinical development of our most advanced product candidates, CNTX-4975;

 

   

continue the research and development of our other product candidates;

 

   

seek to identify and develop additional product candidates;

 

   

seek marketing approvals for any of our product candidates that successfully complete clinical development;

 

   

develop and expand our sales, marketing and distribution capabilities for our product candidates for which we obtain marketing approval;

 

   

scale up our manufacturing processes and capabilities to support our ongoing pre-clinical activities and clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; and

 

   

increase our product liability and clinical trial insurance coverage as we initiate and continue to conduct our clinical trials and commercialization efforts.

As of December 31, 2017, we had cash and cash equivalents of $60.7 million and as September 30, 2018 our cash and cash equivalents were $42.1 million. We believe that our existing cash and cash equivalents as of September 30, 2018, will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2019, without giving effect to any anticipated proceeds from this offering. If we are unable to raise sufficient funding in 2018 or beyond, we may be unable to continue to operate. We believe that the anticipated net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2020. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources

 

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sooner than we expect. In its report on our financial statements for the year ended December 31, 2017, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. See “Risk Factors—Risks Related to Our Financial Position and Need for Additional Capital—Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.”

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

 

   

the number and characteristics of the product candidates we pursue;

 

   

the scope, progress, results and costs of researching and developing our product candidates, and conducting pre-clinical studies and clinical trials;

 

   

the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;

 

   

the timing of, and costs involved in, manufacturing our drug candidates and any drugs we successfully commercialize;

 

   

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

 

   

delays that may be caused by changing regulatory requirements;

 

   

cost and timing of hiring new employees to support our continued growth;

 

   

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

 

   

the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.

Until such time, if ever, as we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaborations agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

 

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2017 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

 

    

Payments Due by Period

 
    

Total

    

Less Than
1 Year

    

1 to 3
Years

    

4 to 5
Years

    

More than
5 Years

 
     (in thousands)  

Operating lease commitments(1)

   $ 3,908      $ 578      $ 1,191      $ 1,237      $ 902  

Loan payable(2)

     2,317        1,679        638        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,225      $ 2,257      $ 1,829      $ 1,237      $ 902  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts in the table reflect payments due for our lease of office space in Boston, Massachusetts under an operating lease agreement that, as amended, expires in 2024.

(2)

Amounts in the table reflect the contractually required principal and interest payments payable and end of term charge pursuant to our term loan facility on $2.0 million outstanding as of December 31, 2017 and does not give effect to any subsequent repayments or borrowings thereunder.

The contractual obligations table does not include any potential contingent payments upon the achievement by us of specified clinical, regulatory and commercial events, as applicable, or patent prosecution or royalty payments we may be required to make under license agreements we have entered into with various universities or partners pursuant to which we have in-licensed certain intellectual property, including the BI Agreement. We have excluded these potential payments in the contractual obligations table because the timing and likelihood of these contingent payments are not known. See “Business—License Agreements” for additional information about these license agreements, including with respect to potential payments thereunder.

We enter into contracts in the normal course of business with CROs for clinical trials, pre-clinical research studies and testing 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.

On June 27, 2018, we entered into a second amendment to the loan and security agreement with SVB. As of September 30, 2018, we had $7.7 million of borrowings outstanding under our amended term loan facility. See “—Liquidity and Capital Resources” for additional information about our amended term loan facility, including with respect to payments thereunder.

Off-Balance Sheet Arrangements

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

Recently Issued and Adopted Accounting Pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 3 to our financial statements appearing at the end of this prospectus, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.

Quantitative and Qualitative Disclosures about Market Risks

We are exposed to market risk related to changes in interest rates. As of September 30, 2018, our cash, cash equivalents consisted of cash and money market funds. Our primary exposure to market risk is interest

 

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income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations.

As of September 30, 2018, we had $7.7 million of borrowings outstanding under our amended term loan facility. The term loan facility bears interest at a floating rate per annum equal to the greater of 3.5% or the prime rate less 1.25%. Based on the $7.7 million of principal outstanding as of September 30, 2018, an immediate 10% change in the prime rate would not have a material impact on our debt-related obligations, financial position or results of operations.

 

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BUSINESS

Overview

We are a late clinical-stage biopharmaceutical company focused on becoming the leader in identifying, developing and commercializing novel, non-opioid and non-addictive therapies to address the large unmet medical need for the treatment of chronic pain.

Pain is a protective reaction that alerts the body to the presence of actual or potential tissue damage so that necessary corrective responses can be mounted. The National Institutes of Health, or NIH, defines chronic pain as pain that persists beyond the normal healing time of an injury or that persists longer than three months. As of 2011, over 40 million adults in the United States and over 1 billion people worldwide suffer from chronic pain each year. This epidemic exacts a tremendous cost in terms of direct treatment and rehabilitation expenditures, lost worker productivity, prevalent addiction to opioid-based drugs, and emotional and financial burden for patients and their families. The World Health Organization, or WHO, and the European Commission estimate the worldwide prevalence of osteoarthritis, or OA, alone will impact 130 million people by 2050, of whom 40 million will be severely disabled by the disease. According to an Institute of Medicine of the National Academies reports, pain is a significant public health problem in the United States that costs society between $560 and $635 billion annually. Despite the magnitude of the pain problem, innovation in the development of therapeutic solutions has been largely absent. Since 2010, there have been 19 approvals by the U.S. Food and Drug Administration, or FDA, for the treatment of pain, of which 11 were opioid variants, one was an extended release generic corticosteroid, five were variants of aspirin, and two were variants of other existing drugs. We are developing a portfolio of novel product candidates designed to overcome the limitations of current treatment options for chronic pain and present patients and physicians with better and safer treatment alternatives.

Our most advanced product candidate, CNTX-4975, is designed to selectively and locally target and disrupt the signaling of pain-sensing nerve fibers. CNTX-4975 is in pivotal Phase 3 development for the treatment of moderate to severe pain due to knee OA. In a Phase 2 randomized, double-blinded, placebo-controlled clinical trial in 175 subjects with moderate to severe pain due to knee OA, we observed that, compared to placebo, subjects receiving a single intra-articular, or IA, injection of 1.0 mg of CNTX-4975 experienced: