S-1 1 d286200ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on April 10, 2017.

 

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Ovid Therapeutics Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   46-5270895

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

 

1460 Broadway, Suite 15044

New York, New York 10036

(646) 661-7661

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

 

 

 

Jeremy M. Levin, DPhil, MB BChir

Chief Executive Officer

Ovid Therapeutics Inc.

1460 Broadway, Suite 15044 New York, New York 10036

(646) 661-7661

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

 

Copies to:

 

Laura A. Berezin

Divakar Gupta

Robert W. Phillips

Jaime L. Chase

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304

(650) 843-5000

 

Yaron Werber, MD

Chief Business and Financial Officer

Ovid Therapeutics Inc.

1460 Broadway, Suite 15044

New York, New York 10036

(646) 661-7661

 

Mitchell S. Bloom

Edwin M. O’Connor

Seo Salimi

Goodwin Procter LLP

The New York Times Building

620 Eighth Avenue

New York, New York 10018

(212) 813-8800

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities

to be registered

  Proposed maximum
aggregate offering price(1)
 

Amount of

registration fee(1)

Common stock, $0.001 par value per share

  $86,250,000   $9,997

 

 

 

(1)   Estimated solely for the purpose of computing the amount of registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price. Includes the offering price of additional shares of common stock that the underwriters have the option to purchase to cover over-allotments, if any.

 

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, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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

 

SUBJECT TO COMPLETION, DATED APRIL 10, 2017

 

PRELIMINARY PROSPECTUS

 

             Shares

 

LOGO

 

Common Stock

 

 

 

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

 

We have granted the underwriters an option to purchase up to             additional shares of common stock to cover over-allotments, if any.

 

We have applied to list our common stock on the NASDAQ Global Market under the symbol “OVID.”

 

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus.

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements for this prospectus and future filings.

 

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

 

 

 

     Per Share      Total  

Initial public offering price

   $                   $               

Underwriting discount and commissions(1)

   $                   $               

Proceeds to Ovid Therapeutics Inc. (before expenses)

   $                   $               

 

(1)  

We refer you to “Underwriting” beginning on page 148 for additional information regarding underwriter compensation.

 

The underwriters expect to deliver the shares to purchasers against payment in New York, New York on                 , 2017 through the book-entry facilities of The Depository Trust Company.

 

Citigroup    Cowen and Company

 

 

 

William Blair    JMP Securities

 

 

 

                    , 2017


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You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

 

 

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     10  

Special Note Regarding Forward-Looking Statements

     45  

Market and Industry Data

     47  

Use of Proceeds

     48  

Dividend Policy

     50  

Capitalization

     51  

Dilution

     53  

Selected Financial Data

     56  

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

     58  

Business

     69  

Management

     106  

Executive and Director Compensation

     112  

Certain Relationships and Related Party Transactions

     130  

Principal Stockholders

     134  

Description of Capital Stock

     136  

Shares Eligible for Future Sale

     141  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     144  

Underwriting

     148  

Legal Matters

     154  

Experts

     154  

Where Can You Find Additional Information

     154  

Index to Financial Statements

     F-1  

 

 

 

Our name “Ovid Therapeutics,” the Ovid logo, BoldMedicine and other trademarks, trade names or service marks of Ovid Therapeutics Inc. appearing in this prospectus are the property of Ovid Therapeutics Inc. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.


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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, especially the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. Unless the context otherwise requires, the terms “Ovid,” “Ovid Therapeutics,” “the company,” “we,” “us,” “our” and similar references in this prospectus refer to Ovid Therapeutics Inc.

 

Overview

 

We are a biopharmaceutical company focused exclusively on developing impactful medicines for patients and families living with rare neurological disorders. We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years; yet has remained underappreciated by the industry. Our experienced team began with a vision to integrate the biology and symptomology of rare neurological conditions to employ innovative research and clinical strategies for the development of our drug candidates. Using recent scientific advances in genetics and the biological pathways of the brain, we have created a proprietary map of disease-relevant pathways to identify and acquire novel compounds for the treatment of rare neurological disorders. We are executing on our strategy by in-licensing and collaborating with leading biopharmaceutical companies and academic institutions. We are developing a robust pipeline of clinical assets with an initial focus on neurodevelopmental disorders and rare epileptic encephalopathies. Our most advanced candidate, OV101, has commenced a Phase 2 trial, which is primarily a safety trial that is designed to provide proof-of-concept on efficacy parameters, in adults with Angelman syndrome. OV101 has also commenced a Phase 1 trial in adolescents with Angelman syndrome or Fragile X syndrome. Our second lead drug candidate, OV935, is expected to commence a Phase 1b/2a trial in rare epileptic encephalopathies in 2017.

 

The Ovid Approach

 

The Ovid approach to drug development for rare neurological disorders is scientifically driven, patient focused and business development oriented.

 

   

Scientifically Driven – We are building our portfolio based on the existence of clear biological rationales, including a focus on disorders that have, where possible, a direct genetic linkage.

 

   

Patient Focused – We are highly focused on the patient communities affected by the rare neurological disorders we are addressing. We aim to develop close relationships with patients, caregivers, families, disease foundations and key opinion leaders to better understand the history of these disorders, raise awareness, identify patients and facilitate enrollment of clinical trials.

 

   

Business Development Oriented – Through the in-licensing or partnering of drug candidates, we maintain a highly focused and disciplined business development effort aimed at securing relevant assets in each of our selected rare neurological disorders.

 

 

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Our Pipeline

 

The following table sets forth the status and mechanism of action of our drug candidates:

 

LOGO

 

*   Also known as TAK-935 under a co-development program with Takeda Pharmaceutical Company Limited pursuant to a license and collaboration agreement.

 

OV101

 

We are developing OV101, our most advanced drug candidate, for the treatment of Angelman syndrome and Fragile X syndrome, two neurodevelopmental disorders that are characterized by similar symptoms due to decreased tonic inhibition. Angelman syndrome and Fragile X syndrome have overlapping symptoms, including sleep disorder, aberrant behavior, anxiety and cognitive or intellectual disabilities. Both of these disorders are typically diagnosable in early childhood and require full-time care for the patients affected.

 

Our development plan for OV101 highlights our ability to translate new scientific insights into drug candidates that target an unexplored disease-relevant pathway. OV101 targets diminished tonic inhibition, a neurological signaling abnormality that has been identified as a potential central cause of the symptoms seen in a number of disorders of the brain. We believe modulating tonic inhibition may have a meaningful clinical impact in patients with certain rare neurodevelopmental disorders, including Angelman syndrome and Fragile X syndrome. Specifically, OV101 is a differentiated selective GABA agonist. Gamma aminobutyric acid, or GABA, is an inhibitory neurotransmitter that plays a role in anxiety, sleep, seizures, motor functions and certain other brain functions. Certain GABA receptors contain a specific domain called the d (delta) subunit, which is responsible for tonic inhibition. OV101 specifically modulates tonic inhibition in a novel manner through the signaling of the d subunit. We believe that OV101, which we acquired from H. Lundbeck A/S, or Lundbeck, is

 

 

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the only drug candidate in development with this mechanism of action. See section titled “Business—License and Collaboration Agreement—License Agreement with H. Lundbeck A/S” for additional information. Although the FDA has not yet made any determination regarding the safety and efficacy of OV101, in previously conducted clinical trials in primary insomnia enrolling over 4,000 adults, OV101 was observed to have favorable safety and oral bioavailability profiles. Success in these previous trials does not ensure that our clinical trials in OV101 will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of OV101. We have commenced a Phase 2 trial of OV101, which is primarily a safety trial that is designed to provide proof-of-concept on efficacy parameters, in adults with Angelman syndrome and a Phase 1 trial in adolescents with either Angelman syndrome or Fragile X syndrome. In September 2016, the U.S. Food and Drug Administration, or the FDA, granted orphan drug designation for OV101 for the treatment of Angelman syndrome.

 

OV935

 

In January 2017, we entered into an agreement with Takeda Pharmaceutical Company Limited, or Takeda, to collaborate in the development and commercialization of its compound, TAK-935, which we refer to as OV935. OV935 is a potent, highly selective inhibitor of the enzyme cholesterol 24-hydroxylase, or CH24H. We believe, if approved, OV935 has the potential to become a first-in-class inhibitor of CH24H. CH24H is predominantly expressed in the brain, where it plays a central role in cholesterol homeostasis. We believe that by down-regulating the excitatory signals involved in epilepsy, OV935 offers the possibility not only to suppress seizures, as was observed in preclinical studies, but also to modulate the underlying biological pathways that lead to the development of seizures. This may offer the possibility of a long-term, disease-modifying therapy. OV935 has completed four Phase 1 trials demonstrating favorable tolerability at doses that are believed to be therapeutically relevant. Observations in these prior clinical trials are not based on the FDA’s assessment and successful prior trial results do not indicate that OV935 will achieve favorable results in any later stage trials or that the FDA will ultimately determine that OV935 is effective for purposes of granting marketing approval. We are initially targeting OV935 for epileptic encephalopathies with high unmet medical need and expect to commence a Phase 1b/2a proof-of-concept trial in patients with Dravet syndrome, Lennox-Gastaut syndrome and Tuberous Sclerosis Complex in 2017.

 

Intellectual Property and Manufacturing

 

Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our current and future drug candidates, novel discoveries, product development technologies and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing or in-licensing U.S. and foreign patents and patent applications related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trademarks, trade secrets, copyright protection, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintain our proprietary position. For example, the proprietary map of disease-relevant biological pathways underlying orphan disorders of the brain that we developed would not be appropriate for patent protection and, as a result, we rely on trade secrets to protect this aspect of our business.

 

Certain members of our management have broad experience in manufacturing, which we believe may provide a competitive advantage. However, we currently have no manufacturing facilities and we intend to use our collaborators to provide the drug substance supply for our planned clinical trials in OV101 and OV935. We have contracted, or in the case of OV935, will contract, with a third-party contract development and manufacturing organization to manufacture our drug products for our planned clinical trials. We also expect to engage another third party to package, label and distribute our drugs.

 

 

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Our Leadership

 

Our management team is a critical component to the execution of our overall strategy and our business model. We have assembled a team with significant experience in translational science, drug evaluation, clinical development, regulatory affairs and business development. The members of our team have been collectively involved in the development and approval of over 20 marketed drugs. We believe that we are particularly well positioned to execute on our business development strategy given the extensive network and breadth of expertise of our Chairman and Chief Executive Officer, Dr. Jeremy Levin, and the other members of our management team. Our management team is supported by our board of directors, which has extensive experience in the biopharmaceutical industry.

 

Risks Associated with Our Business

 

Our business is subject to a number of risks of which you should be aware before making a decision to invest in our common stock. These risks are more fully described in the section titled “Risk Factors,” including the following:

 

   

We have a limited operating history, have never generated any revenues from drug sales and have incurred significant operating losses since inception.

 

   

We anticipate that we will continue to incur substantial operating losses for the foreseeable future and may never achieve or maintain profitability.

 

   

We will require additional capital to finance our operations, which may not be available on acceptable terms, if at all.

 

   

We may be required to make significant payments in connection with our licenses of OV101 from Lundbeck and OV935 from Takeda.

 

   

Our future success is dependent on the successful clinical development, regulatory approval and commercialization of our current and future drug candidates, without which our ability to generate revenue will be adversely affected.

 

   

Because the results of preclinical studies or earlier clinical trials are not necessarily predictive of future results, our drug candidates may not have favorable results in planned or future studies or trials, or may not receive regulatory approval.

 

   

Risks associated with the in-licensing or acquisition of drug candidates could cause substantial delays in the preclinical and clinical development of our drug candidates.

 

   

We may encounter substantial delays in our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

 

   

We are heavily dependent on our relationship with Takeda for the development and commercialization of OV935. Any disruption in our relationship with Takeda could lead to delays in, or the termination of, the development of OV935, which would materially harm our business.

 

   

If we are unable to obtain and maintain patent protection for our current or any future drug candidates, or if the scope of the patent protection obtained is not sufficiently broad, we may not be able to compete effectively in our markets.

 

 

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Our Corporate Information

 

We were incorporated under the laws of the State of Delaware on April 1, 2014. Our principal executive offices are located at 1460 Broadway, Suite 15044, New York, New York 10036, and our telephone number is (646) 661-7661. Our corporate website address is www.ovidrx.com. Information contained on, or accessible through, our website is not a part of this prospectus and should not be relied on in determining whether to invest in our common stock. We have included our website in this prospectus solely as an inactive textual reference.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and we may remain an emerging company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

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 provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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THE OFFERING

 

Common stock to be offered

             shares

 

Common stock to be outstanding after this offering

             shares

 

Over-allotment option

             shares

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $            million (or approximately $            million if the underwriters exercise in full their option to purchase up to             additional shares of common stock to cover over-allotments, if any), based on an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, (i) to conduct a Phase 2 STARS trial of OV101 in adults with Angelman syndrome and a Phase 1 trial of OV101 in adolescents with Angelman syndrome or Fragile X syndrome, as well as other future Phase 2 trials in adolescents and pediatrics in these indications, (ii) to conduct a Phase 1b/2a trial of OV935 in patients with rare epileptic encephalopathies, (iii) other ongoing research and development activities related to additional drug candidates and preclinical programs and (iv) to fund the expansion of patient-focused activities, including social media outreach and involvement in patient-focused organizations, for ongoing research and development activities, as well as for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies, although, we have no present commitments or agreements for any specific acquisitions. See the section titled “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.

 

Risk factors

You should read the section titled “Risk Factors” for a discussion of factors to consider carefully, together with all the other information included in this prospectus, before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market symbol

“OVID”

 

The number of shares of our common stock to be outstanding after this offering is based on 42,144,229 shares of common stock outstanding as of December 31, 2016, and excludes:

 

   

6,423,680 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2016, at a weighted-average exercise price of $3.47 per share;

 

   

2,247,545 shares of our common stock issuable upon the exercise of outstanding stock options granted between December 31, 2016 and April 10, 2017 at a weighted-average exercise price of $3.95 per share;

 

 

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             shares of our common stock reserved for future issuance under our 2017 Equity Incentive Plan, or the 2017 Plan, which will become effective upon the execution of the underwriting agreement related to this offering, as well as any future increases in the number of shares of common stock reserved for issuance under our 2017 Plan and any shares underlying outstanding stock awards granted under our 2014 Equity Incentive Plan, or the 2014 Plan that expire or are repurchased, forfeited, cancelled or withheld, as more fully described in the section titled “Executive and Director Compensation—Equity Incentive Plans”; and

 

   

             shares of our common stock reserved for future issuance under our 2017 Employee Stock Purchase Plan, or ESPP, which will become effective upon the execution of the underwriting agreement related to this offering, as well as any future increases in the number of shares of common stock reserved for issuance under our ESPP.

 

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

 

   

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

 

   

the automatic conversion of all outstanding shares of our Series A convertible preferred stock and Series B convertible preferred stock as of December 31, 2016 into an aggregate of 17,159,959 shares of our common stock upon the completion of this offering;

 

   

the issuance on January 6, 2017 of 3,831,293 shares of our Series B-1 convertible preferred stock and the automatic conversion thereof into an aggregate of 3,831,293 shares of our common stock upon the completion of this offering;

 

   

no exercise of the outstanding options described above; and

 

   

no exercise by the underwriters of their option to purchase up to             additional shares of our common stock to cover over-allotments, if any.

 

 

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SUMMARY FINANCIAL DATA

 

The following tables set forth our summary statements of operations data for the years ended December 31, 2016 and 2015 and balance sheet data as of December 31, 2016, all of which has been derived from our audited financial statements appearing elsewhere in this prospectus. The following summary financial data should be read with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

 

     Year Ended December 31,  
     2016     2015  
    
(in thousands, except share and per share data)             

Statements of Operations and Comprehensive Loss

    

Operating Expenses

    

Research and development

   $ 9,585     $ 6,612  

Selling, general and administrative

     12,950       6,578  
  

 

 

   

 

 

 

Total operating expenses

     22,535       13,190  
  

 

 

   

 

 

 

Interest income (expense), net

     121       30  
  

 

 

   

 

 

 

Loss before income tax

     (22,414     (13,160

Income taxes

     —         —    
  

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (22,414   $ (13,160
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (22,414   $ (13,160
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders

   $ (1.06   $ (0.63
  

 

 

   

 

 

 

Weighted-average common shares outstanding used to compute net loss per share attributable to common stockholders

     21,152,977       20,853,388  
  

 

 

   

 

 

 

Unaudited pro forma net loss(1)

   $ (48,276  
  

 

 

   

Unaudited pro forma net loss per share attributable to common stockholders(1)

   $ (1.15  
  

 

 

   

Unaudited pro forma weighted-average common shares outstanding used to compute net loss per share attributable to common stockholders(1)

     42,144,229    
  

 

 

   

 

(1)   See Note 2 to our notes to our financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the pro forma net loss, net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

 

 

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     As of December 31, 2016  
     Actual     Pro  Forma(1)     Pro Forma
As  Adjusted(2)(3)
 
(in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 51,940     $ 51,940     $               

Working capital(4)

     48,678       48,678    

Total assets

     53,028       53,028    

Total liabilities

     3,733       3,733    

Common stock

     21       42    

Convertible preferred stock

     17       —      

Accumulated deficit

     (35,910     (61,771  

Total stockholders’ equity

     49,294       49,294    

 

(1)   The pro forma column reflects the (i) automatic conversion of all outstanding shares of our Series A convertible preferred stock and Series B convertible preferred stock into an aggregate of 17,159,959 shares of our common stock upon the completion of this offering and (ii) the issuance on January 6, 2017 of 3,831,293 shares of our Series B-1 convertible preferred stock and the automatic conversion thereof into an aggregate of 3,831,293 shares of our common stock upon the completion of this offering.
(2)   The pro forma as adjusted column reflects the pro forma adjustments discussed above and the sale of              shares of our common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting 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 $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity on a pro forma as adjusted basis by approximately $             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 underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1.0 million increase (decrease) in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity on a pro forma as adjusted basis by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.
(4)   Working capital is defined as current assets less current liabilities. See our financial statements for additional information regarding our current assets and current liabilities.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline and you may lose all or part of your investment.

 

Risks Related to Our Financial Position and Need For Additional Capital

 

We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future and may never achieve or maintain profitability.

 

Since inception in April 2014, we have incurred significant operating losses. Our net loss was $22.4 million and $13.2 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had an accumulated deficit of $35.9 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Since inception, we have devoted substantially all of our efforts to research and preclinical and clinical development of our drug candidates, as well as to building out our management team and infrastructure. It could be several years, if ever, before we have a commercialized drug. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we:

 

   

continue the ongoing and planned preclinical and clinical development of our drug candidates;

 

   

continue to build a portfolio of drug candidates through the acquisition or in-license of drugs, drug candidates or technologies;

 

   

initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future;

 

   

seek marketing approvals for our current and future drug candidates that successfully complete clinical trials;

 

   

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

 

   

develop, maintain, expand and protect our intellectual property portfolio;

 

   

implement operational, financial and management systems; and

 

   

attract, hire and retain additional administrative, clinical, regulatory and scientific personnel.

 

In addition, because of the numerous risks and uncertainties associated with pharmaceutical products and development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses could increase and profitability could be further delayed if we decide to or are required by the U.S. Food and Drug Administration, or FDA, or other regulatory authorities such as the European Medicines Agency, or EMA, to perform studies or trials in addition to those currently expected, or if there are any delays in the development, or in the completion of any planned or future preclinical studies or clinical trials of our current and future drug candidates. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing our current and future drug candidates.

 

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations.

 

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We have a limited operating history and have never generated any revenue from drug sales. Our limited operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

 

We are a clinical-stage company founded in April 2014. Our operations have consumed substantial amounts of cash since our inception, primarily due to organizing and staffing our company, business planning, raising capital, acquiring assets and undertaking the development of OV101. We have not yet demonstrated the ability to complete clinical trials of any of our drug candidates, obtain marketing approvals, manufacture a commercial-scale drug or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had more experience developing drug candidates.

 

Our ability to generate revenue from drug sales and achieve profitability depends on our ability, alone or with any current or future collaborative partners, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, our current and future drug candidates. We do not anticipate generating revenue from drug sales for the next several years, if ever. Our ability to generate revenue from drug sales depends heavily on our, or any current or future collaborators’, success in:

 

   

timely and successfully completing preclinical and clinical development of our current and future drug candidates;

 

   

obtaining regulatory approvals for our current and future drug candidates for which we successfully complete clinical trials;

 

   

launching and commercializing any drug candidates for which we obtain regulatory approval by establishing a sales force, marketing and distribution infrastructure or, alternatively, collaborating with a commercialization partner;

 

   

qualifying for coverage and adequate reimbursement by government and third-party payors for any drug candidates for which we obtain regulatory approval, both in the United States and internationally;

 

   

developing, validating and maintaining a commercially viable, sustainable, scalable, reproducible and transferable manufacturing process for our current and future drug candidates that is compliant with current good manufacturing practices, or cGMP;

 

   

establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate amount and quality of drugs and services to support clinical development, as well as the market demand for our current and future drug candidates, if approved;

 

   

obtaining market acceptance, if and when approved, of our current or any future drug candidate as a viable treatment option by physicians, patients, third-party payors and others in the medical community;

 

   

effectively addressing any competing technological and market developments;

 

   

implementing additional internal systems and infrastructure, as needed;

 

   

negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations pursuant to such arrangements;

 

   

our ability to obtain and maintain orphan drug exclusivity for any of our current and future drug candidates for which we obtain regulatory approval;

 

   

maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;

 

   

avoiding and defending against third-party interference or infringement claims; and

 

   

securing appropriate pricing in the United States, the European Union and other countries.

 

We expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. We will need to eventually

 

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transition from a company with a research and development focus to a company capable of undertaking commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.

 

We will require additional capital to finance our operations, which may not be available on acceptable terms, if at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our drug development efforts or other operations.

 

Our operations have consumed substantial amounts of cash since our inception. We expect our expenses to increase in connection with our ongoing and planned activities, particularly as we continue to develop and commercialize our drug candidates, in addition to costs associated with the acquisition or in-licensing of any additional drug candidates we may pursue. Our expenses could increase beyond expectations if the FDA or other regulatory authorities require us to perform clinical and other studies in addition to those that we currently anticipate. In addition, if we obtain marketing approval for our drug candidates, we expect to incur significant expenses related to manufacturing, marketing, sales and distribution. Furthermore, upon the completion of this offering, we expect to incur additional costs associated with operating as a public company.

 

As of December 31, 2016, our cash and cash equivalents was $51.9 million. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will fund our current operating plans through at least the next 12 months. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches.

 

In any event, we will require more capital to pursue additional preclinical and clinical activities, regulatory approval and the commercialization of our current or future drug candidates. Even if we believe we have sufficient capital for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations. Any additional capital raising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our current and future drug candidates.

 

If we do not raise additional capital in sufficient amounts, or on terms acceptable to us, we may be prevented from pursuing development and commercialization efforts, which will harm our business, operating results and prospects.

 

Raising additional capital or acquiring or licensing assets by issuing equity or debt securities may cause dilution to our stockholders, and raising funds through lending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.

 

Until such time as we can generate substantial revenue from drug sales, if ever, we expect to finance our cash needs through a combination of equity and debt financings, strategic alliances, and license and development agreements in connection with any collaborations. We do not have any committed external source of funds. To the extent that we issue additional equity securities, our stockholders may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. In addition, we may issue equity or debt securities as consideration for obtaining rights to additional compounds. For example, in our arrangement with Takeda Pharmaceutical Company Limited, or Takeda, upon the achievement of a certain development milestone, we will be obligated to issue to Takeda additional securities equal to up to 8% of our outstanding capital stock in certain situations which will dilute our stockholders. In addition, further dilution may occur if we elect to issue shares of common stock to Takeda as payment for the remaining potential global commercial and regulatory milestone payments, which aggregate to approximately $35.0 million. For more information, see “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda” and “Business—License and Collaboration Agreements—License and Collaboration Agreement with Takeda.”

 

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Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as redeeming our shares, making investments, incurring additional debt, making capital expenditures, declaring dividends or placing limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could negatively impact our ability to conduct our business. If we raise additional capital through future collaborations, strategic alliances or third-party licensing arrangements, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us.

 

If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts, or grant rights to develop and market drug candidates that we would otherwise develop and market ourselves.

 

We may be required to make significant payments in connection with our licenses of OV101 from Lundbeck and OV935 from Takeda.

 

We acquired rights to OV101, pursuant to a license agreement with H. Lundbeck A/S, or Lundbeck, in March 2015, or the Lundbeck agreement. Under the Lundbeck agreement, we are subject to significant obligations, including payment obligations upon achievement of specified milestones and royalties on drug sales, as well as other material obligations. We are obligated to pay Lundbeck milestone payments up to an aggregate of $181.0 million upon the achievement of certain development, regulatory and sales milestone events. In addition, we are obligated to pay Lundbeck tiered royalties based on net sales of OV101. If these payments become due under the terms of the Lundbeck agreement, we may not have sufficient funds available to meet our obligations and our development efforts may be harmed.

 

We also acquired rights to OV935 pursuant to a license and collaboration agreement with Takeda, or the Takeda license agreement, in January 2017. Under the Takeda license agreement, we are obligated to pay Takeda future payments upon achievement of specified milestones. Upon the first patient enrollment in the first Phase 3 trial for the first of the initial indications we and Takeda are focusing on pursuant to the Takeda license agreement, we are obligated to issue to Takeda the number of unregistered shares of our common stock equal to the lesser of (i) 8% of our outstanding capital stock on the issuance date or (ii) $50.0 million divided by the applicable share price, unless certain events occur. In the event such payment would cause Takeda to own over 19.99% of our outstanding capital stock or other events occur, such payment must be paid in cash. The remaining potential global commercial and regulatory milestone payments equal approximately $35.0 million and can be satisfied in cash or unregistered shares of our common stock at our election, unless certain events occur in which Takeda can require us to pay such payments in cash. If these payments become due under the terms of the Takeda license agreement and we can only pay, or choose to pay, these payments in cash, we may not have sufficient funds available to meet our obligations and our development efforts may be harmed.

 

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

 

We have incurred substantial losses since inception and do not expect to become profitable in the near future, if ever. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes may be limited. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of this offering and/or subsequent shifts in our stock ownership (some of which shifts are outside our control). As a result, if we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income will be subject to limitations. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. As

 

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a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could negatively impact our future cash flows.

 

Risks Related to the Development and Commercialization of Our Drug Candidates

 

Our future success is dependent on the successful clinical development, regulatory approval and commercialization of our current and future drug candidates. If we are not able to obtain required regulatory approvals, we will not be able to commercialize our drug candidates, and our ability to generate revenue will be adversely affected.

 

We do not have any drugs that have received regulatory approval. Our business is dependent on our ability to successfully complete preclinical and clinical development of, obtain regulatory approval for, and, if approved, successfully commercialize our current and future drug candidates in a timely manner. Activities associated with the development and commercialization of our current and future drug candidates are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and similar regulatory authorities outside the United States. Failure to obtain regulatory approval in the United States or other jurisdictions will prevent us from commercializing and marketing our current and future drug candidates.

 

Even if we obtain approval from the FDA and comparable foreign regulatory authorities for our current and future drug candidates, any approval might contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we are unable to obtain regulatory approval, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of that drug candidate or any other drug candidate that we may in-license, develop or acquire in the future.

 

Furthermore, even if we obtain regulatory approval for our current and future drug candidates, we will still need to develop a commercial organization, establish a commercially viable pricing structure and obtain approval for adequate reimbursement from third-party and government payors. If we are unable to successfully commercialize our current and future drug candidates, we may not be able to generate sufficient revenue to continue our business.

 

Because the results of preclinical studies or earlier clinical trials are not necessarily predictive of future results, our drug candidates may not have favorable results in planned or future preclinical studies or clinical trials, or may not receive regulatory approval.

 

Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a drug candidate. Frequently, drug candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. For instance, although OV101 was observed to have a favorable safety and oral bioavailability profile in previously conducted clinical trials in primary insomnia, OV101 has not been previously tested in human patients with Angelman syndrome and Fragile X syndrome and OV935 has not been tested in patients with rare epileptic encephalopathies and the FDA has not yet made any determination regarding safety and efficacy of either OV101 or OV935 in these indications. The results from preclinical studies of OV101 and OV935 in animal models and the results from the OV101 clinical trials in primary insomnia may not be predictive of the effects of these compounds in human patients with the targeted disease. Our approach of targeting the extrasynaptic GABAA receptor with OV101 and cholesterol 24-hydroxylase with OV935 are both novel and unproven and as such, the cost and time needed to develop OV101 and OV935 is difficult to predict and our efforts may not be successful. If we do not observe favorable results in clinical trials of our drug candidates, we may decide to delay or abandon clinical development of such drug candidate. Any such delay or abandonment could harm our business, financial condition, results of operations and prospects.

 

Risks associated with the in-licensing or acquisition of drug candidates could cause substantial delays in the preclinical and clinical development of our drug candidates.

 

Prior to March 2015, we had no involvement with or control over the preclinical and clinical research and development of OV101. We have relied on Lundbeck or its prior licensee to have conducted such research and

 

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development in accordance with the applicable protocol, legal, regulatory and scientific standards, having accurately reported the results of all clinical trials conducted prior to our acquisition of OV101 and having correctly collected and interpreted the data from these trials. If the research and development processes or the results of the development programs prior to our acquisition of OV101 prove to be unreliable, this could result in increased costs and delays in the development of OV101, which could adversely affect any future revenue from this drug candidate.

 

Similarly, we acquired rights to OV935 from Takeda in January 2017. Because we were not involved in the development of OV935 prior to January 2017, we may experience difficulties in the transition of certain development activities from Takeda and its affiliates to us, which may result in delays in clinical trials, as well as problems in our development efforts, particularly if we do not receive all of the necessary products, information, reports and data from Takeda and its affiliates in a timely manner. Further, we have had no involvement with or control over the preclinical and clinical development of OV935 to date. We have relied on Takeda having conducted such research and development in accordance with the applicable protocol, legal, regulatory and scientific standards, having accurately reported the results of all clinical trials conducted prior to our agreement with Takeda and having correctly collected and interpreted the data from these trials. To the extent any of these has not occurred, expected development time and costs may be increased which could adversely affect any future revenue from this drug candidate.

 

We may also acquire or in-license additional drug candidates for preclinical or clinical development in the future as we continue to build our pipeline. The risks associated with acquiring or in-licensing current or future drug candidates could result in delays in the commencement or completion of our preclinical studies and clinical trials, if ever, and our ability to generate revenues from our drug candidates may be delayed.

 

We may encounter substantial delays in our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

 

Before obtaining marketing approval from regulatory authorities for the sale of our drug candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the drug candidate for its intended indications. Clinical trials are expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:

 

   

delays in reaching a consensus with regulatory authorities on trial design;

 

   

delays in reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites;

 

   

delays in opening sites and recruiting suitable patients to participate in our clinical trials;

 

   

imposition of a clinical hold by regulatory authorities as a result of a serious adverse event, concerns with a class of drug candidates or after an inspection of our clinical trial operations or trial sites;

 

   

delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

   

occurrence of serious adverse events associated with the drug candidate that are viewed to outweigh its potential benefits; or

 

   

changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

 

Further, clinical endpoints for certain diseases we are targeting, such as Angelman syndrome and Fragile X syndrome, have not been established, and accordingly we may have to develop new modalities or modify existing endpoints to measure efficacy, which may increase the time it takes for us to commence or complete

 

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clinical trials. In addition, we believe investigators in this area may be inexperienced in conducting trials in this area due to the current lack of drugs to treat these disorders, which may result in increased time and expense to train investigators and open clinical sites.

 

Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to generate revenue from future drug sales and regulatory and commercialization milestones. In addition, if we make manufacturing or formulation changes to our drug candidates, we may need to conduct additional testing to bridge our modified drug candidate to earlier versions. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our drug candidates, if approved, or allow our competitors to bring comparable drugs to market before we do, which could impair our ability to successfully commercialize our drug candidates and may harm our business, financial condition, results of operations and prospects.

 

Additionally, if the results of our clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with our drug candidates, we may:

 

   

be delayed in obtaining marketing approval, if at all;

 

   

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

 

   

obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

 

   

be subject to additional post-marketing testing requirements;

 

   

be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;

 

   

have regulatory authorities withdraw, or suspend, their approval of the drug or impose restrictions on its distribution in the form of a modified risk evaluation and mitigation strategy, or REMS;

 

   

be subject to the addition of labeling statements, such as warnings or contraindications;

 

   

be sued; or

 

   

experience damage to our reputation.

 

Our drug development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, need to be restructured or be completed on schedule, if at all.

 

Further, we, the FDA or an institutional review board, or IRB, may suspend our clinical trials at any time if it appears that we or our collaborators are failing to conduct a trial in accordance with regulatory requirements, including the FDA’s current Good Clinical Practice, or GCP, regulations, that we are exposing participants to unacceptable health risks, or if the FDA finds deficiencies in our investigational new drug, or IND, applications or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for commencement and completion of future clinical trials. If we experience delays in the commencement or completion of our clinical trials, or if we terminate a clinical trial prior to completion, the commercial prospects of our drug candidates could be negatively impacted, and our ability to generate revenues from our drug candidates may be delayed.

 

Angelman syndrome has no FDA-approved treatments, and the clinical endpoints to obtain approval are not well defined.

 

We intend to seek a broad indication for OV101 to treat Angelman syndrome. However, Angelman syndrome is characterized by a variety of signs and symptoms, such as delayed development, intellectual disability, severe speech impairment, problems with movement and balance, seizures, sleep disorders and anxiety. In order to obtain a broad indication for treatment of Angelman syndrome from the FDA, we would need to demonstrate efficacy on several of the key symptoms of Angelman syndrome. If we fail to do so, our clinical

 

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development may be delayed or our label may be limited. In addition, the FDA has not endorsed any primary efficacy endpoints with respect to development of drugs to treat Angelman syndrome. As a result, we must develop acceptable endpoints and seek the FDA’s agreement before seeking approval of OV101. If we fail to reach such an agreement with the FDA as to how to measure efficacy in Angelman syndrome patients in our trials, our clinical development plan will be delayed.

 

Our primary endpoint in the Phase 2 trial of OV101 in adults with Angelman syndrome is safety. While we are also evaluating indications of efficacy as exploratory endpoints, this is primarily a safety trial that is designed to provide a proof-of-concept on the efficacy parameters. Hence, we do not know whether we will be able to obtain a statistically significant result in any of these exploratory endpoints.

 

Before we can begin trials for OV101 in adolescents with Angelman syndrome, we will need to complete a Phase 1 pharmacokinetic trial of OV101 initially in adolescents with Angelman syndrome, which may make enrollment and demonstrating efficacy more difficult and time consuming.

 

The FDA has requested that we obtain certain pharmacokinetic and tolerability data in adolescents prior to enrolling them in our clinical trials. Therefore, we are currently conducting a Phase 2 trial of OV101 initially in adults over the age of 18 with Angelman syndrome. However, genetic testing for Angelman syndrome is fairly new, and most patients who have been conclusively tested for Angelman syndrome are young. Because older patients often do not undergo genetic testing since there are currently no approved therapies for this disorder, we believe that many adult Angelman syndrome patients have not received a confirmed diagnosis of Angelman syndrome. As a result, we may experience difficulties enrolling patients in the trial or we may discover that enrollment takes longer than we anticipate. In addition, certain aspects of Angelman syndrome, such as sleep disturbances, may change with age. As a result, demonstrating a statistically significant and clinical meaningful effect in adults with respect to these symptoms may be more difficult, may take longer or may require more patients than demonstrating an effect in adolescents or pediatric patients.

 

If we decide to seek approval to treat Angelman syndrome in patients younger than 18, we must include these patients in our clinical trials. However, the FDA may not allow us to enroll children or adolescents in our clinical trials if the pharmacokinetic and tolerability data in these populations are not consistent with the data in adults. If we are unable to enroll children and adolescents in our clinical trials, any approval we receive would be limited to adults, which would significantly reduce the commercial potential of OV101.

 

We must develop a new formulation of OV101 for use in young children initially, and eventually for infants and toddlers, and we may be unable to successfully develop an appropriate formulation.

 

Our existing formulation of OV101 is an oral capsule. For use in young pediatric patients, we will need to develop an oral liquid formulation of OV101 or a solid formulation that can be sprinkled on applesauce or similar semi-solid foods. While we have begun developing these formulations, we do not know if our efforts will be successful or if the FDA will agree that the new formulation is comparable to our current formulation. We may experience manufacturing problems such as with solubility or stability or we may discover that the new formulation is less effective than an oral capsule. In addition, we will need to conduct bridging studies to demonstrate that the new formulation is equivalent to our oral capsule, which could result in delays in development and additional costs.

 

We may not be able to obtain or maintain orphan drug designations or exclusivity for our drug candidates, which could limit the potential profitability of our drug candidates.

 

Regulatory authorities in some jurisdictions, including the United States, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States. Generally, if a drug with an orphan drug designation subsequently receives the first marketing approval for an indication for which it receives the designation, then the drug is entitled to a period of marketing exclusivity that precludes the applicable regulatory

 

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authority from approving another marketing application for the same drug for the same indication for the exclusivity period except in limited situations. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation.

 

In September 2016, the FDA granted orphan drug designation for OV101 for the treatment of Angelman syndrome. We intend to pursue orphan drug designation for OV101 in additional indications, as well as for OV935 and potential other future drug candidates. Obtaining orphan drug designations is important to our business strategy; however, obtaining an orphan drug designation can be difficult and we may not be successful in doing so. Even if we were to obtain orphan drug designation for a drug candidate, we may not obtain orphan exclusivity and that exclusivity may not effectively protect the drug from the competition of different drugs for the same condition, which could be approved during the exclusivity period. Additionally, after an orphan drug is approved, the FDA could subsequently approve another application for the same drug for the same indication if the FDA concludes that the later drug is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug exclusive marketing rights in the United States also may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. The failure to obtain an orphan drug designation for any drug candidates we may develop, the inability to maintain that designation for the duration of the applicable period, or the inability to obtain or maintain orphan drug exclusivity could reduce our ability to make sufficient sales of the applicable drug candidate to balance our expenses incurred to develop it, which would have a negative impact on our operational results and financial condition.

 

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

 

A key element of our strategy is to develop and potentially commercialize a portfolio of drug candidates to treat rare neurological disorders. We intend to do so by in-licensing and entering into collaborations with leading biopharmaceutical companies or academic institutions for new drug candidates. Identifying new drug candidates requires substantial technical, financial and human resources, whether or not any drug candidates are ultimately identified. Our approach to business development, including our efforts to map the biological pathways related to orphan disorders of the brain and our relationships among the pharmaceutical industry, may not result in viable drug candidates for clinical development. Even if we identify drug candidates that initially show promise, we may fail to in-license or acquire these assets and may also fail to successfully develop and commercialize such drug candidates for many reasons, including the following:

 

   

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

 

   

competitors may develop alternatives that render any drug candidate we develop obsolete;

 

   

any drug candidate we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

   

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

 

   

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

 

   

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

 

We have limited financial and management resources and, as a result, we may forego or delay pursuit of opportunities with other drug candidates or for other indications that later prove to have greater market potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable

 

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market opportunities. If we do not accurately evaluate the commercial potential or target market for a particular drug candidate, we may relinquish valuable rights to that drug candidate through collaboration, licensing or other royalty arrangements in circumstances under which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate.

 

If we are unsuccessful in identifying and developing additional drug candidates or are unable to do so, our key growth strategy and business will be harmed.

 

We are heavily dependent on our relationship with Takeda for the development and commercialization of OV935. Any disruption in our relationship with Takeda could lead to delays in, or the termination of, the development of OV935, which would materially harm our business.

 

We are jointly developing OV935 with Takeda pursuant to the Takeda license agreement, which also granted us intellectual property rights to OV935. The development and commercialization of OV935 is highly dependent upon our relationship with Takeda, including Takeda’s submission of the IND to the FDA. If for any reason the Takeda license agreement is terminated, or we otherwise lose the intellectual property rights to OV935, our business would be adversely affected. The Takeda license agreement imposes on us rights and obligations, including but not limited to exclusivity, territorial rights, development, commercialization, funding, payment, diligence, sublicensing, insurance and intellectual property protection. After a negotiated time period, each party has the right to terminate the license for convenience upon six to twelve months’ notice to the other party, which would result in us being unable to co-develop and sell OV935. Further, if we breach any material obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages to Takeda, and Takeda may have the right to terminate the license. Takeda could also breach its obligations under the agreement, or may not commit a sufficient amount of resources to satisfy its obligations, which would result in the development of OV935 being materially delayed or terminated.

 

We may explore additional strategic collaborations that may never materialize or may fail.

 

Our business strategy is based on acquiring or in-licensing compounds directed at rare neurological disorders. As a result, we intend to periodically explore a variety of possible additional strategic collaborations in an effort to gain access to additional drug candidates or resources. At the current time, we cannot predict what form such a strategic collaboration might take. We are likely to face significant competition in seeking appropriate strategic collaborators, and strategic collaborations can be complicated and time consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with establishing them.

 

Clinical trials are very expensive, time-consuming and difficult to design and implement.

 

Our drug candidates will require clinical testing before we are prepared to submit a new drug application, or NDA, for regulatory approval. We cannot predict with any certainty if or when we might submit an NDA for regulatory approval for any of our drug candidates or whether any such NDA will be approved by the FDA. Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. For instance, the FDA may not agree with our proposed endpoints for any future clinical trial of our drug candidates, which may delay the commencement of our clinical trials. In addition, we may not succeed in developing and validating disease-relevant clinical endpoints based on insights regarding biological pathways for the disorders we are studying. The clinical trial process is also time-consuming. We estimate that the successful completion of clinical trials of our drug candidates will take at least several years to complete, if not longer. Furthermore, failure can occur at any stage and we could encounter problems that cause us to abandon or repeat clinical trials.

 

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Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be made more difficult or rendered impossible by multiple factors outside our control.

 

Identifying and qualifying patients to participate in our clinical trials is critical to our success. The number of patients suffering from Angelman syndrome, Fragile X syndrome and rare epileptic encephalopathies, such as Dravet syndrome, Lennox-Gastaut syndrome and Tuberous Sclerosis Complex, is small and has not been established with precision. If the actual number of patients with these disorders is smaller than we anticipate, we may encounter difficulties in enrolling patients in our clinical trials, thereby delaying or preventing development and approval of our drug candidates. Even once enrolled we may be unable to retain a sufficient number of patients to complete any of our trials. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the existing body of safety and efficacy data, the number and nature of competing treatments and ongoing clinical trials of competing therapies for the same indication, the proximity of patients to clinical sites and the eligibility criteria for the trial. Because we are focused on addressing rare neurological disorders, there are limited patient pools from which to draw in order to complete our clinical trials in a timely and cost-effective manner. Furthermore, our efforts to build relationships with patient communities may not succeed, which could result in delays in patient enrollment in our clinical trials. In addition, any negative results we may report in clinical trials of our drug candidate may make it difficult or impossible to recruit and retain patients in other clinical trials of that same drug candidate. 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 our drug candidates, or could render further development impossible. In addition, we may rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials and, while we intend to enter into agreements governing their services, we will be limited in our ability to compel their actual performance.

 

Our drug candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.

 

During the conduct of clinical trials, patients report changes in their health, including illnesses, injuries and discomforts, to their doctor. Often, it is not possible to determine whether or not the drug candidate being studied caused these conditions. Regulatory authorities may draw different conclusions or require additional testing to confirm these determinations, if they occur. In addition, it is possible that as we test our drug candidates in larger, longer and more extensive clinical programs, or as use of these drug candidates becomes more widespread if they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by subjects. Many times, side effects are only detectable after investigational drugs are tested in large-scale, Phase 3 trials or, in some cases, after they are made available to patients on a commercial scale after approval. For example, in one of the trials conducted by Lundbeck, there were reports of hallucinations in drug abusers at 30mg and 45mg doses of OV101, which are higher than the 10mg and 15mg doses that were effective for sedation. In addition, some patients treated with OV101 in the Lundbeck Phase 3 trials experienced headaches, nausea and dizziness. Patients in our ongoing or planned clinical trials may experience similar or other side effects after treatment with OV101. If additional clinical experience indicates that any of our current drug candidates, including OV101 and OV935, and any future drug candidates has side effects or causes serious or life-threatening side effects, the development of the drug candidate may fail or be delayed, or, if the drug candidate has received regulatory approval, such approval may be revoked, which would harm our business, prospects, operating results and financial condition.

 

Moreover, if we elect, or are required, to delay, suspend or terminate any clinical trial of our drug candidates, the commercial prospects of our drug candidates may be harmed and our ability to generate revenue through their sale may be delayed or eliminated. Any of these occurrences may harm our business, financial condition and prospects significantly.

 

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Additionally, if any of our drug candidates receive marketing approval, the FDA could require us to include a black box warning in our label or adopt REMS to ensure that the benefits outweigh its risks, which may include, among other things, a medication guide outlining the risks of the drug for distribution to patients and a communication plan to health care practitioners. Furthermore, if we or others later identify undesirable side effects caused by our drug candidates, several potentially significant negative consequences could result, including:

 

   

regulatory authorities may suspend or withdraw approvals of such drug candidate;

 

   

regulatory authorities may require additional warnings on the label;

 

   

we may be required to change the way a drug candidate is administered or conduct additional clinical trials;

 

   

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

 

   

we may need to conduct a recall; and

 

   

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of our drug candidates and could significantly harm our business, prospects, financial condition and results of operations.

 

We may be required to relinquish important rights to and control over the development and commercialization of our drug candidates to any future collaborators.

 

Our current and future collaborations could subject us to a number of risks, including:

 

   

we may be required to undertake the expenditure of substantial operational, financial and management resources;

 

   

we may be required to issue equity securities that would dilute our stockholders’ percentage of ownership;

 

   

we may be required to assume substantial actual or contingent liabilities;

 

   

we may not be able to control the amount and timing of resources that our strategic collaborators devote to the development or commercialization of our drug candidates;

 

   

strategic collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a drug candidate, repeat or conduct new clinical trials or require a new version of a drug candidate for clinical testing;

 

   

strategic collaborators may not pursue further development and commercialization of products resulting from the strategic collaboration arrangement or may elect to discontinue research and development programs;

 

   

strategic collaborators may not commit adequate resources to the marketing and distribution of our drug candidates, limiting our potential revenues from these products;

 

   

we rely on our current collaborators to manufacture drug substance and drug product and may do so with respect to future collaborators, which could result in disputes or delays;

 

   

disputes may arise between us and our strategic collaborators that result in the delay or termination of the research, development or commercialization of our drug candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;

 

   

strategic collaborators may experience financial difficulties;

 

   

strategic collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

 

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business combinations or significant changes in a strategic collaborator’s business strategy may also adversely affect a strategic collaborator’s willingness or ability to complete its obligations under any arrangement;

 

   

strategic collaborators could decide to move forward with a competing drug candidate developed either independently or in collaboration with others, including our competitors; and

 

   

strategic collaborators could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our drug candidates.

 

If the market opportunities for our drug candidates are smaller than we believe they are, even assuming approval of a drug candidate, our business may suffer. Because the patient populations in the market for our drug candidates may be small, we must be able to successfully identify patients and acquire a significant market share to achieve profitability and growth.

 

We focus our research and drug development on treatments of rare neurological disorders. Given the small number of patients who have the disorders that we are targeting, our eligible patient population and pricing estimates may differ significantly from the actual market addressable by our drug candidates. Our projections of both the number of people who have these disorders, as well as the subset of people with these disorders who have the potential to benefit from treatment with our drug candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, patient foundations, or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these disorders. The number of patients may turn out to be lower than expected. Likewise, the potentially addressable patient population for each of our drug candidates may be limited or may not be amenable to treatment with our drug candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect our results of operations and our business.

 

We face substantial competition, which may result in others developing or commercializing drugs before or more successfully than us.

 

The development and commercialization of new drugs is highly competitive. We face competition with respect to our current drug candidates and will face competition with respect to any other drug candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell drugs or are pursuing the development of drug candidates for the treatment of the indications that we are pursuing. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

 

More established companies may have a competitive advantage over us due to their greater size, resources and institutional experience. In particular, these companies have greater experience and expertise in securing reimbursement, government contracts, relationships with key opinion leaders, conducting testing and clinical trials, obtaining and maintaining regulatory approvals and distribution relationships to market products, and marketing approved drugs. These companies also have significantly greater research and marketing capabilities than we do. If we are not able to compete effectively against existing and potential competitors, our business and financial condition may be harmed.

 

As a result of these factors, our competitors may obtain regulatory approval of their drugs before we are able to, which may limit our ability to develop or commercialize our drug candidates. Our competitors may also develop therapies that are safer, more effective, more widely accepted and cheaper than ours, and may also be more successful than us in manufacturing and marketing their drugs. These appreciable advantages could render our drug candidates obsolete or non-competitive before we can recover the expenses of such drug candidates’ development and commercialization.

 

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Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

 

Even if our current or future drug candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success.

 

Even if our current or future drug candidates receive marketing approval, they may fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. If they do not achieve an adequate level of acceptance, we may not generate significant drug revenue and may not become profitable. The degree of market acceptance of our current or future drug candidates, if approved for commercial sale, will depend on a number of factors, including but not limited to:

 

   

the efficacy and potential advantages compared to alternative treatments and therapies;

 

   

effectiveness of sales and marketing efforts;

 

   

the strength of our relationships with patient communities;

 

   

the cost of treatment in relation to alternative treatments and therapies, including any similar generic treatments;

 

   

our ability to offer such drug for sale at competitive prices;

 

   

the convenience and ease of administration compared to alternative treatments and therapies;

 

   

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 availability of third-party coverage and adequate reimbursement;

 

   

the prevalence and severity of any side effects; and

 

   

any restrictions on the use of the drug together with other medications.

 

Our efforts to educate physicians, patients, third-party payors and others in the medical community on the benefits of our drug candidates may require significant resources and may never be successful. Such efforts may require more resources than are typically required due to the complexity and uniqueness of our drug candidates. Because we expect sales of our drug candidates, if approved, to generate substantially all of our drug revenues for the foreseeable future, the failure of our drugs to find market acceptance would harm our business and could require us to seek additional financing.

 

Even if we obtain regulatory approval for our current or future drug candidates, they will remain subject to ongoing regulatory oversight.

 

Even if we obtain any regulatory approval for our current or future drug candidates, such approvals will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information. Any regulatory approvals that we receive for our current or future drug candidates may also be subject to a REMS, limitations on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 trials, and surveillance to monitor the quality, safety and efficacy of the drug.

 

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In addition, drug manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the NDA or foreign marketing application. If we, or a regulatory authority, discover previously unknown problems with a drug, such as adverse events of unanticipated severity or frequency, or problems with the facility where the drug is manufactured or if a regulatory authority disagrees with the promotion, marketing or labeling of that drug, a regulatory authority may impose restrictions relative to that drug, the manufacturing facility or us, including requesting a recall or requiring withdrawal of the drug from the market or suspension of manufacturing.

 

If we fail to comply with applicable regulatory requirements following approval of our current or future drug candidates, a regulatory authority may:

 

   

issue an untitled letter or warning letter asserting that we are in violation of the law;

 

   

seek an injunction or impose administrative, civil or criminal penalties or monetary fines;

 

   

suspend or withdraw regulatory approval;

 

   

suspend any ongoing clinical trials;

 

   

refuse to approve a pending NDA or comparable foreign marketing application (or any supplements thereto) submitted by us or our strategic partners;

 

   

restrict the marketing or manufacturing of the drug;

 

   

seize or detain the drug or otherwise require the withdrawal of the drug from the market;

 

   

refuse to permit the import or export of drug candidates; or

 

   

refuse to allow us to enter into supply contracts, including government contracts.

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our current or future drug candidates and harm our business, financial condition, results of operations and prospects.

 

In addition, the FDA’s policies, and those of equivalent foreign regulatory agencies, may change and additional government regulations may be enacted that could cause changes to or delays in the drug review process, or suspend or restrict regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to 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 and we may not achieve or sustain profitability, which would harm our business, financial condition, results of operations and prospects.

 

If we are unable to establish sales and marketing capabilities, or enter into agreements with third parties to market and sell our current or any future drug candidates, we may be unable to generate any revenue from drug sales.

 

To successfully commercialize any drug candidate that may result from our development programs, we will need to build out our sales and marketing capabilities, either on our own or with others. The establishment and development of our own commercial team or the establishment of a contract sales force to market any drug candidate we may develop will be expensive and time-consuming and could delay any drug launch. Moreover, we cannot be certain that we will be able to successfully develop this capability. We may seek to enter into additional collaborations with other entities to utilize their established marketing and distribution capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If any current or future collaborators

 

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do not commit sufficient resources to commercialize our drug candidates, or we are unable to develop the necessary capabilities on our own, we will be unable to generate sufficient revenue to sustain our business. We compete with many companies that currently have extensive, experienced and well funded marketing and sales operations to recruit, hire, train and retain marketing and sales personnel. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our current and future drug candidates. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

 

Even if we obtain and maintain approval for our current or future drug candidates from the FDA, we may never obtain approval for our current or future drug candidates outside of the United States, which would limit our market opportunities and could harm our business.

 

Approval of a drug candidate in the United States by the FDA does not ensure approval of such drug candidate by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Sales of our current and future drug candidates outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a drug candidate, comparable regulatory authorities of foreign countries also must approve the manufacturing and marketing of the drug candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and more onerous than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a drug candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for any drug candidates, if approved, is also subject to approval. Obtaining approval for our current and future drug candidates in the European Union from the European Commission following the opinion of the EMA, if we choose to submit a marketing authorization application there, would be a lengthy and expensive process. Even if a drug candidate is approved, the FDA or the European Commission, as the case may be, may limit the indications for which the drug may be marketed, require extensive warnings on the drug labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our current and future drug candidates in certain countries.

 

Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Also, regulatory approval for our drug candidates may be withdrawn. If we fail to comply with the regulatory requirements, our target market will be reduced and our ability to realize the full market potential of our current and future drug candidates will be harmed and our business, financial condition, results of operations and prospects could be harmed.

 

If we seek approval to commercialize our current or future drug candidates outside of the United States, in particular in the European Union and Israel, a variety of risks associated with international operations could harm our business.

 

If we seek approval of our current or future drug candidates outside of the United States, we expect that we will be subject to additional risks in commercialization including:

 

   

different regulatory requirements for approval of therapies in foreign countries;

 

   

reduced protection for intellectual property rights;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

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

 

   

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

 

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

 

   

foreign reimbursement, pricing and insurance regimes;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

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

 

   

business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons, floods and fires.

 

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, Israel and many of the individual countries in and outside of Europe with which we will need to comply. Many biopharmaceutical companies have found the process of marketing their own products in foreign countries to be very challenging.

 

Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any drug candidate that we may develop.

 

We face an inherent risk of product liability exposure related to the testing of our current and any future drug candidates in clinical trials and may face an even greater risk if we commercialize any drug candidate that we may develop. If we cannot successfully defend ourselves against claims that any such drug candidates caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any drug candidate that we may develop;

 

   

loss of revenue;

 

   

substantial monetary awards to trial participants or patients;

 

   

significant time and costs to defend the related litigation;

 

   

withdrawal of clinical trial participants;

 

   

the inability to commercialize any drug candidate that we may develop; and

 

   

injury to our reputation and significant negative media attention.

 

Although we maintain product liability insurance coverage, such insurance may not be adequate to cover all liabilities that we may incur. We anticipate that we will need to increase our insurance coverage each time we commence a clinical trial and if we successfully commercialize any drug candidate. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

Risks Related to Regulatory Compliance

 

Our relationships with customers, physicians, and third-party payors will be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, health information privacy and security laws, and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

 

Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any drug candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and third-party payors may subject us to various federal and state fraud and abuse laws and other

 

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health care laws, including, without limitation, the federal Anti-Kickback Statute, the federal civil and criminal false claims laws and the law commonly referred to as the Physician Payments Sunshine Act and regulations. These laws will impact, among other things, our clinical research, proposed sales, marketing and educational programs. In addition, we may be subject to patient privacy laws by both the federal government and the states in which we conduct or may conduct our business. The laws that will affect our operations include, but are not limited to:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, in return for the purchase, recommendation, leasing or furnishing of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand, and prescribers, purchasers and formulary managers on the other. The Patient Protection and Affordable Care Act, as amended, or the PPACA, amended the intent requirement of the federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it;

 

   

federal civil and criminal false claims laws, including, without limitation, the False Claims Act, and civil monetary penalty laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid or other government payors that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. The PPACA provides, and recent government cases against pharmaceutical and medical device manufacturers support, the view that federal Anti-Kickback Statute violations and certain marketing practices, including off-label promotion, may implicate the False Claims Act;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit a person from knowingly and willfully executing a scheme or making false or fraudulent statements to defraud any healthcare benefit program, regardless of the payor (e.g., public or private);

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, and as amended again by the final HIPAA omnibus rule, Modifications to the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules Under HITECH and the Genetic Information Nondiscrimination Act; Other Modifications to HIPAA, published in January 2013, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization by entities subject to the rule, such as health plans, health care clearinghouses and health care providers, and their respective business associates;

 

   

federal transparency laws, including the federal Physician Payments Sunshine Act, which is part of the PPACA, that require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to: (i) payments or other “transfers of value’’ made to physicians and teaching hospitals; and (ii) ownership and investment interests held by physicians and their immediate family members;

 

   

state and foreign law equivalents of each of the above federal laws, state laws that require manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, and state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or to adopt compliance programs as prescribed by state laws and regulations, or that otherwise restrict payments that may be made to healthcare providers; and

 

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state and foreign laws that govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

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

 

It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion of drugs from government funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations.

 

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.

 

Coverage and adequate reimbursement may not be available for our current or any future drug candidates, which could make it difficult for us to sell profitably, if approved.

 

Market acceptance and sales of any drug candidates that we commercialize, if approved, will depend in part on the extent to which reimbursement for these drugs and related treatments will be available from third-party payors, including government health administration authorities, managed care organizations and other private health insurers. Third-party payors decide which therapies they will pay for and establish reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for any drug candidates that we develop will be made on a payor-by-payor basis. One payor’s determination to provide coverage for a drug does not assure that other payors will also provide coverage, and adequate reimbursement, for the drug. Additionally, a third-party payor’s decision to provide coverage for a therapy does not imply that an adequate reimbursement rate will be approved. Each payor determines whether or not it will provide coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of its formulary it will be placed. The position on a payor’s list of covered drugs, or formulary, generally determines the co-payment that a patient will need to make to obtain the therapy and can strongly influence the adoption of such therapy by patients and physicians. Patients who are prescribed treatments for their conditions and providers prescribing such services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our drugs unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our drugs.

 

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that coverage and reimbursement will be available for any drug that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Inadequate coverage and reimbursement

 

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may impact the demand for, or the price of, any drug for which we obtain marketing approval. If coverage and adequate reimbursement are not available, or are available only to limited levels, we may not be able to successfully commercialize our current and any future drug candidates that we develop.

 

Healthcare legislative reform measures may have a negative impact on our business and results of operations.

 

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of drug candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any drug candidates for which we obtain marketing approval.

 

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, the PPACA was passed, which substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The PPACA, among other things: (i) addresses 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; (ii) increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations; (iii) establishes annual fees and taxes on manufacturers of certain branded prescription drugs; (iv) expands the availability of lower pricing under the 340B drug pricing program by adding new entities to the program; and (v) establishes a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. Additionally, in the United States, the Biologics Price Competition and Innovation Act of 2009 created an abbreviated approval pathway for biologic drugs that are demonstrated to be “biosimilar or interchangeable” with an FDA-approved biologic drug. This new pathway could allow competitors to reference data from biologic drugs already approved after 12 years from the time of approval. This could expose us to potential competition by lower-cost biosimilars even if we commercialize a biologic drug candidate faster than our competitors. Some of the provisions of the PPACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the PPACA. The Budget Resolution is not a law, however, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the PPACA. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of the PPACA that are repealed. Thus, the full impact of the PPACA on our business remains unclear.

 

Other legislative changes have been proposed and adopted since the PPACA was enacted. These changes include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013 and will remain in effect through 2025 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals 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 may result in additional reductions in Medicare and other healthcare funding, which could have an adverse effect on customers for our drug candidates, if approved, and, accordingly, our financial operations.

 

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Additional changes that may affect our business include the expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which will be fully implemented in 2019. At this time, it is unclear how the introduction of the Medicare quality payment program will impact overall physician reimbursement. Also, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which have resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products.

 

We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved drug. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our drugs.

 

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our drug candidates or additional pricing pressures.

 

Risks Related to Our Intellectual Property

 

If we are unable to obtain and maintain patent protection for our current or any future drug candidates, or if the scope of the patent protection obtained is not sufficiently broad, 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 the intellectual property related to our development programs and drug candidates. Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our current and any future drug candidates. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our current and future development programs and drug candidates. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

 

Pursuant to the Lundbeck Agreement, we obtained an exclusive, worldwide license to develop, manufacture and commercialize OV101 for the treatment of human disease. However, the Lundbeck Agreement permits Lundbeck and certain other entities to manufacture and research OV101 and, in certain situations, to perform additional non-commercial activities involving OV101, all of which could result in new patentable inventions concerning the manufacture or use of OV101. While the Lundbeck Agreement prohibits Lundbeck from filing certain patent applications regarding OV101 and obligates Lundbeck to include certain newly filed patents in the license granted to us, if new patents issue that cover valuable methods for making or using OV101, we would be prohibited from employing such methods to manufacture or use OV101 unless we obtain a license to such patents.

 

It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our current or any future drug 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 current or any future drug candidates, third parties may challenge their validity, enforceability or scope, which may result in

 

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such patents being narrowed, invalidated, or held unenforceable. Any successful opposition to these patents or any other patents owned by or licensed to us could deprive us of rights necessary for the successful commercialization of any drug candidates or companion diagnostic that we may develop. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a drug candidate and companion diagnostic under patent protection could be reduced.

 

If the patent applications we hold or have in-licensed with respect to our development programs and drug candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for our current or any future drug candidates, it could dissuade companies from collaborating with us to develop drug candidates, and threaten our ability to commercialize, future drugs. Any such outcome could have a negative effect on our business.

 

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does. Publications of discoveries in scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or drugs, in whole or in part, or which effectively prevent others from commercializing competitive technologies and drugs. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

 

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The United States Patent Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business and financial condition.

 

Moreover, we may be subject to a third-party pre-issuance submission of prior art to the U.S. Patent and Trademark Office, or USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or drugs and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future drug candidates.

 

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. An adverse determination in any such challenges may result in loss of exclusivity or in patent claims being

 

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narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and drugs, or limit the duration of the patent protection of our technology and drugs. Moreover, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years from the earliest filing date of a non-provisional patent application. Various extensions may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our current or future drug candidates, we may be open to competition from generic versions of such drugs. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing drugs similar or identical to ours.

 

We may be unable to prevent third parties from selling, making, promoting, manufacturing, or distributing alternative polymorphic forms of OV101.

 

We currently have issued patents directed to polymorphic forms of OV101. These patents would not prevent a third-party from creating, making and marketing alternative polymorphic forms that fall outside the scope of these patent claims. There can be no assurance that any such alternative polymorphic forms will not be therapeutically equivalent and/or commercially feasible. In the event an alternative polymorphic form of OV101 is developed and approved for use in indications that we may seek approval for, the marketability and commercial success of OV101, if approved, could be materially harmed.

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by government 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 government fees on patents and/or applications will be due to be paid to the USPTO and various government patent agencies outside of the United States over the lifetime of our owned and licensed patents and/or applications and any patent rights we may own or license in the future. We rely on our outside counsel or our licensing partners to pay these fees due to non-U.S. patent agencies. The USPTO and various non-U.S. government patent agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply and we are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property. 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. There are situations, however, 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, potential competitors might be able to enter the market and this circumstance could harm our business.

 

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

 

Given the amount of time required for the development, testing and regulatory review of new drug candidates such as OV101, patents protecting such candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we are prosecuting patents. 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). However, 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 take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their drug earlier than might otherwise be the case.

 

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

 

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

 

   

others may be able to make compounds or formulations that are similar to our drug candidates but that are not covered by the claims of any patents, should they issue, that we own or control;

 

   

we or any strategic partners might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own or control;

 

   

we might not have been the first to file patent applications covering certain of our inventions;

 

   

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

 

   

it is possible that our pending patent applications will not lead to issued patents;

 

   

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

 

   

our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights and then use the information learned from such activities to develop competitive drugs for sale in our major commercial markets;

 

   

we may not develop additional proprietary technologies that are patentable; and

 

   

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

 

The proprietary map of disease-relevant biological pathways underlying orphan disorders of the brain that we developed would not be appropriate for patent protection and, as a result, we rely on trade secrets to protect this aspect of our business.

 

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a negative impact on the success of our business.

 

Our commercial success depends, in part, upon our ability and the ability of our current or future collaborators to develop, manufacture, market and sell our current and any future drug candidates and use our proprietary technologies without infringing the proprietary rights and intellectual property of third parties. The biotechnology and pharmaceutical industries are characterized by extensive and complex litigation regarding patents and other intellectual property rights. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our current and any future drug candidates and technology, including interference proceedings, post grant review and inter partes review before the USPTO. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patent rights against us. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed, which could have a negative impact on our ability to commercialize our current and any future drug candidates. In order to successfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. If we are found to infringe a third party’s valid and enforceable intellectual property rights, we could be required to obtain a license from such third party to continue developing, manufacturing and marketing our drug candidate(s) and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. We could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technology or drug candidate. In addition, we could be found liable for monetary

 

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damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. A finding of infringement could prevent us from manufacturing and commercializing our current or any future drug candidates or force us to cease some or all of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations and prospects.

 

We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

 

Certain of our employees, consultants or advisors are currently, or 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 advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. 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. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property.

 

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

 

Competitors may infringe or otherwise violate our patents, the patents of our licensors or our other intellectual property rights. To counter infringement or unauthorized use, we may be required to file legal claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our 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. The initiation of a claim against a third party may also cause the third party to bring counter claims against us such as claims asserting that our patents are invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review, or post-grant review, or oppositions or similar proceedings outside the United States, in parallel with litigation or even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. We cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. For the patents and patent applications that we have licensed, we may have limited or no right to participate in the defense of any licensed patents against challenge by a third party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of any future patent protection on our current or future drug candidates. Such a loss of patent protection could harm our business.

 

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We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States. Our business could be harmed if in litigation the prevailing party does not offer us a license on commercially reasonable terms. Any litigation or other proceedings to enforce our intellectual property rights may fail, and even if successful, may result in substantial costs and distract our management and other employees.

 

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 an adverse effect on the price of our common stock.

 

Changes in U.S. patent law or the patent law of other countries or jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our current and any future drug candidates.

 

The United States has recently enacted and implemented wide-ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions or changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we have licensed or that we may obtain in the future.

 

We may not be able to protect our intellectual property rights throughout the world, which could negatively impact our business.

 

Filing, prosecuting and defending patents covering our current and any future drug candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own drugs and, further, may export otherwise infringing drugs to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These drugs may compete with our drugs in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

 

Reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

 

If we rely on third parties to manufacture or commercialize our current or any future drug candidates, or if we collaborate with additional third parties for the development of our current or any future drug candidates, we must, at times, share trade secrets with them. We may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development partnerships or similar agreements. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how

 

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and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure could have an adverse effect on our business and results of operations.

 

In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any third-party collaborators. A competitor’s discovery of our trade secrets would harm our business.

 

Risks Related to Our Dependence on Third Parties

 

We do not have our own manufacturing capabilities and will rely on third parties to produce clinical and commercial supplies of our current and any future drug candidates.

 

We have no experience in drug formulation or manufacturing and do not own or operate, and we do not expect to own or operate, facilities for drug manufacturing, storage and distribution, or testing. We will be dependent on third parties to manufacture the clinical supplies of our drug candidates. The drug substance for OV101 was manufactured by Lundbeck. We believe that the drug substance transferred from Lundbeck under the Lundbeck agreement will be sufficient for us to complete our ongoing and future clinical trials. We will also continue to rely on Takeda to provide the drug product supply for our planned clinical trials in OV935.

 

Further, we also will rely on third-party manufacturers to supply us with sufficient quantities of our drug candidates, including OV101 and OV935, to be used, if approved, for commercialization. Any significant delay in the supply of a drug candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our drug candidates.

 

Further, our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured drug candidates ourselves, including:

 

   

inability to meet our drug specifications and quality requirements consistently;

 

   

delay or inability to procure or expand sufficient manufacturing capacity;

 

   

issues related to scale-up of manufacturing;

 

   

costs and validation of new equipment and facilities required for scale-up;

 

   

failure to comply with cGMP and similar foreign standards;

 

   

inability to negotiate manufacturing agreements with third parties under commercially reasonable terms, if at all;

 

   

termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;

 

   

reliance on single sources for drug components;

 

   

lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;

 

   

operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier; and

 

   

carrier disruptions or increased costs that are beyond our control.

 

Any of these events could lead to clinical trial delays, failure to obtain regulatory approval or impact our ability to successfully commercialize our current or any future drug candidates once approved. Some of these events could be the basis for FDA action, including injunction, request for recall, seizure, or total or partial suspension of production.

 

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We intend to rely on third parties to conduct, supervise and monitor our preclinical studies and clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm our business.

 

We do not currently have the ability to independently conduct any clinical trials. We intend to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our preclinical studies and clinical trials, and we expect to have limited influence over their actual performance. We intend to rely upon CROs to monitor and manage data for our clinical programs, as well as the execution of future nonclinical studies. We expect to control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for ensuring that each of our preclinical studies or clinical trials are conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities.

 

We and our CROs will be required to comply with the good laboratory practices, or GLPs, and good clinical practices, or GCPs, which are regulations and guidelines enforced by the FDA and are also required by the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities in the form of International Conference on Harmonization guidelines for any of our drug candidates that are in preclinical and clinical development. The regulatory authorities enforce GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. Although we will rely on CROs to conduct GCP-compliant clinical trials, we remain responsible for ensuring that each of our GLP preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol and applicable laws and regulations, and our reliance on the CROs does not relieve us of our regulatory responsibilities. If we or our CROs fail to comply with 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. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of subjects, we may be required to repeat clinical trials, which would delay the regulatory approval process.

 

While we will have agreements governing their activities, our CROs will not be our employees, and we will not control whether or not they devote sufficient time and resources to our future clinical and nonclinical programs. These CROs 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 which could harm our business. We face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may reduce our trade secret protection and allow our potential competitors to access and exploit our proprietary technology. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize any drug candidate that we develop. As a result, our financial results and the commercial prospects for any drug candidate that we develop would be harmed, our costs could increase, and our ability to generate revenue could be delayed.

 

If our relationship with these CROs terminates, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or adding additional CROs involves substantial 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 negatively impact our ability to meet our desired clinical development timelines. Though we intend to carefully manage our relationships with our CROs, 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 negative impact on our business, financial condition and prospects.

 

In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA. The FDA may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected

 

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interpretation of the trial. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of marketing approval of our current and future drug candidates.

 

Risks Related to Our Business Operations, Employee Matters and Managing Growth

 

We are highly dependent on the services of our senior management team, including our Chairman and Chief Executive Officer, Dr. Jeremy Levin, and if we are not able to retain these members of our management team or recruit and retain additional management, clinical and scientific personnel, our business will be harmed.

 

We are highly dependent on our senior management team, including our Chairman and Chief Executive Officer, Dr. Levin. The employment agreements we have with these officers do not prevent such persons from terminating their employment with us at any time. The loss of the services of any of these persons could impede the achievement of our research, development and commercialization objectives.

 

In addition, we are dependent on our continued ability to attract, retain and motivate highly qualified additional management, clinical and scientific personnel. If we are not able to retain our management and to attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

 

We may not be able to attract or retain qualified personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses. Many of the other 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. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates and consultants than what we have to offer. If we are unable to continue to attract, retain and motivate high-quality personnel and consultants to accomplish our business objectives, the rate and success at which we can discover and develop drug candidates and our business will be limited and we may experience constraints on our development objectives.

 

Our future performance will also depend, in part, on our ability to successfully integrate newly hired executive officers into our management team and our ability to develop an effective working relationship among senior management. Our failure to integrate these individuals and create effective working relationships among them and other members of management could result in inefficiencies in the development and commercialization of our drug candidates, harming future regulatory approvals, sales of our drug candidates and our results of operations. Additionally, we do not currently maintain “key person” life insurance on the lives of our executives or any of our employees.

 

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

 

As of April 10, 2017, we had 31 full-time employees. As our development and commercialization plans and strategies develop, we expect to need additional managerial, operational, sales, marketing, financial, legal and other resources. Our management may need to divert a disproportionate amount of its attention away from our day-to-day operations 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, operational inefficiencies, 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 our current and potential future drug candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and grow revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance, our ability to commercialize drug

 

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candidates, develop a scalable infrastructure and compete effectively will depend, in part, on our ability to effectively manage any future growth.

 

Our employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

 

We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in other jurisdictions, provide accurate information to the FDA and other regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter employee misconduct, 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 government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a negative impact on our business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.

 

Risks Related to This Offering and Ownership of Our Common Stock

 

No public market for our common stock currently exists, and a public market may not develop or be liquid enough for you to sell your shares quickly or at market price.

 

Prior to this offering, there has not been a public market for our common stock. If an active trading market for our common stock does not develop following this offering, you may not be able to sell your shares quickly or at the market price. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares of our common stock and may impair our ability to acquire other companies or technologies by using our common stock as consideration. The initial public offering price of our common stock will be determined by negotiations between us and representatives of the underwriters, and may not be indicative of the market prices of our common stock that will prevail in the trading market.

 

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.

 

The market price of our common stock is likely to be volatile. The stock market in general and the market for biopharmaceutical or pharmaceutical companies in particular, has 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:

 

   

results of clinical trials of our current and any future drug candidates or those of our competitors;

 

   

the success of competitive drugs or therapies;

 

   

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

 

   

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

 

   

the recruitment or departure of key personnel;

 

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the level of expenses related to our current and any future drug candidates or clinical development programs;

 

   

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

 

   

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

 

   

our inability to obtain or delays in obtaining adequate drug supply for any approved drug or inability to do so at acceptable prices;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

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.

 

In addition, in the past, stockholders have initiated class action lawsuits against companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources.

 

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

 

Based upon our shares of our common stock outstanding as of                     , 2017, upon the completion of this offering, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately     % of our outstanding common stock.

 

Takeda, a greater than 5% holder, may receive additional securities upon the achievement of certain development, commercial and regulatory milestones pursuant to the Takeda license agreement. Specifically, we will be obligated to issue additional securities to Takeda equal to the lesser of 8% of our outstanding capital stock or $50.0 million unless certain events occur, and may issue, at our discretion, additional securities to Takeda upon the achievement of other milestones, as further described in the section titled “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda.” Further, pursuant to the Series B-1 preferred stock purchase agreement entered into with Takeda in January 2017, or the Takeda stock purchase agreement, Takeda has agreed to, among other things, (i) a standstill provision, (ii) restrictions on its ability to sell or otherwise transfer it shares of our stock, (iii) vote its shares on certain matters in accordance with the holders of a majority of shares of our common stock and (iv) restrictions on the percentage of our outstanding common stock it may own. See the sections titled “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda” and “Business—License and Collaboration Agreements—License and Collaboration Agreement with Takeda” for additional information.

 

If our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock acted together, they may be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. The concentration of voting power, Takeda standstill provisions, voting obligations and transfer restrictions could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in the management of our company in ways with which other stockholders disagree with.

 

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If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

 

The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no, or few, analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

 

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

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We have broad discretion in the use of our cash and cash equivalents, including the net proceeds from this offering, and may not use them effectively.

 

Our management will have broad discretion in the application of our cash and cash equivalents, including 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. The failure by our management to apply these funds effectively could result in financial losses that could have a negative impact on our business, cause the price of our common stock to decline and delay the development of our drug candidates. Pending their use, we may invest our cash and cash equivalents, including the net proceeds from this offering, in a manner that does not produce income or that loses value. See the section titled “Use of Proceeds” for additional information.

 

If we engage in future acquisitions or strategic partnerships, this may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

 

Our business plan is to continue to evaluate various acquisitions and strategic partnerships, including licensing or acquiring complementary drugs, intellectual property rights, technologies, or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including:

 

   

increased operating expenses and cash requirements;

 

   

the assumption of additional indebtedness or contingent liabilities;

 

   

assimilation of operations, intellectual property and drugs of an acquired company, including difficulties associated with integrating new personnel;

 

   

the diversion of our management’s attention from our existing drug programs and initiatives in pursuing such a strategic partnership, merger or acquisition;

 

   

retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;

 

   

risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing drugs or drug candidates and regulatory approvals; and

 

   

our inability to generate revenue from acquired technology and/or drugs sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

 

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In addition, if we engage in future acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or drugs that may be important to the development of our business.

 

A significant portion of our total outstanding shares are restricted from immediate resale but may 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 performing well.

 

Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject to certain restrictions described below. These sales, or the perception in the market that 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              shares of common stock based on the number of shares outstanding as of December 31, 2016 assuming: (i) no exercise by the underwriters’ over-allotment option; (ii) the conversion of all outstanding shares of our convertible preferred stock into 17,159,959 shares of our common stock upon the completion of this offering; and (iii) the conversion of the shares of our Series B-1 convertible preferred stock issued on January 6, 2017 into an aggregate of 3,831,293 shares of our common stock upon the completion of this offering. 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. The remaining 42,144,229 shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the sections titled “Shares Eligible for Future Sale” and “Underwriting.” Moreover, upon the completion of this offering, holders of an aggregate of approximately 42,144,229 shares of our common stock will have rights, subject to some 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. We intend to register all shares of common 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 section titled “Underwriting.”

 

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 outstanding options are exercised, you will incur further dilution. Based on an assumed initial public offering price of $              per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $             per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering at the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately     % of the aggregate price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. See the section titled “Dilution” for additional information.

 

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,” or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an EGC until the earlier of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be

 

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a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC. For so long as we remain an EGC, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

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

 

   

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;

 

   

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;

 

   

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 may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of reduced reporting burdens in this prospectus. In particular, we have not included all of the executive compensation information that would be required if we were not an EGC. We cannot predict whether investors will find our common stock less attractive if we rely on certain or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, the JOBS Act provides that an EGC may take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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.

 

As a public company, and particularly after we are no longer an EGC, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC and The NASDAQ Stock Market LLC have imposed 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.

 

Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an EGC, 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

 

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consultants and 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 that 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 neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our corporate charter and our bylaws that will become effective upon the completion of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could 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:

 

   

establish a classified board of directors such that not all members of the board are elected at one time;

 

   

allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

   

limit the manner in which stockholders can remove directors from the board;

 

   

establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

 

   

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

   

limit who may call stockholder meetings;

 

   

authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

   

require the approval of the holders of at least 66 2/3% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, 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.

 

Additionally, the Takeda standstill provisions and transfer restrictions in the Takeda stock purchase agreement may delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. See the sections titled “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda” and “Business—License and Collaboration Agreements—License and Collaboration Agreement with Takeda” for additional information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

 

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 financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this prospectus, regarding, among other things:

 

   

the initiation, timing, progress and results of our current and future preclinical studies and clinical trials and our research and development programs;

 

   

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

 

   

our ability to identify additional novel compounds with significant commercial potential to acquire or in-license;

 

   

our ability to successfully acquire or in-license additional drug candidates on reasonable terms;

 

   

our ability to obtain regulatory approval of our current and future drug candidates;

 

   

our expectations regarding the potential market size and the rate and degree of market acceptance of such drug candidates;

 

   

our ability to fund our working capital requirements;

 

   

the implementation of our business model and strategic plans for our business and drug candidates;

 

   

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

 

   

our ability to maintain and establish collaborations or obtain additional funding;

 

   

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

 

   

our ability to compete in the markets we serve;

 

   

the impact of government laws and regulations;

 

   

developments relating to our competitors and our industry; and

 

   

the factors that may impact our financial results.

 

The foregoing list of risks is not exhaustive. Other sections of this prospectus may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

 

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In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. You should refer to the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

 

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MARKET AND INDUSTRY DATA

 

Certain market and industry data included in this prospectus were obtained from independent third-party surveys, market research, publicly available information, reports of governmental agencies and industry publications and surveys. All of the market and industry data used in this prospectus involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publication and other third-party sources included in this prospectus is reliable, such information is inherently imprecise. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering will be approximately $             million (or approximately $             million if the underwriters exercise in full their option to purchase up to              additional shares of common stock to cover over-allotments), based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             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 underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us by $             million, assuming the assumed initial public offering price per share remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, establish a public market for our common stock and to facilitate future access to the public equity markets by us, our employees and our stockholders, obtain additional capital to support our operations, and increase our visibility in the marketplace.

 

We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

   

approximately $             million to conduct and complete a Phase 2 STARS trial of OV101 in adults with Angelman syndrome and a Phase 1 trial in OV101 in adolescents with Angelman syndrome or Fragile X syndrome, as well as other future Phase 2 trials in adolescents and pediatrics in these indications;

 

   

approximately $             million to conduct and complete a Phase 1b/2a trial of OV935 in patients with epileptic encephalopathies;

 

   

approximately $             million for other ongoing research and development activities related to additional drug candidates and preclinical programs; and

 

   

the remainder to fund the expansion of patient-focused activities, including social media outreach and involvement, and for working capital and general corporate purposes.

 

This expected use of the net proceeds from this offering represents our intentions based on our current plans and business conditions, which could change in the future as our plans and business conditions evolve. Further, due to the uncertainties inherent in the drug development process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes. Our management will have broad discretion over the use of the net proceeds from this offering, and our investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering. The amounts and timing of our expenditures will depend upon numerous factors including the results of our research and development efforts, the timing and success of preclinical studies and any ongoing clinical trials or clinical trials we may commence in the future, the timing of regulatory submissions and the amount of cash obtained through current and any future collaborations.

 

Our strategic plan includes the intent to expand our portfolio of drug candidates through business development. We believe opportunities may exist from time to time to expand our current business through acquisitions or in-licenses of complementary companies, medicines or technologies. While we have no existing agreements, commitments or understandings for any specific future acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

 

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The expected net proceeds from this offering, together with our cash and cash equivalents, will not be sufficient for us to fund any of our drug candidates through regulatory approval, and we will need to raise additional capital to complete the development and commercialization of our drug candidates. We expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, license and development agreements. We have based these estimates on assumptions that may prove to be incorrect, and we could expend our available capital resources at a rate greater than we currently expect.

 

Pending the use of the net proceeds from this offering as described above, we intend to invest the net proceeds in interest-bearing investment-grade securities or government securities.

 

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DIVIDEND POLICY

 

We have never declared or paid cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. In addition, our ability to pay cash dividends on our capital stock in the future may be limited by the terms of any future debt or preferred securities we issue or any credit facilities we enter into.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents, and our capitalization as of December 31, 2016 on:

 

   

an actual basis;

 

   

a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our Series A convertible preferred stock and Series B convertible preferred stock into an aggregate of 17,159,959 shares of our common stock upon the completion of this offering and (ii) the issuance on January 6, 2017 of 3,831,293 shares of our Series B-1 convertible preferred stock and the automatic conversion thereof into an aggregate of 3,831,293 shares of our common stock upon the completion of this offering; and

 

   

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

 

Our cash and cash equivalents and capitalization following the completion of this offering will depend on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with the sections titled “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

     As of December 31, 2016  
         Actual             Pro Forma         Pro Forma As
Adjusted(1)
 

(in thousands, except share and per share data)

  

Cash and cash equivalents

   $ 51,940     $ 51,940     $  
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Common stock, $0.001 par value per share: 58,000,000 shares authorized and 21,152,977 shares issued and outstanding, actual;              shares authorized and 42,144,229 shares issued and outstanding, pro forma; and              shares authorized, and              shares issued and outstanding, pro forma as adjusted (unaudited)

     21       42    

Series A convertible preferred stock, $0.001 par value per share: 5,121,453 shares authorized, issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted (unaudited)

   $ 5     $ —       $ —    

Series B convertible preferred stock, $0.001 par value per share: 12,038,506 shares authorized, issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted (unaudited)

     12       —         —    

Additional paid-in capital

     85,166       111,023    

Accumulated deficit

     (35,910     (61,771  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     49,294       49,294    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 49,294     $ 49,294     $               
  

 

 

   

 

 

   

 

 

 

 

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

 

The number of shares of common stock in the table above is based on 42,144,229 shares of common stock outstanding as of December 31, 2016, which gives effect to the pro forma transactions described above and excludes:

 

   

6,423,680 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2016, at a weighted-average exercise price of $3.47 per share;

 

   

2,247,545 shares of our common stock issuable upon the exercise of outstanding stock options granted between December 31, 2016 and April 10, 2017 at a weighted-average exercise price of $3.95 per share;

 

   

             shares of our common stock reserved for future issuance under our 2017 Plan, which will become effective upon the execution of the underwriting agreement related to this offering, as well as any future increases in the number of shares of common stock reserved for issuance under our 2017 Plan and any shares underlying outstanding stock awards granted under our 2014 Plan that expire or are repurchased, forfeited, cancelled or withheld, as more fully described in the section titled “Executive and Director Compensation—Equity Incentive Plans”; and

 

   

             shares of our common stock reserved for future issuance under our ESPP, which will become effective upon the execution of the underwriting agreement related to this offering, as well as any future increases in the number of shares of common stock reserved for issuance under our ESPP.

 

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DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be 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.

 

Our historical net tangible book value as of December 31, 2016 was approximately $49.2 million, or $2.33 per share of our common stock. Our historical net tangible book value represents our total tangible assets less total liabilities and convertible preferred stock. Historical net tangible book value per share is our historical net tangible book value divided by the number of shares of our common stock outstanding as of December 31, 2016.

 

Our pro forma net tangible book value as of December 31, 2016 was $49.2 million, or $1.17 per share of our common stock, which gives effect to (i) the automatic conversion of all outstanding shares of our Series A convertible preferred stock and Series B convertible preferred stock into an aggregate of 17,159,959 shares of our common stock upon the completion of this offering and (ii) the issuance on January 6, 2017 of 3,831,293 shares of our Series B-1 convertible preferred stock and the automatic conversion thereof into an aggregate of 3,831,293 shares of our common stock upon the completion of this offering. Pro forma net tangible book value per share is our pro forma net tangible book value divided by the number of shares of our common stock deemed to be outstanding as of December 31, 2016.

 

After giving effect to the sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2016 would have been $             million, or $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to new investors participating in this offering.

 

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $               

Historical net tangible book value per share as of December 31, 2016

   $ 2.33     

Pro forma decrease in net tangible book value per share as of December 31, 2016 attributable to pro forma transactions and other adjustments described above

     1.16     
  

 

 

    

Pro forma net tangible book value per share as of December 31, 2016

     1.17     
     

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

     
  

 

 

    

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

     
     

 

 

 

Dilution in net tangible book value per share to new investors participating in this offering

      $               
     

 

 

 

 

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

 

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If the underwriters exercise in full their option to purchase up to              additional shares of common stock to cover over-allotments, if any, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $             per share, representing an immediate increase to existing stockholders of $             per share and immediate dilution to new investors participating in this offering of $             per share assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

The foregoing discussion and tables are based on 42,144,229 shares of common stock outstanding as of December 31, 2016, which gives effect to the pro forma transactions described above and excludes:

 

   

6,423,680 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2016, at a weighted-average exercise price of $3.47 per share;

 

   

2,247,545 shares of our common stock issuable upon the exercise of outstanding stock options granted between December 31, 2016 and April 10, 2017 at a weighted-average exercise price of $3.95 per share;

 

   

             shares of our common stock reserved for future issuance under our 2017 Plan, which will become effective upon the execution of the underwriting agreement related to this offering, as well as any future increases in the number of shares of common stock reserved for issuance under our 2017 Plan and any shares underlying outstanding stock awards granted under our 2014 Plan that expire or are repurchased, forfeited, cancelled or withheld, as more fully described in the section titled “Executive and Director Compensation—Equity Incentive Plans”; and

 

   

             shares of our common stock reserved for future issuance under our ESPP, which will become effective upon the execution of the underwriting agreement related to this offering, as well as any future increases in the number of shares of common stock reserved for issuance under our ESPP.

 

If all our outstanding stock options had been exercised as of December 31, 2016, assuming the treasury stock method, our pro forma net tangible book value as of December 31, 2016 (calculated on the basis of the assumptions set forth above) would have been approximately $             million, or $             per share of our common stock, and the pro forma as adjusted net tangible book value would have been $             per share, representing dilution in our pro forma as adjusted net tangible book value to new investors of $             per share.

 

Effective upon completion of this offering,              shares of our common stock will be reserved for future issuance under our 2017 Plan and              shares of our common stock will be reserved for future issuance under our ESPP, and the number of reserved shares under each such plan will also be subject to automatic annual increases in accordance with the terms of the plans. New awards that we may grant under our 2017 Plan or shares issued under our ESPP will further dilute investors purchasing common stock in this offering.

 

The following table summarizes, as of December 31, 2016, on the pro forma as adjusted basis described above:

 

   

the total number of shares of common stock purchased from us by our existing stockholders and by new investors participating in this offering;

 

   

the total consideration paid to us by our existing stockholders and by new investors participating in this offering, at the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us; and

 

   

the average price per share paid by existing stockholders and by new investors participating in this offering.

 

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

Existing stockholders

     42,144,229               $ 110,333,958 (1)             $           

New investors

           
  

 

 

    

 

 

   

 

 

   

 

 

   

Total

        100   $                    100  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

(1)  

Includes non-cash consideration received in connection with the Lundbeck agreement and the Takeda license agreement.

 

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the completion of this offering.

 

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SELECTED FINANCIAL DATA

 

You should read the following selected financial data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. The selected financial data included in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and the related notes included elsewhere in this prospectus.

 

The following tables set forth our selected statements of operations data and our balance sheet data, for the years ended December 31, 2016 and 2015, all of which has been derived from our audited financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

 

     Year Ended December 31,  
     2016     2015  
    
(in thousands, except share and per share data)             

Statements of Operations and Comprehensive Loss

    

Operating Expenses

    

Research and development

   $ 9,585     $ 6,612  

Selling, general and administrative

     12,950       6,578  
  

 

 

   

 

 

 

Total operating expenses

     22,535       13,190  
  

 

 

   

 

 

 

Interest income (expense), net

     121       30  
  

 

 

   

 

 

 

Loss before income tax

     (22,414     (13,160

Income taxes

     —         —    
  

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (22,414)     $ (13,160
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (22,414)     $ (13,160
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders

   $ (1.06)     $ (0.63
  

 

 

   

 

 

 

Weighted-average common shares outstanding used to compute net loss per share attributable to common stockholders

     21,152,977       20,853,388  
  

 

 

   

 

 

 

Unaudited pro forma net loss(1)

   $ (48,276  
  

 

 

   

Unaudited pro forma net loss per share attributable to common stockholders(1)

   $ (1.15  
  

 

 

   

Unaudited pro forma weighted-average common shares outstanding used to compute net loss per share attributable to common stockholders(1)

     42,144,229    
  

 

 

   

 

(1)   See Note 2 to our notes to our financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the pro forma net loss, net loss per share and the weighted-average number of shares used in the computation of the per share amounts.

 

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     As of December 31,  
     2016     2015  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 51,940     $ 69,944  

Working capital(1)

     48,678       67,974  

Total assets

     53,028       70,377  

Total liabilities

     3,733       2,309  

Common stock

     21       21  

Convertible preferred stock

     17       17  

Accumulated deficit

     (35,910     (13,495

Total stockholders’ equity

     49,294       68,067  

 

(1)   Working capital is defined as current assets less current liabilities. See our financial statements for additional information regarding our current assets and 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 titled “Selected Financial Data” and the financial statements and the related notes included elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks, uncertainties and assumptions. Our actual results may differ materially from those described in or implied by these forward-looking statements as a result of many factors, including those set forth under the section titled “Risk Factors” and in other parts of this prospectus.

 

Overview

 

We are a biopharmaceutical company focused exclusively on developing impactful medicines for patients and families living with rare neurological disorders. We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years; yet has remained underappreciated by the industry. Our experienced team began with a vision to integrate the biology and symptomology of rare neurological conditions to employ innovative research and clinical strategies for the development of our drug candidates. Using recent scientific advances in genetics and the biological pathways of the brain, we have created a proprietary map of disease-relevant pathways to identify and acquire novel compounds for the treatment of rare neurological disorders. We are executing on our strategy by in-licensing and collaborating with leading biopharmaceutical companies and academic institutions. We are developing a robust pipeline of clinical assets with an initial focus on neurodevelopmental disorders and rare epileptic encephalopathies. Our most advanced candidate, OV101, has commenced a Phase 2 trial, which is primarily a safety trial that is designed to provide proof-of-concept on efficacy parameters, in adults with Angelman syndrome. OV101 has also commenced a Phase 1 trial in adolescents with Angelman syndrome or Fragile X syndrome. Our second lead drug candidate, OV935, is expected to commence a Phase 1b/2a trial in rare epileptic encephalopathies in 2017.

 

Since our inception in April 2014, we have devoted substantially all of our efforts to organizing and planning our business, building our management and technical team, acquiring operating assets and raising capital.

 

Since our inception, we have not generated any revenue and have funded our business primarily through the sale of our capital stock. We have raised net proceeds of $75.6 million from the sale of convertible preferred stock. As of December 31, 2016, we had $51.9 million in cash and cash equivalents. We recorded net losses of $22.4 million and $13.2 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had an accumulated deficit of approximately $35.9 million.

 

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our other research and development and commercial development activities. We expect our expenses will increase substantially over time as we:

 

   

continue the ongoing and planned preclinical and clinical development of our drug candidates;

 

   

build a portfolio of drug candidates through the acquisition or in-license of drugs, drug candidates or technologies;

 

   

initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future;

 

   

seek marketing approvals for our current and future drug candidates that successfully complete clinical trials;

 

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

 

   

develop, maintain, expand and protect our intellectual property portfolio;

 

   

implement operational, financial and management systems; and

 

   

attract, hire and retain additional administrative, clinical, regulatory and scientific personnel.

 

License and Collaboration Agreement with Takeda Pharmaceutical Company Limited

 

In January 2017, we entered into a license and collaboration agreement, or the Takeda license agreement, with Takeda Pharmaceutical Company Limited, or Takeda. All activities of the collaboration regarding OV935 will be guided by the Takeda/Ovid “One Team” concept, an integrated and interdisciplinary team from both companies devoted to the successful advancement of OV935 across rare epilepsy syndromes. We will take the lead in clinical development activities and commercialization of the compound OV935 and products containing this compound for the treatment of certain rare neurological disorders in the United States, Canada, the European Union and Israel. Takeda will take the lead in commercialization of OV935 in Japan and has the option to lead in Asia and other selected geographies. We and Takeda will initially share equally all development and commercialization costs and expenses prior to launch of a product and all revenues and commercialization costs and expenses after launch.

 

Please see the sections titled “Business—License and Collaboration Agreements—License and Collaboration Agreement with Takeda” and “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda” for additional information.

 

Financial Operations Overview

 

Revenue

 

We have not generated any revenue from commercial drug sales and do not expect to generate any revenue unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates. In the future, we may also seek to generate revenue from a combination of research and development payments, license fees and other upfront or milestone payments.

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our product candidates, which include, among other things:

 

   

fees related to the acquisition of the rights to OV101 and OV935;

 

   

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

 

   

fees paid to consultants for services directly related to our drug development and regulatory effort;

 

   

expenses incurred under agreements with contract research organizations, as well as contract manufacturing organizations and consultants that conduct preclinical studies and clinical trials;

 

   

costs associated with preclinical activities and development activities;

 

   

costs associated with technology and intellectual property licenses;

 

   

milestone payments and other costs under licensing agreements; and

 

   

depreciation expense for assets used in research and development activities.

 

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Costs incurred in connection with research and development activities are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or other information provided to us by our vendors.

 

Research and development activities are and will continue to be central to our business model. We expect our research and development expenses to increase for the foreseeable future as we advance our current and future drug candidates through preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. It is difficult to determine with certainty the duration and costs of any preclinical study or clinical trial that we may conduct. The duration, costs and timing of clinical trial programs and development of our current and future drug candidates will depend on a variety of factors that include, but are not limited to, the following:

 

   

number of clinical trials required for approval and any requirement for extension trials;

 

   

per patient trial costs;

 

   

number of patients that participate in the clinical trials;

 

   

number of sites included in the clinical trials;

 

   

countries in which the clinical trial is conducted;

 

   

length of time required to enroll eligible patients;

 

   

number of doses that patients receive;

 

   

drop-out or discontinuation rates of patients;

 

   

potential additional safety monitoring or other studies requested by regulatory agencies;

 

   

duration of patient follow-up; and

 

   

efficacy and safety profile of the drug candidate.

 

In addition, the probability of success for any of our current or future drug candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each drug candidate, as well as an assessment of each drug candidate’s commercial potential.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation expense, related to our executive, finance, business development and support functions. Other selling, general and administrative expenses include travel expenses, conferences, professional fees for auditing, tax and legal services and facility-related costs.

 

We expect that selling, general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly traded company. These increases will include legal and accounting fees, costs associated with maintaining compliance with The NASDAQ Stock Market LLC and the Securities and Exchange Commission, or the SEC, directors’ and officers’ liability insurance premiums and fees associated with investor relations. In addition, if our current or future drug candidates are approved for sale, we expect that we would incur expenses associated with building our commercial and distribution infrastructure.

 

Interest Income (Expense), Net

 

Interest income consists of interest income earned on our cash and cash equivalents maintained in the money market funds.

 

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Results of Operations

 

Comparison of the Years Ended December 31, 2016 and 2015

 

The following table summarizes the results of our operations for the periods indicated:

 

     Year Ended December 31,        
     2016     2015     Change $  
     (in thousands)  

Research and development

   $ 9,585     $ 6,612     $ 2,973  

Selling, general and administrative

     12,950       6,578       6,372  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,535       13,190       9,345  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,535     (13,190     (9,345

Interest income (expense), net

     121       30       91  
  

 

 

   

 

 

   

 

 

 

Loss before income tax

     (22,414     (13,160     (9,254

Income taxes

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (22,414   ($ 13,160   $ (9,254
  

 

 

   

 

 

   

 

 

 

 

Research and Development Expenses

 

     Year Ended December 31,         
     2016      2015      Change $  
     (in thousands)  

Preclinical and development expense

   $ 4,819      $ 4,325      $ 494  

Payroll and payroll-related expenses

     4,212        1,604        2,608  

Other expenses

     555        683        (128
  

 

 

    

 

 

    

 

 

 

Total research and development

   $ 9,586      $ 6,612      $ 2,974  
  

 

 

    

 

 

    

 

 

 

 

Research and development expenses were $9.6 million for the year ended December 31, 2016 compared to $6.6 million for the year ended December 31, 2015. During the year ended December 31, 2016, total research and development expenses consisted of $4.8 million in preclinical and development expenses, which included $0.5 million in consulting expenses, $4.2 million in payroll and payroll-related expenses, of which $1.5 million related to stock-based compensation, due to increased headcount in the research and development department, and $0.6 million in other expenses. During the year ended December 31, 2015, total research and development expenses consisted of $4.3 million of costs associated with the acquisition of the rights to OV101, $1.1 million in compensation expenses, and $0.7 million in other expenses which included $0.6 million in consulting expenses.

 

Selling, General and Administrative Expenses

 

     Year Ended December 31,     

 

 
     2016      2015      Change $  
     (in thousands)  

Payroll and payroll-related expenses

   $ 6,753      $ 3,579      $ 3,174  

Legal and professional fees

     4,330        2,258        2,072  

General office expenses

     1,867        741        1,126  
  

 

 

    

 

 

    

 

 

 

Total selling, general and administrative

   $ 12,950      $ 6,578      $ 6,372  
  

 

 

    

 

 

    

 

 

 

 

Selling, general and administrative expenses were $12.9 million for the year ended December 31, 2016 compared to $6.6 million for the year ended December 31, 2015. The increase of $6.4 million was due to the increases in (a) payroll and payroll-related expenses of $3.2 million as a result of increased headcount, of which

 

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$1.2 million and $0.8 million related to stock-based compensation and employee severance, respectively, (b) legal and professional fees of $2.1 million related to our efforts to build our management and operational team, develop potential pipelines and expand our operations, and (c) general office expenses of $1.1 million related to our continued growth of operations.

 

Interest Income (Expense), Net

 

Interest income increased to $0.1 million for the year ended December 31, 2016 from $30 thousand for the year ended December 31, 2015. The increase was primarily due to interest earned on higher cash and cash equivalents due to the receipt of aggregate net proceeds of $70.6 million from the sale of our Series B convertible preferred stock in August 2015.

 

Income Taxes

 

There was no provision for income taxes for the years ended December 31, 2016 and 2015 because we have historically incurred operating losses and we maintain a full valuation allowance against our net deferred tax assets. The valuation allowance was approximately $16.3 million and $6.1 million at December 31, 2016 and 2015, respectively.

 

Liquidity and Capital Resources

 

Overview

 

Since our inception through December 31, 2016, we have raised aggregate net proceeds of $75.6 million from the sale of convertible preferred stock, which has been used to fund our operations. In October and November 2014, we completed the sale of 5,121,453 shares of Series A convertible preferred stock for aggregate net proceeds of approximately $5.0 million, which included the conversion of a $60,000 simple agreement for future equity with each of Drs. Jeremy Levin and Matthew During. In August 2015, we completed the sale of 12,038,506 shares of our Series B convertible preferred stock for aggregate net proceeds of approximately $70.6 million. As of December 31, 2016, we had total cash and cash equivalents of $51.9 million as compared to $69.9 million as of December 31, 2015. The $18.0 million decrease in total cash was due primarily to funding of operations, which mainly consisted of research and development activities and general and administrative activities, including costs associated with this offering.

 

We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. We incurred net losses of approximately $22.4 million and $13.2 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, we had an accumulated deficit of approximately $35.9 million, working capital of $48.7 million and cash and cash equivalents of $51.9 million.

 

We believe our cash and cash equivalents at December 31, 2016 will be sufficient to fund our current operating plans through at least the next 12 months.

 

Until such time, if ever, as we can generate revenue from drug sales, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, license and development agreements. To the extent that we raise additional capital through future equity offerings or debt financings, 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 and equity financings, 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. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue our

 

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research and development programs or future commercialization efforts. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

 

Cash Flows

 

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2016     2015  
    

(in thousands)

 

Net cash (used in) provided by:

    

Operating activities

   $ (17,802   $ (5,485

Investing activities

     (189     (56

Financing activities

     (14     70,639  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (18,005   $ 65,098  
  

 

 

   

 

 

 

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $17.8 million for the year ended December 31, 2016 compared to $5.5 million for the year ended December 31, 2015. The increase of $12.3 million in net cash used in operating activities was primarily due to an increase in our research and development programs and in our payroll and payroll-related expenses as the result of increased headcount as we continue to build our management team and expand our operations and the payment of the 2015 accrued bonus of $1.6 million.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $0.2 million for the year ended December 31, 2016 compared to $56 thousand for the year ended December 31, 2015. The increase in cash used was due to an increase in the purchase of property and equipment and external software development costs.

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash used in financing activities of $14 thousand for the year ended December 31, 2016 was for transaction costs related to this offering.

 

Net cash provided by financing activities of $70.6 million for the year ended December 31, 2015 was due to $70.6 million of net proceeds received from the sales of our Series B convertible preferred stock.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and commitments as of December 31, 2016:

 

December 31, 2016

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

Preclinical research agreements(1)

   $ 230      $ —        $ —        $ —        $ 230  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 230      $ —        $ —        $ —        $ 230  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Represents the noncancellable portion of a work order for preclinical research related to OV101, which totaled approximately $286,900 (of which $57,375 is included in accrued expenses as of December 31, 2016) and is expected to be paid within the next fiscal year.

 

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Except as disclosed in the table above, we have no long-term debt or capital leases and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis.

 

The contractual obligations table does not include any potential contingent payments upon the achievement by us of clinical, regulatory and commercial events, as applicable, or royalty payments that we may be required to make under license agreements we have entered into with various entities pursuant to which we have in-licensed certain intellectual property, including our license agreement with H. Lundbeck A/S and our Takeda license agreement. We excluded the contingent payments given that the timing and amount (if any) of any such payments cannot be reasonably estimated at this time. See the section titled “Business—License and Collaboration Agreements—License Agreement with H. Lundbeck A/S” and “Business—License and Collaboration Agreements—License and Collaboration Agreement with Takeda” for additional information.

 

Off-Balance Sheet Arrangements

 

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

 

Quantitative and Qualitative Disclosure about Market Risk

 

The primary objectives of our investment activities are to ensure liquidity and to preserve capital. As of December 31, 2016, we had cash equivalents of $51.6 million that were held in an interest-bearing money market account. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. To minimize the risk in the future, we intend to maintain our portfolio of cash equivalents in institutional market funds that are comprised of U.S. Treasury and U.S. Treasury-backed repurchase agreements.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

 

Our significant accounting policies are described in more detail in Note 2 to our audited financial statements appearing elsewhere in this prospectus. We believe the following critical accounting policies are most important to understanding and evaluating our reported financial results.

 

Accrued Clinical Expenses

 

When preparing our financial statements, we are required to estimate our accrued clinical expenses. This process involves reviewing open contracts and communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. Payments under some of the contracts we have with third parties depend on factors, such as successful enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones.

 

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When accruing clinical expenses, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If possible, we obtain information regarding unbilled services directly from our service providers. However, we may be required to estimate the cost of these services based only on information available to us. If we underestimate or overestimate the cost associated with a trial or service at a given point in time, adjustments to research and development expenses may be necessary in future periods. Historically, our estimated accrued clinical expenses have approximated actual expense incurred.

 

Income Taxes

 

We file U.S. federal income tax returns and New York state tax returns. Our deferred tax assets are primarily composed of federal and state tax net operating losses and tax credit carryforwards and are recorded using enacted tax rates expected to be in effect in the years in which these temporary differences are expected to be utilized. At December 31, 2016, we had available approximately $25.9 million and $25.7 million of unused net operating loss carryforwards for federal and state tax purposes, respectively, that may be applied against future taxable income. We also had approximately $25.6 million of unused net operating loss carryforwards for New York City purposes. The net operating loss carryforwards will begin to expire in the year 2035 if not utilized prior to that date. We may be subject to the net operating loss utilization provisions of Section 382 of the U.S. Internal Revenue Code of 1986, as amended. The effect of an ownership change would be the imposition of an annual limitation on the use of the federal and state net operating loss carryforwards attributable to periods before the change. The amount of the annual limitation depends upon our value immediately before the ownership change, changes to our capital during a specified period prior to the change, and the federal published interest rate. The annual limitation may result in the expiration of the federal and state net operating loss carryforwards prior to utilization. We have not conducted a Section 382 analysis to determine the potential limitation.

 

Stock-Based Compensation

 

We account for stock-based compensation awards in accordance with the Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation, or ASC 718. ASC 718 requires all stock-based compensation awards to employees to be recognized as expense based on their grant date fair values. We recognized expenses over the requisite service period, which is generally the vesting period of the award under the straight-line method. We record the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date.

 

We recognize stock-based compensation expense related to stock options granted to non-employees issued in exchange for services based on the estimated fair value of the awards on the date of grant, net of forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. Option awards granted to non-employees are accounted for in accordance with ASC Topic 505, Equity. Compensation expense is recognized over the vesting period in which the services are rendered. At the end of each financial reporting period prior to the time at which the award is fully vested, the fair value of each non-employee award is remeasured based on the current fair value of our common stock at that time with the updated assumption inputs in the Black-Scholes option-pricing model. The resulting increase or decrease in value, if any, is recognized as expense or income, respectively, during the period the related services are rendered.

 

The Black-Scholes option-pricing model uses highly subjective assumptions. These assumptions include:

 

   

Expected Volatility.    Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, the expected volatility was estimated using

 

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weighted-average measures of implied volatility and the historical volatility of a representative group of small, publicly traded drug development companies in a similar stage of development as ourselves.

 

   

Expected Term.    The expected term of the options outstanding is determined using the “simplified” method for “plain vanilla” options based on the mid-point between the vesting date and the end of the contractual term as prescribed by Staff Accounting Bulletin No. 107, Share-Based Payment.

 

   

Risk-Free Interest Rate.    The risk-free interest rate is based on U.S. Treasury notes with remaining terms similar to the expected term of the option.

 

   

Expected Dividends.    The dividend yield assumption is zero since we have never paid cash dividends and do not plan to pay cash dividends in the foreseeable future.

 

In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment.

 

We have computed the fair market value of employee and non-employee stock options at date of grant utilizing the following weighted-average assumptions:

 

     For the Year Ended December 31,  
     2016     2015  
     Weighted
Average
    Weighted
Average
 

Volatility

     83     77

Expected Term in Years

     6.04       6.03  

Dividend Rate

     0     0

Risk Free Interest Rate

     1.45     1.80

Fair Value of Option on Grant Date

   $ 2.30     $ 2.58  

 

Stock-based compensation expense was $3.6 million and $1.5 million for the years ended December 31, 2016 and 2015, respectively. At December 31, 2016, we had $11.0 million of unamortized stock-based compensation expense, which is expected to be recognized over a remaining average vesting period of 2.95 years.

 

We expect the impact of our stock-based compensation expense for stock options granted to employees and non-employees to grow in future periods due to the potential increases in the value of our common stock and in headcount.

 

Valuation of Common Stock

 

All options to purchase shares of our common stock are granted with an exercise price per share equal to the fair value per share of our common stock on the date of grant, based on the information known to us on the date of grant. Prior to this offering, on each grant date, our board of directors estimated the fair value of our common stock in order to determine an exercise price for the option grants. Our board of directors considered, among other things, timely valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common stock, our board of directors exercises its reasonable judgment and takes a number of factors into consideration for the determination of the fair value of our common stock on each grant date. These factors include, but are not limited to:

 

   

any recent valuations of our common stock performed by an independent third-party valuation firm;

 

   

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

 

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the status of research and development efforts;

 

   

our stage of development and business strategy;

 

   

the material risks related to our business;

 

   

the prices at which we sold our shares of convertible preferred stock to outside investors in arm’s length transactions and the rights, preferences and privileges of the convertible preferred stock relative to those of our common stock, including the liquidation preferences of the convertible preferred stock;

 

   

the illiquid nature of our common stock;

 

   

the value of companies we consider peers based on a number of factors including, but not limited to, similarity to us with respect to industry, business model, stage of growth, company size, financial risk and other factors;

 

   

trends and market conditions affecting our industry; and

 

   

the likelihood of achieving a liquidity event for the holders of our common stock, such as an initial public offering or sale.

 

After the completion of this offering, our board of directors will determine the per share fair value of our common stock based on the closing price of our common stock as reported by the NASDAQ Global Market on the date of grant.

 

Stock Option Grants

 

The following table summarizes, by grant date, the number of shares of common stock underlying stock options granted from April 1, 2014 (date of inception) through April 10, 2017, as well as the associated per share exercise price, which was the fair value per share of our common stock as determined by our board of directors on the applicable grant date:

 

Date of the Grant

   Numbers of
Shares
Subject to
Options
Granted
    Exercise Price
Per Share of
Common Stock
     Estimated
Fair Value  Per

Share of
Common Stock

at Grant Date
 

September 22, 2014

     150,000     $ 0.10      $ 0.10  

May 13, 2015

     300,000       3.81        3.81  

June 8, 2015

     2,750,000       3.81        3.81  

September 17, 2015

     415,000 (1)      3.88        3.88  

October 5, 2015

     100,000       3.88        3.88  

November 6, 2015

     125,000       3.88        3.88  

December 3, 2015

     225,000       3.88        3.88  

January 28, 2016

     229,000       3.88        3.88  

February 24, 2016

     582,500       3.88        3.88  

March 30, 2016

     455,000       2.91        2.91  

May 3, 2016

     50,000       2.91        2.91  

July 11, 2016

     1,337,680       2.91        2.91  

August 2, 2016

     110,000       2.91        2.91  

November 1, 2016

     19,500       3.11        3.11  

January 19, 2017

     2,241,545       3.95        3.95  

February 2, 2017

     6,000       3.95        3.95  

 

(1)   Number reflects an option grant modification that occurred on July 25, 2016, whereby an option to purchase 300,000 shares of our common stock granted on July 17, 2015 was modified to an option to purchase 165,000 shares of our common stock.

 

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The intrinsic value of all outstanding options as of December 31, 2016 was $             million based on the estimated fair value of our common stock of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, of which approximately $             million related to vested options and approximately $             million related to unvested options.

 

Recent Accounting Pronouncements

 

Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to our audited financial statements appearing elsewhere in this prospectus for a discussion of recent accounting pronouncements.

 

JOBS Act

 

On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. The JOBS Act provides that, among other things, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. As an emerging growth company, we have irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies.

 

In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we intend to rely on such exemptions, we are not required to, among other things, (1) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, (2) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (3) 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 (auditor discussion and analysis), and (4) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of this offering or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.

 

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BUSINESS

 

Overview

 

We are a biopharmaceutical company focused exclusively on developing impactful medicines for patients and families living with rare neurological disorders. We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years; yet has remained underappreciated by the industry. Our experienced team began with a vision to integrate the biology and symptomology of rare neurological conditions to employ innovative research and clinical strategies for the development of our drug candidates. Using recent scientific advances in genetics and the biological pathways of the brain, we have created a proprietary map of disease-relevant pathways to identify and acquire novel compounds for the treatment of rare neurological disorders. We are executing on our strategy by in-licensing and collaborating with leading biopharmaceutical companies and academic institutions. We are developing a robust pipeline of clinical assets with an initial focus on neurodevelopmental disorders and rare epileptic encephalopathies. Our most advanced candidate, OV101, has commenced a Phase 2 trial, which is primarily a safety trial that is designed to provide proof-of-concept on efficacy parameters, in adults with Angelman syndrome. OV101 has also commenced a Phase 1 trial in adolescents with Angelman syndrome or Fragile X syndrome. Our second lead drug candidate, OV935, is expected to commence a Phase 1b/2a trial in rare epileptic encephalopathies in 2017.

 

Our most advanced drug candidate is OV101, which we acquired from H. Lundbeck A/S, or Lundbeck, in 2015. We received orphan drug designation for OV101 for the treatment of Angelman syndrome from the U.S. Food and Drug Administration, or FDA, in September 2016. We believe our development plan for OV101 highlights our ability to translate new scientific insights into drug candidates that target an unexplored disease-relevant pathway. OV101 targets disorders characterized by diminished tonic inhibition, a neurological signaling abnormality that has been identified as a potential central cause of the symptoms seen in a number of disorders of the brain. This can lead to certain symptoms, including, but not limited to motor deficiencies, sleep abnormalities, behavioral manifestations and seizures. We believe modulating tonic inhibition may have a meaningful clinical impact in patients with Angelman syndrome and Fragile X syndrome.

 

In January 2017, we entered into a collaboration with Takeda Pharmaceutical Company Limited, or Takeda, for Takeda’s compound, TAK-935, which we refer to as OV935. The collaboration enables us to share equally in building upon Takeda’s discoveries, bringing together the capabilities of both companies in development, regulatory and commercialization activities. We believe that OV935’s inhibition of the cholesterol metabolism pathway may down regulate the excitatory signals involved in epilepsy, which may suppress seizures and also lead to a long-term disease-modifying effect. We are initially targeting OV935 for rare epileptic encephalopathies with high unmet medical need, including Dravet syndrome, Lennox-Gastaut syndrome and Tuberous Sclerosis Complex. OV935 has completed four Phase 1 trials in certain epileptic encephalopathies, preliminarily demonstrating favorable tolerability at doses that we believe may be therapeutically relevant. Observations in these prior clinical trials are not based on the FDA’s assessment and successful prior trial results do not indicate that OV935 will achieve favorable results in any later stage trials or that the FDA will ultimately determine that OV935 is effective for purposes of granting marketing approval.

 

Our management team is a critical component to the execution of our overall strategy and our business model. We have assembled a team with significant experience in translational science, drug evaluation, clinical development, regulatory affairs and business development. We believe these capabilities will drive our ability to identify, acquire, develop and commercialize novel compounds that have the potential to modify the devastating course of rare neurological disorders. We believe our expertise will make us the partner of choice for leading biopharmaceutical companies or academic institutions that wish to maximize the value of their neurology drug candidates. The members of our team have been collectively involved in the development and approval of over 20 marketed drugs. Further, we believe that we are particularly well positioned to execute on our business

 

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development strategy given the extensive network and breadth of expertise of our Chairman and Chief Executive Officer, Dr. Jeremy Levin, and the other members of our management team. Our management team is supported by our board of directors which has extensive experience in the biopharmaceutical industry.

 

Our Focus: Rare Neurological Disorders

 

Rare neurological disorders are among the most devastating in their impact on patients and their families. Patients suffering from these disorders typically require full-time care, and yet, are among the most underserved. Based on our proprietary map, we believe that there are at least 100 neurodevelopmental disorders, epileptic encephalopathies and other related rare neurological disorders that we may be able to target. These disorders are characterized by impairments and pathologies in the growth and development of the brain. Due to a historical overwhelming preference in the drug industry to develop drugs for broader neurological indications, many of these disorders have no approved therapies. As a result, recent scientific advancements have been overlooked which we believe presents us with an opportunity to pursue these indications. These reasons include:

 

   

High penetrance linking genetic defect to disorder pathology. Rare neurological disorders that are genetic in origin typically have a strong correlation, or penetrance, between the presence of a gene and the manifestation of the corresponding disease pathology. As a result, we believe we can develop drug candidates that will be efficacious in patients with a given genetic profile.

 

   

Predictive genetic and other models. Recent advances in genetics enable us to employ predictive in vivo genetic models of certain of these disorders. These models allow us to evaluate and observe a drug candidate’s potential activity prior to initiation of clinical trials. Through these models, we believe we will be able to select the most relevant clinical endpoints for our trials and increase the potential for clinical success.

 

   

Overlapping pathophysiology and symptoms. Neurological disorders are often characterized by a number of overlapping symptoms, such as seizures, sleep disturbances, movement deficiencies and behavioral manifestations. We believe these commonalities will enable us to employ clinical endpoints that may be translatable from one disorder to another, and to develop drugs that may provide a clinical benefit across multiple indications.

 

   

Early observation of proof-of-concept. By employing clinical endpoints that are highly relevant and are designed to detect meaningful clinical benefits, we anticipate that many of our studies may provide early proof-of-concept in clinical development.

 

   

Potential ability to affect disease progression.    We are focusing on disorders that are typically diagnosed in early childhood when the brain is still developing. We believe that we may be able to meaningfully address symptoms and potentially alter the progression of disease, especially if the drug can be administered early in life.

 

   

Motivated and accessible patient populations.    We are targeting development programs for disorders with motivated and accessible patient populations. We believe that the patients and caregivers affected by these disorders are avid users of social media, in order to learn about and share relevant information and experiences. We aim to use digital platforms to efficiently identify new patients for our clinical trials, raise disease awareness and help connect the patient and caregiver communities.

 

The Ovid Approach

 

The Ovid approach to drug development for rare neurological disorders is scientifically driven, patient focused and business development oriented.

 

Scientifically Driven

 

We are taking a scientifically driven approach to identifying promising drug candidates for our pipeline. We are building our portfolio based on the existence of clear biological rationales, including a focus on disorders

 

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that have, where possible, a direct genetic linkage. We are using our proprietary map to identify drug candidates across all stages of development for potential acquisition or in-licensing. Through utilization of our proprietary map, we are building on the emerging body of scientific insights developed by us and others in the biopharmaceutical industry to target these new disease pathways of the brain. As we evaluate data from previous and ongoing preclinical studies and clinical trials, we intend to refine our scientific approach and apply these insights to continue to build our pipeline.

 

In particular, the Ovid approach is driven by the following scientific principles:

 

   

map biological pathways that are relevant for rare neurological disorders with significant unmet need;

 

   

target biological pathways for which proof-of-concept has been established via in vitro or animal models;

 

   

focus on biological pathways that cause the pathology of the disorder and that have common symptoms that we can target; and

 

   

identify and utilize biomarkers that can provide evidence of the activity of our drug candidates.

 

Patient Focused

 

We are highly focused on the patient communities affected by the rare neurological disorders we are addressing. We believe this aspect of our approach is critical given that these disorders affect a small population of patients, but carry serious morbidities and require extensive involvement from the patients’ families, caregivers, physicians and patient advocacy groups.

 

The Ovid approach is driven by the following patient-focused principles:

 

   

develop close relationships with patients, caregivers, families, disease foundations and key opinion leaders, to better understand the history of these disorders, raise awareness, identify patients and facilitate enrollment of clinical trials;

 

   

identify clinically meaningful endpoints based on input from patients and their physicians and caregivers; and

 

   

develop digital capabilities to engage, foster and maintain close relationships with patient communities.

 

Business Development Oriented

 

We are building a broad pipeline of potential drug candidates to treat rare neurological disorders through the in-licensing or partnering of drug candidates. Central to the success of this process is a highly focused and disciplined business development effort aimed at securing relevant assets in each of our selected rare neurological disorders.

 

We are developing a specialized, scalable and robust infrastructure that we believe will make us a leader in rare neurological disorders and the partner of choice for leading biopharmaceutical companies or academic institutions that wish to maximize the value of their neurology drug candidates in these areas. This infrastructure spans from research, translational science, clinical development and regulatory affairs to business development, market access and relationships with patient advocacy groups. If and when our drug candidates are approved, we also plan to establish a highly focused commercial and distribution network dedicated to rare neurological disorders in the United States and Europe, where we believe the patient populations and medical specialists are sufficiently concentrated to effectively market our drug candidates.

 

We believe that we are particularly well positioned to execute on our business development strategy because of the extensive network of our Chairman and Chief Executive Officer, Dr. Jeremy Levin, and the other members of our management team, who collectively have a track record of success in orphan drug development and evaluation.

 

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Our Pipeline

 

The following table sets forth the status and mechanism of action of our drug candidates:

 

LOGO

 

*   Also known as TAK-935 under a co-development program with Takeda Pharmaceutical Company Limited pursuant to a license and collaboration agreement.

 

OV101

 

We are developing OV101, our most advanced drug candidate, for the treatment of Angelman syndrome and Fragile X syndrome, two neurodevelopmental disorders that are characterized by similar symptoms due to decreased tonic inhibition. Angelman syndrome and Fragile X syndrome have overlapping symptoms, including sleep disorder, aberrant behavior, anxiety and cognitive or intellectual disabilities. Both of these disorders are typically diagnosable in early childhood and require full-time care for the patients affected. Although the FDA has not yet made any determination regarding the safety and efficacy of OV101, in previously conducted clinical trials in primary insomnia enrolling over 4,000 adults, OV101 was observed to have favorable safety and oral bioavailability profiles. Success in these previous trials does not ensure that our clinical trials in OV101 will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of OV101. We have commenced our Phase 2 trial of OV101, which is primarily a safety trial that is designed to provide proof-of-concept on efficacy parameters, in adults with Angelman syndrome. We have commenced a Phase 1 trial in adolescents with Angelman syndrome or Fragile X syndrome. In September 2016, the FDA granted orphan drug designation for OV101 for the treatment of Angelman syndrome.

 

OV101 and Tonic Inhibition

 

Tonic inhibition is a critical regulatory mechanism that allows a healthy human brain to decipher excitatory and inhibitory neurological signals correctly without being overloaded. Defects of this system are thought to play a role in multiple disease states, including Angelman syndrome and Fragile X syndrome. OV101 represents a promising compound targeting this mechanism.

 

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Tonic inhibition refers to the ability of the brain to modulate incoming messages and filter out extraneous signals between nerve cells, or neurons. Decreased tonic inhibition results in an imbalance in the ratio of excitation to inhibition. If tonic inhibition is reduced, the brain becomes inundated with signals and loses the ability to separate background noise from critical information. This imbalance disrupts normal brain functioning, including sensory processing and integration. This can lead to symptoms characteristic of neurodevelopmental disorders, including those related to behavior, learning, cognitive development, motor function, sleep disturbances and seizures. By modulating tonic inhibition, OV101 may have the potential to alleviate important symptoms and provide a meaningful clinical benefit to patients across several neurodevelopmental disorders including Angelman syndrome and Fragile X syndrome.

 

Tonic Inhibition and Neurodevelopmental Disorders

 

Neurotransmission

 

The brain is composed of a vast network of interconnected neurons that facilitate the communication between cells. These communications are governed by the release of chemical signals, or neurotransmitters, from one neuron to another. The neuron that releases the neurotransmitter is called the presynaptic neuron. The neuron that receives the neurotransmitter is called the postsynaptic neuron. The presynaptic neuron releases a neurotransmitter into a physical gap separating the two neurons, which is called the synaptic gap. The neurotransmitter then diffuses across the synaptic gap to bind to a receptor on the postsynaptic neuron. This binding then triggers a signal to stimulate, inhibit or otherwise modulate the activity of the postsynaptic neuron. For example, gamma-aminobutyric acid, or GABA, is an inhibitory neurotransmitter that plays a role in anxiety, sleep, seizure, motor functions and certain other brain functions. The neurotransmitter GABA binds to receptors in the synaptic gap, called synaptic receptors, as well as receptors outside the synaptic gap, called extrasynaptic GABA receptors. The following figure depicts the synaptic gap and extrasynaptic GABA receptors outside the synaptic gap:

 

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Figure 1: The neurotransmitter GABA binds to synaptic receptors in the synaptic gap and extrasynaptic GABA

receptors outside the synaptic gap.

 

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The Role of GABA in Phasic and Tonic Inhibition

 

There is a fine balance between an appropriate and an inappropriate response of the postsynaptic neuron to an incoming stimulus. Neurons are typically responsive to incoming stimulus at two levels through processes known as phasic and tonic inhibition.

 

Phasic Inhibition.    Phasic inhibition is short-acting in nature and takes place in the synaptic gap. The brain processes signals passed between neurons in milliseconds. To keep the system in balance, the body sets up a feedback loop so that signaling is interpreted appropriately. When the body determines that it should cease responding to a specific signal, it triggers this feedback loop, which inhibits the receiving neuron from responding too strongly. This is done when the neurotransmitter, GABA, binds to receptors in the synaptic gap, or synaptic GABAA receptors. Once the receiving postsynaptic neuron has been inhibited, balance can be restored and the receiving neuron can prepare to receive a new stimulus.

 

Tonic Inhibition.    Tonic inhibition is longer-acting in nature and takes place in the extrasynaptic region. Extrasynaptic GABAA receptors contain specific subunits that make them different from synaptic GABAA receptors in structure and activity. In particular, many extrasynaptic GABAA receptors contain a specific domain called the d (delta) subunit, which are not expressed in synaptic GABAA receptors. These extrasynaptic GABAA that contain the d subunit receptors act with slower kinetics, hence the longer-acting inhibitory response of tonic inhibition. The following figure depicts the location and domains of the extrasynaptic GABAA receptor:

 

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Figure 2: Structure and localization of the d (delta) subunit contained in the extrasynaptic GABAA receptor.

 

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The following figure depicts physiologic levels of phasic inhibition and tonic inhibition, the two levels of signaling between neurons:

 

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Figure 3: Phasic inhibition is rapid and short-lived. Tonic inhibition is more persistent.

 

The same neurotransmitter, GABA, which stimulates the short-acting receptors in the synapse in the process of phasic inhibition, also stimulates the longer-acting receptors outside the synapse in the process of tonic inhibition.

 

Under normal conditions there is sufficient GABA present in and around the synaptic region and both sets of receptors are stimulated. However, in certain neurodevelopmental disorders, the overall levels of GABA are reduced. This reduction can lead to a situation in which there is enough GABA in the synapse to maintain normal short-term signaling, but GABA outside the synapse is insufficient to occupy the extrasynaptic receptors and maintain longer-term signaling. The decline in tonic inhibition triggered by the shortage of extrasynaptic GABA leads to the chronic activation of the receiving postsynaptic neurons and disruption of normal brain network activity.

 

Tonic inhibition is a key mechanism of neural regulation that has not yet, to our knowledge, been specifically addressed by any approved drug. Tonic inhibition has been shown to be important in helping to discriminate important signals from the “noise” generated by the multitude of sensory signals entering the brain. In patients with decreased tonic inhibition, the flood of incoming signals overwhelms the ability of the brain to process them.

 

The clinical manifestations of decreased tonic inhibition are seen across several neurodevelopmental disorders, including Angelman syndrome and Fragile X syndrome. When tonic inhibition is decreased, the body

 

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has trouble functioning normally in the presence of this chronic overstimulation of neurons. The result is profound pathology that is manifested by seizures, anxiety and disturbances in motor function, behavior, sleep, cognition, learning, memory and ability to communicate effectively.

 

In addition, learning and memory are closely linked to the ability of the brain to establish and maintain connections among nerve cells. Many brain processes, including tonic inhibition, play a role in the creation and maintenance of these connections. One of the long-term consequences of decreased tonic inhibition is the disruption of memory. The restoration of tonic inhibition has been observed to lead to improvements in memory in adult animal models.

 

OV101 and Tonic Inhibition in Angelman Syndrome and Fragile X Syndrome

 

OV101 is a delta selective extrasynaptic GABAA receptor agonist. An agonist is a chemical that binds to a receptor and activates the receptor to produce a biological response. OV101 specifically exerts its biological activity through the d subunit of extrasynaptic GABAA receptors. Based on the biological pathway and existing preclinical data, we anticipate developing OV101 as an orally active selective extrasynaptic GABAA agonist to compensate for the deficit in GABA concentrations observed in patients with certain rare neurological disorders. We believe OV101 is the only drug candidate in development that exerts its biological activity preferentially through the d subunit of extrasynaptic receptors. We are initially developing OV101 for Angelman syndrome and Fragile X syndrome, and we believe it has the potential to address multiple neurodevelopmental disorders characterized by decreased tonic inhibition.

 

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The following figure depicts how OV101 addresses tonic inhibition by restoring activity of the extrasynaptic GABAA receptors:

 

LOGO

 

Figure 4. How OV101 is designed to address tonic inhibition by restoring activity of the extrasynaptic GABAA receptors. The figures represent the synapse between a GABAergic neuron and a postsynaptic cell. The top panel shows normal release and uptake of GABA with activation of both synaptic and extrasynaptic receptors resulting in normal phasic and tonic inhibition. In the middle panel, an increase in GABA uptake (Angelman syndrome) or a reduction in GABA release (Fragile X syndrome) leads to a reduction in extracellular concentrations of GABA, preferentially impacting extrasynaptic GABA receptor signaling and resulting in reduced tonic inhibition. In the bottom panel, OV101 acts selectively on the extrasynaptic GABAA receptors restoring tonic inhibition.

 

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Angelman Syndrome

 

Overview.    Angelman syndrome is a rare genetic disorder that is typically diagnosed in the United States after one year of age when parents notice severe developmental delays or the child suffers seizures. Characteristic features of this disorder include delayed development, intellectual disability, severe speech impairment, problems with movement and balance, seizures, sleep disorders and anxiety. Individual patients with Angelman syndrome can have varied symptoms, including the inability to walk or control motor movement, which can limit their ability to handle daily functions such as feeding, dressing or bathing. These patients are also often hyperactive, leading to various behavioral problems. Angelman syndrome symptoms, such as poor sleeping patterns, can lead to serious consequences, including increased frequency of seizures and exacerbation of behavioral manifestations. Most Angelman syndrome patients require full-time care, which can represent a substantial emotional and financial burden on their families. In addition, Angelman syndrome has been associated with poor parental sleep and higher parental stress.

 

According to the National Organization for Rare Disorders, the approximate prevalence of Angelman syndrome is between 1 in 12,000 to 20,000 people. There are no FDA-approved therapies for the treatment of Angelman syndrome. The current standard of care for seizures associated with Angelman syndrome are traditional anticonvulsants, which are not designed to trigger tonic inhibition. There is no widely accepted standard of care for other symptoms of Angelman syndrome, including sleep disruptions, motor dysfunction and behavioral abnormalities.

 

Tonic Inhibition and Angelman Syndrome.    In 1997, scientists traced the genetic causes of Angelman syndrome to mutations and other disruptions in the UBE3A gene. The UBE3A gene encodes the UBE3A protein, which plays a central role in protein degradation. Protein degradation is the breakdown of damaged or unnecessary proteins within the cell, which is an important aspect of maintaining normal cellular function. The UBE3A protein triggers the attachment of a protein called ubiquitin to other cellular proteins. These ubiquitin attachments serve as tags that mark the tagged cellular proteins for degradation. Alterations in the UBE3A gene, and therefore the UBE3A protein, result in deficiencies in the tagging of proteins for degradation, leading to inappropriate protein accumulation within the cell.

 

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One of the proteins that the UBE3A protein normally tags for degradation is GABAA Transporter 1, or GAT1, a protein that is responsible for the uptake of GABA by neurons. The disruption in the UBE3A gene results in an overabundance of GAT1, leading to an exaggerated uptake of GABA. This results in low levels of GABA in both the synaptic and extrasynaptic regions. The deficiency of GABA in the extrasynaptic region culminates in a decrease of tonic inhibition, triggering a chronic activation of downstream neurons. The following figure depicts the biological pathway by which the UBE3A gene alteration present in Angelman syndrome patients leads to decreased tonic inhibition:

 

LOGO

 

Figure 5. Linkage between UBE3A

gene alteration and tonic inhibition.

 

By adding OV101, a GABA agonist, we believe it is possible to address this decreased tonic inhibition by compensating for the low GABA levels. Once OV101 is added, the extrasynaptic receptors are activated to transport chloride, or Cl-ions, from outside the cell into the postsynaptic neuron. Negatively charged CI-ions inside the postsynaptic neuron increase tonic inhibition, reducing the excessive activation of downstream neurons.

 

Preclinical Data in Angelman Syndrome.    In preclinical studies conducted by an independent academic group in Angelman syndrome mouse models, OV101 was observed to increase tonic inhibition and alleviate the key motor symptoms that are also observed in Angelman syndrome patients.

 

In 2012, researchers published a study in the journal Science Translational Medicine, reporting that they had created mice that lacked a functional copy of the UBE3A gene. In these mouse models, the researchers observed several features of Angelman syndrome, including a loss of controlled bodily movements and motor deficits. The researchers further observed that mice lacking a functional copy of the UBE3A gene had deficiencies in tonic inhibition and that increased GABA could partially restore this deficiency.

 

In this study, analysis of the activity of individual nerve cells in mice with a defective UBE3A gene demonstrated the effects of decreased tonic inhibition. Decreased tonic inhibition resulted in excessive neuronal activity, which

 

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caused disruption of the normal, tightly coordinated and regulated signaling within the brain. The direct addition of OV101 to these nerve cells largely restored their activity and regional brain network activity. Based on these results, we believe that OV101 may have a similar effect in increasing tonic inhibition in Angelman syndrome patients.

 

The utility of these Angelman syndrome mouse models is also demonstrated by the effects of OV101 on walking gait. Angelman syndrome patients often have an altered walking gait where the legs are wide-spaced and feet are turned out. The Angelman syndrome mouse models were observed to have an altered gait, involving rotation of the hind paws outward. In this study, Angelman syndrome mouse models and normal mice were each administered OV101 and a placebo. Administration of OV101 was observed to result in statistically significant reductions in hind paw rotation in the Angelman syndrome mice, but had no effect in the normal mice. The following figure depicts the decrease in hind-paw rotation in the Angelman syndrome mice administered OV101 versus those that were administered a placebo:

 

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Figure 6: Administration of OV101 led to a reduction in the degree of hind paw rotation.

 

  **   A p-value of 0.05 or less represents statistical significance, meaning that there is a less than 1-in-20 likelihood that the observed results occurred by chance. A p-value of 0.01 or less means that there is a less than 1-in-100 likelihood that the observed results occurred by chance.  

 

OV101 administration in Angelman syndrome mouse models was also observed to result in improved overall motor and clasping reflex function as measured by a rotarod test and tail suspension. In the rotarod test, mice are required to perch atop a rotating cylinder and use their legs and body in a coordinated fashion in order to avoid falling off. Angelman syndrome mice that were administered OV101 were observed to have an increased time on the rotarod versus those that were administered a placebo. Administration of OV101 was not observed to have an effect in normal mice. The experiment showed that the increased amount of time shown on the rotarod after treatment was statistically significant (approximately 20%, p<0.05) relative to the time spent on the rotarod before injection. In the tail suspension test, Angelman syndrome mice showed a mild to moderate clasping reflex, represented by forelimb clasping and flexion to the body and smaller forelimb flexion. Angelman syndrome mice treated with OV101 showed improved clasping reflexes and significantly increased forelimb angles (p<0.01).

 

Fragile X Syndrome

 

Overview.    Fragile X syndrome is a genetic condition that results in intellectual disability, anxiety disorders, behavioral and learning challenges and various physical disabilities. Patients with Fragile X syndrome

 

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exhibit autism-like symptoms, including cognitive impairment, anxiety, mood swings, hyperactivity, attention deficit and heightened sensitivity to various stimuli, such as sound. The severity of an individual patient’s impairment can range from mild learning disabilities to more severe cognitive or intellectual disabilities. Fragile X syndrome is one of the most commonly inherited intellectual disability disorders. Children with Fragile X syndrome also often have unusual sleep patterns and may have difficulty with routine activities such as feeding and dressing. The challenges presented by Fragile X syndrome often extend beyond the patient and can lead to significant hardships on the emotional and financial health of their families.

 

Fragile X syndrome is caused by mutations in the fragile X mental retardation gene, or FMR1 gene. FMR1 is a gene that leads to the synthesis of the fragile X mental retardation protein, FMRP, which is needed for normal brain development. The FMR1 gene normally contains in its sequence between 5 and 44 copies of a short, repeated motif, or recurring pattern in DNA. In Fragile X syndrome, there are more than 200 copies of this motif in the FMR1 gene, a genetic change that prevents the synthesis of FMRP. Patients with intermediate numbers of repeats are able to make some FMRP and have milder symptoms.

 

According to the National Fragile X Foundation, Fragile X syndrome affects approximately 1 in 3,600 to 4,000 males and 1 in 4,000 to 6,000 females. The average age of diagnosis of Fragile X syndrome is approximately three years. Currently, there are no approved therapies for the treatment of Fragile X syndrome. The current standard of care for the psychiatric challenges of Fragile X syndrome is tailored to each patient and may include antipsychotics, antidepressants and drugs to treat attention deficit and sleep disorders. Special education and symptomatic treatments for anxiety and irritability are often employed to lessen the burden of illness. Fragile X syndrome patients also may experience seizures, which are treated with traditional anticonvulsants.

 

Tonic Inhibition and Fragile X Syndrome.    Due to mutations in the FMR1 gene, patients with Fragile X syndrome have deficiencies in the levels of FMRP, an RNA binding protein that regulates the synthesis of proteins such as the two forms of glutamic acid decarboxylase, or GAD65 and GAD67, which we refer to together as GAD65/67. GAD65/67 are the key enzymes required for synthesis of GABA. Knocking out the FMR1 gene results in reduced expression of GAD65/67 in mouse models. The following figure depicts the reduced expression of GAD65/67 in mice containing a knockout of the FMR1 gene:

 

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Figure 7: Knockout of the FMR1 gene leads to reduced expression of

GAD65/67 in mice.

 

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The reduced expression of GAD65/67 in this model results in decreased GABA production and subsequently lower extrasynaptic levels of GABA and decreased tonic inhibition required for normal tonic inhibition. Decreased tonic inhibition is believed to be responsible for a number of Fragile X syndrome-related symptoms, such as behavioral and cognitive problems. The following figure depicts the biological pathway by which an alteration in the FMR1 gene leads to decreased tonic inhibition:

 

LOGO

 

Figure 8: Linkage between FMR1 gene alteration and tonic inhibition.

 

Preclinical Data in Fragile X Syndrome.    The association between the FMR1 gene and physiological changes observed in Fragile X syndrome patients has been evaluated in preclinical studies conducted by an independent academic group. Mice containing a knockout of the FMR1 gene exhibit behaviors similar to those observed in Fragile X syndrome patients, such as hyperactivity, anxiety and increased sensitivity to sounds.

 

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In these studies, hyperactivity in FMR1-deficient mice was assessed by the distance traveled and average speed in an open field test. FMR1-deficient mice were significantly more active than normal mice. It was observed that treatment of these mice with OV101 led to a statistically significant decrease in the distance traveled and average speed. These results were considered to be indicative of a reduction in hyperactivity, which we believe resulted from increased tonic inhibition. The following figure depicts the normalization of hyperactivity in mice containing a knockout of the FMR1 gene when administered OV101:

 

LOGO

 

Figure 9: OV101 was observed to reduce signs of hyperactivity in mice containing a knockout of the FMR1 gene.

 

In these studies, OV101 partially normalized the mice’s response to startling sounds in the pre-pulse inhibition test in which a pre-stimulus is given to suppress the startle response and improved the signal to noise ratio. Additionally, mice with a knockout of the FMR1 gene were also observed to have higher neuronal activity as compared to normal mice and a lower threshold for action potential, or AP, generation leading to increased AP bursts, which reverted to normal levels with the administration of OV101, as shown in the following figure:

 

LOGO

 

Figure 10. OV101 was observed to reduce levels of neuronal activity in mice with a knockout of

the FMR1 gene.

 

OV101 and its Potential Impact on Neurogenesis and on Learning and Memory

 

Based on preclinical data, we believe OV101 may facilitate neurogenesis, or the creation and maturation of new neurons, which may lead to cognitive benefits. In a preclinical study in mice conducted by an independent

 

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academic group, OV101 was observed to promote the performance of certain memory behaviors and facilitate neurogenesis.

 

Extrasynaptic GABAA receptors contain a unique d subunit, which is a specific domain on extrasynaptic GABAA receptors that is not expressed in synaptic GABAA receptors. OV101 mediates its pharmacological properties via the activity of this d subunit and we believe that is a key differentiating aspect of our drug. It is believed that GABAA receptor-dependent signaling regulates memory and also facilitates the growth of neurons after birth in the brain.

 

Long-term administration of OV101 in normal mice, but not in mice deficient in the GABAA receptor delta subunit, was observed to result in significant increases in neurogenesis. These treated mice also performed better on challenges that were dependent on long-term memory. We believe that these results in mice suggest that long-term treatment with OV101 in patients with Angelman syndrome and Fragile X syndrome may lead to improvement in cognitive abilities.

 

Previous Clinical Development of OV101

 

We acquired worldwide rights to OV101 from Lundbeck in March 2015. Prior to the acquisition, Lundbeck filed an investigational new drug, or IND, application with the FDA for the treatment of insomnia. Pursuant to this IND, Lundbeck and Merck & Co., Inc., or Merck, partnered to conduct several Phase 3 trials for primary insomnia between 2004 and 2007. Over the course of the development of OV101, over 4,000 adults were administered OV101, resulting in an OV101 exposure of approximately 950 patient years. These trials were primarily randomized, placebo-controlled short-term and long-term safety and efficacy clinical studies, using classic sleep parameters such as total sleep time, time to sleep onset, wakefulness after sleep onset, and number of nocturnal awakenings as clinical endpoints.

 

The Phase 3 program consisted of three trials: two 3-month placebo controlled trials conducted in the United States and one 2-week trial conducted in Europe and Canada, each evaluating OV101 against placebo and the active comparator, zolpidem (Ambien). The primary endpoints of the trials included total sleep time and time-to-sleep onset and the secondary endpoints included number of nocturnal awakenings, wakefulness after sleep onset and daytime function. In Phase 3 trials, which were conducted for durations of up to 12 months, OV101 was observed to have efficacy that was largely comparable to zolpidem (Ambien) on several sleep metrics. In the first 3-month trial, a dose of 15mg of OV101 met both of the primary endpoints as well as the secondary endpoints at week one and month three compared to placebo. In the second 3-month trial, the same dose met only total sleep time and number of awakenings at week one, but significance was lost after adjusting for multiplicity at month three. The 2-week trial met all primary endpoints and wakefulness after sleep onset, for 15mg gaboxadol at weeks one and two. Additionally, subjects that were administered OV101 showed no evidence of withdrawal symptoms or rebound insomnia after discontinuation of short-term treatment, whereas transient rebound insomnia was observed in subjects receiving zolpidem. In addition, clear differences were observed between OV101 and zolpidem from a sleep architecture perspective. OV101 has shown consistent increases in slow wave sleep compared to zolpidem with no significant effect on stage 2 or REM sleep in healthy adult, elderly subjects. It is believed that slow wave sleep is important for encoding long-term, fact-based memories. Slow wave sleep has been associated with physical changes in neuronal connections.

 

Safety and Tolerability

 

Overall, OV101 was observed to be well-tolerated in adult patients aged 18-64 years in the Phase 2 and Phase 3 trials at doses of 5mg to 15mg given as evening doses. The FDA has not, however, made any determination regarding the safety and efficacy of OV101. Success in these previous trials does not ensure that our clinical trials in OV101 will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of OV101. The most common reported adverse events were headache, nausea, vomiting, somnolence and dizziness. In general, the adverse events appeared to be dose-related. The majority of the serious adverse events,

 

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or SAEs, observed were considered to not be related to treatment with OV101. One SAE, fatigue, was considered by Lundbeck and Merck as probably related to OV101 treatment. Among the 9 SAEs considered by Lundbeck and Merck to be possibly related to OV101 treatment, there were three cases of fainting and one case each of: radius fracture, abnormal QRS axis, transient ischemic attack, non-cardiac chest pain, unresponsive to stimuli and atrial fibrillation. Across trials there were no apparent clinical trends regarding SAEs with respect to frequency, distribution across system organ classes or preferred terms. Also, there were no apparent clinical differences versus placebo. In the Phase 3 trials at the 15mg dose, at least one SAE was observed in 1.3% of subjects at two weeks and 3 months and 3.0% of subjects at 12 months versus 0.0% to 1.0% on placebo over the same timeframe.

 

Consistent with the clinical development of other insomnia drugs, the FDA requested that Lundbeck and Merck conduct a series of preclinical and clinical abuse studies as part of their development program. In preclinical studies, OV101 demonstrated low abuse potential. In one clinical trial, the abuse potential of OV101 was investigated in doses up to 45mg in male and female subjects with a history of hypnotic/sedative abuse and other drug abuse. Safety results showed that OV101 administered at doses of 30mg and 45mg in women and 45mg in men was not tolerated in this population of drug abusers, contrary to previous experience with the same doses in healthy volunteers. This indicated that a history of drug abuse decreased tolerability to OV101 in these subjects. Adverse events that were associated with a dose-dependent lack of tolerability in this trial included psychiatric, nervous system, musculoskeletal and gastrointestinal disorders.

 

In 2007, following the completion of all clinical trials for OV101 in insomnia, Lundbeck and Merck discontinued the development program for insomnia, and announced that the overall clinical profile did not support further development of OV101 for insomnia.

 

OV101 Clinical Development Plan

 

We have commenced our Phase 2 trial of OV101 in adults with Angelman syndrome, which we refer to as the STARS trial, and have commenced a Phase 1 pharmacokinetic, or PK, trial in adolescents with Angelman syndrome or Fragile X syndrome. We anticipate topline data for the STARS trial in 2018 and Phase 1 PK data in adolescents with Angelman syndrome and Fragile X syndrome in the second half of 2017. Both trials will be conducted pursuant to our IND that went into effect on August 15, 2016. With the initial trials being conducted in adults and adolescents, our goal is to initiate subsequent pediatric clinical trials pending completion of a pediatric PK trial and juvenile animal toxicity studies.

 

We have designed and initiated the STARS trial to assess safety in the target patient populations and to explore multiple endpoints that have the potential to inform the design of our future clinical trials. The STARS trial, currently ongoing, is expected to enroll approximately 75 adults aged 18-49 years with a confirmed diagnosis of Angelman syndrome. The trial is a randomized, double-blind, placebo-controlled trial. The primary endpoint will evaluate the safety and tolerability of OV101 from baseline to week 12 in two dosing schedules either once a day, or QD, or twice daily, or BID. The QD dose is an evening dose up to 15mg. The BID doses involves one morning dose up to 10mg and one evening dose up to 15mg. The exploratory endpoints will evaluate measures of gross and fine motor skills, maladaptive behavior, sleep, clinical global impression and health-related quality of life questionnaires. While we are also evaluating indications of efficacy as exploratory

 

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endpoints, this is primarily a safety trial that is designed to provide a proof-of-concept on efficacy parameters. The following figure depicts the design of the STARS trial:

 

 

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Figure 11: The STARS trial is a randomized, double-blind placebo-controlled Phase 2 trial to assess the safety and tolerability of two dose schedules in adults with a confirmed diagnosis of Angelman syndrome.

  

 

In parallel, we have commenced a Phase 1 single-dose PK trial in adolescents with Angelman syndrome or Fragile X syndrome aged 13 to 17 years. We plan to enroll approximately 12 adolescents. We plan on using a dosage of 5mg of OV101 in trials in Angelman syndrome and Fragile X syndrome, which is consistent with those that were used in the trials conducted by Lundbeck and Merck for insomnia and lower than those used in the clinical abuse trial.

 

OV935

 

OV935 for Epileptic Encephalopathies

 

We are developing OV935 in collaboration with Takeda for the treatment of rare epileptic encephalopathies. OV935 is a potent, highly selective inhibitor of the enzyme cholesterol 24-hydroxylase, or CH24H. We believe, if approved, OV935 has the potential to become a first-in-class inhibitor of CH24H. CH24H is predominantly expressed in the brain, where it plays a central role in cholesterol homeostasis. Recent literature suggests that modulation of CH24H may have an impact on over-activation of neurotransmitter pathways that have been implicated in a number of neurological disorders, such as epilepsy. OV935 has completed four Phase 1 trials demonstrating favorable tolerability at doses that are believed to be therapeutically relevant. Observations in these prior clinical trials are not based on the FDA’s assessment and successful prior trial results do not indicate that OV935 will achieve favorable results in any later stage trials or that the FDA will ultimately determine that OV935 is effective for purposes of granting marketing approval. We and Takeda expect to commence a Phase 1b/2a proof-of-concept trial in patients with Dravet syndrome, Lennox-Gastaut syndrome and Tuberous Sclerosis Complex in 2017, each of which are rare epileptic encephalopathies that we believe, based on their biology, may be treated by OV935. We believe that OV935 offers the possibility not only to suppress seizures, as was observed in preclinical studies, but also to modulate the underlying biological pathways that lead to the development of seizures. This may offer the possibility of a long-term, disease-modifying therapy.

 

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Dravet Syndrome

 

Dravet syndrome is a severe form of childhood epilepsy largely genetically driven by the mutation of the SCN1A gene typically presents during the first year of life. Eighty percent of patients have a mutation of the SCN1A gene. Children experience frequent seizures, loss of muscle control, cognitive deficits and, in approximately 10% of cases, death before the age of 12 years. Children continue to suffer from seizures and severe cognitive and developmental impairment throughout their lifetime. While some patients may survive into adulthood, their long-term intellectual development and seizure outcomes are typically extremely poor. The incidence of Dravet syndrome in the United States ranges from 1 in 15,700 to 1 in 20,900 births. Patients are frequently treated with combinations of classic anti-epileptic drugs, none of which are particularly effective. However, no drug has been approved specifically for the treatment of Dravet syndrome in the United States and only one drug, the anticonvulsant stiripentol, has been approved in Europe.

 

Lennox-Gastaut Syndrome

 

Lennox-Gastaut syndrome is a rare disorder that is often diagnosed between three and five years of age. Patients diagnosed with Lennox-Gastaut syndrome experience a multitude of seizure types that are difficult to manage and have many of the same symptomologies as other rare pediatric epilepsies. Studies estimate that Lennox-Gastaut syndrome affects approximately 14,500 to 18,500 children under the age of 18 and over 30,000 children and adults in the United States. Some patients have de novo genetic mutations, including a mutation of the SCN2A gene. The annual incidence of Lennox-Gastaut syndrome in childhood is estimated to be 2 per 100,000 children. It is also estimated that between 1% and 4% of childhood epilepsies are a result of Lennox-Gastaut syndrome. Only 10% of these patients have seizures that are fully controlled by existing therapies.

 

Tuberous Sclerosis Complex

 

Tuberous Sclerosis Complex is a genetic disorder that causes non-malignant tumors to form in many different organs, and primarily in the brain, eyes, heart, kidney, skin and lungs and is often diagnosed in childhood. The brain and skin are the most affected organs. Tuberous Sclerosis Complex results from a mutation in tumor suppression genes TSC1 or TSC2. Most cases of Tuberous Sclerosis Complex are caused by de novo mutations of the TSC1 or TSC2 genes. According to the Tuberous Sclerosis Alliance, Tuberous Sclerosis Complex is estimated to affect approximately 50,000 patients in the United States and occurs in 1 of 6,000 live births. The most common symptom of Tuberous Sclerosis Complex is epilepsy, which occurs in 60% to 90% of patients, of which 70% experience seizure onset in their first year of life. Despite available therapies, a significant number of Tuberous Sclerosis Complex patients have treatment-resistant seizures. There are significant co-morbidities associated with Tuberous Sclerosis Complex, including cognitive impairment in 50%, autism spectrum disorders in up to 40% and neurobehavioral disorders in over 60% of individuals with Tuberous Sclerosis Complex.

 

The Role of Cholesterol Metabolism in Epileptic Encephalopathies

 

The brain is a cholesterol-rich organ, containing about 25% of the total cholesterol in the body. Cholesterol is an essential component of cellular membranes, including the synaptic membranes that aid in the transmission of signals between cells. Cholesterol is also a key component of myelin, the protective layer of lipids and proteins that serves as an insulating sheathe and facilitates electrical conduction in nerve cells.

 

Cholesterol in the brain is entirely synthesized and metabolized locally to maintain physiologic levels. When cholesterol is metabolized in the brain, it is broken down to 24-hydroxycholesterol, or 24HC, by CH24H, an enzyme predominantly expressed in the brain. Converting cholesterol to 24HC enables it to pass through the blood brain barrier and enter into the circulatory system, allowing it to be eliminated from the body. Since CH24H is primarily present in the brain, there is a strong correlation between circulating blood levels and brain levels of 24HC. The levels of 24HC can therefore serve as a biomarker of CH24H activity in the brain.

 

24HC levels can profoundly impact key signaling pathways in the brain including glutamatergic signaling, or signaling by the neurotransmitter glutamate. In one subtype of glutamate receptors called N-Methyl-D-Aspartate, or

 

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NMDA, receptors, elevated levels of 24HC have been shown in various cellular and tissue models to lead to increased activation of the glutamate signaling pathway. Activation of NMDA receptors has been implicated in a number of neurological disorders, including Alzheimer’s disease and epilepsy. As a result, modulation of cholesterol metabolism has been proposed as a potential therapeutic approach for several neurological disorders. We believe that decreasing 24HC levels, and thereby modulating NMDA receptor activity, represents a sound rationale for addressing the underlying biology of epileptic encephalopathies. The following figure depicts inhibition of CH24H by OV935 and its impact on excitatory signaling in the brain.

 

LOGO

 

Figure 12: Through inhibition of CH24H, OV935 is believed to reduce brain levels of 24HC, thereby reducing excitatory signaling.

 

The glutamatergic pathway and NMDA receptors have been the targets of a number of approved drugs. Many of these approved drugs, including anesthetics such as ketamine, were developed as antagonists of NMDA receptors, which were designed to block the receptor. These drugs have not been used in disorders such as epilepsy, where the goal is not to entirely block the NMDA receptor, but rather to modulate its activity. The complete blockade of the NMDA receptor with long-term use is frequently associated with poor tolerability. In some cases, low doses of NMDA receptor antagonists have demonstrated clinical benefit outside their prescribed use, including for treatment of neurological disorders. For example, memantine, a low affinity NMDA receptor antagonist, has been used to treat moderate to severe Alzheimer’s disease patients because it does not completely block the NMDA receptor. Modulation of the NMDA receptor, rather than NMDA receptor antagonism, could provide a more effective method for treatment of neurological disorders.

 

A number of publications by independent academic groups have stated that 24HC is a potent modulator of the NMDA receptor. These publications describe 24HC as a positive allosteric modulator, a molecule that induces a conformational change within the protein structure of the receptor and increases its activity. Mice lacking CH24H expression have reduced brain levels of 24HC and decreased NMDA receptor signaling, therefore reducing 24HC levels in the brain offers an alternate mechanism for modulating NMDA receptor activity without blocking normal receptor function. We believe that reducing 24HC levels represents an innovative approach to impacting the glutamatergic pathway to treat epileptic encephalopathies. The novelty of this approach, along with the strength of the data supporting it, are what attracted us to OV935 as a potential treatment for these disorders.

 

OV935 Preclinical Data

 

OV935 has been evaluated in multiple preclinical epilepsy and seizure models. In these studies, OV935 was observed to have anti-convulsive activity in genetic, pharmacologic and inflammation-induced seizure models.

 

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Based on the preclinical data available to us, OV935 may have diverse effects on overall brain function, affecting both seizure intensity and frequency, and potentially modifying the underlying disease biology. We believe the data provide a rationale to test OV935 in multiple epileptic encephalopathies. The models are summarized as follows:

 

Model

  

Observed OV935 Activity

SCN1A Knock-In Model of DS    Increased temperature threshold for hyperthermia induced seizures
Pentylenetetrazol (PTZ) Kindling Model    Reduced PTZ-induced seizure progression
Fring’s Audiogenic Seizure Model    Reduced audiogenic seizures
APP/PS1 Transgenic Mouse Model   

Prolonged overall survival

TMEV Mouse Model    Decreased seizure activity and duration

 

SCN1A Knock-In Model of Dravet Syndrome

 

OV935 was tested in a knock-in model of Dravet syndrome constructed by inactivation of the SCN1A gene. This gene encodes a voltage-gated sodium channel that plays a critical role in the normal functioning of inhibitory pathways in the brain. Deficiencies in the functioning of this channel allow brain excitatory pathways to function unchecked resulting in severe seizures. The majority of Dravet syndrome cases are caused by mutations in this gene. Mice containing the SCN1A gene mutation have hyperthermia-induced or high-temperature-induced seizures. Mice treated with OV935 were observed to have a significantly raised threshold temperature for developing these seizures after seven days of dosing, relative to untreated mice, as depicted below.

 

LOGO

 

Source: RIKEN Brain Science Institute, Neurogenetics laboratory (Lab head; Kazuhiro Yamakawa).

 

Figure 13: OV935 increases the threshold for temperature-induced seizures in mice containing the

SCN1A gene mutation.

 

PTZ Kindling Model

 

OV935 was tested in a preclinical kindling seizure model. Scientists use kindling models to study the effects of repeat seizures in the brain. One such kindling model described here is the pentylenetetrazol, or PTZ, model. As depicted in the figure below, it has been observed that repeat stimulation can increase the likelihood of seizures, presumably because there is a threshold for seizures to occur and the repeat stimulation lowers this threshold. In this model, PTZ is used to chemically stimulate mice at sub-convulsive levels. PTZ also increases the density and sensitivity of glutamate receptors in specific regions of the brain. Mice that were dosed daily with OV935 demonstrated a significant delay in seizure development in this model.

 

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LOGO

 

Figure 14: OV935 delayed seizure development in the PTZ-induced kindling mouse model.

 

Fring’s Audiogenic Seizure Model

 

OV935 was tested in a preclinical audiogenic seizure model. The Fring’s audiogenic seizure model is widely used by scientists to investigate the effects of investigational drugs in a model sensitive to sound-induced seizures. In the experiment, OV935 was dosed once a day for either one or three days. The effect of OV935 on the duration of seizures was determined after the induction of a seizure either one hour or 24 hours following administration of the last dose. As depicted in the figure below, it was observed that OV935 treatment resulted in a significant dose-dependent reduction in sound-induced seizures following single and 3-day repeat dosing.

 

LOGO

 

Figure 15: OV935 dose-dependently reduced seizure in the Fring’s audiogenic seizure model.

 

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APP/PS1 Transgenic Mouse Model

 

OV935 was tested in a preclinical Alzheimer’s disease model where an amyloid precursor protein, or APP, overexpressing mouse was crossed with a presenilin-1, or PS1, mutant mouse that is highly prone to developing spontaneous seizures. We believe that results obtained in this model yield some valuable insights into neurological disorders, and particularly into the biochemistry of the brain. Mice in this model typically have a high incidence of sudden death with only 50% of them surviving after three months. As depicted in the figure below, mice treated with OV935 in this model were observed to have a significant increase in overall survival. While it is unclear if the increase in survival is directly related to reduction in seizures, increase in survival has previously been observed in APP/PS1 mice when one copy of the gene for CH24H is inactivated, suggesting that the survival benefit observed after treatment with OV935 may be due to inhibition of its intended target, CH24H.

 

LOGO

 

Figure 16: OV935 increased survival in APP/PS1 transgenic mouse model.

 

TMEV Mouse Model

 

OV935 was tested in a Theiler’s murine encephalomyelitis virus, or TMEV, model to determine the role of OV935 in reducing inflammation-induced seizures. Infection with TMEV in this model leads to acute seizures and significant elevations in inflammatory signaling molecules, known as cytokines. A large fraction of the mice develop spontaneous, recurrent seizures and various behavioral co-morbidities weeks later. As depicted below, treatment with OV935 demonstrated reduction in the overall number and average severity of seizures in the mice in the acute phase. In addition, long-term benefits were observed, based on significant improvements in anxiety assays such as the open field test.

 

LOGO

 

Figure 17: OV935 reduced the number of seizures and the number of severe (Stage 4/5) seizures in the

TMEV model.

 

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OV935 Clinical Data

 

OV935 has been tested in 86 healthy volunteers across four Phase 1 trials. Single oral doses of up to 1,350mg of OV935 were well-tolerated. The most frequently reported adverse events were headache, ECG electrode application site dermatitis and nausea. All reported events were mild with no apparent dose-response. In a 14-day repeat dosing trial, doses of 100mg once a day, or QD, 300mg QD and 400mg QD were well-tolerated. One volunteer at the 300mg BID experienced an event of confusional state and another volunteer at the 600mg QD dose experienced acute psychosis. Both volunteers discontinued the trial at day 11. One volunteer receiving placebo reported events of nightmares, spatial disorientation, insomnia and dizziness. All treatment emergent adverse events, or TEAEs, resolved with continued dosing through day 15. No serious adverse events were reported. Overall, no safety issues of concern were identified in the Phase 1 trials based on assessments of physical examinations, vital sign measurements, clinical laboratory values or 12-lead electrocardiogram findings.

 

The following table summarizes each trial:

 

Trial

  

Purpose

  

Design

   Number of
Volunteers
  

Dosage

1    Safety and tolerability    Phase 1, randomized, double-blind, placebo-controlled, single ascending dose trial    48    15-1,350mg, oral
2    Safety and tolerability    Phase 1, randomized, double-blind, placebo-controlled, multiple ascending dose trial    40    100-600mg QD, and 300mg BID, 14 days, oral
3    Brain CH24H enzyme occupancy using positron emission tomography, or PET    Open-label, non-randomized    11    50-600mg, oral
4    Relative bioavailability of tablet versus solution formulation; effect of food    Phase 1, randomized, open-label, single dose trial    9    300mg (tablet), oral; 300mg (solution), oral

 

In the Phase 1 PET imaging trial, following administration of OV935, levels of plasma 24HC decreased as the dose increased, reaching an apparent plateau of a 60% reduction at a dose of 300mg, as depicted in the figure below.

 

LOGO

 

Figure 18: Dose-dependent reduction in plasma 24HC by OV935 in a Phase 1 multiple ascending-dose trial.

 

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OV935 Clinical Development Plan

 

In 2017, along with our development partner, Takeda, we intend to launch a Phase 1b/2a proof-of-concept trial in patients with rare epileptic encephalopathies, including Dravet syndrome, Lennox-Gastaut syndrome and Tuberous Sclerosis Complex. We intend to conduct this trial pursuant to an IND that Takeda will submit to the FDA. The development and commercialization of OV935 is dependent upon Takeda’s submission of the IND. If Takeda were to breach its obligations under the Takeda license agreement, the development of OV935 could be materially delayed or terminated.

 

Other Programs

 

Epilepsy

 

We are developing additional preclinical-stage compounds for rare epilepsy disorders that may provide the opportunity to exploit novel pathways or offer differentiated profiles over existing therapies.

 

OV102

 

We are exploring opportunities to develop OV102, an intravenous formulation of OV101, for indications in the hospital setting. We may choose to develop OV102 internally, or to collaborate externally.

 

License and Collaboration Agreements

 

License Agreement with H. Lundbeck A/S

 

In March 2015, we entered into a license agreement with Lundbeck, or the Lundbeck agreement, pursuant to which we obtained from Lundbeck an exclusive (subject to certain reserved non-commercial rights), worldwide license to develop, manufacture, and commercialize OV101, also known as gaboxadol, for the treatment of human disease. Under the Lundbeck agreement, we are responsible for and will use commercially reasonable efforts to carry out all future development and commercialization of OV101. Initially, we will purchase OV101 compound from Lundbeck’s existing inventory at a specified price. Following the depletion of the existing inventory, we may purchase the compound from a third party or, if the parties agree, Lundbeck may continue to supply the compound to us. We are also obligated to make certain manufacturing-related payments to Lundbeck, including for its preparation of a drug master file for OV101. We granted Lundbeck a right of first negotiation if we decide at any time to seek a partner to develop or commercialize OV101 in one or more specified countries.

 

In connection with the Lundbeck agreement, we issued 1,052,977 shares of our common stock to Lundbeck. We also agreed to pay to Lundbeck milestone payments up to an aggregate of $181.0 million upon the achievement of certain global development, regulatory and sales milestone events. In addition, if we successfully develop and commercialize OV101, we will be obligated to pay to Lundbeck tiered royalties in the range of low to middle teens based on the net sales of OV101, subject to certain reductions for generic product sales and for royalties paid for licenses to third party intellectual property. In the event that we commercialize OV101 with a partner in China, Japan or South Korea, each, an Asian Partner, we will instead share with Lundbeck specified percentages of the payments we receive from the Asian Partner, including any upfront payment, milestone payments and royalties, provided that we may deduct certain OV101 development expenses from the amounts owed to Lundbeck. Our obligation to make royalty payments, and to share amounts received from Asian Partners, will expire on a country-by-country basis upon the later of the expiration of the last solely owned licensed patent or 10 years after the first commercial sale. If Lundbeck manufactures OV101 compound for us after the expiration of the royalty term, we will pay to Lundbeck, in addition to the fully burdened cost of such manufacture, a low, single digit manufacturing royalty on the net sales of OV101 manufactured by Lundbeck.

 

The Lundbeck agreement will continue until the expiration of all relevant royalty terms, and may be earlier terminated by either party for the other party’s uncured material breach or insolvency. In addition, we can

 

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terminate the Lundbeck agreement upon advance notice for convenience at any time prior to first regulatory approval of OV101. If the Lundbeck agreement is terminated by us for convenience or by Lundbeck for our breach or insolvency, the OV101 compound will revert to Lundbeck and we will grant Lundbeck an exclusive license to develop and commercialize OV101; such license will be royalty-bearing if we filed an application for regulatory approval prior to termination. If we terminate the Lundbeck agreement for Lundbeck’s breach or insolvency, our license will continue and our obligations to make royalty payments to Lundbeck and to share Asian Partner payments with Lundbeck will continue but we will not be obligated to make further milestone payments to Lundbeck or to purchase any additional quantities of OV101 compound from Lundbeck’s existing inventory.

 

License and Collaboration Agreement with Takeda

 

In January 2017, we entered into a license and collaboration agreement with Takeda, or the Takeda license agreement. All activities of the collaboration regarding OV935 will be guided by the Takeda/Ovid “One Team” concept, an integrated and interdisciplinary team from both companies devoted to the successful advancement of OV935 across rare epilepsy syndromes. Pursuant to the Takeda license agreement, we will take the lead in clinical development activities and commercialization of the compound OV935 and products containing this compound (as well as certain other similar compounds, including any prodrug where TAK-935 is the primary pharmacologically active metabolite) for the treatment of certain rare neurological diseases in the United States, Canada, the European Union and Israel. Takeda will take the lead in commercialization of OV935 in Japan and has the option to lead in Asia and the rest of the world, or the Takeda Territory. While we and Takeda have agreed to initially focus on certain rare neurological disorders, the scope of the collaboration may in the future include other mutually agreed upon rare neurological disorders.

 

Under the Takeda license agreement, Takeda granted to us an exclusive license in our territory under certain patents and other intellectual property controlled by Takeda to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders. Takeda also granted to us a worldwide, co-exclusive license to develop, manufacture and otherwise exploit (but not commercialize) OV935 and products containing OV935 for the treatment of certain rare neurological disorders.

 

Under the Takeda license agreement, we granted to Takeda an exclusive license in the Takeda Territory under certain patents and other intellectual property controlled by us to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders. We also granted to Takeda a worldwide, co-exclusive license to develop, manufacture and otherwise exploit (but not commercialize) OV935 and products containing OV935 for the treatment of certain rare neurological disorders and a co-exclusive license in certain countries to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders that are subsequently included in the collaboration.

 

We and Takeda will collaborate in the development of OV935. Pursuant to the terms of the Takeda license agreement, each party is required to use commercially reasonable efforts to develop OV935 for the treatment of certain rare neurological disorders in accordance with a mutually agreed upon development plan. We are primarily responsible for activities related to the development of OV935, and as such Takeda will transition certain development activities to us. Takeda is initially responsible for regulatory activities in all countries (excluding Israel). We are initially responsible for regulatory activities in Israel, and, upon regulatory approval in the United States, Canada, and the European Union, we will assume responsibility for further regulatory activities in such jurisdictions.

 

We and Takeda will collaborate in the commercialization of OV935. Pursuant to the terms of the Takeda license agreement, each party is required to use commercially reasonable efforts to commercialize OV935 for the treatment of certain rare neurological disorders in its territory. We are responsible for commercialization of OV935 in the United States, Canada, the European Union and Israel, and Takeda is responsible for commercialization of OV935 in Japan, and has the first right to elect to commercialize the products in the Takeda

 

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Territory. Additionally, Takeda has the right to jointly commercialize the products with us in the United States and/or the European Union for any additional mutually agreed upon rare neurological indication.

 

Under the Takeda license agreement, we and Takeda will initially share equally all development and commercialization costs and expenses prior to launch of a product and all revenues and commercialization costs and expenses after launch. In the event that we and Takeda agree to expand the scope of the collaboration to include additional rare neurological disorders, either party may elect not to fund all or a portion of the development of such indication, in which case such party’s overall share of revenues and commercialization costs and expenses after launch of a product may be reduced under certain circumstances.

 

During the period commencing on the effective date of the Takeda license agreement, we and Takeda have both agreed that we will not, directly or indirectly, and will cause all of our respective affiliates, not to, alone or with others, commercialize any competing product in the field of rare neurological disorders. For these purposes, a competing product is any product or compound directed against CH24H as its primary, intended mode of action. If, during such period, we or any of our affiliates is acquired by a third party that is commercializing a competing product, then we must divest our interest or terminate the commercialization of the competing product or cause our affiliate to do so.

 

The Takeda license agreement will expire upon the cessation of commercialization of the products by both us and Takeda. Either party may terminate the Takeda license agreement as a result of the other party’s uncured material breach or insolvency, for safety reasons, or, after completion of the first proof of mechanism clinical trial, for convenience. Takeda may terminate the Takeda license agreement for our (or our sublicensee’s) challenge to the patents licensed under the Takeda license agreement. If the agreement is terminated by Takeda for our material breach, bankruptcy or patent challenge or by us for convenience or safety reasons, our rights to the products will cease, we will transition all activities related to the products to Takeda, and we will grant Takeda an exclusive, royalty-bearing license under certain patents and other intellectual property controlled by us to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders. If the agreement is terminated by us for Takeda’s material breach or bankruptcy or by Takeda for convenience or safety reasons, Takeda’s rights to the products will cease, Takeda will transition all activities related to the products to us, and Takeda will grant us an exclusive, royalty-bearing license under certain patents and other intellectual property controlled by Takeda to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders.

 

Under the Takeda license agreement, in the event of an acquisition of us by certain types of acquirers prior to the final dosing of a patient in the first Phase 3 trial, Takeda would have the right to elect to take over all development and commercialization activities with respect to the products, so long as Takeda at such time has (or will have) sufficient commercial infrastructure to commercialize the products. Even if Takeda exercises such right to take over all development and commercialization activities with respect to the products, we and Takeda will continue to share equally all development and commercialization costs and expenses prior to launch of a product and all revenues and commercialization costs and expenses after launch, unless otherwise set forth in the agreement.

 

In connection with the Takeda license agreement and in consideration of certain license rights granted to us by Takeda, we issued 3,831,293 shares of our Series B-1 convertible preferred stock to Takeda. Under the Takeda license agreement, we are obligated to pay Takeda future payments if and when certain milestones are achieved. Upon the first patient enrollment in the first Phase 3 trial for the first of the initial disorders we and Takeda are focusing on, we are obligated to issue to Takeda the number of unregistered shares of our common stock equal to the lesser of (a) 8% of our outstanding capital stock on the issuance date or (b) $50.0 million divided by the applicable share price, unless certain events occur. In the event such payment would cause Takeda to own over 19.99% of our outstanding capital stock or other events occur, such payment must be paid in cash. The remaining potential global commercial and regulatory milestone payments equal approximately $35.0 million and can be satisfied in cash or unregistered shares of our common stock at our election.

 

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Please see the sections titled “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda” and “—Investors’ Rights Agreement” for further information regarding our agreements with Takeda.

 

Sales and Marketing

 

Given our stage of development, we have not yet established a commercial organization or distribution capabilities. We plan to build focused capabilities in the United States and European Union to commercialize our development programs focused on orphan disorders of the brain, where we believe the patient populations and medical specialists for the indications we are targeting are sufficiently concentrated to allow us to effectively promote our product, if approved for commercial sale, with a targeted sales team. In other markets for which commercialization may be less capital efficient for us, we may selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of our drug candidates.

 

Manufacturing and Supply

 

We currently have no manufacturing facilities and we intend to use our collaborators and contract manufacturers for the foreseeable future. However, certain members of our management have broad experience in manufacturing, which we believe may provide a competitive advantage.

 

We currently rely on Lundbeck to provide the drug substance supply for our planned clinical trials in OV101. Pursuant to the Lundbeck agreement, we agreed to purchase from Lundbeck, and Lundbeck agreed to sell to us, the entirety of their existing inventory of the OV101 compound. We have purchased and imported a portion of this inventory, which was requalified by Lundbeck, and expect that this supply will be sufficient to meet our needs through the completion of our planned Phase 2 trials in Angelman syndrome and Fragile X syndrome. We further expect that Lundbeck’s remaining existing inventory will be sufficient to meet our needs through the completion of all of our planned clinical trials in OV101 and potentially into commercialization, if approved. Following the depletion of Lundbeck’s existing inventory, we may purchase the OV101 compound from a third party or, if the parties agree, Lundbeck may continue to supply to compound to us at the fully burdened cost of manufacture. We have contracted with a third-party contract development and manufacturing organization to manufacture the drug product for our planned clinical trials in OV101, and we expect to engage another third party to package, label and distribute the drug. We plan to continue to rely upon Lundbeck and/or one or more alternative contract manufacturers to supply us with commercial quantities of drug substance and drug product supply, including for OV101, if approved.

 

We will continue to rely on Takeda to provide the drug product supply for our planned clinical trials in OV935 and, if approved, drug substance supply for commercial use of OV935. We will be required to contract with a third-party development and manufacturing organization to manufacture the drug product for our commercial use, and we expect to engage another third party to package, label and distribute the drug.

 

Competition

 

Currently, there are no therapies approved for the treatment of Angelman syndrome or Fragile X syndrome. However, certain symptomatic treatments, including traditional anticonvulsants, sedatives and antianxiety drugs, are employed to lessen the burden of these disorders. We believe SAGE Therapeutics, Inc., Marinus Pharmaceuticals, Inc. and Zynerba Pharmaceuticals, Inc. are our most direct competitors with respect to OV101. We believe Zogenix, Inc., GW Pharmaceuticals plc, Sage Therapeutics, Inc., Marinus Pharmaceuticals, Inc., Zynerba Pharmaceuticals, Inc., Insys Therapeutics, Inc. and PTC Therapeutics, Inc. are our most direct competitors with respect to OV935.

 

Drug development is highly competitive and subject to rapid and significant technological advancements. Our ability to compete will significantly depend upon our ability to complete necessary clinical trials and

 

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regulatory approval processes, and effectively market any drug that we may successfully develop. Our current and potential future competitors include pharmaceutical and biotechnology companies, academic institutions and government agencies. The primary competitive factors that will affect the commercial success of any drug candidate for which we may receive marketing approval include efficacy, safety and tolerability profile, dosing convenience, price, coverage and reimbursement. Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, as well as in obtaining regulatory approvals of those drug candidates in the United States and in foreign countries.

 

Our current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing. Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a small number of our competitors.

 

Accordingly, our competitors may be more successful than us in obtaining regulatory approval for therapies and in achieving widespread market acceptance of their drugs. It is also possible that the development of a cure or more effective treatment method for the disorders we are targeting by a competitor could render our current or future drug candidates non- competitive or obsolete or reduce the demand for our drug candidates before we can recover our development and commercialization expenses.

 

Intellectual Property

 

Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our current and future drug candidates, novel discoveries, product development technologies and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing or in-licensing U.S. and foreign patents and patent applications related to technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trademarks, trade secrets, copyright protection, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintain our proprietary position. For example, the proprietary map of disease-relevant biological pathways underlying orphan disorders of the brain that we developed would not be appropriate for patent protection and, as a result, we rely on trade secrets to protect this aspect of our business.

 

While we seek broad coverage under our existing patent applications, there is always a risk that an alteration to the product or process may provide sufficient basis for a competitor to avoid infringement claims. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued and courts can reinterpret patent scope after issuance. Moreover, many jurisdictions including the United States permit third parties to challenge issued patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. Moreover, we cannot provide any assurance that any patents will be issued from our pending or any future applications or that any potentially issued patents will adequately protect our intellectual property.

 

As of April 10, 2017, we have exclusively licensed a portfolio of issued U.S. and international patents from Lundbeck directed to polymorphic forms of OV101 and their preparation, and these patents expire on dates ranging from 2025 to 2028. In addition, we have exclusively licensed from Lundbeck a pending application directed to an OV101 manufacturing processes that, if issued, would have a statutory expiration in 2036. We have also filed, and own, multiple patent families directed to methods of treatment and formulations with OV101. In particular, we currently own two issued U.S. patents directed to treatment of Angelman syndrome with OV101 that expire in 2035, excluding any regulatory extensions. Additional applications are pending that are directed to methods of treating neurodegenerative diseases and developmental disorders, including Fragile X syndrome. We are, or will, seek patent protection for these inventions in numerous countries and regions including, among others, Europe, Australia, Canada, Mexico, Israel, and Japan.

 

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On January 6, 2017, we licensed from Takeda a portfolio of U.S. and international patents and applications directed to the OV935 composition of matter, and these patents and applications expire in 2032, excluding any regulatory extensions.

 

Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, utility patents issued for applications filed in the United States are granted a term of 20 years from the earliest effective filing date of a non-provisional patent application. In addition, in certain instances, a patent term can be extended to recapture a portion of the U.S. Patent and Trademark Office, or the USPTO, delay in issuing the patent as well as a portion of the term effectively lost as a result of the FDA regulatory review period. However, as to the FDA component, the restoration period cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. The actual protection afforded by a patent may vary on a product by product basis, from country to country and can depend upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.

 

Furthermore, we rely upon trade secrets and know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part, using confidentiality agreements with our employees and consultants and any potential commercial partners and collaborators and invention assignment agreements with our employees. We also have or intend to implement confidentiality agreements or invention assignment agreements with our selected consultants and any potential commercial partners. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees and 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.

 

Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties. It is uncertain whether the issuance of any third-party patent would require us to alter our development or commercial strategies, or our drugs or processes, obtain licenses or cease certain activities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require to develop or commercialize our future drugs may have an adverse impact on us. Since patent applications in the United States and certain other jurisdictions are maintained in secrecy for 18 months or potentially longer, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in Interference, Derivation, Reexam, Post-Grant Review, Inter Partes Review, or Opposition proceedings brought by third parties or declared by the USPTO.

 

Government Regulation

 

The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketing and distribution of drugs, such as those we are developing. These agencies and other federal, state and local entities regulate, among other things, the research and development, testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, distribution, post-approval monitoring and reporting, sampling and export and import of our drug candidates.

 

U.S. Government Regulation

 

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance

 

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with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending New Drug Applications, or NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.

 

The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

   

completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;

 

   

submission to the FDA of an IND which must become effective before human clinical trials may begin;

 

   

approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;

 

   

performance of adequate and well controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacy of the proposed drug product for each indication;

 

   

submission to the FDA of an NDA;

 

   

satisfactory completion of an FDA advisory committee review, if applicable;

 

   

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing practice, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and

 

   

FDA review and approval of the NDA.

 

Preclinical Studies

 

Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.

 

Clinical Trials

 

Clinical trials involve the administration of the investigational new drug to human patients under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research patients provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their www.clinicaltrials.gov website.

 

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Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

 

   

Phase 1 clinical trial: The drug is initially introduced into healthy human volunteers or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.

 

   

Phase 2 clinical trial: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

 

   

Phase 3 clinical trial: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.

 

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Each of Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

 

A drug being studied in clinical trials may be made available to individual patients in certain circumstances. Pursuant to the 21st Century Cures Act, or Cures Act, which was signed into law in December 2016, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the later of 60 calendar days after the date of enactment of the Cures Act or the first initiation of a Phase 2 or Phase 3 trial of the investigational drug.

 

Marketing Approval

 

Assuming successful completion of the required clinical testing, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision.

 

In addition, under the Pediatric Research Equity Act of 2003, or PREA, as amended and reauthorized, certain NDAs or supplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.

 

The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.

 

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The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.

 

The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

 

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCP requirements.

 

After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.

 

Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.

 

Orphan Drug Act

 

Under the Orphan Drug Act of 1983, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the name of the sponsor, identity of the drug or biologic and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not shorten the duration of the regulatory review or approval process, but does provide certain advantages, such as a waiver of PDUFA fees, enhanced access to FDA staff and potential waiver of pediatric research requirements.

 

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If a product 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 product exclusivity, which means that the FDA may not approve any other applications, including a full NDA, to market the same drug or biologic 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. Orphan drug exclusivity does not prevent FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the application user fee. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

 

In September 2016, the FDA granted orphan drug designation for OV101 for the treatment of Angelman syndrome. We intend to pursue orphan drug designation for OV101 in additional indications, as well as for OV935 and potential other future drug candidates as we deem it appropriate. Even if we were to obtain orphan drug designation for a drug candidate, we may not obtain orphan exclusivity and that exclusivity may not effectively protect the drug from the competition of different drugs for the same condition, which could be approved during the exclusivity period.

 

Post-Approval Requirements

 

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

 

The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.

 

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

 

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Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

 

   

restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

 

   

fines, warning letters or holds on post-approval clinical trials;

 

   

refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;

 

   

product seizure or detention, or refusal to permit the import or export of products; or

 

   

injunctions or the imposition of civil or criminal penalties.

 

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

 

Coverage and Reimbursement

 

Sales of our drug candidates, if approved, will depend, in part, on the extent to which such products will be covered by third-party payors, such as government health care programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly limiting coverage or reducing reimbursements for medical products and services. In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Third-party payors decide which therapies they will pay for and establish reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for any drug candidates that we develop will be made on a payor-by-payor basis. Each payor determines whether or not it will provide coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of its formulary it will be placed. The position on a payor’s list of covered drugs, or formulary, generally determines the co-payment that a patient will need to make to obtain the therapy and can strongly influence the adoption of such therapy by patients and physicians. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our drug candidates or a decision by a third-party payor to not cover our drug candidates could reduce physician usage of our drug candidates, once approved, and have a material adverse effect on our sales, results of operations and financial condition.

 

Other Healthcare Laws

 

Because of our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and third-party payors, we will also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we will conduct our business, including our clinical research, proposed sales, marketing and educational programs. Failure to comply with these laws, where applicable, can result in the imposition of significant civil penalties, criminal penalties, or both.

 

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The U.S. laws that may affect our ability to operate, among others, include: the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; certain state laws governing the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; the Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

 

In addition, many states have similar laws and regulations, such as anti-kickback and false claims laws that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to the extent that our product is sold in a foreign country, we may be subject to similar foreign laws.

 

Healthcare Reform

 

Current and future legislative proposals to further reform healthcare or reduce healthcare costs may result in lower reimbursement for our products. The cost containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented in the future could significantly reduce our revenues from the sale of our products.

 

For example, implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, collectively the Affordable Care Act, or the PPACA, has substantially changed healthcare financing and delivery by both governmental and private insurers, and significantly impacted the pharmaceutical industry. The PPACA, among other things, established an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents, revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, and provided incentives to programs that increase the federal government’s comparative effectiveness research. Since its enactment there have been judicial and Congressional challenges to certain aspects of the PPACA. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the PPACA. The Budget Resolution is not a law, however, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the PPACA. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states,

 

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individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of the PPACA that are repealed. Thus, the full impact of the PPACA on our business remains unclear.

 

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals for spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments, will remain in effect through 2025 unless additional Congressional action is taken. Additionally, in January 2013, then President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products.

 

We expect that additional federal and state, as well as foreign, healthcare reform measures will be adopted in the future, any of which could result in reduced demand for our products or additional pricing pressure.

 

Employees

 

As of April 10, 2017, we had 31 full-time employees, 16 of whom were primarily engaged in research and development activities and 14 of whom had an MD or PhD degree. None of our employees is represented by a labor union and we consider our employee relations to be good.

 

Facilities

 

We lease the space for our principal executive offices, which are located at 1460 Broadway, New York, New York, on a monthly basis. We believe that our facilities are adequate to meet our current needs.

 

Legal Proceedings

 

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have an adverse effect on our business, operating results or financial condition.

 

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MANAGEMENT

 

The following table sets forth information regarding our executive officers and directors, including their ages as of April 10, 2017:

 

Name

    Age     

Position(s)

Executive Officers

    

Jeremy M. Levin, DPhil, MB BChir

  63    Chief Executive Officer and Chairman of the Board of Directors

Matthew During, MD, DSc

  60    President, Chief Scientific Officer and Director

Yaron Werber, MD

  45    Chief Business and Financial Officer and Secretary

Amit Rakhit, MD

  47    Chief Medical and Portfolio Management Officer

Dirk Haasner, PhD, MPM

  52    Senior Vice President, Global Regulatory Affairs

Timothy Daly

  45    Vice President, Finance and Corporate Controller

Non-Employee Directors

    

Karen Bernstein, PhD

  64    Director

Bart Friedman

  72    Director

Douglas Williams, PhD

  59    Director

 

 

Executive Officers

 

Jeremy M. Levin, DPhil, MB BChir has served as our Chief Executive Officer since March 2015 and as Chairman of our board of directors since April 2014. Prior to joining us, Dr. Levin served as President and Chief Executive Officer, of Teva Pharmaceutical Industries Ltd., or Teva, a publicly held pharmaceutical company, from May 2012 to October 2013. Dr. Levin joined Teva in February 2012. From September 2007 to December 2012, Dr. Levin held several roles at Bristol-Myers Squibb Company, a publicly held pharmaceutical company, finally serving as the Senior Vice President of Strategy, Alliances and Transactions. Dr. Levin also served as a member of the Executive Committee at Bristol-Myers Squibb Company. Prior to that, Dr. Levin served as Global Head of Strategic Alliances at Novartis Institutes for Biomedical Research, Inc., a division of Novartis AG, from 2002 to 2007. Previously, he served on the board of directors of various public and private biopharmaceutical companies, including as Chairman and Chief Executive Officer of Cadus Pharmaceuticals Corporation, a drug development company. Dr. Levin currently serves on the board of directors of BioCon Ltd., a publicly held biopharmaceutical company, H. Lundbeck A/S, a publicly traded pharmaceutical company, and ZappRx, Inc., an e-health company. Dr. Levin is also a serving member on the board of the Biotechnology Innovation Organization. He has also served as a practicing physician at university hospitals in England, South Africa and Switzerland. Dr. Levin earned his BA in Zoology, MA in Cell Biology and Doctorate in Chromatin Structure, all from University of Oxford, and his MB and BChir from the University of Cambridge. We believe Dr. Levin’s extensive experience in the global biotechnology and pharmaceutical industry qualifies him to serve on our board of directors.

 

Matthew During, MD, DSc is our founder and was appointed as our Chief Scientific Officer in March 2015 and has served as our President and a member of our board of directors since April 2014. From April 2014 to March 2015, he served as our Chief Executive Officer. Prior to founding our company, Dr. During founded NightstaRx Limited, a pharmaceutical company, in October 2013 and served as a consultant until November 2015. From February 2014 to December 2014, Dr. During served as a Senior Manager at Bridgewater Associates. Prior to that, he founded Neurologix, Inc., a pharmaceutical company, in October 1999 and served as a member of its Scientific Advisory Board until March 2012. Dr. During also co-founded Merlin Pharmaceuticals (P) Limited, a pharmaceutical company, in February 1993 and served a member of its Scientific Advisory Board until December 1994. Dr. During previously served on the faculty of Yale University as Professor of Neurosurgery from 1989 to 2000, as a Professor at Cornell University until 2006 and Ohio State University from 2006 to December 2014, where he currently serves as an Adjunct Professor. Since 2011, he has also served as a visiting Professor of Translational Neuroscience at the University of Oxford. Dr. During earned his BS, MD and

 

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DSc from the University of Auckland. He also completed fellowships at Massachusetts Institute of Technology and Harvard Medical School. We believe Dr. During’s knowledge of our company and expertise in the fields of neuroscience and genetics qualifies him to serve on our board of directors.

 

Yaron Werber, MD has served as our Chief Business Officer since July 2016, as our Chief Financial Officer since June 2015 and as our Secretary since July 2015. Prior to joining us, Dr. Werber worked at Citigroup Global Markets Inc. from March 2004 to June 2015, where he most recently served as a Managing Director, starting December 2011, and the Head of U.S. Healthcare and Biotech Equity Research teams. Previously, Dr. Werber was a Senior Biotech Analyst and Vice President at SG Cowen Securities Corporation. He began his career in academic research and was director of business development at NotifyMD, Inc., an e-health company. Dr. Werber earned his BS in Biology from Tufts University and a combined MD/MBA degree from Tufts University School of Medicine.

 

Amit Rakhit, MD has served as our Chief Medical and Portfolio Management Officer since March 2016. Prior to joining us, Dr. Rakhit served as Senior Vice President, Worldwide Medical at Biogen Inc., a publicly held biotechnology company, from March 2014 to March 2016 and as Vice President, Program Leadership & Management from June 2011 to February 2014. Prior to that, he worked at Bristol-Myers Squibb Company from August 2001 to June 2011, where he most recently served as Vice President, Intercontinental Medical. Dr. Rakhit earned his BA in Molecular Biology from the University of California, Berkeley, his MD from Tufts University School of Medicine, his MS from Vanderbilt University School of Medicine and dual MBAs from the London Business School and Columbia University. Dr. Rakhit completed his fellowship in pediatric cardiology at Harvard Medical School.

 

Dirk Haasner, PhD, MPM has served as our Senior Vice President, Global Regulatory Affairs since March 2016. Dr. Haasner previously served as our Vice President, Global Regulatory Affairs from December 2015 to March 2016. Prior to joining us, Dr. Haasner was Vice President Regulatory and Medical Affairs, and Vice President Regulatory Strategy and Policy at Lundbeck USA, Inc., a H. Lundbeck A/S subsidiary, from February 2002 to November 2015, with responsibility for all FDA interactions on several marketed orphan drugs and all Lundbeck development compounds. From 1994 to 2002, Dr. Haasner was employed at F. Hoffmann-La Roche AG, a publicly held healthcare company, where he held positions of increasing responsibility in global product development and global strategic marketing before being appointed Global Life-cycle Leader. Dr. Haasner co-founded the biotech start-up 4-Antibody AG that was acquired in 2014 by Agenus Inc., a publicly held biotechnology company. Dr. Haasner obtained a MSc in Molecular Biology at the University of Basel, Switzerland, a PhD in Cell Biology and Immunology at the Basel Institute for Immunology, and holds a postgraduate degree in Pharmaceutical Medicine from the EUCOR Universities Basel, Strasbourg and Freiburg.

 

Timothy Daly has served as our Vice President, Finance and Corporate Controller since September 2015. Prior to joining us, Mr. Daly was Vice President of Finance and Corporate Controller at Advanced Health Media LLC from August 2013 to September 2015, a global provider of technology to healthcare professionals. From December 2011 to August 2013, Mr. Daly served as Vice President, Controller and Chief Accounting Officer at Enzon Pharmaceuticals, Inc., a publicly held pharmaceuticals company. Prior to that, from 1999 to 2011, he served in various operation finance roles during his 12-year tenure at ImClone Systems Incorporated, a wholly owned subsidiary of Eli Lilly and Company, and most recently as Director of Finance. Mr. Daly earned his BS in accounting from Rider University.

 

Non-Employee Directors

 

Karen Bernstein, PhD has served as a member of our board of directors since September 2015. Prior to joining us, Dr. Bernstein co-founded BioCentury Inc., or BioCentury, a provider of clinical, regulatory and finance news for the biotechnology and pharmaceutical industries, where she served as Editor-in-Chief from its inception in August 1992 to August 2015. From September 2015 to October 2016, she also served on the board

 

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of directors of Vitae Pharmaceuticals, Inc., which was acquired by Allergan Holdco US, Inc. Dr. Bernstein continues to serve as Chairman of the board of directors of BioCentury. Dr. Bernstein earned her BA in Politics and History from Brandeis University and her PhD in Political Science from Stanford University. We believe Dr. Bernstein’s extensive knowledge of the life science industry qualifies her to serve on our board of directors.

 

Bart Friedman has served as a member of our board of directors since November 2015. Mr. Friedman was a partner at Cahill Gordon & Reindel LLP, a New York law firm, since 1980 and became Senior Counsel as of January 2017. Mr. Friedman’s practice focuses on corporate governance investigations and advisory and crisis advisory. Earlier in his career, Mr. Friedman worked at the Securities and Exchange Commission, initially as Special Counsel and later as Assistant Director. Mr. Friedman currently serves as Chairman of the board of directors of the Sanford C. Bernstein Mutual Funds and as the lead independent director of the board of directors of Allied World Assurance Company Holdings, AG, a publicly held company. He currently serves as Chair of the Audit Committee of the Brookings Institution, Chair of the Audit Committee of Lincoln Center for the Performing Arts and Treasurer of the Smithsonian’s Cooper-Hewitt Museum. Mr. Friedman earned his AB from Long Island University and his JD from Harvard Law School. We believe Mr. Friedman’s broad experience advising financial institutions, global corporations and boards of directors of publicly held companies qualifies him to serve on our board of directors.

 

Douglas Williams, PhD has served as a member of our board of directors since January 2016. Dr. Williams is currently a member on the board of directors of each of Ironwood Pharmaceuticals, Inc. and Regulus Therapeutics Inc., each a publicly held biotechnology company. Dr. Williams is President, Chief Executive Officer and a member of the board of directors of Codiak Biosciences, Inc., a biotechnology company, which was founded in November 2015. Prior to that, he served as Biogen Inc.’s Executive Vice President, Research and Development from January 2011 to July 2015. From 2004 to 2010, Dr. Williams served in various roles at ZymoGenetics, Inc., a former publicly held pharmaceutical company, and a subsidiary of Bristol-Myers Squibb Company, a publicly held pharmaceutical company, most recently in the role of Chief Executive Officer and a member of its board of directors. Dr. Williams also served as a member of the board of directors of each of Oncothyreon Inc. and Array BioPharma Inc. Previously, Dr. Williams held senior leadership positions within the biotechnology industry, including Chief Scientific Officer and Executive Vice President of Research and Development at Seattle Genetics, Inc., a publicly held biotechnology company, Senior Vice President and Washington Site Leader at Amgen, Inc., a publicly held biopharmaceutical company, and Executive Vice President and Chief Technology Officer at Immunex Corporation, a publicly held pharmaceutical company, which was acquired by Amgen Inc. in 2002. Dr. Williams earned his BS in Biological Sciences from the University of Massachusetts, Lowell and his PhD in Physiology from the State University of New York at Buffalo, Roswell Park Memorial Institute Division. We believe Dr. Williams’s scientific and senior leadership experience within the life sciences industry qualifies him to serve on our board of directors.

 

Family Relationships

 

There are no family relationships among our directors and executive officers.

 

Board Composition

 

Our board of directors currently consists of five members. In accordance with our amended and restated certificate of incorporation, which will be effective immediately prior to the completion of this offering, our board of directors will be divided into three classes. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:

 

   

The Class I director will be                  and such director’s term will expire at the annual meeting of stockholders to be held in 2018;

 

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The Class II directors will be                  and                 , and their terms will expire at the annual meeting of stockholders to be held in 2019; and

 

   

The Class III directors will be                  and                 , and their terms will expire at the annual meeting of stockholders to be held in 2020.

 

We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.

 

Director Independence

 

Under The NASDAQ Stock Market LLC, or NASDAQ, Marketplace Rules, or the NASDAQ Listing Rules, independent directors must comprise a majority of our board of directors as a public company within one year of listing.

 

Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that Dr. Bernstein, Mr. Friedman and Dr. Williams, representing three of our five directors, do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements of the NASDAQ Listing Rules. Our board of directors has determined that Dr. Levin, by virtue of his position as our Chief Executive Officer, and Dr. During, by virtue of his position as our President and Chief Scientific Officer, are not independent under applicable rules and regulations of the SEC and NASDAQ Listing Rules. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

 

Lead Independent Director

 

Our board of directors is currently chaired by our Chief Executive Officer, Dr. Levin. Our corporate governance guidelines provide that, if the chairman of the board is a member of management or does not otherwise qualify as independent, the independent directors of the board may or may not elect a lead independent director. Our board of directors has appointed Bart Friedman as our lead independent director, effective upon completion of this offering. The lead independent director’s responsibilities include, but are not limited to: presiding over all meetings of the board of directors at which the chairman is not present, including any executive sessions of the independent directors; acting as the liaison between the independent directors and the chief executive officer and chairman of the board of directors; and such additional duties as our board of directors may otherwise delegate. Our corporate governance guidelines further provide the flexibility for our board of directors to modify our leadership structure in the future, as it deems appropriate.

 

Board Committees

 

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Each committee has adopted a written charter that satisfies the applicable rules and regulations of the SEC and NASDAQ Listing Rules, which we will post on our website at www.ovidrx.com, upon completion of this offering.

 

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Audit Committee

 

The audit committee is responsible for assisting our board of directors in its oversight of the integrity of our financial statements, the qualifications and independence of our independent auditors and our internal financial and accounting controls. The audit committee has direct responsibility for the appointment, compensation, retention (including termination) and oversight of our independent auditors, and our independent auditors report directly to the audit committee. The audit committee also prepares the audit committee report that the SEC requires to be included in our annual proxy statement.

 

Our audit committee consists of Dr. Bernstein, Mr. Friedman and Dr. Williams. Our board of directors has determined that Dr. Bernstein, Mr. Friedman and Dr. Williams are independent under the NASDAQ Listing Rules and Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The chair of our audit committee is Mr. Friedman. Our board of directors has determined that Mr. Friedman is an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulations S-K. Our board of directors has also determined that each member of our audit committee can read and understand fundamental financial statements, in accordance with applicable requirements. In arriving at these determinations, the board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector.

 

Compensation Committee

 

The compensation committee approves the compensation objectives for the company, the compensation of the chief executive officer and approves, or recommends to our board of directors for approval, the compensation for other executives. The compensation committee reviews all compensation components, including base salary, bonus, benefits and other perquisites.

 

Our compensation committee consists of Dr. Bernstein, Mr. Friedman and Dr. Williams. Our board of directors has determined that Dr. Bernstein, Mr. Friedman and Dr. Williams are independent under the NASDAQ listing standards, are “non-employee directors” as defined in Rule 16b-3 promulgated under the Exchange Act and are “outside directors” as that term is defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, or Section 162(m). The chair of our compensation committee is Dr. Williams.

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee makes recommendations regarding corporate governance, the composition of our board of directors, identification, evaluation and nomination of director candidates and the structure and composition of committees of our board of directors. In addition, the nominating and corporate governance committee is responsible for developing and recommending corporate governance guidelines to our board of directors, as applicable to the company.

 

Our nominating and corporate governance committee consists of Dr. Bernstein, Mr. Friedman and Dr. Williams. The chair of our nominating and corporate governance committee is Dr. Bernstein. Each member of the nominating and corporate governance committee is a non-employee director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act, an independent director as defined by the NASDAQ Listing Rules and is free from any relationship that would interfere with the exercise of his or her independent judgment, as determined by the board of directors in accordance with the applicable NASDAQ Listing Rules.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the compensation committee is currently, or has been at any time, one of our officers or employees. None of our executive officers currently serves, or has served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or on our compensation committee.

 

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Code of Business Conduct and Ethics

 

We have adopted a written code of business conduct and ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, and agents and representatives. The full text of our code of business conduct and ethics will be posted on our website at www.ovidrx.com. The nominating and corporate governance committee of our board of directors will be responsible for overseeing our code of business conduct and ethics and any waivers applicable to any director, executive officer or employee. We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions applicable to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and agents and representatives, on our website identified above.

 

Limitation on Liability and Indemnification Matters

 

Our amended and restated certificate of incorporation and our amended and restated bylaws, each which will become effective immediately prior to the completion of this offering, limits our directors’ liability, and may indemnify our directors and officers to the fullest extent permitted under Delaware General Corporation Law, or the DGCL. The DGCL provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:

 

   

transaction from which the director derives an improper personal benefit;

 

   

act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

   

unlawful payment of dividends or redemption of shares; or

 

   

breach of a director’s duty of loyalty to the corporation or its stockholders.

 

These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or recession.

 

The DGCL and our amended and restated bylaws provide that we will, in certain situations, indemnify our directors and officers and may indemnify other employees and other agents, to the fullest extent permitted by law. Any indemnified person is also entitled, subject to certain limitations, to advancement, direct payment or reimbursement of reasonable expenses (including attorneys’ fees and disbursements) in advance of the final disposition of the proceeding.

 

In addition, we have entered, and intend to continue to enter, into separate indemnification agreements with each of our directors and officers. These indemnification agreements, among other things, require us to indemnify our directors and officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of their services as a director or officer, or any other company or enterprise to which the person provides services at our request.

 

We maintain a directors’ and officers’ insurance policy pursuant to which our directors and officers are insured against liability for actions taken in their capacities as directors and officers. We believe that these provisions in our amended and restated certificate of incorporation and amended and restated bylaws and these indemnification agreements are necessary to attract and retain qualified persons as directors and officers.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers or control persons, in the opinion of the SEC, such indemnification is against public policy, as expressed in the Securities Act and is therefore unenforceable.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

 

Our named executive officers for the year ended December 31, 2016, which consists of our principal executive officer and our two other most highly compensated executive officers, are:

 

   

Jeremy M. Levin, DPhil, MB BChir, our Chief Executive Officer;

 

   

Amit Rakhit, MD, our Chief Medical and Portfolio Management Officer; and

 

   

Dirk Haasner, PhD, MPM, our Senior Vice President, Global Regulatory Affairs.

 

Summary Compensation Table

 

The following table provides information regarding the compensation provided to our named executive officers for the year ended December 31, 2016.

 

Name and Principal Position

   Year      Salary(1)
($)
     Option
Awards

($)(2)
     Non-Equity
Incentive Plan
Compensation

($)
    All Other
Compensation

($)
    Total
($)
 

Jeremy Levin, DPhil, MB BChir

     2016        500,000        784,265        250,000 (3)      5,000 (4)      1,539,265  

Chief Executive Officer

               

Amit Rakhit, MD

     2016        292,969        956,150        87,500 (3)      77,902 (5)      1,414,521  

Chief Medical and Portfolio Management Officer

               

Dirk Haasner, PhD

     2016        294,952        762,026        118,750 (3)      3,250 (4)      1,178,978  

Senior Vice President, Global Regulatory Affairs

               

 

(1)   See “—Narrative to the Summary Compensation Table—Annual Base Salary” below.
(2)   In accordance with SEC rules, this column reflects the aggregate grant date fair value of the option awards granted during fiscal year 2016 computed in accordance with ASC 718 for stock-based compensation transactions. Assumptions used in the calculation of these amounts are included in note 6 to our audited financial statements included elsewhere in this prospectus. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the stock options, the exercise of the stock options, or the sale of the common stock underlying such stock options.
(3)   Reflects performance-based cash bonuses awarded to our named executive officers. See “—Non-Equity Incentive Plan Compensation” and “—Employment Arrangements” below for a description of the material terms of the agreements pursuant to which this compensation was awarded.
(4)   Includes contributions by us to the named executive officer’s 401(k) plan account.
(5)   Includes (a) $50,000 in reimbursements paid to Dr. Rakhit for moving and relocation expenses and (b) $27,902 in consulting fees earned in 2016 by a limited liability company of which Dr. Rakhit was the majority member prior to his employment with us.

 

Narrative to the Summary Compensation Table

 

Our board of directors reviews compensation annually for all employees, including our named executive officers. In setting executive base salaries and bonuses and granting equity incentive awards, we consider compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short- and long-term results that are in the best interests of our stockholders, and a long-term commitment to our company.

 

The compensation committee has historically determined our executive officers’ compensation and has typically reviewed and discussed management’s proposed compensation with our chief executive officer for all executives other than our chief executive officer. Based on those discussions and its discretion, the compensation committee and our full board of directors then approved the compensation of each executive officer. Upon the completion of this offering, the compensation committee will continue to determine our executive officers’ compensation and

 

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follow this process, but the compensation committee itself, rather than our board of directors, will approve the compensation of each executive officer.

 

Annual Base Salary

 

Base salaries for our executive officers are initially established through arm’s-length negotiations at the time of the executive officer’s hiring, taking into account such executive officer’s qualifications, experience, prior salary, the scope of his or her responsibilities and competitive market compensation paid by other companies for similar positions within the industry. Base salaries are reviewed annually, typically in connection with our annual performance review process, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. In making decisions regarding salary increases, we may also draw upon the experience of members of our board of directors with executives at other companies. The 2017 base salaries for our named executive officers are as follows:

 

Name

   2017 Base Salary  

Jeremy M. Levin, DPhil, MB BChir

   $ 515,000  

Amit Rakhit, MD

   $ 386,250  

Dirk Haasner, PhD, MPM

   $ 334,750  

 

Equity-Based Incentive Awards

 

Our equity-based incentive awards are designed to align our interests and those of our stockholders with those of our employees and consultants, including our named executive officers. Historically, our board of directors has been responsible for approving equity grants proposed by the compensation committee. As of December 31, 2016, stock option awards were the only form of equity awards we granted to our named executive officers.

 

We have historically used stock options as an incentive for long-term compensation to our named executive officers because they are able to profit from stock options only if our stock price increases relative to the stock option’s exercise price, which exercise price is set at the fair market value of our common stock on the date of grant. We may grant equity awards at such times as our board of directors determines appropriate. Dr. Haasner was awarded grants in the form of stock options (i) in January 2016, in connection with his employment with us and (ii) in March 2016, in connection with his promotion to Senior Vice President, Global Regulatory Affairs. In February 2016 and July 2016, Drs. Rakhit and Levin, respectively, were each awarded a stock option in connection with their employment with us. Additional grants may occur periodically in order to specifically incentivize executives with respect to achieving certain corporate goals or to reward executives for exceptional performance.

 

Prior to this offering, we have granted all stock options pursuant to our 2014 Plan. Following this offering, we will grant equity incentive awards under the terms of our 2017 Plan. The terms of our equity plans are described below under “—Equity Incentive Plans.”

 

All options are granted with an exercise price per share that is no less than the fair market value of our common stock on the date of grant of such award. Our stock option awards generally vest over a four-year period, and may be subject to acceleration of vesting and exercisability under certain termination and change in control events. See “—Outstanding Equity Awards at Fiscal Year-End” below for additional information.

 

Non-Equity Incentive Plan Compensation

 

The employment agreement with each of our named executive officers provides that the executive may be eligible to earn an annual performance bonus of up to a target percentage of the executive’s base salary. From time to time, our board of directors or compensation committee may approve annual bonuses for our named executive officers based on individual performance, company performance or as otherwise determined appropriate.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information regarding the outstanding equity awards held by our named executive officers as of December 31, 2016. All awards were granted pursuant to the 2014 Plan. See “—Equity Incentive Plans—2014 Equity Incentive Plan” below for additional information.

 

                Option Awards  

Name and Principal Position

  Grant Date     Vesting
Commencement
Date
    Number of
Securities
Underlying
Unexercised
Options (#)
(Exercisable)
    Number of
Securities
Underlying
Unexercised
Options (#)
(Unexercisable)
    Option
Exercise
Price $
    Option
Expiration
Date
 

Jeremy M. Levin, DPhil, MB BChir

    6/8/2015       6/8/2015       300,000       500,000 (1)(2)      3.81       6/8/2025  

Chief Executive Officer

    7/11/2016       1/1/2016       —         400,000 (1)(2)      2.91       7/11/2026  

Amit Rakhit, MD

    2/24/2016       2/24/2016       —         500,000 (1)(3)      3.88       2/24/2026  

Chief Medical and Portfolio Management Officer

           

Dirk Haasner, PhD, MPM

    1/28/2016       12/19/2015       50,000       150,000 (1)(3)      3.88       1/28/2026  

Senior Vice President, Global Regulatory Affairs

    3/30/2016       3/30/2016       —         100,000 (1)(3)      2.91       3/30/2026  

 

(1)   25% of the shares underlying this option vest on the one-year anniversary of the vesting commencement date and the remainder vest in 36 equal monthly installments thereafter.
(2)   Pursuant to Dr. Levin’s employment agreement, any unvested shares underlying his option will become fully vested and exercisable upon a change in control or a covered termination (as each term is defined in his employment agreement).
(3)   Pursuant to Dr. Rakhit’s and Dr. Haasner’s employment agreements, any unvested shares underlying their option will become fully vested and exercisable upon a change in control termination (as defined in the applicable employment agreement).

 

Employment Arrangements

 

Below are descriptions of our employment agreements and arrangements with our named executive officers. The agreements generally provide for at-will employment without any specific term and set forth the named executive officer’s initial base salary, eligibility for employee benefits and severance benefits upon a qualifying termination of employment or change in control of our company. Furthermore, each of our named executive officers has executed a form of our standard proprietary information and inventions assignment agreement. The key terms of the employment agreements with our named executive officers, including potential payments upon termination or change in control, are described below.

 

Agreement with Dr. Levin

 

We entered into an employment agreement with Dr. Levin in June 2015 that governs the current terms of his employment with us. Pursuant to this agreement, Dr. Levin is entitled to an annual base salary of $500,000, is eligible to receive an annual target performance bonus of at least 50% of his base salary, as determined by our board of directors, and is eligible to participate in all of the employee benefit plans that we generally make available to all of our full-time employees. In addition, Dr. Levin was entitled to a bonus of $250,000 upon the closing of the first private placement investment after the date of his employment agreement with gross proceeds to us of at least $25.0 million, which was paid in February 2016. Dr. Levin’s employment agreement also provided that he was entitled to the grant of an option to purchase 800,000 shares of our common stock with an exercise price equal to the fair market value of a share of our common stock on the grant date, subject to a four-year vesting schedule, which option was granted in June 2015. Additionally, Dr. Levin is entitled to certain severance benefits and change in control payments and benefits pursuant to his agreement, the terms of which are described under “—Potential Payments upon Termination or Change in Control” below for additional information.

 

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Agreement with Dr. Rakhit

 

We entered into an employment agreement with Dr. Rakhit in February 2016 that governs the current terms of his employment with us, which began in March 2016. From January 1, 2016 until the effective date of his employment agreement in March 2016, Dr. Rakhit served as a consultant to us. Pursuant to his employment agreement, Dr. Rakhit is entitled to an annual base salary of $375,000, is eligible to receive an annual target performance bonus of up to 30% of his base salary, as determined by our board of directors, and is eligible to participate in all of the employee benefit plans that we generally make available to all of our full-time employees. In addition, Dr. Rakhit was entitled to relocation and moving expenses of $50,000, which was paid in June 2016. Dr. Rakhit’s employment agreement also provided that he was entitled to the grant of an option to purchase 500,000 shares of our common stock with an exercise price equal to the fair market value of a share of our common stock on the grant date and subject to a four year vesting schedule, which option was granted in February 2016. Additionally, Dr. Rakhit is entitled to certain severance benefits pursuant to his agreement, the terms of which are described under “—Potential Payments upon Termination or Change in Control” below for additional information.

 

Agreement with Dr. Haasner

 

Dr. Haasner commenced employment with us, and was appointed as our Vice President, Global Regulatory Affairs in December 2015. Dr. Haasner was promoted to our Senior Vice President, Global Regulatory Affairs in March 2016. We entered into an employment agreement with Dr. Haasner in May 2016 that governs the current terms of his employment with us. Pursuant to this agreement, Dr. Haasner is entitled to an annual base salary of $325,000, is eligible to receive an annual target performance bonus of up to 30% of his base salary, as determined by our board of directors, and is eligible to participate in all of the employee benefit plans that we generally make available to all of our full-time employees. Dr. Haasner’s employment agreement also provided that he was entitled to the grant of an option to purchase 100,000 shares of our common stock with an exercise price equal to the fair market value of a share of our common stock on the grant date and subject to a four year vesting schedule, which was granted in March 2016. Additionally, Dr. Haasner is entitled to certain severance benefits pursuant to his agreement, the terms of which are described under “—Potential Payments upon Termination or Change in Control” below for additional information.

 

Potential Payments upon Termination or Change in Control

 

Regardless of the manner in which a named executive officer’s service terminates, the named executive officer is entitled to receive amounts earned during his term of service, including salary and unused vacation pay. In addition, each of our named executive officers is eligible to receive certain benefits pursuant to his or her employment agreements with us described above under “—Employment Arrangements” above for additional information.

 

Termination Payments and Benefits

 

Under the terms of their respective employment agreements, each of our named executive officers is eligible to receive the following severance payments and benefits upon a termination without “cause” or due to “permanent disability,” or upon “resignation for good reason,” each as defined below, contingent upon the named executive officer’s delivery to us of a satisfactory release of claims, and subject to the named executive officer’s compliance with non-competition and non-solicitation restrictive covenants for two years following the termination date:

 

   

A severance amount, for Dr. Levin, equal to the sum of Dr. Levin’s monthly base salary plus one-twelfth of the target annual performance bonus paid to Dr. Levin for the year preceding the year in which the termination occurs, multiplied by 36, payable over 36 months following termination in accordance with our standard payroll procedures.

 

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A severance amount, for Drs. Rakhit and Haasner, equal to the named executive officer’s monthly base salary multiplied by 12 for Dr. Rakhit and multiplied by 9 for Dr. Haasner, payable bi-weekly following termination in accordance with our standard payroll procedures.

 

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